T. Alexander Spratt
Founder & former President

Many financial services professionals believe that, after relative dormancy, M&A activity might increase shortly. In my 50 years of performing due diligences (DD) on loan portfolios as a banker or advisor, I have observed many actions that diminish the quality of a DD. As negative consequences of mistakes are often more indelible than observing something done well, I’m offering my thoughts on ten mistakes to avoid during this sensitive and critical process.

1. Do not do a cursory DD. The two biggest mistakes banks make are overpaying for the target and doing an ineffective DD, particularly on loan portfolios — the target’s biggest asset. Most bank failures include risky loan portfolios.

2. Do not communicate hard and pre-determined, desired mark-to-market (mark) for the DD. We have seen banks try to back into a (mark) for borrowers and portfolio that both deceives them and undermines true independence.

3. Do not overlook the importance of culture, risk appetite and loan portfolio management. We have seen situations that would have — or did — result in no added value for the acquirer due to clashing cultures and business methods.

4. Do not rush to complete a DD at the expense of thoroughness and quality. While there is always a sense of urgency, no short cuts should be made that would jeopardize a good DD. Relying only on call reports, board reports and/or the target’s risk ratings is a dangerous shortcut.

5. Do not confuse a DD with an ordinary loan review. A proper DD uses established software, protocol and credit professionals to focus on future material possibilities and consequences — not just on historical numbers and performance. It’s more acutely risk-based and prospective than a standard loan review.

6. Do not use junior lenders or credit analysts. Having relatively few problem loans for the past 12 years has created overconfident lenders who, when reviewing loans, lack workout and troubled borrower experience. Seasoned professionals with executive level and senior backgrounds that have workout as well as deep and broad credit management experience are necessary for a good DD.

7. Do not think saving money on a DD is cost-effective. In the long run, if done well, a DD’s cost pales in comparison to that of attorneys, CPAs, investment bankers and terminating redundant costs of contracts and people. Anticipating issues is more cost-effectively managed than surprises.

8. Do not minimize the impact of integrating any loan portfolio into your bank. Understand the impact of stress, disruption and confusion that could be added to the cost of charge offs and/or non-accruals completing a transaction.

9. Do not put DD results into a model and forget the observations and knowledge gleaned that may be very useful when integrating another bank into your own. The results can have useful information well beyond a mark. Virtually all integrations have some bumps in the road. Disruptions can be dealt with much earlier by using the DD as a roadmap to focus on credit risk that typically surfaces well after the merger is finalized.

10. Do not forget that loan problems are inherent in every bank’s portfolio. Finding them is only a matter of when, what and how much. We find in most DDs that many banks’ risk ratings are at least slightly on the optimistic side, and many banks are reluctant to downgrade risk ratings, even to the lowest Pass grades.

The bottom line is, if you use the right people, the right tools and the right processes, you give yourself the best chance to avoid learning these lessons the hard way, and you will have a more successful transaction.


T. Alexander Spratt

Founder & former President

  1. Alexander (Sandy) Spratt, is the founder and former President & CEO of Ardmore Banking Advisors and Ardmore Capital Advisors, which he has led for 33 years. Sandy is a former bank Chairman, President & CEO, Chief Credit Officer and Chief Lending Officer. As a bank executive he supervised multiple lending and investment banking segments from local to national, small business to large corporate, and also very specialized industries such as ABL, Healthcare, Communications, Leveraged Lending, CRE and Financial Advisory. He has also advised non-financial corporations from startups to multi-national entities on management and financial matters, including M&A. He currently continues as Board Chairman of Ardmore and plays an active role in strategic initiatives and in the performance of due diligences.