Prompt Corrective Action; Amended Definition of Post-Merger Net Worth

Summary

NCUA is adopting a final rule implementing a statutory amendment that expands the definition of ``net worth'' that applies to natural person credit unions under regulatory capital standards known as ``prompt corrective action.'' The expanded definition allows the acquiring credit union, in a merger of natural person credit unions, to combine the merging credit union's retained earnings with its own to determine the acquirer's post-merger ``net worth.'' For a merger in which the acquirer is a corporate credit union, the proposed rule similarly redefines corporate credit union capital to allow the acquirer to combine with its capital the retained earnings of the merging credit union to determine the acquirer's post-merger capital.

Full text

SUMMARY: NCUA is adopting a final rule implementing a statutory 
amendment that expands the definition of ``net worth'' that applies to 
natural person credit unions under regulatory capital standards known 
as ``prompt corrective action.'' The expanded definition allows the 
acquiring credit union, in a merger of natural person credit unions, to 
combine the merging credit union's retained earnings with its own to 
determine the acquirer's post-merger ``net worth.'' For a merger in 
which the acquirer is a corporate credit union, the proposed rule 
similarly redefines corporate credit union capital to allow the 
acquirer to combine with its capital the retained earnings of the 
merging credit union to determine the acquirer's post-merger capital.

DATES: This rule is effective December 31, 2008, and applies to credit 
union mergers that are subject to financial reporting under Financial 
Accounting Statement No. 141(R), Business Combinations (2007).

FOR FURTHER INFORMATION CONTACT: Technical: Karen Kelbly, Chief 
Accountant, Office of Examination and Insurance, at the above address 
or by telephone: 703/518-6389; Legal: Steven W. Widerman, Trial 
Attorney, Office of General Counsel, at the above address or by 
telephone: 703/518-6557.

SUPPLEMENTARY INFORMATION: 

