[Congressional Record Volume 151, Number 77 (Monday, June 13, 2005)]
[House]
[Pages H4368-H4371]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




               NET WORTH AMENDMENT FOR CREDIT UNIONS ACT

  Mr. BACHUS. Mr. Speaker, I move to suspend the rules and agree to the 
bill (H.R. 1042) to amend the Federal Credit Union Act to clarify the 
definition of net worth under certain circumstances for purposes of the 
prompt corrective action authority of the National Credit Union 
Administration Board, and for other purposes.
  The Clerk read as follows:

                               H.R. 1042

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Net Worth Amendment For 
     Credit Unions Act''.

     SEC. 2. CLARIFICATION OF DEFINITION OF NET WORTH UNDER 
                   CERTAIN CIRCUMSTANCES FOR PURPOSES OF PROMPT 
                   CORRECTIVE ACTION.

       Subparagraph (A) of section 216(o)(2) of the Federal Credit 
     Union Act (12 U.S.C. 1790d(o)(2)(A)) is amended--
       (1) by inserting ``the'' before ``retained earnings 
     balance''; and
       (2) by inserting ``, together with any amounts that were 
     previously retained earnings of any other credit union with 
     which the credit union has combined'' before the semicolon at 
     the end.

  The SPEAKER pro tempore. Pursuant to the rule, the gentleman from 
Alabama (Mr. Bachus) and the gentleman from California (Mr. Sherman) 
each will control 20 minutes.
  The Chair recognizes the gentleman from Alabama (Mr. Bachus).


                             General Leave

  Mr. BACHUS. Madam Speaker, I ask unanimous consent that all Members 
may have 5 legislative days within which to revise and extend their 
remarks and include extraneous material on H.R. 1042.
  The SPEAKER pro tempore. Is there objection to the request of the 
gentleman from Alabama?
  There was no objection.
  Mr. BACHUS. Madam Speaker, I yield myself such time as I may consume.
  Madam Speaker, I rise in strong support of this legislation, H.R. 
1042, the Net Worth Amendment for Credit Unions Act, which I and the 
gentleman from Vermont (Mr. Sanders), the ranking member, introduced 
along with 16 other cosponsors, evenly divided between Republicans and 
Democrats, including ranking members of both committees.
  It is a so-called technical amendment, but it is also a very 
important piece of legislation designed to address the potentially 
harmful and unintended consequences of the recently proposed FASB 
accounting rules of mergers of financial institutions and, in 
particular, credit unions.
  Because this new accounting rule is expected to become effective 
early next year, it will impact, going forward, credit union mergers, 
and it is essential that we have in place H.R. 1042 prior to that time. 
This legislation has been endorsed by FASB. It has the endorsement of 
the Federal credit union regulators.
  I had testimony which I would like to introduce from NCUA chairman 
Joanne Johnson who testified before the Committee on Financial Services 
this past Thursday in strong support of this legislation. In fact, she 
said without this legislation, it would be hard to, in cases of 
mergers, provide the safest, most efficient and most beneficial mergers 
to the benefit of credit union consumers, and she says this legislation 
is essential for credit union consumers and for their protection.
  It has no opposition that I know of. As far as explaining the rule, I 
am going to submit in its entirety two different pieces on actually 
what the issue is, what the solution is. The solution is 1042, and then 
I would like to introduce this two-page summary.
  Let me briefly try to very briefly state what this does.
  Under the current FASB rule, credit unions are able to use the 
pooling of interests method of accounting for mergers; however, the new 
rule will require use of the purchase method.
  In doing that, they did not anticipate the current definitions in the 
National Credit Union Act. Under the new approach that FASB will be 
instituting, an institution is not permitted to bring over the retained 
earnings of the acquired institution onto its own balance sheet as 
retained earnings, but rather as acquired equity. Thus, the surviving 
institution, the institution which is taking the other institution into 
its corporate being, would not be able to count the retained earnings 
of the merged institution in its net worth for purposes of prompt 
corrective action purposes under the Federal Credit Union Act.

