ALEXANDRIA, Va.-At least four corporate credit unions appear to have decided against participating in NCUA's new expanded guarantee program that requires corporates sign a supervisory agreement with NCUA, a Letter of Understanding, in exchange for coverage of all deposits by the National CU Share Insurance Fund.
The four corporates, EasCorp FCU, First Carolina Corporate CU, Midwest Corporate FCU and Iowa Corporate Central CU, all have negligible losses on their securities portfolios and apparently believe they do not need the extra NCUSIF guarantee on deposits in order to encourage member credit unions to retain their deposits.
In a Feb. 27 letter to members last Friday, Jane Melchionda, president of Woburn, Mass.-based EasCorp, said there were a number of factors that convinced them to opt-out of the NCUA program. They include the condition of EasCorp's portfolio; the "inability of NCUA to make reasonable modifications" to the LUA; and protecting members' capital from being used in an "industry-wide reorganization by NCUA to offset losses that other corporates have or will suffer."
At the end of November, EasCorp reported $7.6 million of unrealized losses on its investments.
In the days after the four corporates announced their decision not to participate, executives with two of the corporates said they had fielded some concerned phone calls from member CUs, but that withdrawals had been negligible. David Brehmer, president of First Carolina Corporate, said that like EasCorp it is working to develop alternative secured accounts.
"When we worked through the worst-case scenarios, we couldn't see how the deposit guarantee would help credit unions," Brehmer said of First Carolina's decision-making process.
"I think as everyone knows there is no such thing as a free lunch," said Alan Bernstein, SVP with EasCorp, referring to the strings that come with the NCUA guarantee.
In order to participate in the extra NCUSIF guarantee, the other 25 corporates are required to sign an LUA that stipulates they will develop a capital restoration plan within 30 days; that no new loans to CUSOs will be allowed, except those already agreed upon under existing lines of credit; no bonus dividends will be paid; and that executive bonuses will be limited to only those already set out.
In rejecting the NCUA guarantee, EasCorp's Melchionda told members the $1.5-billion corporate will adhere to some of the same conditions on its own that are required under the LUAs, including restrictions on executive compensation; the bans on new CUSO loans and on paying bonus dividends to members; and the development of a capital plan to reflect the "new business environment and contingencies.
"Our primary concern was given the serious issues that we are all facing, we felt it was important that members retain a voice in First Carolina," said Brehmer, adding their were three reasons it has opted out: the low-risk profile of its own portfolio and the fact its investments in U.S. Central are already guaranteed; the value it sees in remaining a locally owned corporate, and the desire to protect its capital from unknown risks within the corporate network, not just U.S. Central, where it can quantify its risk.
Bernstein said EasCorp feels similarly. "The exposure to U.S. Central is a concern to our board. The hard thing is going forward there is so little certainty over systemic risk."
Both Bernstein and Brehmer said other corporates may have also wanted to opt out, but there was so little time (nine days) for corporates to make a decision on the NCUA p lan it limited their options.
