Two Meanings of Goodwill (part I of II)

Tis the season for evoking goodwill.   Company/organizational holiday parties, the daily mail full of greeting cards,  Giving Tuesday, community food drives and dozens of other personal and firm initiatives make Advent a time of joy.

Wonderful and colorful decorations enhance this sense of a special time of year. Sporting events promote opportunities to help others. Even if there is constant hurry up, it is a toward good ends.

Concerts and carols bring back familiar lifelong memories.  There is even a heavenly musical declaration of good will in music.

This most dramatic announcement is in the Messiah’s fourth chorus, Glory to God.  As described in Luke 2 v.14, the heavenly hosts sing to shepherds of Jesus’ birth:  Glory to God . . . and peace on earth. This opening is followed by repeated proclamations  of “Goodwill towards men.” 

Angels celebrating a new era in words repeated still today.

More Than Christmas

 Goodwill is not limited to this holiday season.  In everyday usage, goodwill is the feeling of trust, loyalty and support that emerge from a relationship or event. It is the bond greater than any underlying transaction.  It is much more than a feeling of satisfaction.

Rex Johnson, the credit union lending guru, described this as the art of converting members to fans, not just spectators.

For cooperatives, goodwill is an essential component of their market advantage.  It is rooted in members’ belief that the credit union acts in their best interest.  It is embedded in cooperative design. Current generations expect the fruits of their loyalty will be passed to future ones.

When active, goodwill underwrites member relationships giving credit unions a competitive standing no other firm can match. Although real, it shows up nowhere in a credit unions ordinary financial reports.

Accounting Goodwill

There is also an accounting term, goodwill.  It is an intangible asset.  It arises when a credit union acquires a bank or merges with another credit union. The excess of book value  over fair market value of the net assets gained, creates accounting goodwill.

Credit union accounting goodwill has grown dramatically.  The first reported total as of March 2009 was $160 million.  At September 2022, the total was $2.2 billion recorded in 277 credit unions.  Since that initial March date,  it has grown at an annual rate of 21%.

Goodwill is only 2.2% of these 277 credit union’s net worth.  But in some cases it is much higher: 31% of Chartway’s and 21% of Lake Michigan credit unions’ total capital.

Why an Intangible Asset?

Goodwill is classified as an asset because it provides an ongoing revenue generation benefit that extends beyond one year. It may include  such items as customer relationships, liabilities (shares) acquired at below market rates, corporate expertise,  operating (FOM) authorities, or proprietary technology.

Goodwill is recognized only through an acquisition. Unlike member relationships, it cannot be self-created. It is the excess of the “purchase consideration.”

Negative goodwill arises if the acquired assets are purchased at a discount to their fair market value (FMV) and is referred to as a “bargain purchase.”

A description of goodwill accounting and how it works is at this site.

The Status of Accounting Goodwill in Credit Unions

Since December 2018 the total of accounting good will has doubled to the present $2.2 billion. The reasons are two:  premiums paid on whole bank purchases and mergers with credit unions uncovering significantly understated value.

An example of the premiums on whole bank purchases is GreenState which reported $123 million  (12% of its net worth) as goodwill.  The second highest is State Employees in Albany at $112.5 million (16% of net worth) as a result of its merger with Capital Communications.

Because accounting goodwill is an intangible asset, there are numerous issues about how it is considered in net worth calculations, its amortization, and its role in financial decisions.

Tomorrow I will look at the largest reported individual goodwill totals, NCUA’s view of the asset and how it could change the future of the cooperative system.







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