LENEXA, Kan. — In a move that is reverberating throughout the credit union movement, NCUA took over troubled U.S. Central FCU and WesCorp FCU, the nation's two largest corporate credit unions, signaling deepening problems for the health of all credit unions.
In the three-tiered credit union system, WesCorp is the $23-billion corporate credit union providing investment and payment services for 1,022 regular, or natural person credit unions; while U.S. Central is the $34-billion corporate credit union for WesCorp and 25 other corporates.
The two conservatorships will add at least $1.2 billion to the $4.7 billion cost of the corporate bailout and require the 26 corporate members of U.S. Central to charge-off all $2 billion of their capital in U.S. Central, and require all credit union members of WesCorp to charge-off another $2 billion of their capital accounts in the western corporate giant.
The unprecedented conservatorships came just after NCUA received the results from an independent review of all the corporates' investments by PIMCO, which showed growing losses in the two corporates and spread through the entire corporate system, which could reach as much as $10 billion.
NCUA Chairman Michael Fryzel said the NCUA Board decided to take the extraordinary action after reading the 4,500-page Pimco report and concluding they could no longer trust the financial report being provided by management at U.S. Central and WesCorp. "We no longer have confidence in the management and are now running them both," Fryzel said.
Losses Are Reported
The takeovers came just hours after U.S. Central, which had received $1 billion in assistance already from NCUA, reported financials for the month of February which showed unrealized losses on its investments rising by $1.3 billion over the month to $10.5 billion.
WesCorp, which has delayed filing its 2008 financials, has reported more than $3 billion of unrealized losses.
While most of the losses are related to mortgage-backed securities-mostly so-called private-label MBSs, both institutions are accruing losses on all kinds of other holdings. U.S. Central, for example, reported a loss of $1 million on jumbo mortgages it has been buying from credit unions. WesCorp has hundreds of millions of dollars in unrealized losses on collateralized debt obligations and interest-rate swaps.
In all, the corporate system is sitting on as much as $20 billion in unrealized losses, more than 95% of the losses being concentrated in U.S. Central, WesCorp and six other corporates. According to David Marquis, executive director of NCUA who spoke to thousands of credit unions by webcast last week, the Pimco report projects as much as $16 billion of losses and $7 billion on a best case scenario. Marquis said they believe the number is somewhere in the middle-as high as $10.8 billion.
Those losses will have to be paid out of the National CU Share Insurance Fund, then reimbursed by all federally insured CUs through a premium to be charged later this year, said Marquis.
At the least, the takeover of U.S. Central and WesCorp will add another 20 basis points to the charge for every federally insured CU, on top of the 80 bps already expected, reducing every credit unions return-on-assets by 100 bps, or 1% this year.
CUs Pushed Below PCA
The cascading losses will push as many as 247 at-risk credit union below minimum capital standards, forcing an estimated 67 of them toward failure under so-called prompt corrective action rules, according to NCUA's calculations.
"The U.S. Central side will roll down to other corporates; in time it will roll further down to natural person credit unions," said Marquis. "This will be more painful for credit unions on the west coast."
Marquis noted that many of those credit unions are already financially strapped because of the crashing real estate markets.
Between the write-down of credit unions' 1% NCUSIF deposit and the expected premium charge later this year, every federally insured credit union will have to subtract 100 basis points, or 1%, from their net worth to pay the cost. For WesCorp members, who will have to charge-off their WesCorp capital accounts (MCS and PIC) as well, that could amount to as much as 150 BPs, or 1.5%, of net worth, according to Marquis.
NCUA officials said credit unions will have to reflect the write-down of their 1% deposit on their 5300 Call Report for the first quarter ending March 31. The eventual premium charge will be assessed in September when the credit unions should report that charge.
Management Is Replaced
Both U.S. Central and WesCorp were open for business last week after NCUA removed their boards and top management and replaced them with conservators.
At U.S. Central, NCUA ousted CEO Francis Lee and replaced him with James Nance, who served as chief financial officer for U.S. Central from 1993 to 1996 and most recently was working as chief administrative officer at Icap Capital Markets LLC in New Jersey.
At WesCorp, NCUA terminated CEO Robert Siravo and replaced him with Philip Perkins, a long-time money manager who was most recently senior vice president and portfolio manager at Delaware Investments, where he was responsible for asset allocation and sector decisions for a $5- billion Multi-Sector Fixed Income Mutual Fund complex. Perkins has also worked as money manager for Deutsche Bank and Salomon Brothers.
