NCUA Actions Spur More CUs To Shrink, Rather Than Grow

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ALEXANDRIA, Va. — Increasing numbers of credit unions are choosing to cope with NCUA's huge assessments by pushing down their asset size, instead of growing, in order to maintain their critical net worth ratios.

They are doing this by managing their savings rates, in most cases, lowering rates in order to discourage new deposits or encourage marginally profitable depositors to withdraw funds.

"We've changed Patelco's strategy from being a rate leader in the market," in order to lower the denominator for the net worth ratio, said Scott Waite, chief financial officer for the San Francisco credit union giant, which has consciously reduced its assets from a high of $4.2 billion a year ago to $3.7 billion at the end of the first quarter. The shrinkage has succeeded in pushing up Patelco CU's net worth ratio from 8.27% at mid-year 2009 to 9.54% at the end of May, even as total net worth has increased by only $26 million, according to Waite.

Other credit unions, healthy and not so healthy, are duplicating this anti-growth strategy as they expect NCUA's assessment last week of $1.1 billion for the corporate credit union bailout, and again later this year to replenish the National CU Share Insurance Fund, to eat away their net worth, pushing some of them further into prompt corrective action.

This strategy has resulted in some perverse inducements to reduce deposits. Nevada FCU, which has been battered by the state's real estate bust, succeeded in reducing deposits by some $50 million the first part of the year by paying members to withdraw CDs--$25 for $25,000 to $50,000; $50 for $50,000 to $75,000; and, $75 for more than $75,000 — and waiving early withdrawal penalties.

The shrinkage of the state's biggest credit union has reduced assets from $817 million at year-end 2009 to $762 million at March 31, while pushing Nevada Federal's net worth ratio up from 9.25% to 9.75%, according to Brad Beal, president of the credit union, who expressed satisfaction in the plan. "We're very pleased with it," said Beal, whose credit union will be paying NCUA $850,000 for the corporate bailout charge, even as it continues to struggle with the battered local economy. And they expect to be hit with a charge of at least as much later this year when NCUA delivers the second assessment to credit unions.

In announcing the $1.1 billion corporate assessment last week, NCUA said it will reduce the average credit union's net worth by about 13 basis points and push as many as 1,086 credit unions into the red for the second quarter when they are required to accrue the expense, and as many as 552 credit unions into the red for the year.

While credit union executives have been preparing for the charges for months it won't make it any easier, even for the healthiest credit unions. "It is going to cost us money, but we've already budgeted for it," said Frank Pollack, president of Pentagon FCU, who estimated the corporate assessment will cost his $14 billion credit union $15 million, and is projecting as much as $25 million more for the second NCUA assessment this fall. His solution? "Our plan for this year is not to grow shares," in order to keep the net worth ratio up, he explained.

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