WASHINGTON — Proposed legislation that would eliminate a significant obstacle to credit union consolidation went unopposed during a House subcommittee hearing last week.
The lack of discord made the bill’s supporters in the industry and in Congress optimistic about its prospects.
The Net Worth Amendment for Credit Unions Act would let merging credit unions continue to pool their capital so that the resulting entity has a larger, combined total.
In doing so, the bill would neutralize the effect of a proposal being considered by the Financial Accounting Standards Board to eliminate an exemption that lets financial cooperatives continue to use the pooling method to account for mergers and acquisitions. Four years ago the board required stock companies to switch to purchase accounting.
Alicia Posta, an assistant project manager for the FASB, said in an interview with American Banker last month that it wants to standardize M&A rules for all companies. The board expects to release a draft version of its proposal this quarter; the public would then have 90 days to comment. A final rule would probably take effect in the second half of next year.
Credit union officials say requiring them to use purchase accounting would destroy any incentive to merge, because only the acquirer’s capital would be used to calculate the post-merger capital ratio — or “net worth,” in credit union parlance.
Under the Credit Union Membership Act of 1998, credit unions can generate fresh capital only through retained earnings. In the FASB’s interpretation, capital acquired from another institution does not qualify. The capital would be classified as acquired equity — it would boost the surviving institution’s total assets but would be off-limits for use in net worth calculations.
Clearly, making a buyer add all the target’s assets but none of its retained earnings would wreak havoc on capital ratios and kill the industry’s large appetite for mergers and acquisitions.
Last year there were 330 credit union mergers and acquisitions, up from 299 in 2003, according to statistics compiled by the National Credit Union Administration, the industry’s federal regulator.
In her testimony at the hearing, NCUA Chairman JoAnn Johnson said that without the bill, “the number of credit unions willing to merge would be reduced significantly.”
George Reynolds, an official with the Georgia Department of Banking and Finance, who represented the National Association of State Credit Union Supervisors, said the FASB’s proposal is “a recipe for disaster.”
Fred Becker, the president and chief executive of the National Association of Federal Credit Unions, has said the change could result in an increase of credit union failures, because the NCUA on occasion arranges for the acquisition of troubled credit unions by stronger ones.
In an April 13 letter to Rep. Spencer Bachus, R.-Ala., one of the bill’s co-sponsors, Mr. Becker wrote that the FASB’s proposal would create a “disincentive in the future for a healthy credit union to merge with a troubled institution at NCUA’s request, thereby inhibiting NCUA from dealing in a productive manner” with those credit unions.
FASB Chairman Robert Hertz said the bill, HR 1042, met with his approval, because of its narrow scope. “As long as it doesn’t deal with … [generally accepted accounting principles], I’m in favor of it,” he said.
Banking trade groups, which typically oppose credit union initiatives, have also not objected to HR 1042, which is co-sponsored by Rep. Bernie Sanders, I-Vt.