                              {time}  1500

  And the Prompt Corrective Action, as those of us on Committee on 
Financial Services know, is the mechanism to bring credit unions into 
compliance as far as safety and soundness. This change, therefore, 
would have the unintended effect of lowering the merged credit union's 
net worth category classification.
  We have taken testimony of Board members of FASB who say this was not 
their intent; and as I said, they are in favor of the current 
legislation. So the practical effect of FASB's directive changing the 
accounting treatment of credit union mergers from the pooling method to 
the purchase method are perhaps illustrated by a simple hypothetical.
  Under the pooling method previously used to account for a combination 
of two credit unions, if a credit union with $2 million in retained 
earnings merged with a credit union with $2 million in retained 
earnings, the surviving credit union would have $4 million in retained 
earnings, simply, two plus two equals four, which counted as its net 
worth for purposes of applying the Prompt Corrective Action capital 
requirements outlined above.
  However, under the new purchase method of accounting mandated by the 
new FASB rule, if a credit union with $2 million in retained earnings 
merges with another credit union with $2 million in retained earnings, 
the surviving credit union would only have $2 million in retained 
earnings, not a result that makes any sense, and our legislation simply 
preserves the two plus two equals four.
  As I say, Madam Speaker, the legislation simply amends the Federal 
Credit Union Act's definition of net worth to include retained earnings 
of both credit unions that merge in the net worth of the credit union 
that continues after the transaction. Failure to make this statutory 
change will create major disincentives to otherwise merged credit 
unions.
  We took testimony last week from George Reynolds, Senior Deputy 
Commissioner of the Georgia Department of Banking and Finance, and I 
would

[[Page H4369]]

