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Your CU's Capital and Prompt Corrective Action
Thursday, July 7, 2016 6:35 AM

Cheryl Ehmann, AVP Staff Analyst, Credit Union Resources

Part 702 of the NCUA Rules and Regulations regarding capital adequacy is commonly referred to as prompt corrective action. This reflects NCUA’s determination to address a credit union’s capital issues as soon as possible.

This regulation requires federally insured credit unions to measure their net worth at each quarter-end to determine if a transfer should be made from undivided earnings to regular reserves. Net worth is defined as the total of undivided earnings, regular reserves, current earnings not yet closed to undivided earnings, and any special reserves, excluding other comprehensive income (used to account for defined benefit pension plans) and unrealized gains and losses on available for sale investments. Total net worth is divided by total assets to determine the capitalization level of the credit union. This calculation is performed automatically on page 11 of the NCUA 5300 (call) report.

Standard Requirements

If a credit union’s net worth ratio is 7 percent or more, it is considered well capitalized and no transfer is required. 

If a credit union’s net worth ratio is 6 percent or more but less than 7 percent, it is considered to be adequately capitalized and a transfer of 1/10 of 1 percent (0.1 percent) of total assets must be transferred from undivided earnings to regular reserves. It does not matter what the credit union’s net income is for the period; this has no bearing on the amount of the transfer.

If a credit union’s net worth is 4 percent or more but less than 6 percent, it is considered undercapitalized and must make the transfer previously noted, submit a net worth restoration plan to NCUA, and keep total assets at or below the total for the previous quarter.

If a credit union’s net worth is less than 4 percent but more than 2 percent, it is considered to be significantly undercapitalized and must meet the previously mentioned requirements, plus restrict member business loans. 

For net worth ratios less than 2 percent, the credit union is considered critically undercapitalized. There are no specific requirements, and liquidation or conservatorship is likely.

Risk Based Net Worth Requirements

For credit unions that exceed $50 million in assets, a risk-based net worth calculation is required. This calculation is performed automatically on page 12 of the NCUA 5300 (call) report. If the risk-based net worth requirement calculation is more than 6 percent, reserve transfers may be required, even if the net worth ratio is greater than 7 percent.

New Credit Unions

New credit unions, defined as a credit union that has both been in operation for less than 10 years and has total assets of $10 million or less, follow different criteria:

  • Well capitalized – net worth of 7 percent or above – no action necessary.
  • Adequately capitalized – net worth of 6 percent - 6.99 percent - must increase net worth by the amount required by the credit union’s business plan and make a transfer from undivided earnings to regular reserves for that amount. If the amount is not designated in the business plan 0.1 percent of total assets should be used.
  • Moderately capitalized – net worth of 3.5 percent - 5.99 percent - increase net worth and make a transfer as noted above, submit a revised business plan, and restrict business loans.
  • Marginally capitalized – net worth of 2 percent - 3.49 percent - same as moderately capitalized.
  • Minimally capitalized – net worth of 0 percent - 1.99 percent - same as moderately capitalized.
  • Uncapitalized – net worth of less than 0 percent - same as moderately capitalized, except certain conditions require mandatory liquidation or conservatorship.

Small Credit Unions

Credit unions with assets less than $10 million may request assistance from NCUA in developing a business plan to increase net worth.

If you need further assistance with these requirements, please contact the Financial and Technology Resources department with Cornerstone Credit Union League. You can reach me at cehmann@curesources.coop or at 800-442-5762, ext. 6803.