Q. We are considering a merger with another financial institution. What would you recommend from a credit due diligence perspective?
A. In a credit due diligence engagement, the experience of your due diligence team is paramount. Your team must be able to work closely with management, identify the risk and level of analysis that is commensurate with the target financial institution, and complete the project in a timely manner. It is important that the credit due diligence team work closely with the valuation group in determining the credit mark on the loan portfolio.
The acquiring bank’s branch footprint includes both metro and rural areas. This institution has been active in mergers and acquisitions, but has not completed a deal in several years. The bank has an experienced staff, a strong credit department, and a veteran Chief Credit Officer (CCO). The CCO contacted Elliott Davis for insight in identifying areas of risk within the target’s loan portfolio, as well as to assist with credit due diligence on the target.
Elliott Davis worked with the acquiring bank’s credit team to gain an understanding of the target’s portfolio, policies and procedures, concentration risks, and credit culture. Elliott Davis also gained insight from the acquirer regarding prior merger experiences, lessons learned, market knowledge, and areas of concern within the target’s portfolio to help further define the scope of our planning and credit due diligence procedures[ED1] .
In addition, Elliott Davis performed data analysis to gain a robust understanding of the target’s loan portfolio. This analysis included:
- Geographical Analysis: Elliott Davis mapped multiple views of the target’s loan portfolio to uncover geographical concentrations, redlining concerns and other potential issues. This analysis improved understanding of the target’s loan distribution compared to individual counties’ population growth forecasts.
- Portfolio Concentrations: Elliott Davis provided the acquirer’s management team meaningful insights related to (1) portfolio mix in the aggregate and by loan officer, (2) loan officers’ books by total loans and by recent originations, and (3) maturity distributions for each segment.
- Loan Officer Performance: Elliott Davis analyzed officer performance across a number of metrics and provided the results to the acquirer’s management team. Those analyses included (among others) (1) frequency of policy exceptions granted, (2) effects of pricing exceptions granted on net interest income, (3) origination trends by loan count and by book balance, and (4) concentrations of segments within each officer’s loan book.
With these insights, we provided management crucial information that allowed the loan analysis team to select meaningful samples, illuminate blind spots within the portfolio, and supply the acquirer’s management team with a better understanding of how the target’s portfolio can align with the merged organization’s strategic vision and growth ambitions.
With the experience and knowledge of the Credit Risk team, coupled with an in-depth analysis of the loan portfolio, Elliott Davis was able to work closely with management to identify risk within the target loan portfolio. Data analytics identified potential issues within the loan portfolio and allowed the loan analyses to concentrate on risky areas which ultimately saved the financial institution time and money.
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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change as a result of rapidly evolving legislative developments and government guidance.