CUNA Regulatory Comment Call
December 2, 2002
NCUA PROPOSES ABBREVIATED NET WORTH RESTORATION PLAN UNDER PCA
Executive Summary
- Credit unions falling below certain capital standards under prompt corrective action must submit a net worth restoration plan for approval by NCUA.
- NCUA is seeking comments on a proposal to allow approval of an abbreviated net worth restoration plan for qualifying credit unions whose net worth ratio declined marginally below 6 percent because growth in assets outpaces growth in net worth.
- Comments must be received by NCUA on or before January 28, 2003 and should be directed to Becky Baker, Secretary of the Board. National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Comments may be faxed to (703) 518-6319 or e- mailed to regcomments@ncua.gov. (Please send comments by one method only.)
- Please send your comments to CUNA via mdunn@cuna.coop by January 17, 2002. CUNA’s Examination and Supervision Subcommittee chaired by John Franklin will be developing CUNA’s response and wants to know your views on the proposal.
- Here is a copy of the NCUA proposal: http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/2002/pdf/02-30162.pdf
Highlights of the Proposal
Background
The concept of an abbreviated net worth restoration plan ("NWRP") that would provide certain marginally undercapitalized credit unions with a “safe harbor” for PCA compliance in that additional transfer to reserves would not have been required, was first raised in the proposed rule issued in June to improve PCA implementation. However, NCUA did not adopt the proposed “safe harbor” and is seeking comments on a revised version that would not go as far as the earlier proposal in streamlining compliance for credit unions that are marginally undercapitalized because of asset growth. NCUA said it was reluctant to adopt the previous proposal because a ‘safe harbor” implies that NCUA will not be monitoring a credit union’s net worth restoration efforts “’Safe harbor’" approval was a misnomer to the extent that it implied, incorrectly, that NCUA would abdicate this statutory responsibility,” NCUA said.
Proposal for "1st Tier Net Worth Restoration Plan"
The proposed rule permits an "eligible" federally-insured credit union to submit for NCUA approval a "1st tier net worth restoration plan" ("1st tier NWRP") if the credit union falls marginally below "adequately capitalized" (6%) because asset growth, driven primarily by share and deposit growth, outpaces growth in net worth.
Eligibility
To be eligible, a credit union must meet the following criteria:- have a minimum net worth ratio of 5.50% as measured using the quarter-end balance of total assets. If there is an applicable RBNW requirement, the credit union's net worth ratio may not be more than 50 basis points (0.50 percent) below the RBNW requirement.
- for each of the three prior quarters, have a net worth ratio of at least 6 percent. If that credit union is subject to a RBNW requirement, it also must have met that requirement in each of the three prior quarters.
- for the current and each of the three preceding quarters, a credit union must have increased the dollar amount of its net worth by 60 basis points (0.60 percent) annual return on average assets ("ROAA").
- for the period combining the current and three preceding quarters, ending total asset growth may not exceed 110% of the growth in net worth plus shares and deposits.
Filing Time Frame
- A credit union that meets the eligibility criteria must file its 1st tier NWRP within 45 days of meeting the criteria. An eligible credit union receives a single opportunity to seek NCUA approval of a 1st tier NWRP; if it does not receive approval, it must file the standard NWRP.
Contents of 1st Tier NWRP
The 1st Tier plan must must:
- include a realistic pro forma projection of growth in total assets, shares, ROAA and net worth ratio over the next four quarters, that will result in a net worth ratio of at least 6 percent and meet any applicable RBNW requirement. (The duration of a 1st tier NWRP is four quarters.)
- include a statement describing how the credit union will control exposure to market and institution risks arising from any new activities that it plans to undertake over the next four quarters.
Differences between 1st Tier and Standard NWRP
- A standard plan must include complete pro forma financial statements covering a minimum of two years; a 1st tier plan requires four quarters of pro forma projections of total assets, shares and deposits, return on average assets and net worth.
- A standard plan requires the credit union to specify what steps it will take to meet its schedule of quarterly net worth targets; a 1st tier NWRP does not address what steps the credit union will take to become "adequately capitalized" at the end of the term of the plan.
- A standard NWRP requires those steps to extend beyond the term of the plan to ensure that the credit union remains at least "adequately capitalized" thereafter for four consecutive calendar quarters; a 1st tier plan does not address the credit union's net worth after the end of the term of the plan.
Criteria for Approval
Approval is subject to NCUA's case-by-case determination that the growth rate and ROAA projected for the credit union are based on realistic assumptions that are likely to succeed in restoring its net worth ratio to 6 percent and satisfying any applicable RBNW requirement at the end of the term of the plan.
Requirement To File Standard NWRP
A qualifying credit union may still have to file a standard net worth restoration plan under certain circumstances:
- The proposal gives an eligible credit union a single opportunity to submit a 1st tier NWRP for approval. If that plan is not approved, the credit union will then be required to file a standard NWRP.
- A continuing decline in net worth ratio while operating under an approved 1st tier NWRP will trigger the requirement to file a standard NWRP.
- If, at the end of the term of its 1st tier NWRP (i.e., at the fourth quarter-end), a credit union has failed to restore its net worth ratio to 6 percent and to meet any applicable RBNW requirement, it will have to file a standard NWRP.
Questions to Consider
- Do you agree with NCUA that it should not proceed with the original safe harbor proposal?
Yes________ No _______
Please explain your views.
- Do you agree with NCUA’s proposed eligibility requirements?
Yes________ No _______
Please explain your views.
- If you do not agree, what standards for eligibility would you recommend?
- Is the filing time frame adequate
Yes________ No _______
Please explain your views.
- Do you agree that a credit union should only have one opportunity to seek NCUA approval of a 1st Tier NWRP?
Yes________ No _______
Please explain your views.
- Do you agree with NCUA’s proposed requirements for the contents of a 1st Tier plan?
Yes________ No _______
Please explain your views.
- The proposal does not expressly provide for an appeal if NCUA denies a credit union the ability to file a 1st Tier
plan. Should it contain an appeals process or clarify how an appeal would be made?
Yes________ No _______
Please explain your views.
- Do you agree with NCUA’s requirements for a standard net worth restoration plan in some situations even when the
credit union might otherwise qualify for a 1st Tier plan?
Yes________ No _______
Please explain your views.
- How easy do you think the proposal will be for credit unions and NCUA to implement?
Please explain your views.
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
