Chapter 2
Industry Overview—Credit Unions

Description of Business

2.01 The first credit union in the United States was organized in 1908. Although credit unions originally arose within communities, greater success was achieved by organizing credit unions to serve employee groups—particularly government employees, teachers, railway workers, and telephone company employees. A credit union is a member-owned financial cooperative, democratically controlled by its members and operating for the purpose of providing financial services to its members. Credit unions are organized as not-for-profit entities and are exempt from certain taxes. A credit union is subject to rules that restrict membership to the entity.

2.02 In 1934, Congress passed the Federal Credit Union Act (FCUA), establishing a federal regulatory system, which authorized the formation of federally chartered credit unions in all states. In 1970, the National Credit Union Administration (NCUA), an independent governmental agency, was created by Congress to charter, supervise, and regulate federal credit unions. It also extended supervision to state chartered federally insured credit unions. Other legislative initiatives that have affected credit unions include the following:

  • In 1970, the National Credit Union Share Insurance Fund (NCUSIF) was formed to insure credit union share (deposit) accounts up to applicable limits in all federal credit unions and federally insured state-chartered credit unions.
  • In 1977, legislation was passed expanding services available to credit union members, including share certificates and mortgage lending.
  • The Depository Institution Deregulation and Monetary Control Act of 1980.
  • The Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
  • The Credit Union Membership Access Act of 1998 (CUMAA).
  • The Gramm-Leach-Bliley Act of 1999 (also known as the Financial Services Modernization Act).
  • The Financial Services Regulatory Relief Act of 2006.
  • The Emergency Economic Stabilization Act of 2008.
  • The Helping Families Save Their Homes Act of 2009.
  • The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
  • The Consumer Financial Protection Bureau (CFPB) regulations.

2.03 Each credit union is organized around a defined field of membership, and each member shares a common bond of affiliation with other members. The field of membership is a key characteristic of a credit union and is defined, in its charter or bylaws, as those who may belong to it and use its services. All credit unions, except corporate credit unions, are referred to as natural person credit unions. The common bond is a characteristic of the members themselves. Congress, in the FCUA, has recognized three types of membership fields: single common bond, multiple common bond, and community. Single common bond credit unions consist of one group that has a common bond of occupation or association. Multiple common bond credit unions include multiple groups, each of which has a common bond of occupation or association. Community membership fields are defined by the FCUA as persons or organizations within a well-defined local community, neighborhood, or rural district.

2.04 In early 1998, the United States Supreme Court ruled that NCUA had strayed from the original intent of Congress as reflected in the FCUA passed in 1934 relating to common bond affiliation for credit union membership. This ruling had the effect of restricting future membership in federal credit unions. On August 7, 1998, legislation was signed into law that eased membership restrictions on credit unions and allowed them to expand. The legislation, known as the CUMAA, permits occupation-based credit unions to take in groups of members from unrelated companies under certain circumstances.

2.05 The CUMAA also establishes three important new requirements with respect to financial statements and audits. First, all federally insured credit unions with assets of $500 million or more must obtain an annual independent audit of their financial statements by a CPA or public accountant licensed by the appropriate state or jurisdiction. Second, all federally insured credit unions with assets of $10 million or more must follow U.S. generally accepted accounting principles (GAAP) for all reports or statements required to be filed with the NCUA board. Third, for any federal credit union with assets of more than $10 million that uses an independent auditor who is compensated for his or her services to perform a financial statement audit, the audit is subject to state accounting laws, including licensing requirements.

2.06 The CUMAA further addressed minimum capital (net worth) requirements and prompt corrective action (PCA) to restore capital. Net worth standards based on a percentage of assets were established for federally insured credit unions, as well as risk-based net worth standards for complex credit unions as defined by the NCUA. The NCUA also developed PCA regulations, as well as regulations concerning other areas such as new field of membership rules, and supervisory committee audit rules as required by this legislation. In addition, the CUMAA placed restrictions on member business lending and restricted conversions to mutual savings banks.

