ALEXANDRIA, Va.–NCUA has sent a letter to credit unions that discusses the enclosed administrative order approved pursuant to § 702.201 that reduces the amount of earnings retention required for credit unions classified as adequately capitalized. The letter also discusses credit unions’ authority to submit a streamlined net worth restoration plan (NWRP) if their net worth ratio declined to undercapitalized predominantly due to temporary share growth during the COVID-19 pandemic.
Regarding PCA for adequately capitalized credit unions, NCUA noted its board on June 5 approved an administrative order reducing the amount of earnings retention required for credit unions classified as adequately capitalized to zero.
“The agency understands that some credit unions may experience a reduction in earnings and capital due to their COVID-19 response efforts (such as waived fee income, forbearance on loan payments, or an unexpected increase in expenses),” the letter reads. “The NCUA Board determined that a decrease in the earnings retention requirement is necessary to avoid a reduction of shares, to retain system liquidity, and to further the purpose of PCA.”
The letter goes on to note that under this order an adequately capitalized credit union that is unable to meet the earnings retention requirement will not have to submit a written application requesting approval to decrease its earnings retention amount,” NCUA stated. “If, however, a credit union poses an undue risk to the Share Insurance Fund or exhibits material safety and soundness concerns, the Regional Director may require the credit union to submit an application for a decrease in the earnings retention requirement in accordance with 702.201. The NCUA will notify credit unions required to submit a waiver request to the Regional Director at least 45 calendar days prior to the end of the quarter.
This relief remains in effect until Dec. 31, 2020, and covers any decrease in earnings retention applications that an adequately capitalized credit union would otherwise have been required to submit prior to the June,
Net Restoration Plans
In its section letter, NCUA pointed out that due to the COVID-19 pandemic, some credit unions may experience a substantial, short-term increase in shares from stimulus deposits or consumer flight to safety, thereby diluting their net worth ratios.
“For credit unions that experience a decline in their net worth ratio predominantly due to share growth, the NCUA Board will temporarily permit a credit union to submit a streamlined NWRP. The streamlined NWRP must attest that the reduction in the credit union’s net worth ratio was predominantly caused by share growth and that such share growth is a temporary condition due to COVID-19,” NCUA wrote. “Credit unions that become classified as undercapitalized based on June or September 2020 Call Report data may submit a streamlined NWRP under this authority if share growth is the predominant factor for the decline in the net worth ratio and the share growth is temporary.
When approving streamlined NWRPs, NCUA said Regional Directors will analyze whether share growth was the predominant factor in the decline of a credit union’s net worth ratio.
“More specifically, the NCUA will verify that the decline in the net worth ratio was driven by an increase in total assets, and that the increase in total assets is attributed to an increase in shares, not borrowings or other sources of funds,” NCUA said. “Federally insured, state-chartered credit unions must comply with applicable state requirements when submitting an NWRP for state supervisory authority approval. When considering whether to approve an NWRP, the NCUA will consult with the applicable state supervisory authority.”
NCUA said credit unions expecting a continued decline in their net worth ratio to a level below 4% should notify their NCUA examiner and submit a NWRP in accordance with 702.206. Additionally, a credit union that becomes less than adequately capitalized for reasons other than share growth, or falls below undercapitalized, must submit a NWRP in accordance with 702.206.