12 C.F.R. Subpart A—Net Worth Classification
Title 12 - Banks and Banking
(a) Net worth measures. For purposes of this part, a credit union must determine its net worth category classification at the end of each calendar quarter using two measures: (1) The net worth ratio as defined in §702.2(g); and (2) If determined to be applicable under §702.103, a risk-based net worth requirement. (b) Effective date of net worth classification. For purposes of this part, the effective date of a federally-insured credit union's net worth category classification shall be the most recent to occur of: (1) Quarter-end effective date. The last day of the calendar month following the end of the calendar quarter; or (2) Corrected net worth category. The date the credit union received subsequent written notice from NCUA or, if State-chartered, from the appropriate State official, of a decline in net worth category due to correction of an error or misstatement in the credit union's most recent Call Report; or (3) 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) or 702.302(d). (c) Notice to NCUA by filing Call Report. (1) Other than by filing a Call Report, a federally-insured credit union need not notify the NCUA Board of a change in its net worth ratio that places the credit union in a lower net worth category; (2) Failure to timely file a Call Report as required under this section in no way alters the effective date of a change in net worth classification under this paragraph (b) of this section, or the affected credit union's corresponding legal obligations under this part. [65 FR 8584, Feb. 18, 2000; 65 FR 55439, Sept. 14, 2000, as amended at 67 FR 12464, Mar. 19, 2002; 67 FR 71087, Nov. 29, 2002] (a) Net worth categories. Except for credit unions defined as “new” under subpart B of this part, a federally-insured credit union shall be classified (Table 1)— (1) Well capitalized if it has a net worth ratio of seven percent (7%) or greater and also meets any applicable risk-based net worth requirement under §§702.103 through 702.108; or (2) Adequately capitalized if it has a net worth ratio of six percent (6%) or more but less than seven percent (7%), and also meets any applicable risk-based net worth requirement under §§702.103 through 702.108 below; or (3) Undercapitalized if it has a net worth ratio of four percent (4%) or more but less than six percent (6%), or fails to meet any applicable risk-based net worth requirement under §§702.103 through 702.108; or (4) Significantly undercapitalized if it (i) Has a net worth ratio of two percent (2%) or more but less than four percent (4%); or (ii) Has a net worth ratio of four percent (4%) or more but less than five percent (5%), and either— (A) Fails to submit an acceptable net worth restoration plan within the time prescribed in §702.206; or (B) Materially fails to implement a net worth restoration plan approved by the NCUA Board; or (5) Critically undercapitalized if it has a net worth ratio of less than two percent (2%). (b) Reclassification based on supervisory criteria other than net worth. The NCUA Board may reclassify a “well capitalized” credit union as “adequately capitalized” and may require an “adequately capitalized” or “undercapitalized” credit union to comply with certain mandatory or discretionary supervisory actions as if it were in the next lower net worth category (each of such actions hereinafter referred to generally as “reclassification”) in the following circumstances: (1) Unsafe or unsound condition. The NCUA Board has determined, after notice and opportunity for hearing pursuant to §747.2003 of this chapter, that the credit union is in an unsafe or unsound condition; or (2) Unsafe or unsound practice. The NCUA Board has determined, after notice and opportunity for hearing pursuant to §747.2003 of this chapter, that the credit union has not corrected a material unsafe or unsound practice of which it was, or should have been, aware. (c) Non-delegation. The NCUA Board may not delegate its authority to reclassify a credit union under paragraph (b) of this section. (d) Consultation with State officials. The NCUA Board shall consult and seek to work cooperatively with the appropriate State official before reclassifying a federally-insured State-chartered credit union under paragraph (b) of this section, and shall promptly notify the appropriate State official of its decision to reclassify. [65 FR 8584, Feb. 18, 2000, as amended at 65 FR 44966, July 20, 2000; 67 FR 71087, Nov. 29, 2002] For purposes of §702.102, a credit union is defined as “complex” and a risk-based net worth requirement is applicable only if the credit union meets both of the following criteria as reflected its most recent Call Report: (a) Minimum asset size. Its quarter-end total assets exceed ten million dollars ($10,000,000); and (b) Minimum RBNW calculation. Its risk-based net worth requirement as calculated under §702.106 exceeds six percent (6%). [65 FR 44966, July 20, 2000, as amended by 67 FR 13464, Mar. 19, 2002; 67 FR 71088, Nov. 29, 2002] A risk portfolio is a portfolio of assets, liabilities, or contingent liabilities as specified below, each expressed as a percentage of the credit union's quarter-end total assets reflected in its most recent Call Report, rounded to two decimal places (Table 2): (a) Long-term real estate loans. Total real estate loans and real estate lines of credit outstanding, exclusive of those outstanding that will contractually refinance, reprice or mature within the next five (5) years, and exclusive of all member business loans (as defined in 12 CFR 723.1 or as approved under 12 CFR 723.20); (b) Member business loans outstanding. All member business loans as defined in 12 CFR 723.1 or as approved under 12 CFR 723.20; (c) Investments. Investments as defined by 