How is the “net worth ratio” calculated?
The net worth ratio means the ratio of the credit union’s net worth to total assets, expressed as a percentage rounded to two decimal places. 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 22 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 balance).
Here is an example of how using an optional “total assets” election of Average quarterly balance, Average monthly balance; or, Average daily balance, figure can affect the credit union’s official net worth ratio.
|Call Report Field||Dec 2020||Mar 2021||Jun 2021||Sep 2021||Dec 2021|
|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|
How do I determine my Capital Classification?
The following table illustrates the capital classifications based on the capital framework guiding credit unions.
|Capital classification||Net worth ratio||And/Or||Risk-based capital ratio, if applicable||Or||Complex Credit Union Leverage Ratio, if applicable||And subject to following condition(s) . . .|
|Well Capitalized||7% or greater||And||10% or greater||Or||9% or greater *||N/A|
|Adequately Capitalized||6% or greater||And||8% or greater||Or||N/A||And does not meet the criteria to be classified as well capitalized.|
|Undercapitalized||4% to 5.99%||Or||Less than 8%||Or||N/A||N/A|
|Significantly Undercapitalized||2% to 3.99%||N/A||N/A||N/A||N/A||Or if “undercapitalized at <5% net worth and (a) fails to timely submit, (b) fails to materially implement, or (c) receives notice of the rejection of a net worth restoration plan.|
|Critically Undercapitalized||Less than 2%||N/A||N/A||N/A||N/A||N/A|
* A qualifying complex credit union opting into the Complex Credit Union Leverage Ratio (CCULR) framework should refer to 12 CFR 702.104(d)(7) (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) if its CCULR falls below 9.0 percent.
Please refer to §702 (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) for detailed information on the capital frameworks governing credit unions.Close and return to top
Is there an “effective date” for PCA purposes?
Yes, there is an effective date per §702.101(c). 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 March 31 April 30 June 30 July 31 September 30 October 31
- Corrected capital classification. The date the credit union received subsequent written notice from NCUA or, if state-chartered, from the appropriate state official, of a decline in capital classification due to correction of an error or misstatement in the credit union's most recent Call Report; or
- Reclassification to lower category. The date the credit union received written notice from NCUA or, if state-chartered, the appropriate state official, of reclassification on safety and soundness grounds as provided under § 702.102(b) (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) or § 702. 202(d).
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 Retention Requirement 12 CFR 702.106(a)
- 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 (ERW) is requested (if necessary)
When is the earnings retention 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 until it is “well capitalized.”
Here is a hypothetical example. Sample FCU’s capital classification has historically been well capitalized. In 2020, due to a combination of erratic quarterly net income and growth levels, Sample FCU’s capital classification dropped below well capitalized. Let us look at Sample FCU’s requirements for the 0.10 percent quarterly earnings retention requirement.
|Capital Classification||Well Capitalized||Adequately Capitalized||Well Capitalized||Well Capitalized||Adequately Capitalized||Well Capitalized|
|Earnings Retention Required||N/A||No Earnings Retention||0.1% Retention||No Earnings Retention||No Earnings Retention||0.1% Retention|
Sample FCU must retain 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) the required earnings, the credit union must request a decrease in the earnings retention (otherwise known as an 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 meet the retention requirement, it must retain the earnings 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 retention waiver (ERW) due?
As noted above, a credit union must submit an ERW at least 14 days before the close of the quarter for which an ERW is required. See the table below for guidance.
|Quarter-End||No Later than|
What can a credit union expect after they submit an ERW?
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 earnings retention amount to the amount earned rather than the required earnings retention 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 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, 2023.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 classified moderately or lower. The NCUA Board may notify the credit union in writing that its RBP is to be filed within a different period or that it is not necessary to file an RBP.
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 capital classification dropped below “adequately capitalized” on its 6/30, 202X, validated call report? Assuming Sample FCU is not a “new” credit union, its NWRP would be due September 14, 202X.
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 – 3/2/202Y2||+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?
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 capital requirements.)
- Projected amount of earnings retention for each quarter of the NWRP/RBP. (Note—To comply with the earnings retention requirement, the credit union must show positive net income for the quarter. If a loss is projected for the quarter, the earnings retention would be $0. The plan then serves as an earnings retention 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” 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 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 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, 2023.Close and return to top
1 The example credit union used the average of the three month-end balances over the calendar quarter election, and the average of the current and three preceding calendar quarter-end balances election via the NCUA 5300 Call Report.
2 The RBP due date is generally 3/2. However, during leap years the due date will be 3/1.
3 The NWRP due date is 3/17 in a normal year. However, in a leap year the due date would be 3/16.