The Board of Directors

2.07 The board of directors establishes the general operation of a credit union and ensures that it follows applicable laws and regulations and adheres to its bylaws. In addition, the board is responsible for ensuring that a credit union maintains its financial stability, follows good business practices, and is properly insured and bonded. As membership organizations, credit unions are democratically controlled. Federal and state laws require that a board of directors be elected by the membership on the basis of one member, one vote. The board of directors, in turn, appoints the supervisory committee; however, based on state law, not all state chartered credit unions require a supervisory committee. The supervisory committee, which is similar to an audit committee, plays a major role in monitoring a credit union's financial affairs. A credit committee may be appointed or elected to oversee the lending transactions. Other committees may include an asset-liability committee, a marketing or member-relations committee, an educational committee, and various ad hoc committees. Credit unions depend heavily on member volunteers to set policy, make decisions, and sometimes even to operate them. Some officials (board members and board appointed persons) of state chartered credit unions may receive compensation for services, as allowed by law. However, federally chartered credit unions, except as expressly stated in Part 701.33(b) of the NCUA regulations, are generally prohibited from compensating officials.

The Supervisory Committee

2.08 The supervisory or audit committee is responsible for ensuring that member funds are protected, financial records and operations are in order, and elected officials carry out their duties properly. Supervisory committee responsibilities are prescribed in Part 715 of the NCUA regulations. In addition, the supervisory committee is generally responsible for overseeing the financial reporting process and ensuring that management has established effective internal controls. Section 115 of the FCUA (Banks and Banking, U.S. Code 12, Section 1761d) states

The supervisory committee shall make or cause to be made an annual audit and shall submit a report of that audit to the board of directors and a summary of the report to the members at the next annual meeting of the credit union; shall make or cause to be made such supplemental audits as it deems necessary or as may be ordered by the board, and submit reports of the supplementary audits to the board of directors.

Similar requirements exist for most state-chartered credit unions, depending on state laws. The supervisory committee may engage an independent auditor to audit and report on the credit union's financial statements.

2.09 Supervisory committees play an important role in developing and maintaining strong operational and financial management at credit unions. As credit unions continue to broaden the nature and scope of the activities in which they are involved, it is important that supervisory committees meet regularly to carefully review operational and financial goals, internal control, financial statements, and examiners' and auditors' reports. Lack of supervisory committee involvement in credit union operations may be an early indicator of potential problems for a credit union.

The Credit Committee

2.10 The credit committee (composed of volunteers either appointed or elected by the board of directors) establishes and monitors a credit union's lending policies, approves loan applications, and provides credit-counseling services to members. This committee may delegate some of its loan-granting authority to one or more loan officers employed by the credit union in accordance with the bylaws. Many credit unions have amended their bylaws to eliminate the elected credit committee. In these instances, the board of directors assumes credit committee responsibilities and generally delegates its responsibility to loan officers employed by the credit union.

Charters, Bylaws, and Minutes

2.11 The NCUA issues charters for federally chartered credit unions and prescribes the form of bylaws of such credit unions. State regulatory authorities establish the form of the charter and bylaws for state-chartered credit unions. The regulatory authorities generally require monthly meetings of the board of directors and other volunteer committees.

Financial Structure

2.12 Because they are nonstock cooperatives, credit unions' primary source of funds is members' share and savings account deposits. To be entitled to membership, each member must generally own at least one share in the credit union. Members' shares or share accounts are savings accounts that represent the members' ownership in the credit union. Credit unions pay interest (commonly referred to as dividends) on shares. This interest cannot be guaranteed (as interest on deposits can), but ordinarily must be declared by the board and may be paid from current earnings or undivided earnings.

2.13 Credit unions use the funds from these shares and other members' savings accounts to make loans to members and to make investments. In general, loans to members make up the bulk of credit union assets. Funds not needed to meet member loan demand and operating expenses are invested.

Credit Union System

2.14 Credit unions—through their state and national trade associations, service organizations, and corporate credit unions—make up the credit union system. Most credit unions are affiliated with the system through membership in their state or combined state credit union leagues. In turn, credit union leagues or associations belong to the Credit Union National Association, Inc. (CUNA), the principal trade association for credit unions in the United States, and CUNA belongs to the World Council of Credit Unions, an international credit union organization. On the national level, for-profit affiliates of CUNA (including the CUNA Strategic Services, Inc., and the CUNA Mutual Group) provide a wide variety of products and services to credit unions on a fee basis.

2.15 The National Association of State Credit Union Supervisors (NASCUS) was founded in 1965 and serves both state-chartered credit unions and the state credit union regulators who supervise them. NASCUS is the primary resource and voice of the 47 state governmental agencies that charter, regulate, and examine the nation's state-chartered credit unions. (Delaware, South Dakota, and Wyoming have no laws permitting state-chartered credit unions.) NASCUS is the only organization dedicated to the defense and promotion of the state credit union charter and the autonomy of state credit union regulatory agencies. NASCUS promotes a dual-chartering system and the advancement of the autonomy and expertise of state credit union regulatory agencies.

