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Portfolio Risk & CECL Allowance Calculation Purchase Accounting

Merger accounting in banking: Transparent income recognition

Neekis Hammond, CPA
Derek Hipp, CPA
August 14, 2025
Read Time: 0 min

Day 2 accounting work can get tricky 

Following a deal, financial institutions need to recognize the accretion or amortization of purchase accounting marks in an auditable and transparent way. Don't overlook income recognition.

This article covers these key topics: 

Deal activity is heating up; be accounting-ready

With deal activity heating up again, bank and credit union leaders can’t afford to be caught flat-footed when it comes to the accounting side of a merger.

There were 72 U.S. banking M&A transactions in the first half of 2025, and according to a mid-year review from Ankura Consulting Group, this year could see the highest deal count in more than five years. That’s good news for institutions looking to grow, but it’s also a reminder that critical financial reporting follows a deal.

Income recognition, in particular, is one of those areas that can get overlooked until it’s too late. Now’s the time to line up a merger accounting playbook that’s audit-ready and built to scale.

Abrigo's experts handle Day 1 and Day 2 accounting, exit pricing, and other quarterly services.

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Income recognition accounting can’t be an afterthought

Closing a bank acquisition is a big milestone, but it’s really just the start of the hard work. Day 2 accounting—particularly income recognition—is where things can get tricky fast. These purchase marks can be material to earnings, and if financial institutions aren’t paying attention to how they flow through their systems, they might set themselves up for issues with auditors and regulators. Abrigo Advisory has seen this firsthand. A lot of institutions get focused on valuation and CECL planning tied to a deal, and they treat income recognition almost like an afterthought. That can be a costly mistake.

What drives the complexity is the materiality of purchase marks (fair value adjustments). Deferred fees and costs, which are accounted for under the same accounting standard, aren’t significant enough for expedients to generate material differences.

Fair value adjustments, especially in dynamic rate environments, are significant, and it is the responsibility of management to understand how these amounts find their way into the income statement.

The core and income recognition: A recipe for auditor questions

A lot of institutions figure they’ll run the accretion through the core system or track it in a spreadsheet. The problem is, that only gets you so far. ASC 310-20 is the accounting standard that describes the treatment for recognizing fees, costs, fair value adjustments, etc., over the life of the loan as an adjustment to yield. As such, management should be able to recalculate yields, reconcile beginning and ending marks between reporting periods, accelerate and decelerate accretion in order to maintain yield, and provide loan-level positions. If not, something is missing.

To make matters more challenging, we've seen numerous cases where the valuation was calculated at a pool level with purchase marks subsequently being allocated to each underlying loan. This approach results in irrational yields and subsequent problems with loan-level accretion.

Time and time again, we've seen the inability of management to get any information or clarity from core-calculated accretion. When a parallel calculation is performed accurately, the results are significantly different. That’s why we always push for loan-level granularity from the beginning. It gives you control and defensibility.

CECL and income recognition

Some folks ask, “Well, can’t we handle all of this with our CECL model?”

If you’re talking about how marks flow into your allowance or how expected credit losses for acquired loans need to be calculated on Day 1 and for each subsequent reporting period, then yes, there’s overlap. But the allowance isn’t income recognition. They touch, but they’re not the same. As its name implies, the current expected credit loss (CECL) model is about expected credit losses. Income recognition is about amortizing or accreting a known mark into earnings over time. Different accounting standards and different processes.

Documentation matters here more than people think. If you can’t explain why income is rising or falling as those marks burn off, someone’s going to start asking questions. What you don’t want to happen is to get caught flat-footed by assuming the core system was handling it, or by the person who built the spreadsheet leaving without someone else knowing how it worked. That’s not a position you want to be in.

Abrigo built income recognition software with all of this in mind. It takes in the purchase marks, handles both base and accelerated accretion, and ties back to CECL where needed. Everything is transparent and auditable at the loan level.

But regardless of what system you’re using, the point is this: don’t wing it. You need a process that scales and holds up when someone comes asking to see the details.

Who really owns the income recognition process?

We’d also encourage banks not to treat income recognition as a bolt-on task. If you’ve got one firm doing the valuation and another firm helping with CECL, and no one really owning income recognition, you’re going to have gaps. Those gaps usually show up in audits. What you want is someone who can help you stitch the full process together, someone who’s been on calls with examiners and knows what they’re going to ask.

Income recognition isn’t the flashiest part of a deal, but it’s one of the most important parts when it comes to the integrity of your financials. It’s where the marks you put on at close start hitting your earnings every month. A problem isn’t simply a technicality; it’s visible. So get ahead of it. Build the right foundation. And make sure your process isn’t merely working—make sure it’s defendable.

 

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About the Authors

Neekis Hammond, CPA

Vice President, Portfolio Risk Sales and Services
Neekis Hammond has amassed a wealth of knowledge on ALLL, CECL preparation and methodologies, and various portfolio analysis and risk topics. Prior to his consulting work, he worked on acquisitions up to $2 billion in size at a multi-billion-dollar financial institution.

Full Bio

Derek Hipp, CPA

Director, Advisory Services
Derek has over 12 years of experience in public accounting and consulting, specializing in financial institutions. He is a co-founder of the ValuCast™ suite of software solutions and is a leader on Abrigo’s, formerly Valuant, consulting and product delivery services. Derek specializes in Day 1 valuation and due diligence services,

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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