A. Background

1. Natural Person Credit Unions

    a. Prompt Corrective Action. The Credit Union Membership Access 
Act, Pub. L. No. 105-219, 112 Stat. 913 (1998) (``CUMAA''), mandated a 
system of regulatory capital standards for natural person credit unions 
called ``prompt corrective action'' (``PCA'' or ``regulatory 
capital''). 12 U.S.C. 1790d et seq. PCA imposes minimum capital 
standards and corresponding remedies to improve net worth. Id. The NCUA 
Board implemented a comprehensive system of PCA primarily under Part 
702.\1\ 12 CFR 702 et seq.
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    \1\ This is the fifth amendment to Part 702 since it was 
originally adopted in 2000. The first amendment incorporated limited 
technical corrections. 65 FR 55439 (Sept. 14, 2000). The second 
amendment deleted sections made obsolete by adoption of a uniform 
quarterly schedule for filing Call Reports. 67 FR 12459 (March 19, 
2002). The third amendment incorporated a series of revisions and 
adjustments to improve and simplify the implementation of PCA. 67 FR 
71078 (Nov. 29, 2002). Finally, the fourth amendment added a third 
risk-weighting tier to the standard risk-based net worth component 
for member business loans. 68 FR 56537, 56546 (Oct. 1, 2003). A 
proposal to modify the criteria for filing a net worth restoration 
plan, 67 FR 7113 (Nov. 29, 2002), was never adopted.
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    Under PCA, a natural person credit union's ``net worth ratio'' 
determines its classification among five statutory net worth 
categories. 12 U.S.C. 1790d(c); 12 CFR 702.102. CUMMA defined ``net 
worth ratio'' as the ratio of the credit union's net worth to its total 
assets. 12 U.S.C. 1790d(o)(3). It then expressly limited a credit 
union's ``net worth'' to ``the retained earnings balance of the credit 
union, as determined under generally accepted accounting principles 
[GAAP].'' Id. Sec.  1790d(o)(2)(A).\2\ The ``retained earnings only'' 
definition of net worth thus incorporated GAAP by reference generally, 
subject to future amendments and interpretations; it did not 
incorporate GAAP as a snapshot that preserved what GAAP then prescribed 
or how it was then interpreted.
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    \2\ The CUMAA definition of ``net worth'' applies to regulatory 
capital only. For financial reporting purposes, CUMMA requires 
credit unions to adhere to GAAP in the Call Reports required to be 
filed with the NCUA Board. 12 U.S.C. 1782(a)(6)(C)(i). The Financial 
Services Regulatory Relief Act of 2006, discussed infra, did not 
change that mandate.
    Congress gave the other federal financial institution regulators 
the latitude to prescribe the ``relevant capital measures'' of their 
institutions. 12 U.S.C. 1831o(c)(1). As a result, the ``core 
capital'' of banks and thrifts is defined to include virtually all 
GAAP equity components, 12 CFR 325.2(v), not just the ``retained 
earnings'' component of equity.
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    b. The ``Pooling Method'' of Financial Reporting. The predominant 
practice under GAAP for financial reporting of a merger between credit 
unions has been to apply the ``pooling method.'' That method required 
an acquiring or continuing credit union (``acquiring credit union'') to 
combine with its own financial statement components the like components 
of the merging credit union. Under CUMAA's ``retained earnings only'' 
definition of net worth, the ``pooling method'' preserved an incentive 
to merge because it allowed an acquiring credit union to combine its 
own retained earnings with that of the merging credit union to 
determine the acquirer's post-merger net worth ratio.
    c. The ``Acquisition Method'' of Financial Reporting. In 2001, the 
Financial Accounting Standards Board (``FASB''), the body that sets 
GAAP for financial reporting of business combinations, adopted 
Financial Accounting Statement No. 141, Business Combinations (2002). 
FAS 141 replaced the ``pooling method'' of financial reporting of 
business combinations between non-mutual ``for profit'' enterprises 
with the ``purchase method.'' In December 2007, FASB decided to extend 
the ``purchase method'' of financial reporting--which it renamed the 
``acquisition method''--to business combinations between mutual ``for 
profit'' enterprises (``mutual combinations''), such as credit union 
mergers, that take place in the first annual reporting period beginning 
on or after December 15, 2008. Financial Accounting Statement No. 
141(R), Business Combinations (2007) (``FAS 141(R)'') at ]74. The ``acquisition method'' of financial reporting of credit union 
mergers would require the fair value of the net assets acquired in a 
merger to be classified as a direct addition to the acquirer's equity, 
not as an addition to its retained earnings. FAS 141(R) at ]A67. Since 
CUMMA defines a natural person credit union's ``net worth ratio'' as 
the ratio of its net worth to its total assets, 12 U.S.C. 1790d(o)(3), 
and because the ``retained earnings only'' definition of net worth does 
not permit credit unions to count ``additions of equity'' that are not 
retained earnings in their net worth (the numerator of the net worth 
ratio), an acquirer's net worth will not increase as the result of a 
merger. On the contrary, the ``acquisition method'' may well reduce an 
acquirer's post-merger net worth because, as a ratio of total assets 
(the denominator of the net worth ratio), it will be diluted by the 
addition and fair valuation of assets acquired in the merger.
    Due to the ``retained earnings only'' limitation on net worth that 
applies to credit unions, the ``acquisition method'' of financial 
reporting would have exactly the opposite effect of the ``pooling 
method.'' It would discourage credit union mergers by excluding a 
merging credit union's retained earnings from the post-merger net worth 
of the acquiring credit union.
    d. Statutory Expansion of Net Worth Definition. Out of concern that 
FAS 141(R), when subject to the ``retained earnings only'' definition 
of net worth, would stifle credit union mergers, Congress amended the 
CUMAA definition. The Financial Services Regulatory Relief Act of 2006, 
Pub. L. No. 109-351, 120 Stat. 1966 (``2006 Relief Act''), expanded the 
definition of a natural person credit union's ``net worth'' for PCA 
purposes to include, in addition to its own retained earnings, ``any 
amounts that were previously retained earnings of any other credit 
union with which [it] has combined.'' 12 U.S.C. 1790d(o)(2)(A) 
(2006).\3\ The expanded definition permits the acquiring credit union 
``to follow the new FASB rule while still allowing the capital of both 
credit unions to flow forward as regulatory capital and thus preserve 
the incentive for desirable credit union mergers.'' \4\ For a 
comparison of the financial reporting and regulatory capital 
consequences of a credit union merger under present GAAP (the pre-FAS 
141(R) ``pooling method'') and under new GAAP (the post-FAS 141(R) 
``acquisition method'') both with and without implementing the expanded 
net worth definition, see the proposed rule. 73 FR 44197, 44199 (July 
30, 2008).
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    \3\ NCUA advocated expanding the ``retained earnings only'' 
definition more broadly to include the ``equity acquired in a 
merger.'' This would have more closely aligned the post-merger 
regulatory capital definition with CUMAA's financial reporting 
requirement that credit unions adhere to GAAP in Call Reports 
required to be filed with the NCUA Board. 12 U.S.C. 
1782(a)(6)(C)(i).
    \4\ Staff of Senate Comm. on Banking, Housing and Urban Affairs, 
109th Cong., Section-by-Section Analysis of Financial Services 
Regulatory Relief Act of 2006 (Comm. Print 2006) at 3 (available at: 
http://banking.senate.gov/public/_files/RegRel_summary.pdf)
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2. Corporate Credit Unions