2.16 Other national credit union associations include the National Association of Federal Credit Unions, the Credit Union Executives Society, and other associations serving similar credit unions such as educational, defense-related, or aerospace credit unions. These groups may also provide such services as supplies, marketing, insurance, fund transfers, and investment instruments through their affiliates.

Corporate Credit Unions

2.17 A corporate credit union is defined as a credit union organized by natural person credit unions to offer central liquidity, investment, back office processing, deposit and lending facilities for natural person credit unions similar to those provided by other correspondent banking service providers.

Regulation and Oversight

Government Supervision

2.18 Credit unions operate under either a federal or state charter and, therefore, are subject to government supervision and regulation, including periodic examinations by supervisory agency examiners. Federally chartered credit unions are supervised by the NCUA, which is also responsible for administering the NCUSIF. The NCUSIF provides share insurance to all federal credit unions and federally insured, state-chartered credit unions, and insures each deposit up to a specified amount. Each federally insured credit union is required to maintain a deposit with the NCUSIF in an amount equal to 1 percent of its total insured shares.

2.19 State-chartered credit unions are supervised by the regulatory agency of the chartering state. Most state-chartered credit unions are ordinarily required to obtain NCUSIF share insurance coverage. Such credit unions are subject to a periodic insurance examination by the NCUSIF generally performed jointly with their state supervisory authority. Credit unions are allowed to obtain insurance from other sources that are sponsored by a private insurer, depending on state laws. Participation in an insurance program is mandatory for all credit unions.

2.20 Credit unions are subject to the federal, state, and local laws applicable to financial institutions in general. Most state laws allow and follow federal parity whereby they will basically follow NCUA rules and regulations. Such laws include the Uniform Commercial Code, the Truth-in-Lending Laws, the Uniform Consumer Code, Truth-in-Savings regulations, CFPB regulations, and various federal and state tax codes. As financial institutions, they are also subject to a wide variety of federal regulations issued by such agencies as the Treasury Department, the Board of Governors of the Federal Reserve System (Federal Reserve), and the IRS. Rules and regulations issued by the federal and state regulatory agencies address such issues as accounting practices, qualifications for membership, interest rate controls, permissible investments, consumer-protection issues, liquidity reserves, and other operational aspects. The Sarbanes-Oxley Act of 2002 and the SEC implementing regulations do not specifically apply to federal credit unions. However, the NCUA issued Letter to Federal Credit Unions No. 03-FCU-07, Guidance on Selected Provisions of the Sarbanes-Oxley Act of 2002 for Federal Credit Unions (FCUs), in October 2003 to provide a summary of certain provisions within the Sarbanes-Oxley Act of 2002 that NCUA believes are relevant to federal credit unions.

NCUA

2.21 The NCUA issues regulations for both federal credit unions and federally insured, state-chartered credit unions. Federally insured, state-chartered credit unions sign an insurance agreement with the NCUA when they secure federal insurance that stipulates the regulations by which they agree to be bound. NCUA publications that provide useful background information to credit union auditors include the following:

  • The FCUA
  • NCUA letters to credit unions, legal opinions, and regulatory updates
  • Federal Credit Union Bylaws
  • NCUA Chartering and Field of Membership Manual
  • NCUA Examiner's Guide
  • NCUA Letters to Credit Unions
  • Accounting Manual for Federal Credit Unions (and interim Accounting Bulletins)
  • Supervisory Committee Guide for Federal Credit Unions
  • The Federal Credit Union Handbook

Many of the previously mentioned documents can be found at the NCUA’s website at www.ncua.gov.

2.22 Credit unions with under $10 million in assets are provided the Accounting Manual for Federal Credit Unions, which includes some regulatory accounting practices as a guide in accounting for financial transactions and reporting. In accordance with the CUMAA, credit unions with $10 million or more in assets must follow GAAP in the Call Reports they file with the NCUA. These credit unions should not look to this manual, but should seek the advice of an independent accountant to gain a full understanding of GAAP and its implementation. The manual may be adopted by federally insured, state-chartered credit unions under $10 million in assets at the option of the credit unions and their state supervisor.

