FOCUS on self-study CPE
By Doug Van Meter, CPA
& Advisors in Oklahoma a variety of audit and leads the Oklahoma An OSCPA member for Expo.
T
he number of annual bank acquisitions is on the decline after peaking in 2014. Interestingly, the number of deals declined during 2016, suggesting larger banks were being acquired, as compared to recent years. During 2017, the number of deals and aggregate deal values decreased while the average deal value per tangible common equity increased. Approximate average deal value to tangible common equity is 161 percent for 2017, based on 115 completed deals, as compared to 143 percent during 2016 at 227 deals. Average deal values to earnings are slightly lower—22.1 percent during 2017 as compared to 24.05 percent during 2016. Various factors have contributed to the rise in bank acquisitions since 2012, including increased regulatory compliance, succession planning issues, increasing capital requirements, the need to leverage excess capital and uncertainty in operating risk associated with government regulations. However, under the Trump administration, these trends may not continue at the same pace due to recently enacted tax reform and promises for reduced regulatory burden. Te reduction in corporate and individual tax rates likely will affect pricing strategies with considerations for regulatory capital related to reduced net deferred tax assets and longer term benefits of reduced income tax provisions and increases in net earnings. Many bank management teams are assessing their strategic plans to be either buyers or sellers based on the changing acquisition environment. One of the first considerations in the acquisition process is obtaining regulatory approval. Te application process should include thorough due diligence of the target, a well- documented post-acquisition business plan and pro forma financial statements and disclosures with post-closing capital ratios. Capital ratios pre- and post-close will be an important area of emphasis for regulators to evaluate the viability of the transactions and will influence ultimate approval.
10 CPAFOCUS May/June 2018
Terefore, it’s important for the buyer to carefully evaluate the transaction and pro forma financial information recording. A first step in preparing accurate pro forma financial information and disclosures is summarizing the deal contract, including the purchase price, contingencies, obligations and transactions occurring due to change in control provisions and transfer of assets acquired and liabilities assumed. Once a clear understanding of the transactions is obtained, the acquirer will need to apply Accounting Standards Codification 805, Business Combinations, to the transaction, which requires a thorough analysis and recording of assets acquired and liabilities assumed at fair value. Te following are some high-level reminders when recording a target acquisition:
• With limited exceptions, assets acquired and liabilities assumed and non-controlling interest are recorded at fair value;
• Merger-related costs, such as legal, accounting and consulting fees, are no longer capitalized into the acquisition price;
• Currently, none of the target’s allowance for loan losses transfers to the acquirer. Instead, adjustments for credit risk are subsumed in the fair value of loans acquired;
• Any excess of net assets acquired over the purchase price (formerly negative goodwill) is recognized in earnings as a bargain purchase gain;
• Te acquisition date is the date on which the acquirer obtains control of the target; and
• Adjustments to fair value may be made post-acquisition within one year after the acquisition date if better information is obtained.
Estimating fair value can be challenging pre- acquisition and may require outside assistance, particularly with loan portfolios. Bankers generally instill good due diligence processes when
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