“Assisted transactions whereby the acquirer obtains the failed bank’s assets, including its loans, along with a loss-sharing agreement present a much more complicated series of valuation and accounting issues,” according to a recent Mercer Capital article, “Accounting Considerations in the Acquisition of a Failed Bank.”
When purchasing a failed bank, acquirers must answer several challenging questions, such as:
- How should the acquirer consider credit deterioration in the determination of the fair value of the loan portfolio, particularly when weak underwriting or servicing lead to great uncertainty as to future credit losses?
- What adjustments are necessary when the actual cash flows from the portfolio differ from the projected cash flows? The preceding analysis made the greatly simplifying assumption that cash flows occur as originally anticipated. In reality, as actual cash flows differ from expected cash flows, the acquirer may need to adjust the loan discount accretion, the loss-share asset, and perhaps even establish a loan loss reserve when anticipated cash flows are lower than initially expected.
Mercer Capital’s full analysis is here.