2.23 The NCUA administers a Central Liquidity Facility (CLF). The CLF is a mixed ownership government corporation created to improve the general financial stability of credit unions by serving as a liquidity lender to credit unions experiencing unusual or unexpected liquidity shortfalls. Membership is voluntary and is open to all natural person and corporate credit unions that purchase a prescribed amount of CLF stock. The NCUA encourages all credit unions to participate in either the CLF or have direct access to Federal Reserve borrowings.

Regulatory Capital Matters

Natural Person Credit Unions

Capital Adequacy

2.24 Title III of the CUMAA established a system of tiered net worth requirements for all insured natural person credit unions. These requirements did not take effect until August 2000. The act required that the NCUA establish a net worth standard for insured credit unions as well as risk-based capital standards for complex credit unions as defined by the NCUA. A separate system of PCA was mandated for new credit unions. A new credit union is defined as a federally insured credit union that both has been in operation for less than ten years and has $10 million or less in total assets. A summary of general requirements follows. In 2000, the NCUA published PCA guidelines in the Federal Register with respect to the RBNWR. Specific requirements are set forth in Title 12 U.S. Code of Federal Regulations (CFR) Parts 700, 702, 741, and 747.

2.25 Under the existing net worth standard, a credit union’s net worth, the numerator of the net worth ratio, is defined in 12 CFR 702.2 as the retained earnings balance of the credit union at quarter-end as determined under GAAP together with any amounts that were previously retained earnings of any other credit union with which the credit union has combined.1

2.26 A credit union’s total assets, the denominator of the net worth ratio, is calculated in any one of four methods. It may be (a) the average of the quarter-end balances of the four most recent quarters, (b) the monthly average over the quarter, (c) the daily average over the quarter, or (d) the quarter-end balance. A credit union may elect a method from the four options to apply for each quarter. Whatever method is chosen for a quarter generally must be used consistently for all PCA measures other than the RBNWR.

2.27 Credit unions with a ratio of less than 7 percent net worth to total assets and any complex credit union, as defined in the following, not meeting its RBNWR will be required to increase net worth quarterly by an amount of earnings equivalent to at least 1/10 percent (0.1 percent) of total assets for the current quarter. Earnings are required to be transferred quarterly from current earnings to the statutory (regular) reserve. Not all states that have state-chartered credit unions permit this transfer. As in some states, legislation may be necessary to enact change. Separate calculations may also be required for state-chartered credit unions subject to state-imposed capital requirements and may be significantly different from the federal requirements. However, a credit union’s net worth category may be downgraded if any supervisory or safety and soundness issues are identified at the credit union by the NCUA or any applicable state regulatory authority.

2.28 In 1998, Congress amended the FCUA to require the NCUA board to adopt a system of PCA to be applied to federally insured credit unions that become undercapitalized. The new FCUA provision imposes a series of progressively more stringent restrictions and requirements indexed to five net worth categories. The provision also mandates a separate system for new credit unions and additional RBNWRs for complex credit unions. See 12 CFR 702 for details of the system of PCA.

2.29 A credit union is defined as complex, and a RBNWR is applicable only if the credit union meets both of the following criteria as reflected in its most recent Call Report:

  • The credit union’s quarter-end total assets exceed $50 million.
  • The credit union’s RBNWR exceeds 6 percent.

2.30 Under the PCA regulations of the NCUA, a credit union is classified in a net worth category as presented in exhibit 2-1.

Exhibit 2-1

Net Worth Classifications

Classification Net Worth Ratio Prompt Corrective Action
Well capitalized 7% or greater None
Adequately capitalized > 6% but < 7% Earnings transfer
Undercapitalized—first tier > 5% but < 6% Mandatory for level
Undercapitalized—second tier > 4% but < 5% Mandatory and discretionary for level
Significantly undercapitalized Either

a.  > 2% but < 4%

b.  or > 4% but < 5% and either

i.  fails to submit an acceptable net worth restoration plan; or

ii.  materially fails to implement a restoration plan approved by the NCUA board.

 Mandatory and discretionary for level
Critically undercapitalized < 2% Mandatory and discretionary for level

2.31 Under PCA regulations, the net worth category of a credit union that is not considered complex is determined by calculating the ratio of the credit union’s net worth (equal to retained earnings as defined under GAAP) to total assets (computed under any of the four methods described previously) based on the net worth categories in exhibit 2-1.

