(Mortgage M&A Trends) Bill Tessar of CIVIC: When an Acquisition Works—And What Lies Ahead for the Industry

William J. Tessar is President and CEO of CIVIC Financial Services, a premier institutional private money lender for real estate investment financing. He has more than 30 years of experience in the financial services industry and has been one of the nation’s top loan originators. Learn more about CIVIC at www.civicfs.com.

(This is part one of a four-part series, “Mortgage M&A Trends”, discussing recent and upcoming mortgage merger environment. Stories were written by four executives, three of whom have been through a recent M&A transaction: CIVIC Financial Services President William Tessar; Evolve Mortgage Service CEO Paul Anselmo; LoanLogics CEO Bill Neville; and STRATMOR Group Senior Partner Garth Graham.)

In 2019, Harvard Business Review published research concluding that between 70% and 90% of all mergers and acquisitions fail. Having been through several deals in the past, and having witnessed many more, I wasn’t surprised. In every deal, there’s a large probability that teams, cultures, goals or values will not mesh, simply because every organization is different.

Fortunately, our recent acquisition was the exception. Pacific Western Bank provided us with the capital base to take us to new levels without “bankifying” us, and our business has had 12 straight record-breaking months since. It’s been a tremendous success. Given the likelihood there will be many more acquisitions in the industry’s near future, it seems useful to look back and understand why.

Why We Did the Deal

Long before our acquisition, we knew there were several things we would need in a capital partner. The most important was that our parent had to have a strong capital base. If you’re in the business of lending money, you can’t run out of it. I realize that sounds obvious. But during the pandemic, there were many firms in the private lending space that represented themselves as having a sound financial platform and structure that simply evaporated when trouble hit. So capital was number one, and Pacific Western Bank had plenty.

The second most important thing was preserving our unique culture. We’ve managed to build something pretty special at CIVIC and have received numerous awards and broad industry recognition. But it’s really all about our people and our culture. We have almost 20 full-time employees whose sole responsibility is the health and wellness of our entire team. So I needed to know that our new parent would leave our identity alone and not try to make us something we weren’t. They’ve respected that.

We had a number of things working in favor of a successful deal. Prior to PWB entering the picture, we had a “dance” with a huge Wall Street firm that wanted to buy a private lender. The deal obviously didn’t happen, but we had already completed a lot of due diligence work that made our acquisition flow much smoother.

Second, and perhaps most importantly, we knew PWB well and vice versa, as we had already sold them nearly $1 billion in paper. They knew what we were producing, they knew how our paper performed, and they knew how we reacted when the performance wasn’t what we expected and how we resolved those issues.

Third, PWB had lent hundreds of millions of dollars to our former parent, Wedgewood Inc., and their CEOs had a great working relationship, which pretty much put a bow on the deal. PWB also had an experienced acquisition and transition team and had purchased all kinds of firms in different sectors. The fact that they brought a tremendous amount of depth and expertise to the table was icing on the cake.

What I Learned

The most important lesson I learned throughout the acquisition was to listen. When I approached our team about a possible deal, I had to remember I had two ears and one mouth, so I tried to use them proportionally to get everyone’s thoughts, questions, and concerns. Then I took these questions and concerns to my executive team, and we tackled them one at a time.

This wasn’t easy, as it led to some very tough conversations with PWB that needed to be addressed before the deal happened, rather than afterwards. But the process was extremely valuable. Not only did it give me answers to questions that I may not have thought about, but it created a closer bond between myself, my executive team and the entire organization as well. It’s probably why we didn’t lose a single employee after the deal—in fact, we’ve hired 180 additional people since, and been able to expand all of our departments.

Another thing that served me well was keeping an open mind. I don’t walk into any relationship, meeting or merger and think it’s either my way or the highway, or that I have all the answers. Each one of our leaders, in fact, is always open to better ways to scramble an egg, and when we find it, we’re going to take advantage of it.

I also learned how important it was to borrow and adopt best practices from each other and not push your will on the other party. Religion is best learned when it’s met with an open heart, and it’s the same way with marriages and business. The idea is to create unity and something that’s better together than when you were separate. In CIVIC, PWB saw an opportunity to not only get what came out of the ATM but the entire ATM machine. We saw an opportunity to have a tremendous capital resource. From there, we just tried not to screw each other up.

More Deals on the Horizon

There’s little doubt in my mind that M&A activity is going to be very active over the next year. In the private lending space, I know of at least two big deals that are about to happen and probably three or four that will take place by the end of next year. Our sector will end up having six or seven really big, well-capitalized players, with a huge drop down to the next tier of smaller and mid-sized players.

On the conventional side of the business, it’s going to be like the Wild, Wild West. I’m expecting a lot of activity taking place among very large companies and very small ones. Large companies that have big capital bases need to buy up originators because they have huge machines to feed and need loan volume, and the quickest way to get volume is to buy it.

Small mortgage brokers and small mortgage bankers should be fine, because they are able to act more nimbly and adjust to the market because of their size. It’s the players in the middle that will struggle. With massive margin compression and huge reductions in volume as refi appetites wane, mid-sized lenders are going to have to choose whether to get smaller and cut staff or get sucked up and acquired by a larger player. What they can’t do is stay still, but most mid-sized companies may not recognize what is happening before it’s too late.

The conventional market just went through three years of unbelievable volume, mostly because borrowers were refinancing again and again as rates dropped. Now it’s going to be a fight for the purchase borrower amid a shortage of housing inventory. There will be a whole bunch of people fishing in the same pond, and there likely won’t be enough to go around. What the market will look like next year is anyone’s guess, but it will be interesting to watch.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)