How is the “net worth ratio” calculated?
The net worth ratio is simply net worth (per definition) divided by the total assets. NCUA Rules and Regulations §702.2 defines the components of “net worth,” “total assets,” and “net worth ratio.”
The NCUA 5300 Call Report’s Prompt Corrective Action (PCA) Net Worth Calculation Worksheet (currently on page 12 of the Call Report Form) details the components of the net worth ratio.
The term “total assets” has four available measurements for the credit union to utilize:
- Quarter-end balance;
- Average quarterly balance;
- Average monthly balance; or,
- Average daily balance.
A credit union can change its “total assets” election each quarter (default is quarter-end).
Here is an example of how using an optional “total assets” figure can affect the credit union’s official net worth ratio.
|Call Report Field||Dec 2018||Mar 2019||Jun 2019||Sep 2019||Dec 2019|
|Stated Total Assets||$694,518,536||$697,531,110||$694,829,795||$707,312,984||$712,986,289|
|Quarter-end Net Worth||$46,919,657||$49,654,274||$50,491,666||$51,975,960||$52,758,195|
|Net Worth to Total Assets||6.75%||7.11%||7.26%||7.34%||7.39%|
|Net Worth to Total Assets – Including Optional total Assets Election (if used)||6.81%||7.14%||7.29%||7.44%||7.50%|
|Total Assets Election (Optional)1||$688,931,249||$694,491,330||$691,717,404||$698,548,106||$703,041,403|
Is there an “effective date” for PCA purposes?
Yes, there is an effective date per §702.101(b). It is the most recent of:
- The last day of the calendar month following the end of the calendar quarter. This is the most typical effective date and determined by the NCUA 5300 Call Report cycle.
5300 Cycle Net Worth Classification Effective Date December 31 January 31 – 1/31/202X March 31 April 30 – 4/30/202X June 30 July 31 – 7/31/202X September 30 October 31 – 10/31/202X
- The date the credit union received subsequent written notice from the NCUA or, if state-chartered, the appropriate State Supervisory Authority, of:
- A decline in net worth category due to a correction of an error or misstatement in the credit union’s most recent call report; or
- A reclassification to a lower net worth category on safety and soundness grounds.
What is the general PCA process?
Below is an illustration of the timing of the net worth determination and actions required when a credit union’s net worth triggers PCA actions.
- Quarter-end closing entries – Earnings transfer is made from undivided earnings to regular reserves (if required)
- Post-Quarter-end – Call report is filed and net worth ratio calculated
- Month-end following the quarter-end – Net worth classification is determined (the effective date)
- At least 14 days before next quarter-end – Decrease in earnings retention (ETW) is requested (if necessary)
When are earnings retentions (also known as “earnings transfers”) required?
Beginning the effective date of classification of “adequately capitalized” or lower, a federally insured credit union must increase the dollar amount of its net worth quarterly (either in the current quarter, or on average over the current and three preceding quarters), by an amount equivalent to at least 1/10th percent (0.1 percent) of its total assets, and must quarterly transfer that amount (or more by choice) from undivided earnings to its regular reserve account until it is “well capitalized.”
Here is a hypothetical example. Sample FCU’s net worth ratio has historically been above seven percent. In 2019, due to a combination of erratic quarterly net income and growth levels, Sample FCU’s net worth ratio dropped below seven percent. Let us look at Sample FCU’s requirements for making the 0.10 percent quarterly earnings retention and transfer (from Undivided Earnings to Regular Reserves) in the table below.
|Earning Transfer Required||N/A||No Transfer||0.1% Transfer||No Transfer||No Transfer||0.1% Transfer|
Sample FCU must retain and transfer earnings at the quarter end following the effective date of a classification below “well capitalized” (based on the net worth ratio that triggers the classification). Keep in mind the effective date is the month-end after the quarter-end (January 31, April 30, July 31, or October 31).
If the credit union cannot retain (earn) and transfer the required earnings, the credit union must request a decrease in the earnings retention (otherwise known as an earnings transfer waiver or earnings retention waiver) from the appropriate regional office at least 14 days before the end of the quarter. If a credit union is unsure if it will be able to make the 0.10 percent earnings required, it should request the waiver as an abundance of caution.
If the credit union ends up earning enough to make the transfer, it must make the transfer as required. If, however, the credit union did not make the required earnings and the waiver was needed, the credit union will have complied with the requirement to request permission in advance of the quarter-end.Close and return to top
When is an earnings transfer waiver (ETW) due?
As noted above, a credit union must submit an ETW at least 14 days before the close of the quarter for which an ETW is required. See the table below for guidance.
|Quarter-End||No Later than|
What can a credit union expect after they submit an ETW?
Before quarter-end when the credit union normally pays dividends, the Regional Office will distribute a signed letter (approval or denial) to the credit union and the State Supervisory Authority for state-chartered credit unions. An approval allows the credit union to pay dividends and reduce the transfer amount from the Undivided Earnings to the Regular Reserves, to the amount earned rather than the required reserve transfer discussed in item 4 above.Close and return to top
What earnings retention requirements changed under the Temporary Regulatory Relief in Response to COVID-19 – Prompt Corrective Action rule changes to part 702?