    The 2006 Relief Act did not affect corporate credit unions because 
they are exempt from PCA. 12 U.S.C. 1790d(m). But corporate credit 
unions are subject by regulation to a minimum ``capital ratio,'' 12 CFR 
704.3(d), and to a minimum ``retained earnings ratio'' calculated on a 
monthly basis. Id. Sec.  704.3(i). When either ratio falls below the 
prescribed minimum, the corporate credit union is subject to PCA-like 
remedies (e.g., ``capital restoration plan,'' earnings retention 
requirement, and ``capital directives''). Id. Sec. Sec.  704.2(g)-(i), 
704.3(i). The definitions associated with corporate credit union 
capital in Part 704 must be modified to correspond with the expanded 
definition of PCA net worth to enable an acquiring corporate credit 
union to include in its post-merger capital the merging credit union's 
retained earnings.

3. Proposed Rule

    The NCUA Board issued a proposed rule to implement the expanded 
definition of PCA net worth in advance of the effective date of FAS 
141(R) to benefit natural person credit union mergers taking place 
after that date. 73 FR 44197 (July 30, 2008). The proposed rule also 
modifies Part 704 to expand the corresponding definitions associated 
with corporate credit union capital. 12 CFR 704.2.
    NCUA received 15 comment letters on the proposed rule--four from 
federally-chartered natural person credit unions, three from state-
chartered natural person credit unions, one from a corporate credit 
union, six from credit union industry trade associations, and one from 
a banking industry trade association. Three commenters supported the 
rule without reservation, 10 offered qualified support, some suggesting 
specific revisions to the rule text, and two commenters opposed the 
rule, advocating revisions that exceed the scope of the NCUA Board's 
rulemaking authority. The comments on the proposed rule are addressed 
below.

