Acquisition Due Diligence

I’m just back from this year’s America East conference, and one of the things I heard from several attendees was – acquisitions are still happening, and the people inheriting the acquired bank’s SBA portfolio are concerned.

I know from experience that the SBA team is often left out of conversations when a bank acquisition is announced. And if you’re working for the acquiring bank, there are going to be a lot of square pegs trying to fit into round holes – everything from the headaches of system conversions and data mapping to core systems that have been on the “to do” list for upgrades for, well, let’s just not say how long, and any number of other challenges.

And let’s be honest: a bank’s SBA portfolio is a small segment of a big picture – which means it can easily be overlooked.

However, the SBA portfolio is also often the most fragile segment of a bank’s overall loan portfolio. And even if all the SBA loans are solid and without concerns, they’re often the most complicated to convert to a new system – and to integrate into new a team.

So let me say, loud and clear, that the acquiring bank’s SBA administrative and servicing department should be involved early and often.

With that said, here’s a quick rundown on due diligence items the SBA team should be reviewing from the potential acquisition. (And if you’re already past “potential” and into “actual” – these are even more essential for review!)

1. Recent 1502 reports – and recent 1502 discrepancy reports

2. List of any SBA loans unreconciled with FTA – and if in a queue with the FTA, what queue # was assigned

3. Recent semi-annual reports – documenting loans already repurchased by SBA but not yet charged off

4. The bank’s PARRiS score

5. Recent third-party and/or OCRM reviews

6. SBA exception and outstanding tickler reports

7. Verify SBA new loans in process, past due loans, and loans in liquidation status with SBA

8. Verify loans in the process of being repurchased or ready for charge-off

You should also check to see if the bank has any remaining PPP loans approaching maturity. Are there guaranty packages that need to be submitted? Do Borrowers need to submit for forgiveness? Time is running out!

Furthermore, if Borrowers are making payments on PPP loans that you, as the Lender, don’t expect to submit for repurchase, be aware that guarantees will expire when the loan matures, and SBA has requested that Lenders should consider marking them as paid in full with the SBA.

And let’s face it: this list is only the tip of the iceberg, the most important items that need attention. We here at LRM Lender Consultants are ready to help with identifying other points of concern – and of course we can help with the review itself, or with SBA training to bring members of both teams up to speed and ensure full SBA compliance as you complete the acquisition and merger.

Have you recently gone through a conversion or acquisition with an SBA 7(a) portfolio? We want to hear your stories! What didn’t you know that would have made the transition easier and smoother?