In response to the COVID-19 pandemic and resulting economic disruption, the Board has temporarily amended §702.201 to waive the earnings retention requirement for all federally insured credit unions classified as “adequately capitalized.” However, the applicable Regional Director has the authority to subsequently require an application for a decrease in the earnings retention requirement if a particular credit union poses undue risk to the NCUSIF or exhibits material safety and soundness concerns. In this case, the region will notify the individual credit union of the application requirement at least 45 days before quarter-end. This provision is effective now and will expire on March 31, 2022, consistent with other recent COVID-19 regulatory relief rules.Close and return to top
When is a Net Worth Restoration Plan (NWRP) or Revised Business Plan (RBP) required?
If the credit union is “new” (less than 10 years old and under $10 million), they must submit a RBP within 30 calendar days of the effective date of classification below “adequately capitalized” if the credit union either:
- Has not increased its net worth ratio consistent with its active approved business plan or RBP;
- Has no active approved business plan or RBP; or
- Has failed to restrict member business loans as required by §702.304(a)(3).
If the credit union does not meet the definition of “new,” the credit union must submit a NWRP within 45 calendar days of the effective date of a classification below “adequately capitalized.”
Hypothetically, what if Sample FCU’s net worth ratio dropped to 5.98 percent on its 6/30, 202X, validated call report? Assuming Sample FCU is not a “new” credit union, its NWRP would be due September 14, 2020.
The chart below details the different RBP and NWRP due dates by quarter-end and classification date.
|Quarter-End||Effective Date of Net Worth Classification||“New” Credit Union RBP Must Be Received NLT||Not “New” Credit Union NWRP Must Be Received NLT|
|12/31/202X||1/31/202Y||+30 days – 3/1/202Y2||+45 days – 3/16/202Y3|
|3/31/202X||4/30/202Y||+30 days – 5/30/202Y||+45 days – 6/14/202Y|
|6/30/202X||7/31/202Y||+30 days – 8/30/202Y||+45 days – 9/14/202Y|
|9/30/202X||10/31/202Y||+30 days – 11/30/202Y||+45 days – 12/15/202Y|
What resources are available to help a credit union complete the NWRP or RBP?
The following resources are also available in the Videos section and the Resource Guides section on this website:
NCUA assistance may be available to help the credit union complete the NWRP or RBP. Contact your region for details if you need help.Close and return to top
What should the credit union review prior to submitting the NWRP or RBP to the region?
A successful NWRP or RBP will include the following:
- Quarterly timetable showing net worth reaching "adequately capitalized" and remaining so for four consecutive quarters. (Note—Complex credit unions should also include the risk based net worth requirements.)
- Projected amount of earnings transferred to regular reserves for each quarter of the NWRP/RBP. (Note—To make an earnings transfer, the credit union must show positive net income for the quarter. If a loss is projected for the quarter, the earnings transfer would be $0. The plan then serves as an earnings transfer waiver for that quarter.)
- Explanation of how the credit union will comply with mandatory and discretionary supervisory actions.
- Explanation of the types and levels of activities in which the CU will engage.
- Quarterly pro forma financial statements for a minimum of two years, or the length of the plan.
- Explanation of steps the credit union will take to correct unsafe or unsound practices/conditions if the credit union is reclassified to a lower NW level.
- RBP only—Address changes made since the original business plan was approved.
The NWRP or RBP must:
- Include a signature page with at least two board officials' signature.
- Be based on realistic assumptions that allow the credit union to succeed in building net worth.
- Not increase the credit union’s exposure to risk to an unreasonable level.
What NWRP requirements changed under the Temporary Regulatory Relief in Response to COVID-19 – Prompt Corrective Action rule changes to part 702?
In response to the COVID-19 pandemic and resulting economic disruption, the Board has temporarily waived the NWRP content requirements for federally insured credit unions that become classified as “undercapitalized” (a net worth ratio of 4 percent to 5.99 percent) beginning with the March 2021 quarterly Call Report cycles, predominantly as a result of share growth.
In these cases, a credit union may submit a significantly simpler NWRP to the applicable Regional Director; for example, a letter attesting that its reduction in capital was caused by share growth and that such share growth is a temporary condition due to the COVID-19 pandemic would be acceptable. (Note—Federally insured, state-chartered credit unions must still comply with applicable state requirements when submitting NWRPs for state supervisory authority approval.)
If the region determines that the credit union became classified as “undercapitalized” for reasons other than the result of share growth, or otherwise determines safety and soundness concerns warrant a comprehensive NWRP, it still has authority to require a full plan. In this case, the credit union will be notified. This abbreviated plan option does not apply to credit unions with a net worth ratio of less than four percent. Easing of the NWRP requirements are temporary, and only apply to plans submitted by March 31, 2022.Close and return to top
1 The example credit union used the average of the three month-end balances over the calendar quarter election line 11 of the NCUA 5300 Call Report for June 2019, and the average of the current and three preceding calendar quarter-end balances election line 12 of the NCUA 5300 Call Report for December 2018, and March, September, and December 2019 quarters.
2 In 2020 the RBP due date was 3/1 due to leap year, in a normal year the due date would be 3/2.
3 In 2020, the NWRP due date was 3/16 due to leap year. In a normal year, the due date would be 3/17.