By Ray Birch
WASHINGTON—Two new issues may affect how credit unions look at buying banks in the future, experts are saying, even as one firm says its pipeline is “full” of such acquisitions right now.
Banks are taking goodwill impairment charges during the economic downturn, but NCUA is not allowing credit unions to include adjusted retained earnings from a bank merger in their net worth.
Those goodwill impairment charges have been seeing reductions that harken back to the Great Recession, according to Richard Garabedian, counsel with Hunton Andrews Kurth LLP, who has been involved in a number of CU/bank agreements.
Goodwill is the premium a purchaser pays when buying an asset, such as a loan portfolio, for more than its actual value.
“If there is impairment to the goodwill, these amounts will have to be written off and it will reduce the bank’s regulatory capital,” Garabedian said. “Since credit unions can count goodwill as an asset on their balance sheet and in their regulatory capital—unlike banks—if there is impairment to the goodwill, and therefore amounts have to be written off it, it will reduce the credit union’s regulatory capital from where it would have been had the goodwill not been impaired.”
Garabedian thinks the result will be a reduction in the price a bank can ask when selling to a credit union.
“There's less goodwill so there's less goodwill that will flow to the credit union,” he said. “It’s going to affect deals. Maybe it'll be nothing, but maybe it'll be something.”
Richard Garabedian
NCUA Adjustment
There is another change at work that may also affect purchases of bank assets by credit unions, particularly in Florida. In the fourth quarter of 2014, NCUA made an accounting change that prohibits credit unions from including adjusted retained earnings from a bank merger in its net worth.
Garabedian said such a practice has apparently been permitted in Florida in cases where CUs have merged in a bank. NCUA in the fourth quarter wrote in its Call Report instructions that the provision only applies to "business combinations with another credit union. This provision does not extend to a credit union that acquires a bank through merger."
Since Florida permits a credit union to merge in a bank, and a significant number of purchases of bank assets have occurred in the Sunshine State, CUs in Florida that have merged in a bank have been included adjusted retained earnings in their net worth. Garabedian said he believes Call Report data show those credit unions have had to strike those funds from their capital this year.
“I’m not sure how many credit unions have been affected,” he said.
Garabedian said he does not think the ding to capital will harm CUs as far as their CAMEL ratings, but he does expect it might affect their outlook on growing the business through the bank acquisition channel.
“This will certainly impact their business plans,” he said.
Not So Sexy
David Ritter, managing director with ALM First, told CUToday.info he agrees, and believe the change will slow the pace of credit union bank buys in Florida.
“Credit unions looking to buy banks is the new sexy thing,” said Ritter. “I don't know if it was a loophole or just a look away by Florida, but in that state credit unions were able to retain a higher capital ratio when merging in a bank. This will influence future bank buys here.”
Ritter told CUToday.info his company spotted marked declines in some credit unions’ capital in Florida—and in each case it was a credit union that had merged in a bank.
“I think this will provide more black-and-white to the industry about these deals,” said Ritter. “It’s what needs to be done, because people have been scratching their heads about why these funds have been retained by CUs in Florida. I think this will spread out the playing field a bit for credit union purchases of banks—we will see more happen across the country.”
Michael Bell
A Full Pipeline
Michael Bell, attorney with Royal-Oak, Michigan-based Howard & Howard, who pioneered credit union acquisitions of banks leading to the completion of more than 30 whole bank acquisitions to date, said he does not see either of these issues impacting CU purchases of banks.
“Outside of the slight pause caused by the pandemic, our pipeline is full,” stated Bell.
“Deal flow hasn’t slowed and deals are in the works across the country, including in Florida. We have been helping CUs buy banks, bank branches and other related businesses for over ten years, and will continue to do so. Since the pandemic we closed one deal in April, closed another in May and announced a new whole bank transaction. Expect more announcements very soon.”