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WASHINGTON-”H.R. 1042 is a good solution,” NCUA Chairman JoAnn Johnson said of the Net Worth Amendment for Credit Unions Act during a hearing on the bill last week. Financial Institutions and Consumer Credit Subcommittee Chairman Spencer Bachus (R-Ala.), the author of the legislation, hosted a hearing April 13 on H.R. 1042, featuring testimony from Johnson, Financial Accounting Standards Board Chairman Robert H. Herz, and Georgia Banking and Finance Senior Deputy Commissioner George A. Reynolds (on behalf of NASCUS; See related story). FASB has proposed and apparently plans to follow through with shifting all merger accounting to the purchase method by early next year. Credit unions have traditionally employed the pooling method where the net worth of the continuing and merging credit unions can be combined when the institutions are combined. Because credit union net worth is defined as retained earnings, and under the purchase method the merged credit union’s retained earnings would become acquired earnings, a merger would likely put the continuing credit union in hot water with Prompt Corrective Action. If a credit union’s net worth falls below 7%, it can be subject to various levels of PCA. The bill would change the definition of net worth in the Federal Credit Union Act to acknowledge the retained earnings of the merging institutions as well, making “two plus two equal four” as Bachus has often said. The congressman, along with 16 other lawmakers from both sides of the political aisle, introduced the bill. “Well-capitalized institutions should not be placed at a disadvantage due to the unintended consequences created by the FASB rule. Hopefully after this hearing and then a markup, the legislation will be considered on the floor in the near future,” Bachus stated. And, NCUA’s Johnson seems happy with this traditional method of adding. Without the amendment, she contended that credit union mergers would be negatively impacted because of the PCA implications. “This result will discourage voluntary mergers and on occasion make NCUA assisted mergers more difficult and costly to the National Credit Union Share Insurance Fund,” Johnson explained. “Without a remedy an important NCUA tool for reducing costs and managing the fund in the public interest will be lost.” However, with the legislative remedy, credit unions would be permitted to continue the combination of their retained earnings. “This logical result facilitates the ability of credit unions to merge when it is in the best interests of their members. It preserves the capital accumulated by both institutions and, importantly, is less likely to place the combined institution into a lower PCA category,” Johnson said. H.R. 1042 creates a framework for credit unions “comparable to results achieved for other business combinations.” Last year, there were about 338 credit union mergers, according to Johnson. Two hundred and thirty-seven were voluntary mergers, while another seven were NCUA-assisted, and the other 94 were still in the process at year-end. “Without a solution, necessary or beneficial mergers would either be foregone or consummated with a loss of net worth,” the chairman said. “In the case of assisted mergers, it would be at a greater cost to the NCUSIF to make the continuing credit union whole.” If FASB’s Financial Accounting Standard 141, which requires the purchase method, were applied to last year’s mergers, $307 million of nearly $6.5 billion in capital would be wiped out for PCA. “The Net Worth Amendment for Credit Unions Act clearly and appropriately preserves the only source of hard-earned credit union capital when mergers of institutions are accomplished-retained earnings,” Johnson said. No markup of the bill has been scheduled yet to send it to the full committee, but NAFCU Director of Legislative Affairs Brad Thaler said it should be in “relatively short order.” He added that the legislation could be a contender for the suspension calendar, a spot reserved for noncontroversial bills. While the bill could survive as a stand-alone piece of legislation, Senator Mike Crapo (R-Idaho) is also eyeballing it for inclusion in the overall regulation relief bill he has been working on for the financial services sector, according to CUNA Vice President of Legislative Affairs and Senior Legislative Counsel Gary Kohn. NAFCU submitted a letter to the subcommittee for the record, outlining the simplicity, yet importance of the `FASB fix.’ The group was also careful to point out what H.R. 1042 does not do. “It is also important to note that H.R. 1042 does not legislate accounting practices; credit unions will be required to use the “purchase method” of accounting for mergers to receive a clean audit,” NAFCU President and CEO Fred Becker emphasized. “In addition, we would note that this amendment does not grant credit unions that currently lack the authority to offer alternative capital accounts the authority to do so, and it does not confer upon NCUA the regulatory authority or discretion to authorize such accounts now or in the future. Simply stated, this amendment is intended to address a narrow and technical accounting issue and in the process simply maintain the status quo so that, in the case of merging credit unions, 2 + 2 can continue to equal 4.” [email protected]

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