2.32 A credit union that is considered complex must compare its net worth ratio to its RBNWR to determine its net worth category. If a complex credit union’s net worth ratio exceeds its RBNWR, the net worth category under the PCA regulations is determined by calculating its net worth ratio and based on the net worth categories in exhibit 2-1.

2.33 A complex credit union whose RBNWR is greater than its net worth ratio cannot be classified as either “well capitalized” or “adequately capitalized” under PCA regulations. If its net worth ratio is 6 percent or more, the actual net worth classification under PCA regulations would be the first tier of “undercapitalized.” For a complex credit union with a net worth ratio less than 6 percent, any net worth restoration plan submitted by the credit union would have to consider the RBNWR if that requirement were greater than 6 percent.

2.34 The RBNWR is computed by multiplying the end-of-quarter balances of the credit union’s risk-portfolio components (as defined in the regulations) by prescribed percentages (the standard calculation). If the standard calculation produces a RBNWR that is larger than the credit union’s net worth ratio, the credit union can recalculate its RBNWR using some or all of the alternative components approach. In the alternative components approach, the maturities of several of the risk-portfolio components are used to produce a more detailed set of calculations, again each with a prescribed risk percentage. If the alternative components approach produces a RBNWR that is less than the credit union’s net worth ratio, the credit union would have met its RBNWR. If the alternative components approach produces a RBNWR that is larger than the credit union’s net worth ratio, the credit union may apply to the NCUA for a risk mitigation credit (explained in the following) to reduce its calculated RBNWR. If the credit union fails to obtain an adequate amount of risk mitigation credit to reduce its RBNWR below its net worth ratio, it would have failed its RBNWR. The RBNWR ratio is the sum of all components for each category at the calculation date.

2.35 As noted previously, a credit union that fails to meet its applicable RBNWR using either the standard or alternative calculations may apply to the NCUA board for a risk mitigation credit against the credit union’s RBNWR. A risk mitigation credit may be granted by the NCUA board based upon proof from the credit union of mitigation of credit risk or interest rate risk. The amount of the credit and the period that the credit can be used by the credit union is up to the discretion of the NCUA board. A risk mitigation credit may be denied based on the information presented by the credit union or based on other subjective factors considered by the board of the NCUA. A risk mitigation credit may be withdrawn by the NCUA board at any time.

2.36 Beyond the net worth and RBNWR related actions noted previously, 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 in the following circumstances:

  • The NCUA board determines that the credit union is in an unsafe or unsound condition.
  • The NCUA board determines that the credit union has not corrected a material unsafe and unsound practice of which it was, or should have been, aware.

2.37 Actions that may be taken under the PCA provisions can include both mandatory and discretionary actions for each level of capitalization below well capitalized. Actions can range from setting earnings aside to build net worth to restricting or prohibiting certain activities.

2.38 According to regulations, credit unions classified as undercapitalized, significantly undercapitalized, or critically undercapitalized must submit a net worth restoration plan for restoring the credit union to adequate capitalization. Among other things, the plan could

  • specify a quarterly timetable of steps the credit union will take to become adequately capitalized,
  • contain a specific timetable for increasing net worth for each quarter of the plan,
  • specify the amount of earnings equivalent the credit union will transfer to its reserve account on a quarterly basis,
  • detail how the credit union will comply with other restrictions or requirements put into effect,
  • set forth the types and levels of activities that the union will engage, and
  • include pro forma statements covering the next two years at a minimum.
New Credit Unions

2.39 Under the FCUA, a new credit union is classified as

  1. a.  well capitalized if it has a net worth ratio of 7 percent or greater,
  2. b.  adequately capitalized if it has a net worth ratio of 6 percent or more but less than 7 percent,
  3. c.  moderately capitalized if it has a net worth ratio of 3.5 percent or more but less than 6 percent,
  4. d.  marginally capitalized if it has a net worth ratio of 2 percent or more but less than 3.5 percent,
  5. e.  minimally capitalized if it has a net worth ratio of 0 percent or greater but less than 2 percent, and
  6. f.  uncapitalized if it has a net worth of less than 0 percent.

2.40 The NCUA board may reclassify a well capitalized, adequately capitalized, or moderately capitalized new credit union to the next lower net worth category if they determine the credit union is in an unsafe or unsound condition, or the credit union has not corrected a material unsafe or unsound condition.