like to include his statement, but what he and others have pointed out 
to the committee is that oftentimes, whether it be a bank or a thrift 
or a credit union, if you have one credit union that is sound and one 
that may be in need of corrective action, one of the alternatives is to 
merge the weaker institution into a stronger institution for the 
protection of the members of that credit union.
  The NCUA, and also the different State commissioners of banking and 
bank supervisors, and credit union supervisors had not been able to do 
this because of the anticipation of the FASB rules. It has resulted in 
a lot of hesitancy in merging these institutions and, in many cases, is 
slowing corrective action because of this. So failure to make the 
statutory change will, as I say, create major disincentives.
  A credit union seeking to merge with another union institution would 
be faced, in many situations, with a marked decline in its capital for 
PCA purposes once the merger went through, giving rise to a supervisory 
intervention by the NCUA designed to limit its growth and restore its 
now depleted capital to acceptable levels when actually there would 
have been no depletion of capital at all.
  Madam Speaker, I reserve the balance of my time.
  Mr. SHERMAN. Madam Speaker, I yield myself such time as I may 
consume, and I rise today to urge the House to suspend the rules and 
adopt H.R. 1042, the Net Worth Amendment For Credit Unions Act. I would 
like to commend my colleague, the gentleman from Alabama (Mr. Bachus), 
the chairman of the Subcommittee on Financial Institutions and Consumer 
Credit, for bringing this issue before the Committee on Financial 
Services in a timely manner. I would also like to thank the ranking 
member, the gentleman from Vermont (Mr. Sanders), and members of the 
committee who joined with Chairman Bachus and me in sponsoring this 
somewhat technical but important legislation.
  H.R. 1042 addresses a potential problem for a growing number of 
credit unions that arises under the Basel II negotiations on 
international capital accounting standards. In 1996, the Financial 
Accounting Standards Board, known as FASB, and the International 
Accounting Standards Board, initiated a joint project to develop a 
single uniform standard for assessing the value of the assets and 
liabilities acquired in business mergers and acquisitions.
  The effort resulted in the issuing of FASB statement 141 back in June 
of 2001. This statement required the use of the ``purchase method'' of 
accounting as the most appropriate standard for assuring that the 
assets of an acquired business will be uniformly measured at their fair 
market value at the time of acquisition.
  Thus, FASB abolished the then very popular ``pooling method'' of 
accounting, which had been widely used to measure the assets of 
surviving credit unions in credit union mergers. The pooling method had 
permitted the combining of the retained earnings of both the surviving 
and the merged credit unions to determine the net worth of the 
surviving credit union. Under the purchase method, which is now 
required under FASB 141, the retained earnings of the merged credit 
union must be listed as ``acquired equity,'' a concept that did not 
exist at the time the Federal Credit Union Act was last amended on this 
issue.
  Currently the Credit Union Act recognizes only retained earnings in 
calculating a credit union's net worth and its net worth ratio. 
Accounting procedures that fail to recognize that the retained earnings 
of the merged credit union would seriously reduce the postmerger net 
worth ratio of the surviving credit union. This could have the effect 
of discouraging a number of needed mergers between smaller or weaker 
credit unions with a healthy credit union, and it could result in 
determinations that the surviving credit union in the merger is 
technically undercapitalized, even when that surviving credit union has 
a large amount of capital. It is simply that some of that capital is 
listed as ``acquired capital,'' or ``acquired equity'' a term that did 
not previously exist in our law, and some of it is listed as ``retained 
earnings.''
  H.R. 1042 provides a narrow technical fix for the problem of 
postmerger accounting of credit union net worth. It amends the current 
definition of net worth for purposes of the Federal Credit Union Act to 
allow both retained earnings of a credit union and ``any amounts that 
were previously retained earnings of any other credit union with which 
the credit union has combined'' to be included in calculating a credit 
union's net worth and its net worth ratio.
  Where the FASB 141 standard became effective for most business 
combinations initiated after June 30, 2001, FASB had agreed to defer 
the implementation for mergers and acquisitions among so-called mutual 
business enterprises, including credit unions, until the end of 2005. 
The National Credit Union Administration approved 330 mergers involving 
federally insured credit unions in 2004, many of which could have 
resulted in technically undercapitalized credit unions if FASB 141, 
imposing the purchase method, had been applicable. The Agency projects 
a similar number of mergers in 2006 that would be adversely affected 
unless we pass this legislation.
  Madam Speaker, H.R. 1042 is bipartisan legislation which addresses a 
potential problem for credit unions that needs to be resolved this 
year, because next year FASB 141 will be applicable to mutual 
businesses, including credit unions. It is supported by the National 
Credit Union Administration, the National Association of State Credit 
Union Supervisors, and also by both national credit union trade 
associations, the Credit Union National Association, CUNA, and the 
National Association of Federal Credit Unions, NAFCU.
  I am aware of no opposition to this bill, and I urge the House to 
suspend the rules and adopt the Net Worth Amendment for Credit Unions 
Act.
  Madam Speaker, I have no further requests for time, and I yield back 
the balance of my time.
  Mr. BACHUS. Madam Speaker, I yield myself such time as I may consume, 
and let me simply conclude by saying that when the NCUA seeks a healthy 
credit union, or when there is a troubled credit union and the NCUA 
seeks a healthy credit union to rescue it through merger, the pooling 
of potential White Knights is presently limited because of the present 
interpretation. And as they have said, ``They are limited by the 
prospect of a significant postmerger reduction in capital for the 
acquiring credit union under the present interpretation, if the FASB 
rule goes forward without this legislation.'' It goes on to say, NCUA, 
that ``this will inevitably make NCUA-assisted mergers more difficult 
to execute, resulting in more credit union failures and a higher cost 
to the National Credit Union's Share Insurance Fund, which insures the 
deposits to credit union members.''
  So I conclude by saying that for this reason, among others, not only 
the NCUA but also the National Association of Federal Credit Unions, 
NAFCU, and the Credit Union National Association, CUNA, strongly 
support this legislation to ensure an accurate depiction of net worth 
in credit union mergers and to avoid creating unintended obstacles to 
mergers that would otherwise benefit credit union members.
  In addition, FASB has stated that, while it does not take positions 
on public policy initiatives unless they could impair the mission and 
independence of FASB, it believes H.R. 1042, and I quote, ``does not 
propose to establish or change general purpose standards of financial 
accounting and reporting and, therefore, has no impact on the standard-
setting activities of FASB.''
  I would like to again thank, and I will name as I close, the 
cosponsors of this legislation: Introduced by the gentleman from 
Vermont (Mr. Sanders), myself, the gentlewoman from Florida (Ms. Ginny 
Brown-Waite), the gentleman from Florida (Mr. Feeney), the gentlewoman 
from Oregon (Ms. Hooley), the gentlewoman from New York (Mrs. Kelly), 
the gentlewoman from New York (Mrs. Maloney), the gentleman from Kansas 
(Mr. Moore), the gentleman from Texas (Mr. Paul), the gentleman from 
California (Mr. Royce), the gentleman from California (Mr. Sherman), 
the gentleman from Michigan (Mr. Camp), the gentleman from Illinois 
(Mr. Gutierrez), the gentleman from Pennsylvania (Mr. Kanjorski), the 
gentleman from Ohio (Mr. LaTourette), the gentlewoman from

