July/August 2014
Wisconsin Community Banker
23
“School district leasing activity is expected to reach
record levels in the next 24 months,” he said. But rather
than chase after opportunities, LaSalle advocates an organic
process. The least expensive way to generate new business is
through existing accounts. Expect 20 percent of your exist-
ing customers to inquire or participate in leasing within
the next 24 months. Stay away from broker market options,
which is where most of the fraud occurs.
Leasing comes with risk but with some forethought it can
be managed well. In large ticket leasing, “residual” risk —
the amount at the end of the lease that the customer will pay
to transfer and gain ownership — is the source of the great-
est profitability as well as the area with the potential for the
greatest loss. But in middle market leasing, if you document
the residual obligations and requirements at lease expira-
tion, this will convert the market value risk to credit risk.
LaSalle said, “There is no risk you should subject yourself to
with residuals.”
Community banks excel in evaluating credit risk. The
systems, procedures, and personnel are already in place.
Mitigate risk through direct customer communication and
payment requirements. “Community banks have a dramatic
advantage,” he said. “It easily fits into community bank
credit models and operations. We should own that market
in the middle.”
M&A Activity
Open any daily newspaper and you’ll know that mergers
and acquisitions is a hot topic. Regulatory and compliance
costs, Basel III capital requirements, and compression of
net interest margins, as well as slow or no loan growth, are
driving more banks to consider merging or acquiring a peer
or a branch.
Thanks to improved asset quality, we’ve seen a sharp
decline in bank failures and the number of troubled banks
addressing severe regulatory enforcement. This is paving
the way for deals.
Nicholas Hahn, manager of risk advisory services with
McGladrey, provided some important considerations when
determining if your bank should consider an acquisition or
merger. Along with doing due diligence and looking at the
motivations of both the buyer and the seller, he cautioned
community bankers to be aware of compliance issues.
“Their problems are your problems when you take them
over.” Other factors to consider include the existing man-
agement team and talent, key vendors, employee contracts
and compensation, OREO, and funding structure.
Pricing is seeing multiple drivers. There’s more focus on
earnings performance and potential for growth.
Something that people often overlook or dismiss is the
compatibility of the culture between the two parties. Hahn
observed, “Smaller banks often experience larger cultural
instability after a merger than do larger banks.”
Banks receiving stock in an acquisition transaction
should be doing reverse due diligence of the acquirer. Nego-
tiation of pricing and employment happens before the due
diligence. Use in-house or external resources to help you
make those decisions.
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