2.41 New credit unions classified as moderately, marginally, minimally, or undercapitalized generally must file a revised business plan. At a minimum, the following items should be included in the business plan:

  • Outline steps the credit union will take to become adequately capitalized.
  • Set specific quarterly targets for increasing net worth for each year of the plan.
  • Set forth the amount of earnings equivalent the credit union will transfer to its reserve account.
  • Detail how the credit union will comply with other restrictions or requirements put into effect.

2.42 Actions that may be taken under the PCA provisions for new credit unions include both mandatory and discretionary actions ranging from the restriction or prohibition of certain activities to the appointment of a receiver or conservator.

Notice and Effective Date of Net Worth Classification

2.43 A federally insured credit union should have notice of its net worth ratio (including any applicable RBNWR) and should be classified within the corresponding net worth category as of the earliest to occur of the following:2

  • The last day of the calendar month following the end of the calendar quarter
  • 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
  • The date the credit union received written notice from the NCUA board or, if state-chartered, the appropriate state official, of reclassification based on safety and soundness grounds

2.44 Noncompliance or expected noncompliance with regulatory net worth requirements may be a condition that, when considered with other factors, could indicate substantial doubt about an entity's ability to continue as a going concern. The implementation of the PCA provisions warrants similar attention by independent accountants when considering a credit union's ability to remain a going concern. In addition, when a credit union has met its RBNWR through the use of a risk mitigation credit, the subjectivity involved in granting and maintaining the credit may also warrant attention by independent accountants.

Corporate Credit Unions

2.45 Corporate credit unions have regulatory capital requirements that are different from those of other credit unions. Corporate credit unions are not covered by the net worth requirements applicable to other credit unions by virtue of the CUMAA. By statute, the equity or capital of a corporate credit union consists of reserves, undivided earnings, and contributed capital. The NCUA has established a regulatory capital requirement applicable to all corporate credit unions. A state-chartered corporate credit union is also subject to its applicable state law capital requirement, if any. For NCUA regulatory purposes, corporate credit union total capital, as defined in 12 CFR 704.2, consists of the sum of tier 1 and tier 2 capital,3 less the corporate credit union’s equity investments not otherwise deducted when calculating tier 1 capital. Tier 1 capital, as defined in 12 CFR 704.2, represents the sum of (1) retained earnings; (2) perpetual contributed capital (PCC); (3) the retained earnings of any acquired credit union, or of an integrated set of activities and assets, calculated at the point of acquisition, if the acquisition was a mutual combination; and (4) minority interests in the equity accounts of credit union service organization (CUSOs) that are fully consolidated less all of the following:

  1. a.  The amount of the corporate credit union’s intangible assets that exceed one half percent of its moving daily average net assets. However, the NCUA (on its own initiative, upon petition by the applicable state regulator, or upon application from a corporate credit union) may direct the corporate credit union to add back some of these assets.
  2. b.  Investments, both equity and debt, in unconsolidated CUSOs.
  3. c.  An amount equal to any PCC or nonperpetual capital account that the corporate credit union maintains at another corporate credit union.
  4. d.  Beginning on October 20, 2016, and ending on October 20, 2020, any amount of PCC that causes PCC minus retained earnings, all divided by moving daily net average assets, to exceed two percent.
  5. e.  Beginning after October 20, 2020, any amount of PCC that causes PCC to exceed retained earnings.

2.46 The essential function of PCC and nonperpetual capital is to serve as an additional reserve of capital to absorb losses in excess of retained earnings. Therefore, when there is a retained earnings deficit in a corporate credit union, the PCC and nonperpetual capital are depleted to the extent necessary to resolve the deficit. PCC and nonperpetual capital are at-risk capital reserves, and, because they are so designated, a corporate credit union has no legal obligation or authorization as a going concern to restore, replenish, or recoup depleted paid-in capital and membership capital out of future retained earnings, even if retained earnings substantially improve.

2.47 For NCUA purposes, a corporate credit union must maintain at all times (a) a leverage ratio4 of 4.0 percent or greater, (b) a tier 1 risk-based capital ratio5 of 4.0 percent or greater, and (c) a total risk-based capital ratio6 of 8.0 percent or greater.

2.48 NCUA may also establish different minimum capital requirements for an individual corporate credit union based on its circumstances.

2.49 In 2010, the NCUA amended the corporate credit union rules to strengthen the corporate credit union system regulation. As part of these amendments, the NCUA adopted new PCA provisions similar to those currently applicable to banks. Each corporate credit union will be assigned to one of five capital categories. See 12 CFR 704.4 for details of the system of PCA.

