73 FR 44197 (July 30, 2008)

7535-01-U

NATIONAL CREDIT UNION ADMINISTRATION

**12 CFR Parts 702 and 704**

**RIN 3133-AD43**

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

**AGENCY:** National Credit Union Administration (NCUA).

**ACTION:** Proposed Rule.

**SUMMARY:** NCUA requests public comment on a proposed rule
implementing a statutory amendment to the definition of a natural person
credit union's "net worth" that applies solely to NCUA's system of
regulatory capital standards, known as "prompt corrective action." The
amendment expands the definition of "net worth" to allow the acquiring
credit union, in a merger of natural person credit unions, to include
the merging credit union's retained earnings with its own to determine
the acquirer's post-merger "net worth." In a merger of corporate credit
unions, the proposed rule similarly redefines corporate credit union
capital to allow an acquiring credit union to include with its capital
the retained earnings of the merging credit union to determine the
acquirer's post-merger capital.

**DATES:** Comments must be received on or before September 29, 2008.

**ADDRESSES:** You may submit comments by any of the following methods
(**Please send comments by one method only**):

-   [Federal eRulemaking Portal]{.underline}:
    [**http://www.regulations.gov**](http://www.regulations.gov/).
    Follow the instructions for submitting comments.

-   [NCUA Web Site]{.underline}:
    [**http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html**](http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html).
    Follow the instructions for submitting comments.

-   [E-mail]{.underline}: Address to **<regcomments@ncua.gov>.** Include
    "\[Your name\] --

> Comments on Notice of Proposed Rulemaking for Parts 702 and 704" in
> the e-mail subject line.

-   [Fax]{.underline}: (703) 518-6319. Use the subject line described
    above for e-mail.

-   [Mail]{.underline}: Address to Mary Rupp, Secretary of the Board,
    National Credit Union Administration, 1775 Duke Street, Alexandria,
    Virginia 22314-3428.

-   [Hand Delivery/Courier]{.underline}: Same as mail address.

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

**SUPPLEMENTARY INFORMATION:**

###### BACKGROUND

1\. [Natural Person Credit Unions]{.underline}

a\. [Prompt Corrective Action]{.underline}. In 1998, Congress enacted
the Credit Union Membership Access Act ("CUMAA"), Pub. L. No. 105-219,
112 Stat. 913 (1998). CUMAA amended the Federal Credit Union Act to
mandate a system of regulatory capital standards called "prompt
corrective action" ("PCA" or "regulatory capital") consisting of minimum
capital standards and corresponding remedies to improve the net worth of
federally-insured "natural person" credit unions. 12 U.S.C. 1790d [et
seq]{.underline}. In 2000, the NCUA Board implemented a comprehensive
system of PCA primarily under part 702.[^1] 12 C.F.R. 702 [et
seq]{.underline}.

A credit union's "net worth ratio" determines its classification among
five statutory net worth categories. 12 U.S.C. 1790d(c); 12 C.F.R.
702.102. As a credit union's classification among these categories
declines, it is subject to an expanding range of PCA remedies to restore
its net worth. These remedies consist of four mandatory supervisory
actions prescribed by statute, 12 U.S.C. 1790d(e)-(g), and a series of
discretionary supervisory actions developed by NCUA. 12 C.F.R.
702.204(b).

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). For
regulatory capital purposes,[^2] it expressly limits a credit union's
net worth to "the retained earnings balance of the credit union, as
determined under generally accepted accounting principles \["GAAP"\]."
12 U.S.C. 1790d(o)(2)(A) (1998).[^3] Not anticipating the consequences
this rule addresses, the CUMAA net worth definition 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.

b\. [Financial Reporting of Mergers Between Mutual
Enterprises]{.underline}. GAAP pertaining to credit union mergers were
originally embodied in the financial reporting rules for business
combinations established by the Accounting Principles Board's ("APB")
Opinion No. 16, [Business Combinations]{.underline} (1970) ("Opinion
16"). At the time CUMAA mandated PCA, the predominant practice for
financial reporting of a credit union merger, whether of natural person
or corporate credit unions, was 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. Consistent with the
limited statutory definition of net worth, that method allowed an
acquiring credit union to combine its own retained earnings with that of
the merging credit union for purposes of measuring the acquirer's
post-merger net worth ratio. The "pooling method" presumed that the
retained earnings of the merging credit union flowed forward to the
acquirer's financial statement, thus qualifying it as retained earnings
of the acquirer.

