Cultural issues complicate small-bank acquisitions.

Not all bank acquisitions are made equal. The ease of acquisition is in many regards inversely related to the institution's size for various reasons:

First, small institutions are emotionaI about the acquisition process. Therefore, the purchase process and negotiations are often difficult when subjective and emotional factors enter into the decision-making. Many small banks are family-owned or management-owned, and their decision to sell has been a painful one, whether motivated by aging management, the need to liquefy the stock, or the recognition that the bank, a stand-alone entity, will not survive or maximize shareholder value.

Nonetheless, when the time comes to sell, many emotional factors that do not emerge in big institution transactions come to the surface, ranging from name retention to the role of the current owners in the bank's future.

Difficulty of Integration

Second, once the acquisition has been completed, integration is often more difficult with small institutions. They do not have the resources to readily foster the systems and policies of the acquiring institution.

This, while large institutions are typically sophisticated and already possess well-documented policies and processes, in many cases with the resources and the attitude necessary to implement complex systems.

Small institutions are typically unaccustomed to large systems which are, by necessity, associated with larger companies.

They are used to doing things in a more intuitive, less structured manner and are not accustomed to process specialization and segregation of duties typically found in larger institutions, which have more people and more resources.

As a result, integration can be a difficult, labor-intensive process for the small bank that has to undergo the psychological transition from doing things in a flexible, entrepreneurial manner to a structured, more rigid process.

Lack of Experience

Third, resource allocation decisions are more rational and consistent with a big-bank way of doing things.

Smaller banks often have management that has not been exposed to the decision-making associated with a complex customer base and a broad product line, and, as a result, is not as facile in more objective resource decisions.

Consequently, the acquiring institution finds integrating smaller institutions much more resource-intensive than larger institutions where they can rely more readily on the existing infrastructure to facilitate integration.

Checking the Books

What more than makes up for most of these difficulties is the ease of due diligence of the loan portfolio and the low likelihood of finding surprises before and after the acquisition.

Small banks are relatively easy to conduct due diligence on simply due to the volume of the loans. Although documentation may not be as detailed as the big bank's loan portfolio, an acquiring institution can readily go through 80% or more of the loans and determine with a fair level of confidence the quality of the portfolio.

Larger institutions, on the other hand, not only have more complex transactions, but also the sheer volume of loans in their portfolio, which prohibits the acquiring institutions from going through a significant percentage of the loans on file.

The Vital Element

As a result, surprises that can be much more costly than anything described before can emerge.

To summarize, as you contemplate acquisition, although the common wisdom is that big is beautiful and easy, it may be so in a lot of ways, but not when it comes to the most important element in terms of potential impact on the bottom line, which is asset quality.

Smaller banks afford a much better opportunity to assess quality before an acquisition than larger banks do; however, the cultural issues associated with integrating them are much greater.

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