Prompt Corrective Action PCA Implementation Information

This letter provides credit unions with additional information regarding the implementation of NCUA Rules & Regulations Part 702 Prompt Corrective Action (PCA). This letter also addresses several frequently asked questions (FAQs) pertaining to key areas of PCA.

Credit unions should gain an understanding of how PCA will apply to them. However, for the majority of credit unions, PCA generally will not entail more than the quarterly measurement of the net worth to total assets ratio (NWR). In addition, credit unions greater than $10 million in assets must also review their Risk Based Net Worth (RBNW) Requirement, but only for the quarters that they are required to complete a Call Report.

Based on June 2000 Call Report information, NCUA estimates that 95% of all federally insured credit unions will not be directly affected by PCA. This means 95% of all credit unions will not be subject to any mandatory or discretionary supervisory actions under PCA. This is because under most circumstances, PCA supervisory actions will not apply until a credit union’s NWR falls below 7%. Presently, less than 5% of credit unions have a NWR below 7%. The average NWR is nearly double at 13.9%.

Implementation

NCUA and State Supervisory Authorities (SSAs) will officially begin classifying credit unions based upon their net worth ratio (NWR) during the first quarter of 2001. NCUA will base this classification on data credit unions report in the December 2000 Call Report, reflecting activity for the fourth quarter of 2000.

Net Worth Ratio (NWR)

To aid credit unions in measuring the NWR, NCUA has developed a PCA Net Worth Calculation Worksheet and added it to the Call Report for initial release in December 2000. The PCA Worksheet contains all NWR components (Please see Attachment A of this letter). It automatically will compute your credit union’s NWR and provide your Net Worth Classification after you complete pages 1 through 14 of the PC 5300 Automated Call Report System. Hence, no additional input is required. However, at its option, the credit union may elect among three alternative methods of calculating total assets that involve averaging instead of the default denominator quarter-end total assets.

For manual Call Report filers, NCUA will compute your NWR with information you entered manually on pages 1 through 14 of the Call Report.

As noted in Section 702.101(c)(1), if your NWR places the credit union in a lower net worth category at the time you file a Call Report, you are not required to inform NCUA or your SSA.

However, as noted in Section 702.101(c)(2), semiannual Call Report filers must inform NCUA and the appropriate state official if state-chartered, of a change in the NWR that places the credit union in a lower net worth category during the March and September quarters. If your credit union only files a Call Report semi-annually, you may choose to copy the PCA Net Worth Calculation Worksheet and use it to compute your NWR manually for the March and September quarters.

Risk-Based Net Worth (RBNW) Requirement

For credit unions exceeding $50 million in assets, NCUA and SSAs will begin implementing the Risk Based Net Worth (RBNW) requirement for “complex” credit unions using data from the March 2001 Call Report that will reflect activity for the first quarter of 2001. For all other credit unions exceeding $10 million in assets, the RBNW requirement first will be implemented using data from the June 2001 Call Report, that will reflect activity for the second quarter of 2001.

Page 4 of this letter is a copy of the RBNW Calculation Requirement Worksheet. For your information, it displays and sums the standard components of the RBNW Calculation and follows the PCA Net Worth Worksheet in the December 2000 Call Report. Again, no additional input is required. NCUA is providing this calculation as a sample only for December 2000.

Beginning with the March 2001 Call Report, the results of the RBNW Requirement Calculation will appear on line 13 of the PCA Net Worth Calculation Worksheet.

As noted above, all credit unions with assets greater than $10 million are required to review their RBNW requirement at the time of their required Call Report filing. Accordingly, those credit unions between $10 million and $50 million in asset size only will review their RBNW Requirement Calculation semiannually. However, a credit union less than $50 million in assets still has the option of voluntarily filing a Call Report during the March and September quarters to demonstrate 3 either that it has met, or is no longer subject to, an RBNW requirement.

Summary

All credit unions should obtain an understanding of Part 702. For the majority of credit unions, practical experience with PCA may be limited to the procedures highlighted above. Please be familiar with them. For those credit unions interested in more detailed discussion of common PCA questions, please review the NCUA PCA FAQs in Attachment C. You can obtain additional copies of Part 702 and other NCUA Rules and Regulations from NCUA’s Website at www.ncua.gov.

NCUA and State Supervisors will work closely with credit unions during the coming months to help ensure a smooth implementation period.

If you have any questions, please contact your examiner, NCUA regional office, or state supervisory authority.