[[Page H4370]]

New York (Mrs. McCarthy), the gentleman from Ohio (Mr. Ney), the 
gentleman from Arizona (Mr. Renzi), and as I said, the main cosponsor, 
ranking member of the committee, the gentleman from Vermont (Mr. 
Sanders).
  So that, I think, illustrates not only what the gentleman from 
California (Mr. Sherman) said, that there is no opposition to this 
legislation, but also the strong bipartisan support that this has 
across this Congress.
  Madam Speaker, I submit for the Record herewith the various documents 
referred to throughout my remarks:

                                 NASCUS

  [Written Testimony of George Reynolds, Senior Deputy Commissioner, 
  Georgia Department of Banking and Finance on behalf of the National 
 Association of State Credit Union Supervisors Before the Subcommittee 
 on Financial Institutions and Consumer Credit, United States House of 
                    Representatives, April 13, 2005]


                       NASCUS History and Purpose

       Good afternoon, Chairman Bachus, and members of the 
     Subcommittee. I am George Reynolds, Senior Deputy 
     Commissioner for the Georgia Department of Banking and 
     Finance. I appear today on behalf of the National Association 
     of State Credit Union Supervisors (NASCUS), the professional 
     state credit union regulators association. NASCUS represents 
     the 48 state and territorial credit union supervisors, 
     dedicated to defending the dual chartering system for credit 
     unions and advised by the NASCUS Credit Union Council, which 
     is comprised of more than 500 state-chartered credit unions.
       In addition to being a state regulator, I am a certified 
     public accountant allowing me to study and understand the 
     accounting standards recommended by the Financial Accounting 
     Standards Board (FASB). Today I have made recommendations on 
     behalf of NASCUS regarding the impact of changes to the 
     accounting standards regarding mutual institutions.
       The mission of NASCUS is to enhance state credit union 
     supervision and to advocate policies that ensure a safe and 
     sound state credit union system. We achieve those goals by 
     serving as an advocate for a dual chartering system that 
     recognizes the traditional and essential role that state 
     government plays as a part of the national system of 
     depository financial institutions.
       NASCUS applauds the introduction of H.R. 1042, the Net 
     Worth Amendment for Credit Unions Act, which amends the 
     definition of net worth to include the net worth of a credit 
     union merged with a surviving credit union. We appreciate the 
     earnings'' after the merger, period. There is no room, then, 
     for discretion and that has pros and cons.
       Other federal banking regulators have authority to exclude 
     items from measures of pre-merger equity that do not have 
     value to the insurance fund in a liquidation scenario, e.g., 
     core deposit intangibles, goodwill, etc., thus not 
     ``overvaluing'' resulting postmerger capital. The language 
     provided by NCUA last year was intended to provide NCUA a 
     comparable capital (GAAP equity) starting point and 
     comparable authority to subtract similar items from 
     ``retained earnings'' in mergers.
       However, concern surfaced with the earlier language that 
     somehow NCUA might be put in the position of addinq to what 
     qualifies as ``net worth'' and consequently the more precise 
     language of HR 1042 was agreed upon.
       5. How is ``secondary capital'' accounted for in mergers 
     currently, and will this change under HR 1042?
       Post merger, secondary capital counts as part of PCA net 
     worth only if continuing FISCU is low income designated.
       6. Is NCUA seeing an unusual rise of voluntary mergers of 
     insured credit unions this year, in anticipation of the FASB 
     rule being implemented for credit unions?
       No
       7. Does NCUA support SFAS 141?
       It's fair to say that the credit union industry is not 
     welcoming the accounting rule change from the pooling to the 
     purchase method for financial accounting purposes. However, 
     that is not what we are addressing or trying to influence 
     here today or in HR 1042. NCUA and the credit union industry 
     are trying to prepare for and adjust to the pending 
     implementation of SFAS 141--and conform to the options 
     provided to others by FASB to bring capital over as 
     ``acquired equity'' when there are business combinations.
       NCUA and the credit union industry are grateful to FASB for 
     their consideration of mutual enterprises (thus, cooperative 
     credit unions) by providing an exception to the rule when it 
     was implemented in 2001 for others--this has given all of us 
     time to explore ways to address the unexpected consequences.
       Is 8. NCUA trying to interfere with FASB's accounting 
     rulemaking authority?
       Absolutely not. NCUA has nothing to do with financial 
     accounting reporting standards and FASB will proceed as it 
     deems appropriate. NCUA's interest is limited to supporting a 
     solution to the unintended consequences that impact our 
     proper safety and soundness role under the prompt corrective 
     action provisions of the FCUA. The FCUA needs to be amended 
     so NCUA can recognize the retained earnings of a merging 
     credit union, and this is comparable to what Congress permits 
     in it statutes for other financial institutions.
                                  ____

