Recent market conditions have contributed to an increase in bargain purchases, such as the acquisition of failed bank assets and liabilities. In general, a bargain purchase occurs when the fair value of the net assets acquired in a business combination exceeds the fair value of the consideration transferred by the acquiring institution. Generally accepted accounting principles (GAAP) require this excess, previously referred to as “negative goodwill,” to be recognized immediately as a gain in earnings, which increases both GAAP equity and regulatory capital.
On June 7, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of Thrift Supervision (collectively, the agencies) issued guidance to address supervisory considerations related to bargain purchase gains (BPGs) and the impact such gains have on the licensing approval process, including certain supervisory and licensing conditions that may be imposed on the acquiring bank. The guidance also highlights the accounting and reporting requirements unique to business combinations resulting in bargain purchase gains and FDIC- and NCUA-assisted acquisitions of failed institutions (assisted acquisitions). The guidance does not add to or modify existing regulatory reporting requirements issued by the agencies or current accounting requirements under GAAP.
At the acquisition date, the acquiring bank will not have obtained all of the information necessary to measure the fair value of the assets acquired and the liabilities assumed in the business combination in accordance with the applicable GAAP requirements. Accordingly, GAAP allows the acquiring bank to initially record provisional fair values based on the best information available at the acquisition date. The acquiring bank should, however, retrospectively adjust these provisional amounts to reflect new information obtained during the measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements. Due to these potential retrospective adjustments, the acquisition-date estimated BPG and, therefore, the acquiring bank’s regulatory capital, are subject to adjustment during the GAAP measurement period. As articulated in the guidance, although BPGs are included in the computation of regulatory capital for reporting purposes, a financial institution’s primary regulator may determine that the acquisition-date estimated BPG lacks sufficient permanence as a component of regulatory capital for supervisory and licensing decision-making purposes. As such, certain supervisory and licensing conditions may be imposed on the acquiring bank related to, but not limited to, the following: (1) capital preservation; (2) dividend limitations; (3) independent audits, or agreed-upon procedures engagements; (4) independent valuations; and (5) legal lending limits.