ORLANDO, Fla.-NCUA made clear at last week's town hall meeting that while it values the input it is receiving from natural-person credit unions, it continues to move forward with most aspects of overhaul of its corporate regulations (Part 704).
The answer agency representatives could not provide, however, was the same as that which has been raised elsewhere around the country, with one CEO saying his board feels "unquenched anger" toward NCUA over corporate-related expenses and that no one is being held accountable (see related below).
As of December 2009 corporate credit unions continued to hold securities showing unrealized losses of $17 billion, which at first blush appears to be a positive improvement over the $25 billion in unrealized losses corporates held at the beginning of the year.
But as Scott Hunt, director of NCUA's Office of Corporate Credit Unions noted, "You also have to look at the actual credit losses, which have increased with every quarter. We don't want to liquidate bonds. That would make for multiples of the assessments. Vendors we use to project these credit losses continue to see conditions worsen even beyond conservative estimates. Most people who enter (mortgage) delinquency enter foreclosure. We're really only delaying the inevitable in many cases. When these homes hit the market it will put a dampening on the prices in the markets we're most concerned about, the sand states, which will only exacerbate losses on those securities."
Larry Fazio, deputy executive director with the agency, said NCUA is projecting that approximately $5 billion of those losses will ultimately be realized by the share insurance fund. NCUA has reserved about $6 billion for those losses, reflecting the approximately $900 million in deposits that are also included under the corporate deposit guarantee program.
The turnout at the Florida meeting, which like others was hosted by NCUA Chairman Debbie Matz, was slightly smaller than other town halls that have been held around the country, but audience concerns were similar.
One chief concern, raised by Brad Miller, currently the president of the Association of Corporate Credit Unions and soon to take over as CEO of Southeast Corporate, is how corporates will be able to create retained earnings under the proposed rule, which seeks to much more closely align assets and liabilities. Seeking to minimize risk, the proposal limits the asset and liability mismatch to three months, considerably shorter than the average maturity of more than four years of investments now in place in many corporate portfolios.
Miller expressed further concern that the BASEL standards and commercial bank standards being used as a model by NCUA for reforming corproates are predicated on a different business model. "How can corporates build retained earnings if limited to a three-month mismatch," asked Miller.
NCUA's Hunt responded that the agency, along with the outside consultant it has hired but declined to identify, believe the rule still allows for investment in adequate products to generate a spread. He added that since placing WesCorp and U.S. Central into conservatorship in Q1 2009, more than $10 million in annual expenses have been eliminated at each corporate, a model NCUA says indicates other corporates can also further cut costs and build spreads.
Throughout their remarks, each NCUA representative emphasized the agency recognizes the role corporates play in credit unions, especially in payments, but the primary concern remains liquidity.
Other notes from the town hall:
• Hunt said he hears "noise now and again that some people are getting nervous and are pulling out" of the corporates. There is no such trend, he said: "It's categorically not true."
• Hunt said he expects there will be some additional such noise in the near future as funds flow out of U.S. Central and WesCorp; but those funds reflect the System Investment Program (SIP) money raised by NCUA in 2009. With the one-year maturity of that $8-billion total investment having occurred in early January and early February, both corporates have paid down the SIP and have obtained "cost-effective" replacement funding.
• In total, NCUA borrowed $18 billion from Treasury, but those borrowings were to provide liquidity, not cover investment losses, NCUA officials emphasized. Some $13-billion of that debt remains, and the portion of that cost that flows through to credit unions will depend on how the investment portfolios perform moving forward.
• Hunt said that statements by some that the NCUA's OTTI loss estimates are exaggerated are in fact "marrying up" pretty closely to confirmed losses. The agency is using PIMCO to make those estimates. Hunt added that WesCorp could still report an additional $1 billion to $2 billion in OTTI losses.
• NCUA's Part 704 proposal includes three new capital standards for credit unions, two based on risk-based ratios (with the total risk-based capital ratio minimum set at 8%) and another based on a leverage ratio (4%). As part of that, the proposal calls for 200 BPs of tier one capital to be retained earnings (although it isn't fully phased in until 10 years after enactment).
• Fazio emphasized that NCUA has never been out to protect or bail out the corporate system, but instead to protect the interests of natural-person credit unions and consumers/members. In particular, Fazio cited the role corporates play in payments. But he also provided a scenario outlining catastrophic failures that would have cascaded through the credit union system had the agency not acted in the way it has.
SIDEBAR
ORLANDO, Fla.-One CEO expressed the frustration many are feeling over special assessments being charged to natural-person CUs to cover corporate CU losses, and demanded to know how agency representatives would explain themselves to his board.
During the NCUA Town Hall here last week the CEO asked, "If you could come to one of my board meetings and face them right now, I'd like to know what you would say to them. Right now they are feeling a very unquenched anger with the situation related to the corporates. Our credit union feels we didn't contribute. We didn't shop the nation for higher rates. We stayed at home. (My board) feels NCUA let them down, and that no one has been held accountable."
NCUA Chairman Debbie Matz responded, "I understand it and it's not the first time we've heard it. Yes, we had examiners at the corporates and there are probably some things we should have done that we didn't. Having said that, the corporates all had boards of directors and management that made decisions about the risks they were going to take. Above and beyond that we are in an economic cycle that is unprecedented; no one saw this coming. I think we can look back and try to assess blame, and there's a lot of blame to go around. But we're looking back and trying to learn from those mistakes and move forward. I don't think NCUA should bear the full blame for the collapse of the corporates. It's one of the reasons we're changing the governance rules, because we don't think the boards of directors acted in the best interests of the credit union community.