       I would also point out that our reform proposal addresses 
     an important technical amendment needed to the statutory 
     definition of net worth. NCUA anticipates that the Financial 
     Accounting Standards Board (FASB) will act soon to lift the 
     current deferral of the acquisition method of accounting for 
     mergers by credit unions, thereby eliminating the pooling 
     method and requiring the acquisition method. When this change 
     to accounting rules is implemented it will require that, in a 
     merger, the net assets on a fair value basis of the merging 
     credit union as a whole, rather than retained earnings, be 
     carried over as ``acquired equity,'' a term not recognized by 
     the ``Federal Credit Union Act'' (FCUA). Without this 
     important change, only ``retained earnings'' of the 
     continuing credit union will count as net worth after a 
     merger. This result would seriously reduce the post-merger 
     net worth ratio of a federally insured credit union, because 
     this ratio is the retained earnings of only the continuing 
     credit union stated as a percentage of the combined assets of 
     the two institutions. A lower net worth ratio has adverse 
     implications under the statutory ``prompt corrective action'' 
     (PCA) regulation. 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 (NCUSIF). Without a remedy, an important NCUA 
     tool for reducing costs and managing the fund in the public 
     interest will be lost. Thus, our reform roposal provides for 
     a revised definition of net worth to include any amounts that 
     were previously retained earnings of any other credit union.
                                  ____


               Preserving Credit Union Capital In Mergers


                              current law

       Current law and FASB rules permit the recognition of the 
     ``retained earnings'' of both the surviving and merged credit 
     union after a merger. In 2004, there were 338 mergers 
     involving federally insured credit unions (237 voluntary, 7 
     assisted and another 94 mergers pending). In 2003, there were 
     299 mergers (294 voluntary, 5 assisted).


