Goodwill Impairment

Sheshunoff & Co. Investment Banking works exclusively with financial institutions when determining goodwill impairment.

Understanding the Requirements

As a national leader in bank stock valuations, our professionals have a long history assisting banks with their goodwill impairment testing and understand what accounting firms need from appraisers to satisfy impairment testing.

With the recent amendment to the Accounting Standards Codification TM — Intangibles, Goodwill and Other Topic No. 350 — management now has the discretion to determine if goodwill impairment testing is necessary based on a qualitative assessment.

In light of depressed bank stock prices, current market volatility, economic stagnation, margin erosion, political gridlock and regulatory pressure, a more likely than not conclusion on your qualitative assessment may be difficult to make without help.

Sheshunoff provides insight, information and analysis for your qualitative assessment or will perform the qualitative two step goodwill impairment test as needed.

Bank Goodwill Impairment Testing

Institutions are required to review goodwill reported on financial statements annually, and to test annually for bank impairment (or sooner if impairment is anticipated). Goodwill impairment testing must follow the guidance provided by the Accounting Standard Codification (“ASC”) standards:

  • Fair Value Accounting (ASC 820/SFAS 157)
  • Goodwill and Intangible Assets and if impairment is indicated (ASC 350/SFAS 142)
  • Business Combinations and Purchase Price Accounting (ASC 805/SFAS 141R)

Qualitative Assessment

Sheshunoff assists management by providing insight, information and analysis for the qualitative assessment. Management has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that impairment exists. If, after assessing the totality of events or circumstances, an entity determines that it is NOT more than 50% likely that the fair value of a reporting unit is less than its carrying amount including goodwill, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment.

The qualitative assessment should include an assessment but is not limited to:

  • General macroeconomic conditions – deterioration in general economic conditions, limitations on the access to capital, and changes in equity and credit market
  • Industry and market considerations – deterioration in bank’s market, change in competition, decline in market multiples or metrics in absolute terms and relative to peers, and regulatory or political developments
  • Factors having a negative effect on earnings and cash flows (i.e. margins, asset quality, real estate prices etc.)
  • Change in historical or projected financial performance, actual earnings vs. over all projected earnings
  • Institution specific risks — change in management, key personnel, strategy, customers, contemplation of bankruptcy or litigation
  • Events impacting the reporting unit – change in the composition or carrying amount of net asset values, divestiture or acquisition, recognition of impairment loss in financial statements of subsidiary
  • Sustained depressed share price — both absolute terms and relative to peer

Based upon this assessment, if management determines that it is more than 50% likely that the fair value of the reporting unit is less than the carrying value including goodwill, then Step 1 is required.

Step 1—Calculate Fair Value

Our professionals determine the fair value of the financial institution as defined by ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” In determining fair value, Sheshunoff & Co. Investment Banking uses bank valuation methodology reflecting a multipronged approach:

  • Comparable Transaction Analysis
  • Marketable Trading Analysis
  • Discounted Cash Flow Analysis
  • Control Premium Analysis

If a financial institution’s fair value exceeds total book value (including goodwill), no impairment exists and the goodwill impairment testing is complete. If fair value is less than total book value, then impairment may exist and Sheshunoff & Co. Investment Banking proceeds to Step 2 to determine the amount of impairment.

Step 2—Determine Impairment Amount

Sheshunoff & Co. Investment Banking will complete a purchase price allocation of your financial institution’s balance sheet and determine the fair value of identifiable intangible assets as requested by management, including:

  • Investment Portfolio — rely on the institution’s market value reports for securities
  • Loan Portfolio— use Sheshunoff & Co. Investment Banking models to reflect the present value of the expected cash flows of the loans over their lives discounted by the applicable risk-adjusted market rate at the review date for each risk adjusted loan category
  • Deposit Portfolio — use Sheshunoff & Co. Investment Banking models to reflect deposit portfolio characteristics based on type, coupon rates, market rates, maturity type of depositor, regional decay rates, etc. The estimated core deposit value relates solely to the economic benefit of having the core deposits as of the review date, taking into consideration the expected attrition of the core deposits, market deposit rates at the review date and the net delivery cost associated with deposit balances.
  • Borrowing Portfolio — use Sheshunoff & Co. Investment Banking valuation models to reflect borrowing portfolio characteristics based on type, coupon and market rates, maturities, etc.
  • Other Asset Adjustments — based on discussions with the management.
  • Estimate Core Deposit Intangible or Other Intangible Asset Values — based on discussions with management.
  • Other Identifiable Intangible Assets — based on discussions with management.

Sheshunoff & Co. Investment Banking will then determine the amount of the impairment and will provide a Report that reflects:

Qualitative Assessment

  • Market Documentation
  • Peer Comparisons
  • Other necessary information

Step 1

  • Financial and Company Analysis
  • Application of Valuation Methodology & Approaches
  • Supporting Market Data and Documentation
  • Preliminary Determination of Goodwill Impairment

Step 2—All items listed in Step 1 plus:

  • Purchase Price Allocation Determination and Supporting Schedules
  • Final Determination of Impairment and the Impairment Write Off Amount

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