B. Discussion of Comments on Proposed Rule

1. Part 702--Natural Person Credit Union's Post-Merger Net Worth

    The proposed rule expanded the ``retained earnings only'' 
definition of a natural person credit union's ``net worth'' by 
reorganizing and then revising the PCA definition of ``net worth.'' Id. 
Sec.  702.2(f). The rule added the critical language: ``For a credit 
union that acquires another credit union in a mutual combination, net 
worth includes the retained earnings of the acquired credit union, or 
of an integrated set of activities and assets, at the point of 
acquisition.'' 73 FR at 44201. The critical language used the term 
``mutual combination'' in place of ``merger'' and defined it 
(consistent with GAAP) as ``a transaction in which a credit union 
acquires another credit union, or acquires an integrated set of 
activities and assets that is capable of being conducted and managed as 
a credit union for the purpose of providing a return in the form of 
economic benefits directly to owner members.'' FAS 141(R) at ]] 3d-e.
    The term ``mutual combination'' was defined to narrowly extend the 
expanded ``net worth'' definition beyond just mergers between intact 
credit unions to include certain purchase and assumption (``P&A'') 
transactions in which a ``whole institution'' is conveyed exclusive of 
certain collateral obligations that would arise under a pre-existing 
contract. Id. An example of such a transaction takes place when NCUA 
liquidates a credit union and, in a P&A transaction, then sells the 
liquidated credit union's assets, liabilities, and existing depositor 
relationships, etc., to another credit union, but only after 
repudiating the executory obligations of a contract for servicing the 
liquidated credit union's loan portfolio.
    Of the commenters who focused on the language of the proposed rule, 
several sought clarification of the definition of a ``mutual 
combination.'' Two commenters sought to insert the words ``upon 
combination'' as follows in the phrase ``an integrated set of assets 
and activities that upon combination is capable of being conducted and 
managed as a credit union.'' To modify the definition as the commenters 
suggested would allow the acquisition of a group of assets that does 
not constitute a business, and thus is ineligible for the ``acquisition 
method'' in the first place, to receive the regulatory capital benefit 
of this rule-- replicating the result of the ``pooling method.'' FASB, 
not NCUA, drew the distinction between assets that constitute a business and those that do 
not, but the final rule is intended to benefit only those transactions 
to which FAS 141(R) applies.
    Of the others who addressed the ``mutual combination'' definition, 
two were critical of the management ``purpose'' criterion. They 
contended that requiring ``an integrated set of assets and activities * 
* * to be managed as a credit union for the purpose of providing a 
return in the form of economic benefits directly to owner members'' 
could be construed to unnecessarily restrict a credit union's ability 
to consider all factors relevant to determining whether a merger would 
benefit its members. The management ``purpose'' criterion is part of 
the FAS 141(R) definition of a ``business.'' FAS 141(R) at ]3.d. 
However, the commenter's argument has merit because the proposed rule 
was never meant to be construed to impose such an obstacle. 
Accordingly, the final rule excludes the ``for the purpose of * * *'' 
language from subsection (3) of its definition ``net worth.''
    Several commenters expressed a fundamental disagreement with the 
result of this rulemaking. One commenter maintained that CUMAA's 
``retained earnings only'' definition of ``net worth'' deviated from 
GAAP, and that the proposed rule's expanded definition is no better. To 
comply with GAAP, this commenter advocated defining ``net worth'' to 
include all components of GAAP ``equity'' like the bank regulators do. 
Despite acknowledging that NCUA has no control over applicable 
accounting standards, another commenter insisted on retaining the 
``pooling method'' instead of following the ``acquisition method.'' One 
commenter criticized the proposed rule because the ``acquisition 
method'' mandated by FAS 141(R) relies on ``fair value accounting,'' 
which will compel credit unions to hire valuation professionals on a 
continuing basis. Finally, one commenter who supported the proposed 
rule wanted to further expand net worth to encompass ``acquired equity 
including retained earnings after valuation of the acquired credit 
union.'' This would achieve for regulatory capital purposes precisely 
the result the ``acquisition method'' proscribes for financial 
reporting purposes: Combining the merging credit union's acquired 
equity with that of the acquirer. Without that result, the same 
commenter asked, how should a merging credit union's retained earnings 
be reported for accounting purposes?
    With the exception of the last comment (which is addressed below), 
resolving these fundamental disagreements with the proposed rule is 
beyond the scope of the NCUA Board's rulemaking authority. NCUA does 
not establish GAAP, does not oversee FASB, and does not have the 
discretion to reinstate the ``pooling method'' or to disregard fair 
value accounting. The 2006 Relief Act authorized NCUA, by rulemaking, 
to expand the PCA definition of ``net worth'' to include the retained 
earnings of an acquired credit union. It did not give NCUA the 
authority to override or expand limitations and definitions set by law 
or by GAAP.
    Finally, two commenters pointed out the need to amend the Call 
Report to accommodate the final rule. To that end, NCUA will revise the 
``statement of financial condition'' in the Call Report so that it 
collects identifiable intangibles and goodwill, as well as an ``equity 
acquired'' component. Further, a supplementary schedule will collect 
data on post-December 31, 2008, credit union combinations, including 
the merging credit union's acquisition-point retained earnings as 
measured under GAAP. These reported amounts, if not taken during a 
given quarter to cover losses in excess of GAAP retained earnings, will 
flow forward to the Call Report's automatic net worth calculator in 
accordance with this rule. To the extent ``equity acquired'' is eroded 
by credit union losses, the acquired credit union's regulatory capital 
(i.e., its retained earnings balance under GAAP as collected on the 
supplementary Call Report schedule) must be reduced accordingly. NCUA 
will furnish instructions explaining these Call Report revisions and 
clarifying how to report a merging credit union's retained earnings for 
regulatory reporting purposes.
    With the modifications explained above, the final rule adopts the 
expanded ``net worth'' definition, thus enabling an acquiring credit 
union to approximate for PCA purposes the post-merger net worth that 
the ``pooling method'' would have produced,\5\ while adhering to FAS 
141(R) for purposes of financial reporting of the merger.
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    \5\ The result approximates, but does not duplicate, that of the 
``pooling method'' because neither CUMAA nor the 2006 Relief Act 
authorizes the exclusion of intangibles from the ``total assets'' 
denominator of a natural person credit union's net worth ratio.
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2. Part 704--Corporate Credit Union's Post-Merger Capital

