ALEXANDRIA, Va. — NCUA said the nation's 27 corporate credit unions will have to charge-off more than $1.5 billion of capital they held in U.S. Central FCU, pushing most of them below regulatory minimums and, in many cases, forcing their member credit unions to write-down the value of their own capital.
The corporates were weighing the effects on their own capital last week, but the trickle-down effect was most sobering at Members United Corporate FCU, which told its members it would record a $511-million loss, $234 million of it related to its U.S. Central holdings.
The corporate, which serves more than 2,300 credit unions, said the failure of U.S. Central eliminated $234 million of its capital and losses on residential mortgage-backed securities claimed another $266 million. The $9-billion corporate will also take a $9-million charge on loans it made to failed Central States Mortgage Co. and a $1.4-million impairment on its 1% deposit with the National CU Share Insurance Fund. Members United also wrote down the value of almost $50 million of senior unsecured debt it held with Lehman Brothers Holdings to ten cents on the dollar, from 50 cents recorded just after the venerable brokerage filed for bankruptcy last September.
In a letter to members, Joseph Herbst, president of Members United, said that almost two-thirds of the institution's $866 million in capital will be wiped out, leaving it with $355 million.
The losses will wipe out $303 million of retained earnings, $79 million of paid-in-capital and $484 million of membership capital shares, which will be assessed to members on a pro rata basis. That means all of member PIC accounts will be eliminated and 27% of its MCSs.
Other corporates were reporting eroding financials last week. Southwest Corporate FCU indicated the hit to its capital will be about $194 million, as its net income as its net income declined by 63% for the first quarter to $6.1 million. SunCorp FCU reported a first quarter loss of $108,061. Southeast Corporate FCU reported a loss of $536,000 for March, the second straight month of losses.
Trickle-Down Effect
NCUA acknowledged the trickle-down effect of the U.S. Central failure and announced a regulatory forbearance that will allow corporates to temporarily use capital levels reported last Nov. 31, before the failure of U.S. Central. "To avoid any disruption of critical services, the NCUA Board has issued an order that will permit corporate credit unions to use the capital level as reported on their Nov. 30, 2008, NCUA 5310 Call Report, for purposes of determining regulatory compliance with capital-based requirements and regulations in the corporate rule," said NCUA Chairman Michael Fryzel. "We believe this will allow corporate credit unions to continue to meet members' needs while also ensuring corporates do not take additional undue risk."
NCUA Will Not Address Diminished Capital, Yet
NCUA said last week it will not address the diminished capital of the corporates in the short-term, but will wait until it weighs a more comprehensive plan to reform the corporate system, as part of its advanced notice of proposed rulemaking. That process is expected to take as long as six months or longer.
The trickle-down effect was most acute for members of WesCorp FCU, which announced a huge $5.6-billion loss, wiping out all $2 billion of capital held by its 1,022 credit union members. Many credit unions began charging-off their WesCorp capital in the first quarter, but many more will do so in the coming quarters.
Members of other corporates have also started charging-off their capital, but still more are expected to do so later this year.
The diminishing capital had a startling effect on credit unions in March, according to CUNA. Charges related to the corporate bailout helped eliminate almost $6 billion in credit union capital in March, depleting industry capital from 10.3% at the end of February to a 15-year-low of just 9.6% at March 31, according to CUNA's monthly survey.
"Most credit unions in our (monthly) survey did cover the full cost or most of the cost through March," said Bill Hampel, chief economist for CUNA.
As a result, total credit union capital declined from $88.9 billion at Feb. 28 to $83.1 billion at March 31, according to CUNA's monthly FAST survey of almost 500 credit unions.