2.50 Under the PCA regulations of the NCUA, a corporate credit union is classified in a capital category as follows:

  1. a.  Well capitalized if it has a total risk-based capital ratio of 10 percent or greater; has a tier 1 risk-based capital ratio of 6 percent or greater; has a leverage ratio of 5 percent or greater; and is not subject to any written agreement, order, capital directive, or PCA directive issued by the NCUA to meet and maintain a specific capital level for any capital measure.
  2. b.  Adequately capitalized if it has a total risk-based capital ratio of 8 percent or greater; has a tier 1 risk-based capital ratio of 4 percent or greater; has a leverage ratio of 4 percent or greater; and does not meet the definition of a well capitalized corporate credit union.
  3. c.  Undercapitalized if it has a total risk-based capital ratio that is less than 8 percent; has a tier 1 risk-based capital ratio that is less than 4 percent; or has a leverage ratio that is less than 4 percent.
  4. d.  Significantly undercapitalized if it has a total risk-based capital ratio that is less than 6 percent; has a tier 1 risk-based capital ratio that is less than 3 percent; or has a leverage ratio that is less than 3 percent.
  5. e.  Critically undercapitalized if it has a total risk-based capital ratio that is less than 4 percent; has a tier 1 risk-based capital ratio that is less than 2 percent; or has a leverage ratio that is less than 2 percent.

2.51 The NCUA may reclassify a well capitalized corporate credit union as adequately capitalized and may require an adequately capitalized or undercapitalized corporate credit union to comply with certain mandatory or discretionary supervisory actions as if the corporate credit union were in the next lower capital category in the following circumstances:

  1. a.  Unsafe or unsound condition. The NCUA has determined, after notice and opportunity for hearing pursuant to 12 CFR 704.4(h)(1), that the corporate credit union is in an unsafe or unsound condition.
  2. b.  Unsafe or unsound practice. The NCUA has determined, after notice and an opportunity for hearing pursuant to 12 CFR 704.4(h)(1), that the corporate credit union received a less-than-satisfactory CAMEL rating (three or lower, in other words) for any rating category (other than in a rating category specifically addressing capital adequacy) and has not corrected the conditions that served as the basis for the less than satisfactory rating. Ratings under this paragraph refer to the most recent ratings (as determined either on-site or off-site by the most recent examination) of which the corporate credit union has been notified in writing.

2.52 The potential consequences of failing to meet capital standards include restrictions on activities, restrictions on investments and asset growth, restrictions on the payment of dividends, restrictions on executive compensation, requirements to elect new directors or dismiss management, and possible conservatorship.

2.53 According to PCA regulations, corporate credit unions classified as undercapitalized, significantly undercapitalized, or critically undercapitalized must submit a written capital restoration plan for restoring the credit union to adequate capitalization. Among other things, the plan must include

  • the steps the corporate credit union will take to become adequately capitalized;
  • the levels of capital to be attained during each year in which the plan will be in effect;
  • how the corporate credit union will comply with the restrictions or requirements that are put into effect;
  • the types and levels of activities in which the corporate credit union will engage; and
  • a description of the steps the corporate credit union will take to correct the unsafe or unsound condition or practice if required to submit a capital restoration plan as the result of a reclassification of the corporate credit union pursuant to paragraph 2.51.

2.54 Noncompliance or expected noncompliance with regulatory capital requirements may be a condition that, when considered with other factors, could indicate substantial doubt about an entity's ability to continue as a going concern. The implementation of the PCA provisions warrants similar attention by independent accountants when considering a corporate credit union's ability to remain a going concern.

Annual Audits

2.55 As discussed in paragraph 2.05, the CUMAA requires that all federally insured credit unions with assets of $10 million or more must follow GAAP for all reports or statements required to be filed with the NCUA board and obtain one of the following four services:

  1. a.  If the credit union is federally insured with assets of $500 million or more, a financial statement audit performed in accordance with generally accepted auditing standards by a CPA or public accountant licensed by the appropriate state or jurisdiction in which the audit is conducted.
  2. b.  If the credit union is federally chartered with assets of more than $10 million but less than $500 million, the credit union has four options:

i.  Follow the requirement in item a.

ii.  Obtain an opinion audit on the credit union’s balance sheet performed by an independent accountant licensed by the state or jurisdiction in which the audit is conducted.

iii.  Obtain an examination of management’s assertions regarding controls over Call Reporting conducted by an independent accountant licensed by the state or jurisdiction in which the audit is conducted.

iv.  Obtain a supervisory committee audit that meets the minimum requirements of the Supervisory Committee Guide.