The "pooling method," in conjunction with the statutory definition of
net worth, provided an incentive to merge because it allowed the
acquiring credit union to combine the merging credit union's retained
earnings, thus enhancing the acquirer's post-merger net worth. From a
regulatory standpoint, the acquisition of an operationally troubled
credit union by one that will be well capitalized as a result is a
preferable alternative to conserving or liquidating the troubled credit
union.

In 2001, the Financial Accounting Standards Board ("FASB")\--successor
to the APB\--replaced Opinion 16 as the source of GAAP for business
combinations other than those between mutual enterprises with its
Financial Accounting Statement No. 141, [Business
Combinations]{.underline} (2002) ("FAS 141"). FAS 141 replaced the
"pooling method" of financial reporting of business combinations with
the "purchase method" effective in June 30, 2001.

c\. [Deferment of "Acquisition Method" for Mutual
Combinations]{.underline}. For mergers between mutual enterprises
("mutual combinations") such as credit unions, FASB deferred the 2001
effective date of FAS 141 pending the outcome of its project on
[Combinations Between Mutual Enterprises]{.underline}*,* which explored
a "differences-based approach" to mutual combinations. FAS 141 at ¶60.
While the FAS 141 deferment for mutual combinations is pending, Opinion
16 continues to apply, and credit unions continue to use the "pooling
method" of financial reporting of credit union mergers. But that
deferment will expire at the end of 2008.

In December 2007, FASB decided that its revised method of financial
reporting for business combinations should apply equally to mutual
combinations and to combinations between other for-profit enterprises.
Financial Accounting Statement No. 141(R), [Business
Combinations]{.underline} (2007) ("FAS 141(R)") at ¶74. FAS 141(R) will
apply to mutual combinations that take place in fiscal years beginning
after December 15, 2008. In conjunction with the limited statutory
definition of net worth, the net effect of FAS 141(R) is to mandate the
"purchase method" of financial reporting\--which it renamed the
"acquisition method"\--for credit union mergers, resulting in the
exclusion of a merging credit union's retained earnings from the
post-merger net worth of an acquiring credit union.

d\. [Acquisition versus Pooling Method of Financial
Reporting]{.underline}. The "acquisition method" of financial reporting
for credit unions 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. Because credit unions cannot count additions of equity
in their net worth\--which is limited by definition to GAAP retained
earnings\--an acquirer's net worth will not increase as the result of a
merger. Moreover, the "acquisition method" may well [reduce]{.underline}
an acquirer's post-merger net worth because, as a ratio of total assets,
it will be diluted by the addition and fair valuation of assets
([i.e]{.underline}., the denominator of the ratio) acquired in the
merger.

Whereas the "pooling method" of financial reporting, when applied in
conjunction with the statutory definition of net worth, provided an
incentive to merge, the "acquisition method" would have exactly the
opposite effect. The acquiring credit union's net worth ratio not only
would not increase as a result of a merger, it probably would decline.
The risk of being demoted to a lower PCA net worth category, and in turn
being exposed to the mandatory and discretionary supervisory actions of
PCA, would naturally discourage interest in mergers, thus limiting their
availability to rescue troubled credit unions.

e\. [Statutory Expansion of Net Worth Definition]{.underline}. Concerned
that FAS 141(R), in conjunction with the statutory limitation on net
worth, would stifle credit union mergers, Congress enacted the Financial
Services Regulatory Relief Act, Pub. L. No. 109-351, 120 Stat. 1966
("2006 Relief Act") in 2006. Section 504 of the 2006 Relief Act expanded
the original PCA definition of a natural person credit union's "net
worth" to include "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). The express purpose of section 504 is to allow
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." Staff of Senate Comm. on Banking, Housing and Urban Affairs,
109^th^ Cong., [Section-By-Section Analysis of Financial Services
Regulatory Relief Act of 2006]{.underline} (Comm. Print 2006) at 3.[^4]
To conform to the effective date of FAS 141(R), the modifications to
part 702 implementing section 504 must take effect in final form on
December 31, 2008, so that they will apply to natural person credit
union mergers taking place after that date.

