Federally insured credit unions with a net worth ratio less than six percent are subject to the NCUA Rules and Regulations Part 702 – Prompt Corrective Action (PCA), and are required to have in place an NCUA-approved net worth restoration plan (NWRP) or, in the case of new credit unions, an initial business plan or a revised business plan.
When a credit union is subject to PCA, §702.206(a)(1) generally requires them to file a written NWRP with the appropriate Regional Director and, if State-chartered, the appropriate State official. The NWRP must be submitted within 45 calendar days of the effective date of classification as either “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” unless the NCUA Board notifies the credit union in writing that its NWRP is to be filed within a different period. Similar requirements for new credit unions are detailed beginning at §702.301.
When a Region denies a NWRP, it is predominantly because the credit union did not satisfactorily address or support one of the following requirements:
- Quarterly steps the credit union will take to increase its net worth ratio to “adequately capitalized” and remain so for the next four quarters;
- The amount of projected earnings that will be transferred from the undivided earnings account to the regular reserve account each quarter; and/or
- Reasonable pro forma financial statements (including any off-balance sheet items) covering a minimum of two years.
NCUA regulation §702.206(c) stipulates the contents of the NWRP must include:
- A quarterly timetable of steps the credit union will take to increase its net worth ratio so that it becomes “adequately capitalized” by the end of the term of the NWRP, and to remain so for four consecutive calendar quarters. If “complex,” the credit union is subject to a risk-based net worth requirement that may require a net worth ratio higher than six percent to become “adequately capitalized;”
- The projected amount of earnings to be transferred to the regular reserve account in each quarter of the term of the NWRP as required under §702.201(a), or as permitted under §702.201(b);
- How the credit union will comply with the mandatory and any discretionary supervisory actions imposed on it by the NCUA Board under this subpart;
- The types and levels of activities in which the credit union will engage;
- The steps the credit union will take to correct the unsafe or unsound practice(s) or condition(s) if reclassified to a lower category under §702.102(b);
- Pro forma financial statements, including any off-balance sheet items, covering a minimum of the next two years; and
- Other information as the NCUA Board has required.
A credit union should contemplate the following questions and incorporate related actions or plans, as appropriate, in the NWRP plan, assumptions and pro forma financials:
- Will the credit union need an extension of time to submit the NWRP? If so, this should be done early in the process—well before the required submission date.
- What are the most serious challenges the credit union faces? What are the major factors impacting the credit union's ability to achieve and maintain a well-capitalized position?
- Can the board and management team create and implement a NWRP independently, or should outside assistance be sought?
- If this is a revision to a denied NWRP; or a Revised NWRP submission, why was it denied or why was the credit union unsuccessful in implementing the original NWRP?
- Is the credit union currently under an enforcement action? If so, are all action items related to net worth and earnings incorporated into the NWRP?
- What specific goals need to be included in the NWRP and within what timeframe?
- What additional information or assumptions does the credit union need to incorporate into the NWRP?
- Does the NWRP address the following items, as applicable?
- Any identified fraud or out-of-balance condition that would affect the integrity of the credit union's financial statements
- Recent management changes that would favorably or unfavorably affect its recordkeeping, loan underwriting, or collections
- Identified or needed accounting adjustments (for example, Allowance for Loan and Lease Losses funding)
- Changes to loan underwriting or collection policies in the past 12 months
- Significant changes in the field of membership or sponsor that would impact credit quality
- Income adjustments (for example, new or increased fees)
- Expense adjustments (for example, dividends, staffing, salary rate, other operating expenses) NCUA expects to see in the NWRP before it will be approved
- Outstanding Document of Resolution items (especially those related to earnings, net worth, or other items in the NWRP)
- Contingency options if the NWRP is not met, such as identification of a potential merger partner or partners and the status of any merger plans
Addressing the questions above will help the credit union establish assumptions it can use to begin building the pro forma financial projections. Having well documented and supportable assumptions will enhance the likelihood of a successful NWRP the Regional Director can approve. A successful NWRP will have achievable, reasonable goals and timeframes the credit union has designed with the purpose of attaining a sustainable and adequate level of capitalization.
The NCUA has additional resources available here in the Videos section and the Resource Guides section to help the credit union complete the NWRP. They are:
Additional NWRP guidance is located in Chapter 16: Prompt Corrective Action (opens new window) of the NCUA National Supervision Policy Manual.