2.56 For any federal credit union with assets of more than $10 million that uses an independent accountant who is compensated for his or her services to perform a financial statement audit, the audit is subject to state accounting laws, including licensing requirements.

2.57 Although GAAP basis accounting is not mandated for internal reporting, GAAP is required for Call Reports filed with the NCUA board for credit unions with assets of $10 million or more.7

2.58 A federally-chartered credit union with $10 million or less in total assets must obtain an annual Supervisory Committee audit.

2.59 The minimum requirements for a supervisory committee audit of federally chartered credit unions are prescribed by 12 CFR 715.8 State-chartered credit unions are subject to the audit requirements established by state regulatory agencies if they are more stringent than 12 CFR 715 requirements. To satisfy regulatory requirements for a supervisory committee audit, the supervisory committee may perform the necessary procedures itself or it may engage an independent accountant to perform procedures that are necessary to fulfill the federal or state requirements. Because the types of engagement can differ so significantly, it is important for the independent accountant to establish a clear understanding of the nature of an engagement to perform a supervisory committee audit.

2.60 The NCUA requires CUSOs to obtain a separate financial statement audit from a CPA in accordance with generally accepted auditing standards before a federally insured credit union can invest or lend to that CUSO. A wholly owned CUSO is not required to obtain a separate annual financial statement audit if it is included in the annual consolidated financial statement audit of the investing federally insured credit union. See 12 CFR 712.3 for additional information.

2.61 The NCUA requires internal control and reporting requirements for corporate credit unions similar to those required for banks under the FDIC Improvement Act of 1991 and the Sarbanes-Oxley Act of 2002. The most significant revisions, which became effective January 1, 2012, require a corporate credit union to

  • ensure that its annual financial statements and regulatory reports reflect all material correcting adjustments necessary to conform with GAAP as identified by the independent public accountant.
  • prepare an annual management report, signed by the CEO and the chief accounting officer or CFO, that contains

—  a statement of management’s responsibility for preparing the financial statements, for establishing and maintaining an adequate internal control structure, and for complying with safety and soundness laws and regulations;

—  an assessment of compliance with such laws and regulations; and

—  an assessment of the effectiveness of the internal control structure. The assessment requirement is effective January 1, 2013, and therefore would be applicable to management reports for the calendar year 2012 and thereafter.

  • ensure that its independent public accountant

—  reports to the supervisory committee all critical accounting policies;

—  retains for seven years the working papers related to an audit;

—  complies with the independence standards and interpretations of the AICPA;

—  has an acceptable peer review;

—  notifies the NCUA if the independent public accountant ceases being a corporate credit union’s independent accountant; and

—  reports separately to the supervisory committee on management’s assertions concerning the effectiveness of internal control structure. The requirement is effective January 1, 2014, and therefore would be applicable to management reports prepared for the calendar year 2013 and thereafter.

  • ensure that it files a copy of its annual report to the NCUA within 180 days after the end of the calendar year, which the NCUA will make available for public inspection.
  • provide the NCUA with a copy of any letter or report issued by its independent public accountant.
  • inform the NCUA when it engages an independent public accountant or loses an independent public accountant through dismissal or resignation.
  • provide a notice to NCUA of late filing of the annual report.
  • submit a summary of its annual report to the membership.
  • ensure that its supervisory committee consists of members who are independent of the corporate credit union.
  • supervise the independent public accountant.
  • ensure that audit engagement letters do not contain unsafe and unsound limitation of liability provisions.

See 12 CFR 704.15 for further information.

Other Reporting Considerations

2.62 The independent accountant may be requested to perform assurance services other than those required by the CUMAA to the extent that a credit union may be

  1. a.  originating or holding student loans,
  2. b.  servicing residential mortgage loans for others,
  3. c.  originating or servicing Federal Housing Administration or Government National Mortgage Association loans subject to generally accepted government auditing standards (the U.S. Department of Housing and Urban Development),
  4. d.  borrowing from a district Federal Home Loan Bank,
  5. e.  participating in an automated-teller-machine network,
  6. f.  originating or receiving automated-clearinghouse transactions,
  7. g.  using outside technology partners, and
  8. h.  subject to the provisions of the Bank Secrecy Act.

Notes

__________________________

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
3.128.78.30