Garnet Capital Advisors Blog

The pace of bank mergers and acquisitions has accelerated recently. As financial institutions eye possible deals, one key variable is the state of a target's loan portfolios.

During the due diligence phase of the M&A cycle, would-be buyers must learn about the target's loan holdings in detail. Do the institutions share the same risk tolerance? Targets may attempt to hide alarming details about their loan portfolios, so savvy suitors need to know when to bring in help.

Case study: BB&T buys two Pennsylvania banks
Take BB&T's latest takeovers in the Keystone state: National Penn Bancshares and Susquehanna Bancshares. The Winston-Salem, North Carolina bank announced the $1.8 billion National Penn deal in mid-August. At the end of the second quarter, National Penn had deposits of $6.7 billion and loan portfolios worth $6.2 billion, according to American Banker.

As BB&T considered buying the Pennsylvania bank, it had to ask itself questions common to any acquisition. Is the target so deposit-rich we need to buy loans? Does the target's loan portfolio have a similar risk profile to ours?

BB&T executives faced similar questions just months earlier when they were deciding to buy another Pennsylvania bank: Susquehanna Bancshares.

Before the sale was announced, analyst Sean Dalton had flagged Susquehanna as a "good value relative to its peers." When the sale was announced, the bank held assets of $18.6 billion. Dalton saw a mixed bag within the loan portfolio portion of that total. For instance, Susquehanna's loan-to-deposit ratio was 15.3 percentage points higher than that of similar banks, perhaps pointing to too much risk. However, an examination of the loan holdings themselves showed that more than 60 percent were in secured real estate, both commercial and residential.

Acquiring banks benefit from hiring third parties to help evaluate the loan portfolios. When doing so, the in-house credit team should remain involved, according to certified public accountants Rick Childs and Larry Raber.

"Outside professionals can serve to validate the internal team's view of the portfolio," wrote Childs and Raber. "They also can be helpful when segments of the portfolio are outside the acquiring bank's expertise."

Do the banks have similar levels of risk tolerance?
When a buying bank takes on new categories of loans, it has decisions to make about personnel. Should loan officers at the target bank who are familiar with the portfolios stay on? Or should the acquirer train existing staff and perhaps make new hires?

Other questions to ask when analyzing a target's loan portfolio include whether the appetite for risk is a good match with the buyer, according to one M&A advisory firm. Would-be acquirers need to know if the bank to be bought holds sub-prime paper. Buyers should also have a good grasp of all the types of loans handled by the target. They need to know if it makes business sense to hold on to those loans or possibly sell them. Low inflation and continued low interest rates have loan portfolios trading at all-time high prices, so chances of profitable sales remain strong.

If your bank is considering a possible acquisition, any questions or concerns related to whole loan portfolios can be discussed with loan sale advisory firm Garnet Capital Advisors.