                              the problem

       The Financial Accounting Standards Board (FASB) is expected 
     to act in 2005 to lift the current deferral (and use of the 
     pooling method) and thereby begin the use by credit unions of 
     the acquisition method of accounting in mergers by early 
     2006. This will eliminate the practice of accounting for 
     mergers as a pooling of interests which credit unions have 
     relied upon. When this change to accounting rules is 
     implemented it will require, in a merger, that the retained 
     earnings-like component of one credit union be carried over 
     as ``acquired equity,'' a term that is not recognized by the 
     FCUA.
       Without a change to the Federal Credit Union Act, only the 
     ``retained earnings'' of the continuing credit union will 
     count as net worth after the merger for purposes of PCA. This 
     can seriously reduce the post-merger net worth ratio of 
     combined federally insured credit unions. A lower net worth 
     ratio has adverse implications under the statutory ``prompt 
     corrective action'' provisions in the Federal Credit Union 
     Act, and it is this result that will strongly discourage 
     voluntary mergers and, on occasion, make NCUA assisted 
     mergers more difficult and costly to the National Credit 
     Union Share Insurance Fund (NCUSIF).


        h.r. 1042 ``net worth amendment for credit unions act''

       On March 2, 2005, Representative Spencer Bachus (R-AL) and 
     Bernard Sanders (I-VT) introduced H.R. 1042, the ``Net worth 
     Amendment for Credit Unions Act.'' They were joined by the 
     following original co-sponsors: Representatives Ed Royce (R-
     CA), Paul Kanjorski (D-PA), Steven LaTourette (R-OH), Luis 
     Gutierrez (D-IL), Sue Kelly (R-NY), Carolyn Maloney (D-NY), 
     Rick Renzi (R-AZ), Carolyn McCarthy (D-NY), Brad Sherman (D-
     CA), Bob Ney (R-OH), Tom Feeney (R-FL), Darlene Hooley (D-
     OR), Ginny Brown-Waite (R-FL).


                 why this legislation should be adopted

       This amendment to the Federal Credit Union Act (FCUA) is 
     needed to provide certainty for the recognition of pre-merger 
     ``retained earnings'' for purposes of PCA as necessitated by 
     SFAS 141.
       The FASB has expressed support for a legislative solution 
     and has indicated that a legislative redefinition of capital 
     (net worth) in the FCUA will not affect their standards-
     setting activities.
       When crafting the prompt corrective action provisions of 
     the FCUA in 1998 applicable to federally insured credit 
     unions that only recognized ``retained earnings'' of a single 
     credit union as net worth, the drafters did not anticipate 
     this merger accounting policy change by FASB.
       The consequence of not making this change will dramatically 
     alter the treatment of retained earnings and net worth in a 
     manner that will make it difficult or impossible for many 
     credit unions to consider combining their strengths through 
     merger. This seriously reduces the post-merger net worth 
     ratio, because that ratio is the retained earnings stated as 
     a percentage of the combined assets of the institutions. 
     Potential acquiring credit unions would naturally find the 
     prospect of being demoted to a lower net worth category, and 
     potentially subject to more supervisory actions, too high a 
     price to pay to merge with another credit union.
       Failure to make this change will undermine the purpose of 
     ``prompt corrective action'' which is to resolve the problems 
     of

[[Page H4371]]

     credit unions while minimizing losses to the National Credit 
     Union Administration Share Insurance Fund (NCUSIF). Fewer 
     willing merger partners mean fewer opportunities to avert 
     losses to the NCUSIF by merging a troubled credit union. 
     Credit union mergers have traditionally been effective in 
     accomplishing both objectives while preserving the continuity 
     of credit union service to the target credit union's members.
       Banks and their insurers do not have the same concerns 
     because their existing capital definition under relevant law 
     is broader. The FASB rule, in combination with their broader 
     statutory definition of capital, would not result in similar 
     problems for banks and thrifts because they are allowed to 
     include virtually all components of ``equity'' in their 
     capital.

  Madam Speaker, I yield back the balance of my time.
  The SPEAKER pro tempore (Ms. Ginny Brown-Waite). The question is on 
the motion offered by the gentleman from Alabama (Mr. Bachus) that the 
House suspend the rules and pass the bill, H.R. 1042.
  The question was taken; and (two-thirds having voted in favor 
thereof) the rules were suspended and the bill was passed.
  A motion to reconsider was laid on the table.

                          ____________________