Latest NCUA Charge Is Stop-Gap Measure

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ALEXANDRIA, Va. – Even as NCUA was hitting credit unions with another big charge yesterday, top agency officials were acknowledging it will not be the last time.

Under the most rosy scenario, the National CU Share Insurance Fund will be bumping down against the 1.2% level (dollars reserved per $100 of insured deposits) again by the end of 2011, forcing the NCUA Board to contemplate new assessments, according to Melinda Love, NCUA’s chief examiner. Under less rosy scenarios, that day of reckoning could come as soon as next June. With the economy continuing to struggle, the rosy scenario “is not what we expect,” said Love.

The latest NCUA charge, coming on top of a $1.1 billion corporate bailout assessment in July, will drive hundreds of credit unions into the red for the year, pushing some of them into the category of undercapitalized. NCUA projects the $933 million assessment will create fiscal year losses for 855 credit unions and 60 credit unions will see their net worth ratio pushed below 7%, requiring them to supply NCUA with a net worth retention plan. Another 19 credit unions would see net worth fall below 6%, requiring them to provide a net worth restoration plan.

The assessing of the premium and projecting one for next year entails a lot of guesswork, according to Love. The three biggest factors determining the NCUSIF reserves are the earnings on the Fund’s $9 billion portfolio of Treasury bonds, the assistance needed by troubled or failed credit unions, and the growth in total shares or deposits, which dilutes the reserves.

All three factors are trending negative for NCUA. As earnings on the Fund’s investments are down to 10-year lows, NCUA has reserved a record $1.2 billion for credit union losses. Share growth is expected to be near 7% for the full year, according to NCUA.

In assessing the premium, NCUA was considering how low it wanted to let the NCUSIF reserves fall. The NCUA Board likes to retain a 1.3% ratio, which amounts to each credit union’s 1% NCUSIF deposit and 0.3% of retained earnings. The ratio had dropped just below 1.18% at the end of August. That triggered a requirement that NCUA notify Congress of the deteriorating condition of the Fund and provide lawmakers with a plan to restore the reserve ratio.

The lobby groups, particularly NAFCU, urged NCUA to operate at a lower reserve level, so as not to require as big a charge from credit unions.

But NCUA Chairman Debbie Matz said the regulator wanted to add enough new reserves so as to operate as close to the 1.3% mark as possible, while preparing for further credit union losses. “Knowing the magnitude of credit union losses the fund has absorbed this year, plus additional losses which are likely to occur in the coming year, it is not practical to manage the fund without a reasonable margin of safety,” Matz said in a prepared statement.

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