NCUA ruled last week that federal credit unions can make direct donations to other credit unions, but the legal ruling may have come too late for a tiny community development credit union that has been asking neighboring credit unions to help save it.
"The problem is, we're insolvent at this point,' said Patsy Austin, president of three-year-old Citizens East Community Development FCU, which has sent solicitations to credit unions throughout Pennsylvania and New York for donations to help it recapitalize.
The combination of the credit union's near-death plight and confusion over whether such contributions are permissible have prompted an underwhelming response, so far, said Austin. "We did get some donations. But they're all waiting to see if we're going to fail," she said, noting that 12 credit unions have donated just over $6,500. But that figure is nowhere near enough to fill the hole in the credit union's finances, which has deepened since the withdrawal of more than $500,000 in non-member deposits, sending the tiny institution into what could be a death spiral.
Lay-offs in the city's steel mills and elsewhere in the economically depressed Pittsburgh neighborhood helped push loan delinquencies to 15% last year, and charge-offs to an astronomical 70%. The credit union, which claims just 1,655 members, reported a net loss of $60,000 for 2003, virtually wiping out its net capital.
The losses forced the fledgling institution to return most of its non-member deposits, cutting total assets from more than $800,000 at year-end 2002, the credit unions' first full year of operations, to just $322,000 at year-end 2003.
Credit union officials are working with PNC Bank, the National Federation of CDCUs and other founders to try to devise a bailout of the ailing institution and hope the new NCUA ruling can help attract more assistance from the credit union community. But the deep fiscal hole has given pause to potential institutional donors, including NCUA's Community Development Revolving Loan Fund, said Austin.
NCUA's ruling, however, could help other troubled credit unions in the future. "Credit unions have a long tradition of helping credit unions through such means as nonmember deposits, correspondent services, and contributions of staff, equipment and money," NCUA wrote in its legal opinion. "NCUA has long recognized an FCU's authority to make charitable contributions and donations under its incidental powers authority. Charitable donations made by FCUs are within their incidental powers because contributions promote name recognition and generate goodwill."
Such donations, said NCUA, are legitimate expenditures, and not charitable donations. NCUA said it has long been the agency's position that donations to assist the construction of a credit union league or trade association building provides tangible value to a credit union.