    The proposed rule modifies Part 704 to expand the definitions 
associated with corporate credit union capital to correspond to the 
expanded definition of PCA ``net worth'' in Part 702. To that end, the 
Board revised definitions of a corporate credit union's ``capital,'' 
``core capital'' and ``retained earnings ratio'' to include ``the 
retained earnings of the acquired credit union, or of an integrated set 
of activities and assets, at the point of acquisition.'' 73 FR at 
44201. As in Part 702, the definition of a ``mutual combination'' was 
used to encompass both the acquisition of a credit union by merger and 
also, very narrowly, the acquisition of a ``whole institution'' 
previously liquidated by NCUA, exclusive of certain collateral 
obligations that would arise under a pre-existing contract.
    To more closely replicate the regulatory capital result the 
``pooling method'' would have yielded, the proposed rule excluded 
identifiable and unidentifiable intangibles \6\ from the definition of 
a corporate credit union's ``moving daily average net assets'' 
(``MDANA'')--the denominator of its ``capital ratio.'' 12 CFR 704.3(d); 
see note 5 supra. That denominator under the ``pooling method'' would 
not otherwise reflect a merging credit union's intangibles or the 
increased valuation of its tangible assets. While replicating the 
``pooling method'' result, these modifications allow an acquiring 
corporate credit union to adhere to FAS 141(R) for purposes of 
financial reporting of the credit union merger. The NCUA Board invited 
public comment on the proposal to exclude intangibles from the 
definition of a corporate credit union's MDANA.
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    \6\ Identifiable intangibles could include existing member 
relationships (i.e., core deposit intangibles) and unserved portions 
of a field of membership; unidentifiable intangibles include 
predominantly goodwill.
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    In addition to the comments on Part 702 in the preceding section 
that also apply to Part 704, three commenters addressed revisions that 
are specific to Part 704. Recognizing that the NCUA Board has 
flexibility in establishing regulatory capital requirements for 
corporate credit unions, one commenter recommended adding an acquired 
credit union's ``acquired equity'' to corporate ``capital,'' ``core 
capital'', and the numerator of the ``retained earnings ratio,'' rather 
than limiting the addition to the acquired credit union's retained 
earnings. The commenter believes this approach is consistent with GAAP, 
would help to promote efficiencies, and would allay uncertainties in 
the marketplace.
    The NCUA Board has considered the recommended approach but declines 
to adopt it. The introduction of ``acquired equity'' would be 
inconsistent with Congressional intent as reflected in the fact that Congress chose not to include it in the regulatory capital of 
natural person credit unions. It would be appropriate to revisit 
``acquired equity'' were the NCUA Board to consider restructuring 
corporate credit union regulatory capital to conform to GAAP. The same 
is true with respect to this commenter's suggestion to also reflect 
goodwill in the regulatory capital measure of a corporate credit union, 
as a GAAP measurement would do.
    A commenter who, although displeased with FASB's elimination of the 
``pooling method,'' supports the proposed rule asked for clarification 
of the rule's reference to the retained earnings of ``an integrated set 
of activities and assets, at the point of acquisition.'' For the 
reasons given above in reference to natural person credit unions, the 
purpose of this language in Part 704 is to extend the expanded 
definition of corporate credit union capital very narrowly to the 
acquisition of a ``whole institution'' that NCUA previously liquidated, 
exclusive of certain collateral obligations that would arise under a 
pre-existing contract. In this context, the ``integrated set of 
activities and assets'' language will ensure that the retained earnings 
that were earned and counted as net worth of the merging credit union 
will remain within the credit union system.
    The same commenter asked whether the exclusion of intangibles from 
the definition of a corporate credit union's MDANA would apply to 
intangibles created before the final rule's effective date. The answer 
is that the exclusion applies to all identifiable intangibles and 
goodwill regardless of date of origination. The numerator of the 
``capital,'' ``core capital'' and ``retained earnings'' ratios does not 
include intangibles and goodwill. In order not to dilute the ratios, 
and to duplicate the ``pooling method'' result, neither should the 
denominator.
    A commenter objected that the NCUA Board lacks the authority to, in 
effect, preserve the ``pooling method'' for corporate credit union 
mergers by regulation. The premise of this objection is that CUMAA 
exempted corporate credit unions from PCA, and the 2006 Relief Act did 
not subject them to it. From this premise, the commenter draws the 
inference that NCUA needs explicit Congressional authorization to 
permit an acquiring corporate credit union to count the retained 
earnings of a merging credit union as part of its capital. Without that 
authority, corporate credit unions must apply the ``acquisition 
method'' to credit union mergers.
    What this commenter overlooks is that Congress did authorize the 
NCUA Board to charter ``central credit unions'' and subject them to 
``such rules, regulations and orders as the Board deems appropriate.'' 
12 U.S.C. 1766(a). Thus, the NCUA Board has the authority to prescribe 
the capital structure of corporate credit unions and the flexibility to 
permit them to replicate the regulatory capital results of the 
``pooling method.'' Even so, the NCUA Board still requires corporate 
credit unions to file regulatory reports that are consistent with GAAP.
    Finally, among several minor technical corrections to the proposed 
revisions to Part 704, the final rule replaces the term 
``unidentifiable intangibles'' with the term ``goodwill.''