The following table compares the financial reporting and regulatory
capital consequences of a credit union merger under present GAAP
(pre-FAS 141(R)) and under new GAAP (post-FAS 141(R)) both with and
without the proposed modifications to part 702:

**[[Post-Merger Net Worth Under GAAP With and Without Proposed
Rule]{.underline}]{.smallcaps}**

**[ ]{.smallcaps}**

+---------------------+---------------+---------------+---------------+
|                     | **[Current    | **[New        | **[New        |
|                     | GAAP]{        | GAAP]{        | GAAP]{        |
|                     | .smallcaps}** | .smallcaps}** | .smallcaps}** |
|                     |               |               |               |
|                     |               | **[[without   | **[[with      |
|                     |               | ]{.underline} | ]{.underline} |
|                     |               | Proposed      | Proposed      |
|                     |               | Rule]{        | Rule]{        |
|                     |               | .smallcaps}** | .smallcaps}** |
+---------------------+---------------+---------------+---------------+
| GAAP Authority      | APB Opinion   | FAS 141 (R)   | FAS 141 (R)   |
|                     | No. 16        |               |               |
+---------------------+---------------+---------------+---------------+
| GAAP Financial      | "Pooling      | "Acquisition  | "Acquisition  |
| Reporting Method    | Method"       | Method"       | Method"       |
| (e.g. Call Report)  |               |               |               |
+---------------------+---------------+---------------+---------------+
| GAAP Retained       | Acquiring     | Acquiring     | Acquiring     |
| Earnings (A)        | CU's R/E      | CU's R/E      | CU's R/E      |
|                     |               |               |               |
| (R/E = Retained     | \+            |               |               |
| Earnings)           |               |               |               |
|                     | Merging CU's  |               |               |
|                     | R/E           |               |               |
+---------------------+---------------+---------------+---------------+
| GAAP Total Assets   | Acquiring     | Acquiring     | Acquiring     |
| (B)                 | CU's Total    | CU's Total    | CU's Total    |
|                     | Assets @      | Assets @      | Assets @      |
| (BkV = Book Value)  | BkV + Merging | BkV + Merging | BkV + Merging |
|                     | CU's Total    | CU's Total    | CU's Total    |
| (FV = Fair Value)   | Assets @ BkV  | Assets @ FV   | Assets @ FV   |
+---------------------+---------------+---------------+---------------+
| Net Worth Ratio =   | [A            | [A            | [A + Merging  |
|                     | ]{.underline} | ]{.underline} | CU's          |
| [Retained Earnings  |               |               | R/E           |
| (A)]{.underline}    | B             | B             | ]{.underline} |
|                     |               |               |               |
| Total Assets (B)    |               |               | B             |
+---------------------+---------------+---------------+---------------+
| Net Worth Ratio =   | [\$45K        | [\$           | [\$30K +      |
|                     | ]{.underline} | 30K           | \$15K         |
| [Retained Earnings  |               | ]{.underline} | ]{.underline} |
| (B)]{.underline}    | \$450K        |               |               |
|                     |               | \$ 500K       | \$500K        |
| Total Assets (A)    |               |               |               |
+---------------------+---------------+---------------+---------------+
| Post-Merger Net     | 10%           | 6%            | 9%            |
| Worth Ratio         |               |               |               |
+---------------------+---------------+---------------+---------------+

2\. [Corporate Credit Unions]{.underline}.

Corporate credit unions are exempt from PCA, 12 U.S.C. 1790d(m), but
they are subject to a minimum "capital ratio" and to a requirement to
calculate their "retained earnings ratio" on a monthly basis, both as
provided by regulation.

a\. [Minimum Capital Ratio]{.underline}. A corporate credit union's
"capital ratio" is defined as its capital (numerator) divided by its
"moving daily average net assets" (denominator). 12 C.F.R. 704.2. Its
"capital" consists of the sum of its retained earnings, paid-in capital,
and membership capital. [Id]{.underline}. Of these, retained earnings
and paid-in capital constitute "core capital." [Id]{.underline}. A
corporate credit union is required to maintain a minimum capital ratio
of four percent (4%) calculated at least monthly. 12 C.F.R. 704.3(d).
When its capital ratio falls and remains below that minimum, the
corporate credit union is subject to remedies that resemble some of the
mandatory and discretionary supervisory actions of PCA
([e.g]{.underline}., "capital restoration plan," earnings retention
requirement, and "capital directives\"). 12 C.F.R. 704.2(g), (h) and
(i).

