Second of a series: Due diligence means much more than credit

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With the upcoming renewed interest in community bank acquisitions, I thought I would elaborate on the last blog's due diligence discussion, and then advance the discussion further.

 

Credit risk: A matter of scale and scope

The previous blog addressed the issue of credit due diligence. The point was, it is different than loan review, where somebody is making an independent third-party assessment of credits. In an acquisition transaction, they become yours, so you have to be a little bit more "sharp penciled." 

 

A community bank acquisition involving credit due diligence is often different from a large bank acquisition transaction as it relates to credit due diligence.

 

It really should not be, but it is, because the risk factors are different.

 

• If a $2 billion bank is acquiring a $200 million bank, it is going to do a credit due diligence but, frankly, it can afford to make some mistakes.

 

• If a $250 million bank is acquiring a $150 million bank, it simply cannot afford to make any mistakes on credit due diligence.

 

The credit risk, in view of the overall size of the combined institution, is dramatic. The acquirer certainly does not want to do anything to wreck its own bank, which could happen in the latter scenario. In the former scenario, it would not happen, even if the $2 billion bank bought a $200 million "pig in a poke." 

 

Very different as it relates to credit due diligence!

 

Beyond the loan portfolio

Credit is not all.

 

For instance, what about "legal due diligence?"  What about pending or potential lawsuits against the bank? What about claims owned by the bank that may have been filed against deadbeat borrowers or deadbeat former employees or a bonding company or a D&O carrier? 

 

These need to be assessed as well.

 

And that's for starters.

 

Also, human resources, policies, environmental issues, tax returns, additional accounting, and financial issues--all those need to be addressed in connection with a due diligence checklist.

 

A checklist  you can build on

In fact, there are at least 15 separate areas that you might want to consider, including:

 

1. Legal

2. CRA/Fair Lending

3. Loan Review

4. Bank Information Systems

5. Service Center Operations

6. Properties/Purchasing

7. Risk Management

8. Internal Audit

9. Human Resources

10. Core Bank

11. Investments

12. Broker/Dealer Activity/Insurance

13. Trust Activities

14. Regulatory Compliance

15. Marketing

 

Do not be discouraged by due diligence. Just keep in mind that the goal is to figure out what you are getting as best you can, so you can figure out the pricing and the earnings stream.

 

About the Author

Jeff Gerrish is chairman of the board of Gerrish McCreary Smith Consultants, LLC, and a member of the Memphis-based law firm of Gerrish McCreary Smith, PC, Attorneys. He is a frequent contributor to ABA Banking Journal and ABA Bank Directors Briefing, and frequently speaks at ABA events and telephone briefings.

Gerrish formerly served as Regional Counsel for the Memphis Regional Office of the FDIC, with responsibility for all legal matters, including cease-and-desist and other enforcement actions. Before coming to Memphis, Gerrish was with the FDIC Liquidation Division in Washington, D.C. where he had nationwide responsibility for litigation against directors of failed banks.

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  Gerrish can be reached at jgerrish@gerrish.com, and the firm’s website, www.gerrish.com.

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