LAS VEGAS — In last week's NCUA takeover of Community One FCU there was little doubt the troubled credit union's net worth ratio was far below the critical level set under NCUA's minimum capital rules.
The $160-million credit union, which wracked up almost $12 million in losses over the last 18 months, had less than 1% of net worth, well below the 2% level where NCUA rules qualify a credit union as "critically undercapitalized."
But the NCUA's net worth calculations leave a lot of discretion by the regulators and management in determining what qualifies for net worth.
In the recent takeover of Mutual Savings CU in Birmingham, Ala., NCUA said its net worth calculation-the combination of undivided earnings, regular reserves and other reserves-amounted to 8.2% of its $193 million in assets.
But Florida credit union giant Suncoast Schools FCU said it is combining undivided earnings and regular reserves, but is not including other reserves in its calculation of net worth, in order to create a net worth ratio of 6.2% for the $5.7 billion credit union. If Suncoast had added other reserves, which it reports as negative $26.7 million, it would have created a net worth ratio of 5.7% for the nation's seventh largest credit union and a qualification of "under capitalized" under NCUA's rules.
NCUA would not make anyone available to explain why some credit unions are allowed to use other reserves in their net worth calculation, while others are not. But an NCUA spokesman referred to Section 702.2(f) of the agency's rules and regulation, which describe how net worth is calculated. Net Worth means the retained earnings, which it explains as undivided earnings, regular reserves, and any other appropriations designated by management or regulatory authorities."
NCUA's minimum capital rules, adopted as part of HR 1151, the landmark CU Membership Access Act, set a floor of 7% net worth for a well capitalized credit union. Credit unions between 6% and 7% are adequately capitalized; those between 4% and 6% are considered under capitalized.; and those between 2% and 4% are significantly under capitalized. Those under 2% are considered critically undercapitalized and are considered failed.
NCUA rarely discusses the reasons for a credit union failure. But in the case of Community One FCU by Utah's America First CU, it is clear that the Las Vegas credit union was deep in the critically undercapitalized category. At mid-year it had no undivided earnings; $879,731 in regular reserves and $72,298 in other reserves, or less than 1% of assets.
