ALEXANDRIA, Va. -
“Given that some of the credit unions causing concern are located in the western U.S., NCUA is also performing additional on-site visits,” said NCUA spokesman John McKechnie.
NCUA sees isolated problem cases, rather than systemic problems, according to McKechnie, who said the federal regulator is watching some of those credit unions reporting large losses much more closely. He refused to say which ones.
Examiners are urging credit unions to construct their allowance for loan losses carefully in accordance with generally accepted accounting principles, which require credit unions set aside reserves for both realized and unrealized losses, said the NCUA spokesman.
CU Losses Up
The moves come as increasing numbers of credit unions are reporting losses never seen before in the industry.
Eastern Financial Florida CU, in south Florida, for example, reported a $49.5-million loss for the fourth quarter and a $45.2-million loss for the year. Wescom CU, in southern California, reported a $26-million loss for the fourth quarter and $33.2 million for the year. The Credit Union of Texas, in Dallas, reported a $13.7-million loss for the year. Meriwest CU, outside of San Jose, Calif., reported an $11.4-million fourth-quarter loss and $9.2 million for the year. SAFE CU, in Sacramento, Calif., reported an $8.4-million fourth-quarter loss and $5 million for the year.
More than 20 credit unions in California reported losses greater than $1 million for 2007, including Telesis Community CU $6.7 million, USA FCU $5.8 million, American First CU $5.1 million and Travis CU $4 million.
In Colorado, two of the state’s largest credit unions, Norlarco CU and New Horizons Community FCU, failed last year due to their exposure to speculative real estate in southwest Florida; while three Denver area credit unions: US Alliance FCU, Westerra CU and Eagle Legacy FCU, reported respective losses of $3.5 million, $1.6 million and $1.7 million for 2007.
Many of these credit unions have high capital ratios and may rebound, but some of them are not expected to survive and are considered prime candidates for merger.
‘Sky Isn’t Falling’
Experts at CUNA also insisted the major losses were in a handful of states, like California, Florida, Michigan, Ohio and Indiana, all of which are either in or entering a recession.
“The sky isn’t falling. The numbers for credit unions will be deteriorating. Net income will fall,” said Bill Hampel, chief economist for CUNA, who urged managers not to respond by cutting dividend rates and services, lest that exacerbate the situation and lead to further diminishment of income potential.
In a new report, The U.S. Mortgage Crisis, the CUNA economics staff says that rising delinquency and loan losses require close monitoring and active collections, but not necessarily tightening of credit standards. “The best response to a decline in net income cause by rising loan losses may be to adjust your budget and then carefully let it happen,” says the report.
Sitting On Near Record Capital
Hampel notes that credit unions are now sitting on near record capital reserves and said they should use those reserves, rather than cut services, to cushion the blow of what is being recognized as a recession.
“You build capital for a rainy day,” Hampel told the Credit Union Journal. “It’s raining pretty hard in certain parts of the country. Open up you umbrella. That’s what it’s there for.”
The CUNA staff predicted that many credit unions will see their loan losses double or triple, as a percentage of their loan portfolios. But that is from near all-time low delinquency and charge-off rates. Charge-off rates for real estate loans, for example, are just 0.02%, an insignificant amount.
“My concern,” said Hampel, “is that credit unions don’t overreact. This situation is external, but it’s temporary. It might last for a couple of years.”
The economic downturn is expected to have some positive effects on credit unions by increasing deposits and assets, as members are expected to borrow less and save more.
The difficult times, said Hampel, provide some opportunities for credit unions.
