AllCapital Markets

How Banks Can Navigate M&A Challenges

By December 2, 2021 December 9th, 2021 No Comments

4 things to consider when combining loan portfolios

According to a recent article in the American Banking Journal, bank M&A is on pace to exceed pre-pandemic levels. This surge is due in part to the restoration of confidence in the economy, as well as banks being flushed with liquidity and capital. They are ready to do business and increasingly looking to build scale in their organizations through acquisitions.

With this in mind – transactions associated with an M&A come with their own set of challenges. Many different issues can arise when two financial institutions merge especially as it relates to combining their loan portfolios. The rule of thumb that “One Plus One Rarely Equals Two” doesn’t always ring true when you’re merging loan books and managing lending limits. Taking a hard look at the combined loan portfolio is considered prudent risk management.

In this blog post, we will offer up some guidance and best practices on how banks can navigate some of the issues associated with M&A from a capital markets perspective.


When combining two loan portfolios together, we recommend that you consider the following:

  1. Asset Class Concentration – Individually, each bank may have been operating within the boundaries of their existing loan policies; however, when banks merge together, their combined asset class concentrations frequently do not fall within the limits of the new policy. They can be overexposed in one class creating a greater risk or they can be under capacity providing an opportunity.

An example of this can be seen within the hospitality industry, which was heavily impacted by COVID-19. While recovery is underway, loans in this industry sector tend to be on the larger side and financial institutions can quickly assess whether they are overexposed to a geographic area, flag (brand affiliation), or sponsor. If the acquiring bank (Bank A) is close to their limit on hospitality at 100% of the policy and the bank being acquired (Bank B) has a higher concentration above Bank A’s existing loan policy, their combined loan portfolio would be overexposed within that asset class.  As a result, they may want to consider moving assets through note sales, participant sourcing or loan portfolio sale/buybacks.

  1. Lending Limits – Banks with overlapping markets may also experience customer overlap, which can cause them to exceed their loans to one borrower limit that in turn put their deposit relationships at risk. These are often some of the key customers for both institutions – these historical relationships have helped build franchise value and should be preserved during any transaction.

Collectively, two banks do not want to put themselves at risk by exceeding lending limits. For example, a local homebuilder may have a $15 million lending limit at Bank A and an additional loan at Bank B; upon merging these two banks together – the homebuilder may exceed $30 million in loans. In this instance, the bank may need to consider selling loan participations to stay within legal lending limits and help manage their concentrations and relationship exposure.  This also provides the potential to explore other income sources like servicing income.

  1. Approach to Distressed Assets & OREO – Every financial institution will come into a merger with its own process and governance on how they handle distressed assets. It’s important to develop a clear, combined strategy for asset resolution both in the combined loan portfolio, as well as OREO (Other Real Estate Owned).

Sometimes a bank will enter a merger without ever having sold a loan before – in these cases, they may have demonstrated a high level of patience in the disposition of OREO’s and they may not have an accurate valuation on the books. In other cases, a bank may be experienced with disposing of distressed assets quickly through note sales and understand that the disposition process can be a productive and efficient way to move assets. Thorough upfront due diligence should be conducted in order for accurate marks to be placed on the assets prior to closing – this increases a bank’s ability or desire to sell loans.

  1. Application of M&A Accounting Rules to Maximize Value – Banks know that mergers are expensive – they understand the concept of a “One-Time Charge”. Disciplined accounting can maximize value and position the new financial institution to deliver the best results in the future.

During the acquisition the acquiring bank needs to be consistent in modeling the pro forma balance sheet of the company – this includes marks to loans, as well as determining portfolio concentrations. The bank will need to mark assets and consider resolution strategies including loan sales and participations. After the result of this analysis the bank would be well served to take advantage of the one-time charge to position the organization for a smooth earnings stream in the future.

To summarize, banks need to be proactive during an M&A and make sure they are considering the following four things during a consolidation: asset class concentrations, lending limits, distressed assets, and accounting principles. This will ensure that the bank is well-positioned to meet the needs of its customers and deliver predictable earnings into the future.

At MountainSeed, our Capital Markets team regularly engages in dialogue with a network of financial institutions across the country to help them navigate challenges and develop strategies to rebalance loan portfolios, minimize losses and position the combined institutions for growth and success. Whether it be through note sales, participant sourcing, or loan portfolio sale/buybacks – our team of experts can help lenders discover creative ways to solve these issues.

To discuss an upcoming acquisition or the challenges associated with one, please reach out to MountainSeed’s Capital Market Solutions at