3 Ways a Loan Portfolio Valuation Is Helpful to the Acquirer
Mercer Capital works extensively with both the management of an acquirer and their loan review personnel (both internal and external) to obtain an in-depth understanding of loans being acquired. We provide a detailed valuation model along with extensive documentation to support our analysis of the fair value of the subject loans, reflective of the credit risk embedded therein.
Our clients find these analyses helpful both when assessing a target initially and when accounting for the acquired loans at the transaction closing date. Here are three ways that a loan portfolio analysis is helpful to your bank when considering an acquisition.
- Assess the Target’s Credit Risk More Quickly and Accurately. The successful acquirer typically assumes all the credit risk inherent in the target institution, and failure to properly assess this risk typically hurts the acquirer’s ability to generate a profitable return on the capital allocated to complete the acquisition. A timely and accurate valuation of the loan portfolio is necessary to assess the target’s credit risk prior to closing, particularly when the target is relatively weak and both information and time are limited.
- Improve the Decision-Making Process. By obtaining a loan portfolio valuation, managers and directors gain a better understanding of the credit risk inherent in the portfolio, and the outlook for future performance of different segments of and individual credits in the portfolio. This enhances discussions among management and directors and provides a more detailed basis for submitting offers for the target and estimating the pro forma impact on capital ratios and earnings from the acquisition. Additionally, having an independent third party analyze the target’s loan portfolio frees up members of the acquirer’s due diligence team to assess and resolve other merger-related issues.
- Reduce the Potential for an Accounting Surprise. Merger-related accounting issues for bank acquirers are often complex. An assessment of the loan portfolio prior to closing provides management, directors, and their auditors an opportunity to evaluate, in advance, the methodology employed to value the acquired loans, as well as the potential impact on the acquirer’s balance sheet and earnings going forward. This reduces the likelihood of surprises when the fair value of the loan portfolio is determined on the transaction closing date. Further, materially incorrect credit and interest rate marks relative to the loan portfolio valuation at the acquisition closing date leads to delays in subsequent monthly closings and the inability to meet other financial reporting requirements.
In addition to loan portfolio valuation services, we provide acquirers with valuations of other financial assets and liabilities acquired in a bank transaction, including depositor intangible assets, time deposits, and trust preferred securities. We are always happy to discuss your valuation issues in confidence as you plan for a potential acquisition. Give us a call today.