Monday, February 3, 2020

NCUA: CUs Cannot Count Adjusted Retained Earnings from Bank Mergers as Net Worth

A Call Report change for the fourth quarter of 2019 by the National Credit Union Administration could adversely impact the net worth of some credit unions that have acquired a bank.

The NCUA changed line 7 of its PCA Worksheet (see page 56 of the Call Report Instructions) dealing with Adjusted Retained Earnings acquired through Business Combinations.

NCUA in the fourth quarter wrote in its Call Report instructions that this 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."

This change will hit the net worth for any credit union that had included adjusted retained earnings from a bank merger in its net worth.

For example, IBM Southeast Employees Credit Union (Delray Beach, FL) saw a $31 million decline in its net worth between the third and fourth quarters.

Also, this Call Report change may affect the number of credit union deals for banks going forward.

According to Peter Duffy, Managing Director at Piper Sandler, "we believe this change, while not surprising, will result in fewer and smaller deals."

However, Michael Bell, who is a lawyer at Howard and Howard and has done a majority of bank mergers into credit unions, said: "None of the transactions I have been working on have been negatively affected by this Call Report change."

Bell further stated, "Personally I think the change in treatment is mathematically incorrect but we continue to plow ahead."
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