What would members think . . .
. . . if they were given the opportunity to vote on the various obligations their credit union is facing? What would the outcome be?
Some healthy credit unions that want to grow do not feel obligated to bail out the system and want access to alternative capital. They believe their members would both understand and approve.
This summer, credit unions are simultaneously facing multiple and daunting capital decisions.
The credit union movement is pushing credit unions to make voluntary prepayment assessments and participate in a recapitalization of a corporate (wholesale) credit union, which would add to their existing annual special assessments for bailing out conserved corporate credit unions and future retail credit union failures.
Taken together these costs could stifle growth plans and harm earnings.
The voluntary prepayment assessment pays no interest and does not lower the overall assessment cost. The recap offers little to no interest, ties up funds long term, and there are correspondent bank alternatives to using the corporate credit unions that many credit unions have determined to be less costly.
Also, a growing number of large credit unions are beginning to consider the existing bailout assessments as "elective": their due diligence shows that bank assessments will be less than credit union assessments — a charter change would bring the opportunity to raise alternative capital, increase small business lending and eliminate "field of membership" restrictions. Their modeling demonstrates that electing to go this route would lead to the potential for better income and growth.
Healthy and growing credit unions are feeling unnecessarily burdened by bailout costs as they watch healthy community banks raise capital and acquire competitors at near book-value levels. Especially as these credit unions consider the probability that the minimum capital requirement will increase under Basel III (see Section 616 of the Dodd-Frank Act and the FCU Act, which states NCUA must justify why it would/would not adjust capital standards when bank regulators adjust theirs).
Growing credit unions face an additional challenge — something we're calling a "growth tax." We have advised for a few years that shrinkage by some credit unions would leave others to shoulder more of the assessment burden.
Individual credit assessments are a function of the industry assessment dollars multiplied by the individual credit union's percentage of insured shares of the total industry. Thus, as one credit union shrinks in total shares, the commensurate assessment burden is transferred to other credit unions. Because credit unions do not have a risk-based system, the healthy credit unions pay assessments on the same basis as the Camel 5 credit unions
As announced at the May NCUA Board meeting, credit unions must pay various "bailout" obligations totaling $9.2 billion by October 2012. To fund these obligations, the NCUA plans to both assess credit unions $2.94 billion and tap the U.S. Treasury for $5.5 billion. The assessment portion is equal to 38 basis points, while the U.S. Treasury borrowing is a future credit union obligation of 71 basis points (109 basis points of total planned assessments). Thus, the assessments paid (40.8 basis points in 2009-10) and planned (109 basis points) total 150 basis points.
After two-and-a-half years, it is no wonder many credit unions believe the ultimate cost, still unknown, is far greater than their strategic plans can bear.
Here is where the growth tax comes in. Considering the planned assessments of 109 basis points, credit unions that grew from 2008 to 1Q2011 have increased their assessment obligation by $1.4 billion due to the fact that 913 credit unions shrank by $5.76 billion. (Analysis compiled by Sandler O'Neill and RP Financial utilizing NCUA data.)
The 100 fastest growing credit unions' combined obligation is $ 2.78 billion, of which $365 million is the growth tax transferred from shrinking credit unions. No one we speak with believes shrinkage will subside.
Credit unions are starting to believe that "carrying the industry" is no longer a luxury that their capital can afford and are unwilling to reduce their members' value proposition.
These credit unions believe the growth tax dollars could be spent on marketing, branching, capital cushion or increased loan modifications.
With the prospect for continued consumer retrenchment, increased capital requirements, lower interchange income, reduced overdraft fees, no prospect of regulatory relief, and no access to secondary capital, a growth tax on healthy credit unions is galling.
At a minimum, it will fuel the unwillingness of credit unions to elect to do anything that does not protect member value, while distinguishing that "for the movement" is not the same as "for the member."
Peter Duffy is a managing director at Sandler O'Neill & Partners LP.