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
describing any significant economic impact a proposed regulation may 
have on a substantial number of small credit unions (primarily those 
under $10 million in assets). The final rule implements an Act of 
Congress expanding the definition of a natural person credit union's 
net worth. 12 U.S.C. 1790d(o)(2)(A) (2006). The rule affects the 
calculation of the post-merger net worth of an acquiring credit union 
in a credit union merger, the vast majority of which exceed $10 million 
in assets. Accordingly, the final rule will not have a significant 
economic impact on a substantial number of small credit unions. 
Therefore, a regulatory flexibility analysis is not required.

Paperwork Reduction Act

    This final rule implements an Act of Congress expanding the 
definition of a natural person credit union's net worth. 12 U.S.C. 
1790d(o)(2)(A) (2006). NCUA has determined that the rule would not 
increase paperwork requirements under the Paperwork Reduction Act of 
1995 and regulations of the Office of Management and Budget. Control 
number 3133-0154 has been issued for Part 702 and control number 3133-
0129 has been issued for Part 704. Both will be displayed in the table 
at 12 CFR Part 795.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory actions on State and local 
interests. In adherence to fundamental federalism principles, NCUA, an 
independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order. This final rule 
implements a statutory mandate that applies to all federally-insured 
credit unions, including State-chartered credit unions, and thus may 
raise some federalism implications. However, the proposal is unlikely 
to have a direct effect on the States, on the relationship between the 
national government and the States, or on the distribution of power and 
responsibilities among the various levels of government because it 
facilitates, rather than diminishes, the ability of State-chartered 
credit unions to combine with other credit unions.

