WASHINGTON-Opposition among credit unions was spreading last week to NCUA's plans to finance a rescue of the corporate credit union network with a $5-billion premium assessed all federally insured CUs.
James Blake, president of HarborOne CU, in Brockton, Mass., predicted the huge charge will cause even healthy credit unions like his own to reign in lending and other activities as they struggle to cope with a reduction in both net worth and in net income, at a time when credit unions can be helping their troubled members and communities.
"I have to think that those numbers of credit unions already on the ropes now will be absolutely jeopardized. There's no question that the whole industry is going to contract," said Blake, who estimated the cost to his $1.7-billion credit union at $8 million, more than the $7.1-million of net income reported for 2008.
The $5-billion premium, to be assessed through the National CU Share Insurance Fund, will finance a $1-billion capital infusion into U.S. Central FCU, which reported a $1.1-billion loss for 2008, and a guarantee for all deposits at U.S. Central and the 27 other corporate credit unions through at least the end of 2010.
The charge will deal a double blow to credit unions, according to NCUA, by causing a write-down of the value of their current 1% NCUSIF deposit by 50% and by forcing them to come up with additional cash to pay the premium, reducing return-on-average assets for 2009 by the amount of the payment.
"There's no question of needing to save the corporates. The only question is where is the money going to come from?" asked Blake, who wondered if NCUA will need more funds to provide additional assistance to the corporates. "Is the this the final hit, or is there another shoe to drop?"
"I'm in favor of anything that would not cause us to take a reduction in net worth and ROA," said William DeMare, of the estimated $800,000 his credit union, Bay Gulf Federal Credit Union, will have to pay. The cost, he said, will probably push his $160 million credit union's net worth below the 6% mark, necessitating a capital restoration plan under NCUA's prompt correct action rules.
Healthy credit unions are also balking at the price tag.
Gregg Smith, president of Pennsylvania State Employees Credit Union, said his $3.3 billion credit union was able to earn an $18.6 million net, a 0.58% return-on-average assets, for 2008, but projects tougher times for 2009, maybe half the ROA. He worried the NCUA premium could erase all of that profit. "It will be a very challenging thing to post a black number with that," Smith said.
"I understand the rationale but believe there needs to be more thought and effort as to how best to approach the stabilization," said Tina Sbrega, president of GFA FCU, a $260-million credit union in Gardner, Mass. "The current solution will place the entire industry at risk and the public perception of our industry being among the safest will be shattered. I believe it has great potential to cause a run on credit unions when news breaks that a significant percentage of credit unions are below the required capital ratio and have posted losses for the year."
"This has caught a lot of folks by surprise and a lot of folks are not too comfortable with it. But absent any taxpayer assistance there aren't many other alternatives," said Scott Waite, chief financial officer for Patelco CU. Waite estimated the special assessment will cost the $4.1-billion credit union, which reported a $40.2-million loss for 2008, will have to take a $25-million hit to its net worth and its net income for 2008. "This completely caught us and everyone else by surprise," said Waite.
CUNA's chief economist Bill Hampel said last week the entire credit union industry probably had no net income for the fourth quarter of 2008, the worst ever for credit unions, and he projected the NCUA charge will erase any net income for all of 2009. "Eighty to ninety-percent of credit unions would experience negative ROAs just from the premium," said Hampel.
