NCUA's $1 billion assessment is not a surprise for most credit unions, but how it will affect bottom lines and future NCUA action is still unsure.CU Journal asked CU leaders what they expect to see as the future becomes more clear.
The agency telegraphed the move some time ago, but that doesn't make it any easier to bear.
MADISON — The real impact of this NCUA's latest assessment won't be known until examiners start poring over the books, said CUNA Mutual economist Dave Colby. In previous levies the regulator gave some wiggle room for well-capitalized institutions that were pushed below a benchmark because of the assessment. He is confident, however, that natural person CUs, which will pay the vast majority of the $1.06 billion charge, are ready to account for it.
"The credit unions I've talked to have been planning for at least fifteen basis points," said Colby. "The lion's share of them has been planning for some kind of assessment and already accounted for it. It wouldn't be a shock to them or a shock to their financials."
TAMPA, Fla. — CU giant Suncoast Federal Credit Union has already taken care of its share of the NCUA assessment as the charge will be fully accounted for by the end of the month according to CEO Tom Dorety. Word that NCUA expects to levy more charges in 2010 and possibly in 2011 is not "totally unexpected" to the head of the $5.7 billion credit union, but he is hopeful that those assessments will not come down the pipe.
"If it is the case we'll deal with it accordingly," he said.
Dorety is also not surprised to hear that the regulator anticipates more credit union failures and forced mergers in the coming year. Despite proclamations of a nascent recovery and the end to the financial crisis, credit unions' close tie-ins to Main Street and its vulnerability to high unemployment and a still weak real estate market, makes them ripe for weakness in 2010.
"In the sand states we are clearly not out of economic challenges, so I don't think we can expect to see an immediate turnaround," said Dorety. "Unfortunately some of the prediction's say whatever recovery takes place here will be delayed behind the national recovery, and I'm assuming that will be the case in other parts of the country."
LOMBARD, Ill. — Given the current state of the cooperative movement, NCUA's $1 billion premium comes as no surprise to Bill Handel, VP of Research and Development at Raddon Financial Group.
"There still quite a bit of cleanup that has to be done in the industry. I would anticipate that would continue through 2010 and 2011," he explained. "A lot of it will depend on the pace of the economic recovery which some economists say we're starting into right now."
If real estate values level off, the bleeding should stop, but if they drop even as little as another 5% to 10%, Handel sees "substantial pain" for credit unions across the country. But the economic situation is only part of the reason why the federal regulator anticipates more mergers and credit union failures in the coming years, he maintained.
There is a long-term issue and a short term issue. There are long-term trends driving this; the cost of compliance is up tremendously in all of the financial industry space," said Handel. "The short term issue is (economic). Just because the economy is beginning to turn around doesn't mean those issues go away. You're not going to see a snap back in real estate prices so all of this property that credit unions, especially those in the sand states, are holding is depressed in value, their capital ratios are down. There is nothing in the economy that can save these institutions."
But there is a strong ray of hope for many credit unions going forward. Just as CUs avoided the subprime mortgage mess, they are also going to avoid the "next mess," which is commercial real estate. Values have dropped precipitously and delinquencies are rising in the commercial sector, which will force banks to remain in capital preservation mode even as the recovery picks up steam. This phenomenon, Handel pointed out, puts credit unions in a good position for the next few years.
