Given the recession and today's stringent regulatory environment, it's no wonder credit unions are merging. But instead of mergers of necessity, many healthy credit unions are deciding to merge to take advantage of economies of scale and their combined ability to better serve their members. In fact, a recent report by the Filene Institute (August 12, 2009) confirms that the majority of mergers over the past 25 years fall into this category.
But new accounting rules have introduced new complexities for merging credit unions. Instead of simply pooling the credit unions' combined balance sheets, FASB 141-R now requires that the acquisition method of accounting be used to record the fair value of the acquired credit union. This includes determining fair value of individual assets and liabilities, entity value, identifiable intangible assets and the resulting goodwill (or, in some cases, negative goodwill) – all of which involves significant time and valuation expertise. To comply, credit unions are conducting merger valuations with the help of professional firms.
Flexible and adaptable
In nearly all circumstances, credit unions can benefit from having some form of valuation completed – with the extent of that valuation depending on the merger's materiality. A higher-level valuation provides a broad, 50,000-foot view of a credit union's worth, with loans pooled by type to determine value. This can be a good fit for smaller mergers or as the initial step to securing regulatory approval to merge. More complex valuations, however, will typically require a detailed-level valuation with comprehensive documentation, including individual loan-level detail and entity valuations.
Credible firms providing merger valuation services work hand-in-hand with credit union management helping to streamline the responsibilities of all those that will be involved in the valuation process, including the CFO, CLO and others. To get started, merging credit unions will need to provide a variety of documents, including data files, financials, loan-specific details and asset/liability information. In addition, the firm performing the valuation will need access to board minutes, past financials, management strategies and growth projections. Using these materials, the firm can begin determining the fair value of the balance sheet and entity value, as well as making projections related to the proposed merger. Depending on the level of valuation needed, a merger valuation typically takes between two and five weeks to complete. Additionally, care should be taken to make sure the firm selected has a secure website and appropriate controls to ensure the confidentiality of sensitive member data.
Beneficial and efficient
No doubt, the merger process is time consuming, with multiple priorities requiring the attention of management beyond financial and accounting issues, such as organizational charts, marketing, facilities, vendor contracts and staffing. With so many merger-related projects, plus the ongoing, day-to-day operations of running the credit union, staff resources can quickly be stretched to capacity. Outsourcing valuations helps improve work efficiencies while offering other key benefits to credit unions.
When looking for a firm to perform a merger valuation, consider the following:
Timeliness – This is a huge component in the merger process, which comes with set due dates. Merger accounting entries need to be timed to the reporting of financials, typically three weeks after month end. Choose a firm that has the resources to focus full attention on coding and determining these values in this short timeframe, so deadlines can be met.
Credentials – Work with a highly qualified, reputable firm that has expertise and experience to back up its work. Working with a firm that understands credit unions' unique needs and structure brings added peace of mind to credit unions and their auditors, as well as the regulators.
Content and Quality – Firms regarded for their work conducting merger valuations have access to the tools and resources needed to provide in-depth, detailed analyses – such as loan-level detail and amortization schedules. Choose a firm that can demonstrate it understands current rules and regulations for credit unions, as well as has a keen grasp of the accounting requirements and appropriate valuation models, methodologies and assumptions.
Familiarity – While this may be the first time a credit union takes part in a merger, experienced firms providing valuation services have been through the process many times. Make sure the service provider knows what is required and what to expect, eliminating unwanted surprises during the process.
Over the next several months – and well into next year – credit union mergers are predicted to continue their swift growth within the industry. If your credit union finds itself considering a future merger opportunity, don't underestimate the importance of using a qualified firm to provide a merger valuation.