The acquirer is not likely, however, to pay for the benefit. The last factor effecting earnings is the level of loan loss reserves on the balance sheet. Given that banking is a risk taking business, loan losses are a fact of life. How well management measures and prices risk is an important aspect for continual growth of revenues over time. When valuing a bank, the perceived credit risk within the bank should be covered in the loan loss reserve.
Reserves can function as an indicator of how well a bank has been managed.
A reserve that is too high or too low can signify that management may or may not be focusing on the long-term picture. The quarterly provision for loan losses, which serves to replenish or increase the reserve, comes directly out of earnings. Investors would rather see a smooth, steady increase in revenues driving any earnings increase, rather than a heartbeat chart due to changes in yearly provisions to bolster reserves. The key to enhancing value through profitability is consistent execution over an extended period of time. To varying degrees, improving an institution's efficiency will be important.