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The value of fair value: Credit union merger accounting requires a strong partner

Mike Green
March 21, 2024
Read Time: 0 min

Find the right support for your credit union merger

Consider the benefits of a third-party fair value specialist to smooth the credit union merger accounting process.

You might also like this webinar, "Valuation and purchase accounting: Navigating the changing M&A landscape."

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The landscape of credit unions is constantly in flux, mainly due to consolidations. Mergers and acquisitions offer potential for growth but also bring complexities, especially in determining the fair value of assets and liabilities. Consulting firms specializing in valuation services can be crucial partners for credit unions as they negotiate the maze of uncertainty in merger discussions. The following green flags to look for in a third-party specialist can help credit unions choose the best partner possible when it comes to credit union merger accounting and enterprise value analysis.

Why a third-party specialist?

The importance of fair value expertise

The following benefits to using a third-party fair value specialist can help credit unions weigh their options and understand what to look for in a parter:

Accuracy and transparency. Firms specializing in fair value bring specialized expertise in financial modeling and valuation techniques. Their work guarantees that valuation during the merger process is accurate, transparent, and adheres to accounting and regulatory standards. These qualities will help avoid overvaluation or undervaluation during the credit union fair value accounting process.

Objectivity. Fair value specialists provide independent, objective opinions. This objectivity is especially critical when emotions run high during credit union mergers, providing a neutral baseline for negotiations.

Risk mitigation. Identifying and quantifying potential economic risks associated with financial assets and liabilities becomes much easier with a fair value expert on your team. This helps mitigate financial risks and ensure the long-term success of the merged credit union. 

Beyond book value

Understanding enterprise value in credit union mergers

Why is enterprise value important? As mutually owned entities, credit unions do not exchange financial consideration in a merger transaction; hence, there is no “purchase price.”  The “purchase price” is the cornerstone of determining resulting goodwill (or bargain purchase gain).  Enterprise value, or the fair value of the acquired credit union, becomes the imputed “purchase price” of the transaction and acts as the baseline in the purchase price allocation exercise for goodwill determination.

Enterprise value considers more than just the book value of a credit union's assets and liabilities. It incorporates the entity's earning potential, market position, intangible assets, and prospects. This results in a more comprehensive and realistic valuation. A thorough understanding of the to-be-acquired credit union’s enterprise value guides credit unions in making well-informed merger decisions. It clarifies the combined entity's pro forma capitalization and value proposition, ensuring the merger aligns with strategic goals. 

Supporting the merger accounting process

How fair value firms can facilitate credit union mergers

A fair value firm will provide the following support measures during the credit union merger:

Due diligence support. Fair value firms review the target credit union's financial statements, loan portfolios, deposit relationships, and other vital metrics. This in-depth due diligence uncovers critical information and potential red flags and clearly indicates fair value before entering into a transaction.

Negotiation power. Fair value assessments can be the foundation for strong negotiation positions. Executives can enter credit union merger accounting discussions with accurate data and justifications for value, potentially leading to more favorable terms.

Post-merger integration. Fair value specialists can also help support a smooth integration process post-merger. They provide fair value assistance at closing to assist in the fair allocation of the purchase price and the accurate assessment of goodwill (or negative goodwill), simplifying the accounting process.  Post-closing, they can provide the appropriate accounting entries and calculations of the accretion and amortization required by GAAP of the day one fair value adjustments.

Green flags

Choosing the right fair value firm

Once you have made the decision to use a fair value firm to help facilitate your credit union merger, look for the following qualities:

  • Experience: Find fair value firms with a track record in credit union mergers. Their sector-specific knowledge is invaluable.
  • Credentials: Ensure the firm's professionals possess the necessary certifications and credentials in valuation.
  • Communication: Prioritize a firm with exceptional communication skills. They'll need to explain complex valuation concepts clearly for effective decision-making.
  • Comprehensive: The firm should understand the full impact of a transaction on financial reporting. Valuation, CECL, and Income Recognition (Day 2) are interconnected. Solving one piece of the puzzle without the whole picture can confuse and limit success.

Partnering with a fair value firm can be a game-changer for credit union mergers. Their expertise ensures accurate valuations, informed decisions, and smoother transitions. By incorporating enterprise value analysis, credit unions gain a holistic understanding of their potential partners, maximizing the chances of a successful merger.

About the Author

Mike Green

Manager, Advisory Services
Mike Green is a Manager for Abrigo Advisory Services focused on valuation, consulting, and credit risk management, a role he has had since joining the company in 2021. Prior to joining Abrigo, Mike was a senior manager in the EVOLV Business Services group at SS&C Primatics, a role he held

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