12 CFR 703.150 or applicable State law, including investments in CUSOs (as defined by §702.2(d)); (d) Low-risk assets. Cash on hand (e.g., coin and currency, including vault, ATM and teller cash) and the NCUSIF deposit; (e) Average-risk assets. One hundred percent (100%) of total assets minus the sum of the risk portfolios in paragraphs (a) through (d) of this section; (f) Loans sold with recourse. Outstanding balance of loans sold or swapped with recourse, excluding loans sold to the secondary mortgage market that have representations and warranties consistent with those customarily required by the U.S. Government and government sponsored enterprises; (g) Unused member business loan commitments. Unused commitments for member business loans as defined in 12 CFR 723.1 or as approved under 12 CFR 723.20; and (h) Allowance. The Allowance for Loan and Lease Losses not to exceed the equivalent of one and one-half percent (1.5%) of total loans outstanding. [65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002] Except as provided below (Table 3), the weighted-average life of an investment for purposes of §§702.106(c) and 702.107(c) is defined pursuant to §702.2(m): (a) Registered investment companies and collective investment funds. (1) For investments in registered investment companies (e.g., mutual funds) and collective investment funds, the weighted-average life is defined as the maximum weighted-average life disclosed, directly or indirectly, in the prospectus or trust instrument; (2) For investments in money market funds, as defined in 17 CFR 270.2a–7, and collective investment funds operated in accordance with short-term investment fund rules set forth in 12 CFR 9.18(b)(4)(ii)(B)(1)–(3), the weighted-average life is defined as one (1) year or less; and (3) For other investments in registered investment companies or collective investment funds, the weighted-average life is defined as greater than five (5) years, but less than or equal to seven (7) years; (b) Callable fixed-rate debt obligations and deposits. For fixed-rate debt obligations and deposits that are callable in whole, the weighted-average life is defined as the period remaining to the maturity date; (c) Variable-rate debt obligations and deposits. For variable-rate debt obligations and deposits, the weighted-average life is defined as the period remaining to the next rate adjustment date; (d) Capital in mixed-ownership Government corporations and corporate credit unions. For capital stock in mixed-ownership Government corporations, as defined in 31 U.S.C. 9101(2), and member paid-in capital and membership capital in corporate credit unions, as defined in 12 CFR 704.2, the weighted-average life is defined as greater than one (1) year, but less than or equal to three (3) years; (e) Investments in CUSOs. For investments in CUSOs (as defined in §702.2(d)), the weighted-average life is defined as greater than one (1) year, but less than or equal to three (3) years; and (f) Other equity securities. For other equity securities, the weighted average life is defined as greater than ten (10) years. [65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002] A credit union's risk-based net worth requirement is the aggregate of the following standard component amounts, each expressed as a percentage of the credit union's quarter-end total assets as reflected in its most recent Call Report, rounded to two decimal places (Table 4): (a) Long-term real estate loans. The sum of: (1) Six percent (6%) of the amount of long-term real estate loans less than or equal to twenty-five percent (25%) of total assets; and (2) Fourteen percent (14%) of the amount in excess of twenty-five percent (25%) of total assets; (b) Member business loans outstanding. The sum of: (1) Six percent (6%) of the amount of member business loans outstanding less than or equal to fifteen percent (15%) of total assets; (2) Eight percent (8%) of the amount of member business loans outstanding greater than fifteen percent (15%), but less than or equal to twenty-five percent (25%), of total assets; and (3) Fourteen percent (14%) of the amount in excess of twenty-five percent (25%) of total assets; (c) Investments. The sum of: (1) Three percent (3%) of the amount of investments with a weighted-average life (as specified in §702.105 above) of one (1) year or less; (2) Six percent (6%) of the amount of investments with a weighted-average life greater than one (1) year, but less than or equal to three (3) years; (3) Twelve percent (12%) of the amount of investments with a weighted-average life greater than three (3) years, but less than or equal to ten (10) years; and (4) Twenty percent (20%) of the amount of investments with a weighted-average life greater than ten (10) years; (d) Low-risk assets. Zero percent (0%) of the entire portfolio of low-risk assets; (e) Average-risk assets. Six percent (6%) of the entire portfolio of average-risk assets; (f) Loans sold with recourse. Six percent (6%) of the entire portfolio of loans sold with recourse; (g) Unused member business loan commitments. Six percent (6%) of the entire portfolio of unused member business loan commitments; and (h) Allowance. Negative one hundred percent (−100%) of the balance of the Allowance for Loan and Lease Losses account, not to exceed the equivalent of one and one-half percent (1.5%) of total loans outstanding. [65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002; 68 FR 56547, Oct. 1, 2003] A credit union may substitute one or more alternative components below, in place of the corresponding standard components in §702.106 above, when any alternative component amount, expressed as a percentage of the credit union's quarter-end total assets as reflected in its most recent Call Report, rounded to two decimal places, is smaller (Table 5): (a) Long-term real estate loans. The sum of: (1) Non-callable. Non-callable long-term real estate loans as follows: (i) Eight percent (8%) of the amount of such loans with a remaining maturity of greater than 5 years, but less than or equal to 12 years; (ii) Twelve percent (12%) of the amount of such loans with a remaining maturity of greater than 12 years, but less than or equal to 20 years; and (iii) Fourteen percent (14%) of the amount of such loans with a remaining maturity greater than 20 years; (2) Callable. Long-term real estate loans callable in 5 years or less as follows: (i) Six percent (6%) of the amount of such loans with a documented call provision of 5 years or less and with a remaining maturity of greater than 5 years, but less than or equal to 12 years; (ii) Ten percent (10%) of the amount of such loans with a documented call provision of 5 years or less and with a remaining maturity of greater than 12 years, but less than or equal to 20 years; and (iii) Twelve percent (12%) of the amount of such loans with a documented call provision of 5 years or less and with a remaining maturity of greater than 20 years; (b) Member business loans outstanding. The sum of: (1) Fixed rate. Fixed-rate member business loans outstanding as follows: (i) Six percent (6%) of the amount of such loans with a remaining maturity of 3 or fewer years; (ii) Nine percent (9%) of the amount of such loans with a remaining maturity greater than 3 years, but less than or equal to 5 years; (iii) Twelve percent (12%) of the amount of such loans with a remaining maturity greater than 5 years, but less than or equal to 7 years; (iv) Fourteen percent (14%) of the amount of such loans with a remaining maturity greater than 7 years, but less than or equal to 12 years; and (v) Sixteen percent (16%) of the amount of such loans with a remaining maturity greater than 12 years; and (2) Variable-rate. Variable-rate member business loans outstanding as follows: (i) Six percent (6%) of the amount of such loans with a remaining maturity of 3 or fewer years; (ii) Eight percent (8%) of the amount of such loans with a remaining maturity greater than 3 years, but less than or equal to 5 years; (iii) Ten percent (10%) of the amount of such loans with a remaining maturity greater than 5 years, but less than or equal to 7 years; (iv) Twelve percent (12%) of the amount of such loans with a remaining maturity greater than 7 years, but less than or equal to 12 years; and (v) Fourteen percent (14%) of the amount of such loans with a remaining maturity greater than 12 years. (c) Investments. The sum of: (1) Three percent (3%) of the amount of investments with a weighted-average life (as specified in §702.105 above) of one (1) year or less; (2) Six percent (6%) of the amount of investments with a weighted-average life greater than one (1) year, but less than or equal to three (3) years; (3) Eight percent (8%) of the amount of investments with a weighted-average life greater than three (3) years, but less than or equal to five (5) years; (4) Twelve percent (12%) of the amount of investments with a weighted-average life greater than five (5) years, but less than or equal to seven (7) years; (5) Sixteen percent (16%) of the amount of investments with a weighted-average life greater than seven (7) years, but less than or equal to ten (10) years; and (6) Twenty percent (20%) of the amount of investments with a weighted-average life greater than ten (10) years. (d) Loans sold with recourse. The alternative component is the sum of: (1) Six percent (6%) of the amount of loans sold with contractual recourse obligations of six percent (6%) or greater; and (2) The weighted average recourse percent of the amount of loans sold with contractual recourse obligations of less than six percent (6%), as computed by the credit union.
Table 5—§702.107 Alternative Components for Standard Calculation [65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002] (a) Who may apply. A credit union may apply for a risk mitigation credit if on any of the current or three preceding effective dates of classification it either failed an applicable RBNW requirement or met it by less than 100 basis points. (b) Application for credit. Upon application pursuant to guidelines duly adopted by the NCUA Board, the NCUA Board may in its discretion grant a credit to reduce a risk-based net worth requirement under §§702.106 and 702.107 upon proof of mitigation of: (1) Credit risk; or (2) Interest rate risk as demonstrated by economic value exposure measures. (c) Application by FISCU. In the case of a FISCU seeking a risk mitigation credit— (1) Before an application under paragraph (a) above may be submitted to the NCUA Board, it must be submitted in duplicate to the appropriate State official and the appropriate Regional Director; and (2) The NCUA Board, when evaluating the application of a FISCU, shall consult and seek to work cooperatively with the appropriate State official, and shall provide prompt notice of its decision to the appropriate State official. [65 FR 44971, July 20, 2000, as amended at 67 FR 71089, Nov. 29, 2002] [65 FR 44971, July 20, 2000, as amended at 67 FR 71089, 71090, 71091, Nov. 29, 2002; 68 FR 56548, 56549, 56550, Oct. 1, 2003]
Title 12: Banks and Banking
PART 702—PROMPT CORRECTIVE ACTION
Subpart A—Net Worth Classification
§ 702.101 Measures and effective date of net worth classification.
§ 702.102 Statutory net worth categories.
§ 702.103 Applicability of risk-based net worth requirement.
§ 702.104 Risk portfolios defined.
§ 702.105 Weighted-average life of investments.
§ 702.106 Standard calculation of risk-based net worth requirement.
§ 702.107 Alternative components for standard calculation.
§ 702.108 Risk mitigation credit.
Appendixes A–H to Subpart A of Part 702
