Executive Summary
Rising interest rates have materially changed the purchase accounting landscape for bank mergers and acquisitions. Under ASC 805, acquirers must record identifiable assets acquired and liabilities assumed at fair value as of the acquisition date. In a higher-rate environment, this process typically requires greater judgment around loan discounts, securities marks, deposit assumptions, credit risk, and goodwill. The result is a more sensitive and more scrutinized purchase price allocation process, where robust cash flow modeling, market participant assumptions, and clear documentation are essential.
The Shift in the Fair Value Environment
The banking industry has experienced one of the most significant interest rate cycles in decades. Following an extended period of historically low rates, the rapid rise in market interest rates fundamentally altered the economics of bank acquisitions and the purchase price allocation (PPA) process required under ASC 805.
Purchase accounting has always required significant judgment, but rising interest rates have increased the complexity, sensitivity, and importance of fair value measurements across virtually every major asset and liability category. For acquirers, valuation conclusions can materially influence goodwill, tangible book value dilution, capital ratios, earnings accretion, and investor perception of the transaction.
Loan Portfolio Valuation Challenges
The most significant valuation issue in many bank acquisitions is the fair value measurement of the acquired loan portfolio. Acquired loans are recorded at fair value rather than contractual principal balance. Fair value is generally developed using discounted cash flow methodologies that incorporate contractual cash flows, expected prepayments, expected credit losses, liquidity considerations, and market participant yield requirements.
As market interest rates increase, discount rates used to value loans also increase. Loan coupons that were attractive or market-based when originated may become below-market by the acquisition date. This creates larger fair value discounts, particularly for fixed-rate loans originated during the low-rate period from 2020 through 2022.
Loan Categories Most Affected
- Fixed-rate commercial real estate loans
- Residential mortgage portfolios
- Municipal and specialty lending portfolios
- Longer-duration commercial loans
- Low-coupon loans originated during the prior low-rate cycle
These loan marks can be material. Larger discounts reduce the fair value of identifiable assets acquired and may increase goodwill, affect tangible book value dilution, and alter projected accretion from the post-closing accretion of loan marks.
Credit Risk and CECL Interaction
Rising interest rates can also affect purchase accounting through credit risk. Higher borrowing costs may pressure debt service coverage, weaken borrower liquidity, and increase refinancing risk, particularly in more rate-sensitive sectors. Commercial real estate, highly leveraged borrowers, and variable-rate credit exposures often require additional analysis.
The valuation of acquired loans must distinguish between interest rate-driven discounts and credit-related assumptions. For purchased financial assets with credit deterioration, the accounting treatment also requires careful coordination with CECL to avoid double counting the expected credit losses. This increases the need for integrated valuation, credit, and accounting analysis.
Core Deposit Intangible Valuation
Core deposit intangibles (CDIs) remain an important component of bank PPAs. Core deposits provide economic value because they represent a relatively stable and lower-cost source of funding compared with wholesale borrowings or market-rate alternatives.
In a rising rate environment, however, CDI valuation becomes more complex because higher rates create both positive and negative valuation forces. Higher alternative funding costs can increase the economic benefit of core deposits. At the same time, depositors may become more rate-sensitive, deposit betas may increase, and attrition may accelerate as customers seek higher-yielding alternatives.
Key CDI Assumptions Requiring Scrutiny
- Deposit betas and repricing assumptions
- Projected attrition rates by product type
- Alternative funding cost assumptions
- Deposit segmentation and account behavior
- Market participant required returns and discount rates
Small changes in CDI assumptions can produce meaningful changes in the indicated intangible asset value. This has increased the importance of supportable empirical data, product-level analysis, sensitivity testing, and clear documentation of market participant assumptions.
Investment Securities and AOCI Considerations
Investment securities portfolios have become another central area of focus in a rising rate environment. Since bond prices generally move inversely with interest rates, higher rates can create substantial unrealized losses on fixed-income portfolios, including treasury securities, agency securities, mortgage-backed securities, and municipal bonds.
For purchase accounting purposes, acquirers must evaluate the fair value of securities as of the acquisition date. This assessment should consider market pricing, duration, embedded options, extension risk, prepayment behavior, credit spreads, and market liquidity. Although some valuation changes may already be reflected in accumulated other comprehensive income for available-for-sale securities, the PPA process requires a fresh acquisition-date fair value assessment.
Goodwill Volatility and Transaction Economics
Goodwill is the residual amount after identifiable assets acquired and liabilities assumed are measured at fair value. As rates rise, goodwill can become more volatile because several major valuation inputs move at the same time. Loan discounts may increase, securities values may decline, CDI values may become more assumption-sensitive, and credit assumptions may widen.
The combined effect can materially alter the PPA and transaction economics. Larger loan and securities marks may increase goodwill and tangible book value dilution, while future accretion of marks may improve reported earnings over time. Acquirers should evaluate these effects early in the transaction process so that pricing, capital planning, investor messaging, and accounting outcomes are aligned.
In addition, the post-transaction evaluation of goodwill for each reporting unit under ASC 350 also will be an area of focus from auditors, regulators, and the SEC.
The Importance of Discounted Cash Flow Analysis
In the current environment, discounted cash flow (DCF) analysis has become especially important. Market multiples and transaction benchmarks remain useful, but rapidly changing interest rates can make historical market evidence stale or less comparable. DCF analysis allows valuation professionals to explicitly incorporate acquisition-date yield curves, current funding costs, credit loss expectations, prepayment behavior, deposit repricing, and market participant return requirements.
A well-developed DCF model provides transparency into the specific assumptions driving valuation conclusions. It also allows management, auditors, and regulators to evaluate sensitivity around key drivers such as discount rates, deposit betas, loss rates, prepayments, and attrition. In a rising rate environment, this transparency is often as important as the final valuation conclusion itself.
Practical Implications for Acquirers
Conclusion
A rising interest rate environment has transformed the PPA process for bank acquisitions. The most significant challenges typically involve loan portfolio discounts, CDI assumptions, securities marks, credit risk, market participant discount rates, and goodwill determination. These areas are interconnected, and each can materially affect transaction accounting and post-closing financial performance and thus the amount of dilution or accretion that may occur post-deal.
Successful PPAs require robust modeling, disciplined assumptions, and extensive documentation. Institutions that incorporate comprehensive DCF analysis, carefully evaluate deposit and loan behavior, and stress-test key valuation judgments will be better positioned to defend their accounting conclusions and communicate transaction economics clearly to auditors, regulators, investors, and other stakeholders.
© Copyright 2026. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC, its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
