Capital
Net Worth Ratio (Credit Unions)
Also known as Net Worth Ratio
The net worth ratio is the credit-union analog of a bank's leverage ratio, net worth divided by total assets. It is the headline capital measure on the NCUA 5300 Call Report and the basis for credit-union prompt corrective action.
How is Net Worth Ratio calculated?
Net worth for a credit union is principally its retained earnings (undivided earnings and regular reserves), since cooperatives have no common stock. The NCUA 5300 reports it against total assets; 7% or above is 'well capitalized' for most credit unions. A complex credit union (over $500 million in assets) must also meet a 10% risk-based capital ratio to be well capitalized, or opt into the complex credit union leverage ratio (CCULR) framework instead (12 CFR 702.104 and 702.103).
Why does Net Worth Ratio matter?
Because credit unions cannot issue stock, the net worth ratio is their core solvency cushion and the trigger for NCUA prompt corrective action. It is the single most important capital number for a credit union, mirroring the role of the leverage ratio at banks.
How do you interpret Net Worth Ratio?
Read the net worth ratio against the NCUA PCA thresholds. Above 7% is well capitalized; the ratio builds only through retained earnings, so a credit union growing assets faster than earnings will see it drift down, a common source of capital pressure in fast-growing cooperatives.
What is a good Net Worth Ratio?
| Range | Label | Interpretation |
|---|---|---|
| ≥ 7% | Well capitalized | Meets the NCUA well-capitalized threshold. |
| 6-7% | Adequately capitalized | Above minimums but below the well-capitalized line. |
| 4-6% | Undercapitalized | Below adequacy; restoration measures required. |
| < 4% | Concern | Significantly or critically undercapitalized. |
Worked example
Frequently asked
How is a credit union's net worth ratio different from a bank's capital ratio?
Credit unions cannot raise equity by issuing stock, so net worth is built almost entirely from retained earnings. The net worth ratio (net worth ÷ total assets) is unweighted, making it most comparable to a bank's leverage ratio rather than a risk-based ratio.
What net worth ratio must a credit union maintain?
Under NCUA prompt corrective action, 7% or higher is well capitalized (complex credit unions also need a 10% risk-based capital ratio or a CCULR election), 6-7% is adequately capitalized and requires a quarterly earnings-retention transfer to net worth, and below 6% triggers escalating restrictions and a required net worth restoration plan.
Sources
- NCUA 5300 Call Report
- 12 CFR Part 702 (NCUA Prompt Corrective Action)
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