Pub. 5 2015-2016 Issue 3

16 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S FEATURE ARTICLE In the pre-recession world, the due diligence process of reviewing a target’s loans and loan classification system was a critical part of an acquisition. KAMAL MUSTAFA CHAIRMAN AND CEO INVICTUS CONSULTING GROUP Why Community Banking M&A in the Post-Recession World Must Change N early every aspect of community bank- ing has changed since the 2008 re- cession: the economic environment, regulatory oversight, federal mone- tary policy, deposit and liability structures, and capital requirements. This has led to major ad- aptations in the analytical methodologies that underlie capital and strategic planning activities with one exception: mergers and acquisitions. Legacy methodologies and processes con- tinued to dominate M&A, even as regulators are paying close attention. It’s with good rea- son that the Office of the Comptroller of the Currency said in its latest semi-annual risk perspective that its examiners were going to begin to assess community banks’ “merger and acquisition processes and procedures.” Although every acquirer recognizes that its own bank has changed dramatically since the recession, a vast majority fail to investigate how potential target banks have changed. The new regulatory environment has imposed higher leverage ratios across the en- tire community banking system. Traditional accounting statements have limited value when assessing a bank's capital requirements in this post-recession world. Yet these legacy statements – and pro formas generated from them – are still used to analyze most M&A transactions. Some acquirers seek false comfort in the loan review due diligence process. The reality is simple: Without stress testing the target, it is practically impossible to get an accurate as- sessment of the regulatory capital required to support the assets of the bank being purchased. We have reviewed post-recession communi- ty bank M&A transactions and found massive variances between the capital requirements of seemingly identical transactions. These differences turn outwardly great acquisitions into gross overpayments and sometimes -- for- tunately for the acquirer, and unfortunately for the seller-- the reverse.