b\. [Retained Earnings Ratio]{.underline}. A corporate credit union's
"retained earnings ratio" is defined as its retained earnings divided by
its moving daily average net assets. 12 C.F.R. 704.2. A corporate credit
union is required to calculate its "retained earnings ratio" on a
monthly basis. 12 C.F.R. 704.3(i). If the retained earnings ratio is
less than 2 percent, the credit union becomes subject to an earnings
retention requirement. [Id]{.underline}.

3\. [Issues for Comment]{.underline}.

NCUA welcomes public comment on this proposed rule. To facilitate
consideration of the public's views, we ask commenters to organize and
identify their comments by credit union type (natural person or
corporate) or regulation (part 702 or part 704) and by corresponding
topic or definition. General comments, if any, should be included in a
separately identified section. Please recognize that NCUA does not
establish GAAP, does not oversee FASB, does not have the power to
reinstate the "pooling method," and does not have the authority to
override or expand limitations and definitions prescribed by law.
Therefore, this rulemaking will not address comments advocating any of
these actions.

B. DISCUSSION OF PROPOSED MODIFICATIONS

1.         [Part 702 \-- Natural Person Credit Union's Post-Merger Net
Worth]{.underline}.

The 2006 Relief Act's redefinition of "net worth" for natural person
credit unions is implemented through Part 702's PCA definitions. The
present definition of "net worth," 12 C.F.R. 702.2(f), is reorganized
into subsections and includes the following new subsection:

> \(3\) For a credit union that acquires another credit union in a
> mutual combination, net worth also 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 either another credit
> union, or 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.

In the first sentence, proposed subsection (3) adds to an acquiring
credit union's net worth an amount equal to the merging credit union's
retained earnings balance at the point it was acquired, yielding a
regulatory capital measure that approximates the net worth previously
obtainable under the "pooling method."[^5]

Proposed subsection (3) is not limited in scope to the acquisition by
merger of a credit union as an intact legal entity. FAS 141(R) at ¶3d.
The definition of "mutual combination" in the second sentence
incorporates the GAAP definition of a "business" and a "business
combination." FAS 141(R) at ¶¶ 3d-e. This allows subsection (3) to apply
to transactions (e.g., certain purchase and assumptions) that convey
substantially all of the components of a credit union, even though the
components together no longer legally constitute a credit union.

The net effect of the modifications to part 702 is to apply FAS 141(R)
to natural person credit union mergers for financial reporting purposes,
while for PCA purposes replicating the post-merger net worth that would
have resulted under the "pooling method." These modifications affect
only the measurement of a credit union's post-merger regulatory capital
under PCA; financial reporting in its Call Report still must adhere to
GAAP (i.e., acquirer's retained earnings balance must be reported
consistent with GAAP). 12 U.S.C. 1782(a)(6)(C)(i).  

            2.         [Part 704 \-- Corporate Credit Union's
Post-Merger Capital]{.underline}.

The proposed rule modifies part 704 \[Corporate Credit Unions\] to
expand the definitions associated with corporate credit union capital to
correspond with the statutory expansion of net worth for natural person
credit unions. As such, the definition of the "capital" and "core
capital" of a corporate credit union that acquires another credit union
by merger is modified to include "the retained earnings of the acquired
credit union, or of an integrated set of activities and assets, at the
point of acquisition." The same modification is made to the definition
of a corporate credit union's "retained earnings ratio." Further, to
encompass not only the acquisition of a credit union as an intact legal
entity, but also as a group of credit union components that together are
no longer legally constituted as such, the proposed rule adds a separate
definition of "mutual combination" that, like proposed section
702.2(f)(3), incorporates the GAAP definition of "business" and
"business combination."

