Credit culture a second round deal killer

Those of you who have been following my blog over the last couple of years know that recently I did a several-part series on issues related to mergers and acquisitions. Not to revisit that series, but to point out one more recent phenomenon that is impacting transactions: "culture war." 

No, this is not "culture culture" like momentum and things like that. This is credit culture.

How the matchup issue arises

We have had a number of community bank clients in the last six months that have decided, as part of their long-term strategy, that they want to expand geographically through the acquisition of another community bank.

Our clients, for the most part in this case, are healthy, strong, well-rated with excellent asset quality. The targets have been both well-rated with good asset quality and not so well rated with not such good asset quality.

But when the purchaser goes in to do the due diligence, particularly the credit due diligence, the issue of credit culture comes up.

As I had one purchaser tell me:

"It is one thing to acquire these loans that we are not exactly comfortable with now, because the selling bank did not do quite as good a job as we would on the underwriting, documentation, and the like.

"But it is another thing to realize that we are acquiring the same people who made these same loans under the same culture.

"Not only do we need to worry about the loans and work out those that go bad, but we have to worry about turning the cultural battleship completely around toward our credit culture." 

Because both these acquirors that I reference were community banks, both, for somewhat separate reasons, decided that the credit culture was a risk they were unwilling to accept, and walked away from the transaction.

Is your acquisition choice a good match?

When a potential suitor walks away from a transaction because of credit culture issues, it does not necessarily mean that the target's credit quality is bad or that its credit culture is inadequate.

It is just a question of being "different" from the credit culture of the potential acquiror.

No bank has ever intentionally made a bad loan (at least that's what they say). But they made it under their own culture, their own standards, and their own comfort level.

Acquiring another bank where your bank has not made the loans yet you are adopting the loans through the acquisition is a different story. Community banks cannot afford to make a mistake in acquisitions and this entire issue of credit quality and credit culture is paramount.

Credit culture and asset quality are the number one "killer" of community bank transactions after social issues. Social issues, of course, are matters such as:  Where is the international headquarters of the combined bank holding company going to be located; what will it be called; does my charter survive; do my board members still get paid; are you going to fire any of my people; will you still support the community; and those types of things.

They kill the deal first.

Once you get past those, credit quality/credit culture is next.