Charge For Corporate Stabilization Is Anything But Stabilizing

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ALEXANDRIA, Va. – Hundreds of credit unions are expected to be driven into the red and dozens will be forced into a net worth restoration plan as a result of the $1 billion corporate credit union stabilization charge assessed by NCUA last week.

“Some of our credit unions are getting beaten up,” said Cliff Rosenthal, head of the National Federation of Community Development CUs, of the member credit unions that are already teetering on the verge of undercapitalization.

According to NCUA, which approved the charge to repay coats accrued by its Corporate CU Stabilization Fund, the charge will push 1,062 credit unions into the red for the second quarter, and force 552 credit unions with positive net income for the first quarter into the red for the year. As least 63 credit unions will be pushed under the 7% net worth mark, subjecting them to oversight by NCUA and 27 credit unions may be forced under 6%, forcing them to provide a net worth restoration plan to NCUA.

Credit unions big and small will feel the pinch.

“It’s very difficult for a credit union that’s trying to restore capital,” said John Tippets, president of North Island Financial CU, the troubled $1.4 billion San Diego credit union that is already under a net worth restoration plan as it has seen its net worth decline to 4.25%. North Island has been planning for the hit, an estimated $1.5 million, as well as an additional $1.5 million later this year to replenish the National CU Share Insurance Fund, “but that doesn’t make it any smaller or any less difficult,” Tippets told Credit Union Journal yesterday.

The credit union giant, which wracked up a $52.4 million loss last year, swung into the black to the tune of $11.2 million for the first quarter, due to lower projected loan losses, but the NCUA charge is going to make it tough to stay in the black for the second quarter, he said. “It looks like break-even for the second quarter, but it remains to be seen,” he stated.

Other large credit unions see the NCUA charge as another reason to put a halt on growth, lest it drive down their net worth. “Our plan for this year is not to grow shares,” said Frank Pollack, president of fast-growing Pentagon FCU, which expects to pay $15 million for the corporate stabilization assessment and as much as $25 million more for the NCUSIF assessment. Pentagon, which grew shares by 9.8% in 2008 and by 8.2% last year, expects to eke out a mid-year net even with the new charge. “We’ll be in the black, but not heavily so,” said Pollack.

The CDCU Federation’s Rosenthal said he hopes NCUA is good to its word and will work with those credit unions that are endangered by the corporate charge. “The way NCUA handles this is going to be key,” he said. He hopes NCUA will make great efforts to separate those credit unions that are pushed into poor ratios on capital and earnings by the stabilization charge.

NCUA Chairman Debbie Matz said yesterday in a Letter to CUs the agency will be as flexible as the law allows in reviewing and approving a Net Worth Restoration Plan for every credit union that falls into Prompt Corrective Action due to assessments.

But Rosenthal worries that the PCA rules leave little room to wiggle. “The key thing will be how flexible and how hard NCUA is going to come down,” he said.

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Corporate credit unions