Treasury and General Government Appropriations Act, 1999

    NCUA has determined that the proposed rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681 
(1998).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) provides generally for congressional review 
of agency rules. A reporting requirement is triggered in instances 
where NCUA issues a final rule as defined by section 551 of the APA. 5 
U.S.C. 551. The Office of Management and Budget has determined that 
this rule is not a major rule for purposes of SBREFA. As required by 
SBREFA, NCUA will file the appropriate reports with Congress and the 
General Accounting Office so this rule may be reviewed.

List of Subjects in 12 CFR Parts 702 and 704

    Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on November 
20, 2008.
Mary Rupp,
Secretary of the Board.

0
For the reasons set forth above, 12 CFR parts 702 and 704 are amended 
as follows:

PART 702--PROMPT CORRECTIVE ACTION

0
1. The authority citation for part 702 continues to read as follows:

    Authority: 12 U.S.C. 1766(a), 1790d.


0
2. Amend Sec.  702.2 by revising paragraph (f) to read as follows:


Sec.  702.2  Definitions.

* * * * *
    (f) Net Worth means-- (1) The retained earnings balance of the credit union at quarter-
end as determined under generally accepted accounting principles, 
subject to paragraph (f)(3) of this section. Retained earnings consists 
of undivided earnings, regular reserves, and any other appropriations 
designated by management or regulatory authorities;
    (2) For a low income-designated credit union, net worth also 
includes secondary capital accounts that are uninsured and subordinate 
to all other claims, including claims of creditors, shareholders and 
the NCUSIF; and
    (3) For a credit union that acquires another credit union in a 
mutual combination, net worth includes the retained earnings of the 
acquired credit union, or of an integrated set of activities and 
assets, at the point of acquisition. A mutual combination is a 
transaction in which a credit union acquires another credit union, or 
acquires an integrated set of activities and assets that is capable of 
being conducted and managed as a credit union.
* * * * *

PART 704--CORPORATE CREDIT UNIONS

0
1. The authority citation for Part 704 continues to read as follows:

    Authority: 12 U.S.C. 1766(a), 1781, 1789.


0
2. Amend Sec.  704.2 by:
0
a. Revising the current definitions of ``Capital'', ``Core capital'', 
``Moving daily average net assets'' and ``Retained earnings ratio'' to 
read as set forth below; and
0
b. Adding the definition of ``Mutual combination'' to read as follows:


Sec.  704.2  Definitions.

* * * * *
    Capital means the sum of a corporate credit union's retained 
earnings, paid-in capital, and membership capital. For a corporate 
credit union that acquires another credit union in a mutual 
combination, capital includes the retained earnings of the acquired 
credit union, or of an integrated set of activities and assets, at the 
point of acquisition.
* * * * *
    Core capital means the sum of a corporate credit union's retained 
earnings, and paid-in capital. For a corporate credit union that 
acquires another credit union in a mutual combination, core capital 
includes the retained earnings of the acquired credit union, or of an 
integrated set of activities and assets, at the point of acquisition.
* * * * *
    Moving daily average net assets means the average of daily average 
net assets exclusive of identifiable intangibles and goodwill for the 
month being measured and the previous eleven (11) months.
    Mutual combination means a transaction or event in which a 
corporate credit union acquires another credit union, or acquires an 
integrated set of activities and assets that is capable of being 
conducted and managed as a credit union.
* * * * *
    Retained earnings ratio means the corporate credit union's retained 
earnings divided by its moving daily average net assets. For a 
corporate credit union that acquires another credit union in a mutual 
combination, the numerator of the retained earnings ratio also includes 
the retained earnings of the acquired credit union, or of an integrated 
set of activities and assets, at the point of acquisition.
* * * * *

 [FR Doc. E8-28462 Filed 11-28-08; 8:45 am]
BILLING CODE 7535-01-P  

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