CECL Update Eases the Math for M&A

The Financial Accounting Standards Board is set to update the way banks calculate reserves for loans acquired in whole bank acquisitions. Could that change bolster bank M&A?

Under the Current Expected Credit Loss model, or CECL, an acquiring bank must make additional provisions for non-purchased credit-deteriorated loans — meaning, loans that have not experienced significant credit deterioration. Essentially, a buyer has to set aside extra capital to cover expected losses on loans — in addition to credit loss expectations captured in the purchase accounting marks — on day one following the deal closing. It’s referred to as the CECL double count and has been a drag for prospective acquirers.

Responding to industry feedback, FASB announced in May that it would issue an accounting standard update effectively eliminating the double count. Institutions will have the option to early adopt the new rule once it’s released. Otherwise, FASB expects the amendments would apply for annual reporting periods beginning after December 15, 2026.

Banks are now evaluating what the rule means for them. On a July 24 investor call to discuss its pending merger with $61.1 billion Synovus Financial Corp. in Columbus, Georgia, executives at $54.8 billion Pinnacle Financial Partners in Nashville, Tennessee, said their deal modeling assumed the elimination of the double count, though they noted the change did not drive the merger. Similarly, executives at $27.6 billion WesBanco in Wheeling, West Virginia, weighed the potential impacts of early adoption with respect to its recent acquisition of Premier Financial Corp., which closed on March 3. “If the rule is finalized by October of this year, we will evaluate the potential benefits and risks to adopt that change as it relates to the acquisition of Premier,” Chief Financial Officer Daniel Weiss said on a July 30 earnings call.

For the broader industry, the rule change will impact each bank a little bit differently. “It really depends on the capital position of the bank involved in the acquisition,” says Mandi Simpson, partner in charge of the accounting advisory practice at Crowe. Banks that are flush with capital may prefer to stick with the prior method rather than adopt the change early. They’re already used to the existing rule, which allows for more earnings accretion after the deal is closed — the double counted credit mark flows back in as income as the loans are paid down.

But on the other hand, she says: “For an acquirer that has less capital, that double count could be potentially an impediment if the provision required on the non-PCD loans is really impactful to the bottom line.”

The elimination of the double count may also be more meaningful for banks making relatively larger acquisitions, says Kevin Brand, a partner in Crowe’s strategy and transaction advisory group. “The bigger the deal, the bigger this is relative to their capital position,” he says. “If you’re doing close to a merger of equals, that had been basically rebooking the allowance in addition to [the credit mark] on the entire good loan portfolio of a similar size to your own. That can be a large number that now won’t need to be recorded.”

While the double count rule may not have necessarily been a dealbreaker, it was one more added complication to deal metrics, along with interest rate and loan marks related to low rate assets, says Stephen Scouten, managing director and senior research analyst with Piper Sandler & Co.

“Anything that reduces that tangible book value dilution on a deal at announcement is a potential future benefit,” says Scouten. “I’m not going to say it’s been a massive impediment but on top of everything else, it’s been a great frustration. To the degree that’s gone and maybe we get a few rate cuts, those two things in tandem can continue to move us forward.”

The elimination of the double count may also help sellers get a more favorable price since the acquirer will no longer factor in the additional provision on day one, says Alan Lloyd, a principal in the assurance group with Wolf & Co. Boards discussing a potential sale should make sure that possible acquirers are familiar with the rule change and that the capital impact is accounted for in the sale price.

“It does shorten that earn-back period in the dilution, essentially,” he says. “It’s a little sweetener for deals that maybe were very close but couldn’t quite come to an agreement.”

The elimination of the CECL double count may not be the deciding factor for most would-be acquirers. But it promises to make the math easier.

“At the end of the day, I think the most important question is, ‘Is it a good deal?’” Lloyd says. “If you’re really close on pricing, and you can move the needle a little bit now with less capital outflow on day one and a shorter earn back period, I think it could have some impact.”