The NCUA Board has greater flexibility to define corporate credit union
capital than the 2006 Relief Act allows for the net worth of natural
person credit unions. 12 U.S.C. 1766(a). Therefore, to more closely
approximate the regulatory capital result of the "pooling method,"
identifiable and unidentifiable intangibles are excluded from the
definition of a corporate credit union's "moving daily average net
assets" ("MDANA")---the denominator of the capital ratio. 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. The purpose
of excluding intangibles from the MDANA denominator of the capital ratio
is to approximate the denominator of the capital ratio under the
"pooling method." That denominator did not reflect the merging credit
union's intangibles, nor the increased valuation of its tangible assets.
This approach resembles the approach followed by other Federal banking
regulators.

Even though the statutory definition of net worth does not permit
natural person credit unions to exclude intangibles, allowing corporate
credit unions to do so approximates for regulatory capital purposes the
result that would have been achieved under the "pooling method." The
Board welcomes public comment on whether this approach adequately
addresses the risk of devaluation and possible loss to the National
Credit Union Share Insurance Fund.

The net effect of the modifications to part 704 is to apply FAS 141(R)
to financial reporting of corporate credit union mergers while
replicating the post-merger capital, capital ratio and retained earnings
that would have resulted under the "pooling method." These modifications
to part 704 must take effect in final form on December 31, 2008, to
parallel the effective date of the modifications to part 702 that
implement the expanded definition of "net worth."

REGULATORY PROCEDURES

[Regulatory Flexibility Act]{.underline}

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 proposed 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 an acquiring credit union, the vast
majority of which exceed \$10 million in assets. Accordingly, the
proposed rule, if adopted, will not have a significant economic impact
on a substantial number of small credit unions. The NCUA Board invites
comment on this issue.

[Paperwork Reduction Act]{.underline}

NCUA has determined that the proposed 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]{.underline}

Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their regulatory actions on State and local
interests. NCUA, an independent regulatory agency as defined in 44
U.S.C. 3502(5), voluntarily adheres to the fundamental federalism
principles addressed by the executive order. This proposed rule would
apply 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]{.underline}

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).

## 

## List of Subjects

## 12 CFR Parts 702 and 704

Credit unions, Reporting and recordkeeping requirements, Surety bonds.

By the National Credit Union Administration Board on July 24, 2008.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Mary Rupp

Secretary of the Board

For the reasons set forth above, NCUA proposes to amend 12 CFR parts 702
and

704 as follows:

**PART 702 \-- PROMPT CORRECTIVE ACTION**

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

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

2\. Amend §702.2 by revising paragraph (f) to read as follows:

**§702.2 Definitions**

\* \* \* \* \*

\(f\) [Net Worth]{.underline} 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 for the purpose of
> providing a return in the form of economic benefits directly to owner
> members.
>
> \* \* \* \* \*

PART 704 -- CORPORATE CREDIT UNIONS

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

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

2.  Amend §704.2 by:

    a.  Revising the current definitions of [Capital]{.underline}, [Core
        capital]{.underline}, [Moving daily average net
        assets]{.underline} and [Retained earnings ratio]{.underline} to
        read as set forth below; and

    b.  Adding the definition of [Mutual combination]{.underline}
        following the revised definition of [Moving daily average net
        assets]{.underline}, to read as follows:

**§704.2 Definitions**

\* \* \* \* \*

[Capital]{.underline} 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]{.underline} 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]{.underline} means the average of daily
average net assets exclusive of identifiable and unidentifiable
intangibles for the month being measured and the previous eleven (11)
months.

[Mutual combination]{.underline} 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 for the purpose of providing a
return in the form of economic benefits directly to owner members.

\* \* \* \* \*

[Retained earnings ratio]{.underline} 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.

\* \* \* \* \*

[^1]: Since it was first adopted, part 702 has been amended four times.
    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.

[^2]: In contrast, 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).  

[^3]: In contrast to NCUA, 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 C.F.R. 325.2(v),
    whereas credit union capital is limited by law to the "retained
    earnings" component of equity. 12 C.F.R. 702.2(f).

[^4]: Available at:
    <http://banking.senate.gov/public/_files/RegRel_summary.pdf>

[^5]: The result approximates, but does not duplicate, that of the
    "pooling method" because CUMAA does not authorize a corresponding
    exclusion of intangibles from the "total assets" denominator of the
    net worth ratio.