March 11, 2022
TO: ALL WISCONSIN STATE-CHARTERED CREDIT UNIONS
RE: NCUA CHANGES TO CAPITAL ADEQUACY AND 5300 CALL REPORT
This letter is to inform all credit unions of recent changes that the National Credit Union Administration (NCUA) has made to Part 702 of NCUA Rules and Regulations regarding Capital Adequacy and the March 2022 5300 Call Report.
Part 702 now has five subparts:
- Subpart A, Prompt Corrective Action (Revised)
- Subpart B, Alternative Prompt Corrective Action for New Credit Unions
- Subpart C, Capital Planning & Stress Testing (applies to credit unions with assets greater than $10 billion)
- Subpart D, Subordinated Debt, Grandfathered Secondary Capital & Regulatory Capital (New)
- Subpart G, CECL Transition Provisions (New)
Subpart A, Prompt Corrective Action (PCA)
In subpart A, NCUA has defined a complex credit union as one with assets greater than $500 million. A complex credit union must maintain capital commensurate with the level and nature of all risks to which the institution is exposed and must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive written strategy for maintaining an appropriate level of capital. Complex credit unions will provide notice to the NCUA of their capital adequacy via the quarterly 5300 Call Report. Complex credit unions must either complete the risk-based capital analysis in Schedule I (pages 24-28) or opt into an alternative framework, the Complex Credit Union Leverage Ratio (CCULR). Credit unions that opt in to the CCULR framework must have a net worth ratio of 9% and meet four qualifying criteria (as noted in Part 702 and Schedule H of the Call Report on page 23). Credit unions with assets less than $500 million will have their capital adequacy reviewed via the prompt corrective action (PCA) net worth ratio calculation in Schedule G (on page 22) of the Call Report. Credit unions with assets under $500 million do not have to complete Schedule H or I. Subpart A of 702 also addresses Derivative Contracts; PCA for each category of capitalization; Net Worth Restoration Plans; Reserves; Full and Fair Disclosure of Financial Condition; and Payment of Dividends. For additional information, please reference the regulation.
Subpart D, Subordinated Debt, Grandfathered Secondary Capital & Regulatory Capital
Subpart D is a new section of 702 that covers Subordinated Debt, Grandfathered Secondary Capital (formerly referred to as Secondary Capital) and Regulatory Capital. Wisconsin Administrative Code DFI-CU 75 is being updated for the change in terminology. Preapproval for the utilization of subordinated debt is needed from the Office of Credit Unions (OCU) and the NCUA. Regardless of the changes, OCU intends to review applications to issue subordinated debt under the same principles it has historically applied when reviewing applications to issue secondary capital, and to deny applications that seek to issue subordinated debt for purposes inconsistent with the prior rule.
Subpart G, CECL Transition Provisions
This is a new section of 702 that addresses the adverse effects on the regulatory capital of federally insured credit unions that may result from the adoption of the current expected credit losses (CECL) accounting methodology. CECL will be effective on January 1, 2023. The OCU plans to issue guidance
on the adoption of CECL in 2022.
5300 Call Report Changes
The 5300 Call Report has been reorganized to better align the reporting of related information. The Call Report instructions have also been updated. In addition:
- The Regular Reserve account, formerly in the Equity section of the Statement of Financial Condition, is eliminated on the Call Report for all credit unions (page 3). Credit unions should combine the Regular Reserve account with Undivided Earnings in the Call Report. Please note that there are two instances of the use of the term “regular reserve” in Chapter 186 of the Wisconsin Statutes (ss. 186.01 (5) and 186.11 (3)) and two instances in the Wisconsin Administrative Code (ss. DFI-CU 68.06 (2) and DFI-CU 72.01 (9)). The OCU will seek to modify these references in future legislation and rulemaking. For now, however, it is recommended that credit unions maintain the regular reserve account on their Statement of Financial Condition and be aware of these current statutes and rules.
- The Delinquency schedule (page 7) has changed. More detail is added for Commercial Loans/Lines of Credit and the category of loans delinquent 60-179 days is now broken out into two columns: 60-89 days and 90-179 days. In addition, credit unions now only report the total # of loans delinquent 60+ days by loan type (versus for each category of days delinquent).
- On page 10, section 5 for Indirect Loans has been revised to now collect data by loan type. Section 6 is added for Loans Purchased, Loans Sold, and Loan Participations. While some of this data was collected before, it has changed and is reorganized.
- The Call Report has moved Schedules A – I to pages 10-28. The schedules collect data for Loans (Schedule A); Investments (Schedule B); Commitments and Off-Balance Sheet Exposures, Contingent Liabilities and Sources of Funds (Schedule C); Shares (Schedule D); Supplemental Information (Schedule E); Derivative Transactions (Schedule F); and Capital Adequacy (Schedules G, H, and I). Please note that many of the schedules have been overhauled and reorganized to collect pertinent information. Many other accounts are also now eliminated. See the
Catalog of Account Code Changes for specific details.
- Schedules have been added for Risk-Based Capital (Schedule I) and the Complex Credit Union Leverage Ratio (Schedule H) to evaluate capital adequacy for credit unions with assets greater than $500 million.
- The Call Reports are now auto-validated. Credit unions do not need to send their financial statements to the OCU anymore. Please advise your Call Report preparer of this change.
- Credit unions can access documents to assist in navigating the revisions. These documents include: the Form, Instructions, a Catalog of Account Code Changes, Account Descriptions and Supplemental Materials (mapping documents between December 2021 and March 2022 forms). The current 5300 Call Report forms and documents can be accessed at this link: https://www.ncua.gov/regulation-supervision/regulatory-reporting/cuonline
Please share this letter with staff members responsible for the submission of the Call Report. Due to the significant changes, I encourage you and your staff to start reviewing the changes and filling out the Call Report as soon as the report is available in CU Online. The March Call Report is due on April 30. No extensions will be given to file a late call report. Please file on time and note that you can file a corrected call report at a later date, if needed.
NCUA has conducted separate webinars on the changes to Capital Adequacy and the 5300 Call Report.
You can view these webinars on the NCUA You Tube page. NCUA has also stated that they plan to issue a summary of Frequently Asked Questions. Please watch their website (www.ncua.gov) for moreinformation.
If you have specific questions on the Call Report, please contact the NCUA at the email above. For other
Sincerely,
Kim Santos
Kim Santos, Director
OFFICE OF CREDIT UNIONS