Loan-Loss Allowances and Corporate Stabilization Expenses Sink CU Capital
A peek through financial performance reports reveals most credit unions took both large loan-loss allowances and 100% of NCUSIF premium and impairment charges in first-quarter 2009 or fourth-quarter 2008; the financial drains wiped out already meager income stunted by tight loan underwriting standards, strapped members who are paying loans off rather than booking new ones and poor investment returns.
Quantifiable numbers won't be available until full call reports are posted by the NCUA. However, CUNA's Mike Schenk, vice president, economics and statistics, said the trade association stress tested December 2008 numbers against corporate stabilization losses, measuring the impact of taking 100% of share insurance fund charges and specific corporate member capital losses in 2009, assuming no legislative help to stretch the expenses out over several years.
Stress testing revealed that about 90% of credit unions would report a 2009 net loss in that situation, he said, compared to less than 25% without the corporate write-offs. Capital ratios remain comparatively high, he said, but there is collateral damage: about 4% of credit unions were projected to fall below 7% net worth as a result. That's about 200 credit unions, Schenk said, but still relatively small in both numbers and assets.
California, Arizona, Nevada, and to a lesser extent, Florida credit unions are among the hardest hit, said industry CPA Matt Davidson. The former Ohio credit union regulator and longtime California Credit Union League executive has been a busy independent contractor lately, assisting the NCUA with conservatorships in two of the hardest hit states.
It doesn't take long sifting through ratio analysis reports to find credit unions in Arizona, California and Nevada that are reporting less than 6% net worth as of March 31. Many are significantly undercapitalized, with net worth ratios between 3% and 4.99%, and four are critically undercapitalized, with less than 3%.
Three of the critically undercapitalized credit unions-the $1.7 billion Arizona Federal Credit Union, and California credit unions $162 million Community One Federal Credit Union and the $89 million The Members' Own Federal Credit Union-were already in close contact with the NCUA, having fallen below undercapitalized status as of Dec. 31, 2008. The fourth, the $134 million High Desert Federal Credit Union of Apple Valley, Calif., was placed into conservatorship by the NCUA in October 2008, and recorded a negative 9.45% net worth for first quarter 2009.
Arizona Federal Credit Union fell to 1.95% net worth as of March 31, but President/CEO Ron Westad said his recovery plan with the NCUA anticipated the hit, and his Phoenix-based institution is continuing to work "constructively" with the regulator.
Like most credit unions, aggressive charge-offs and loan allowances were partly responsible for first-quarter losses. Westad said his $113 million loan loss allowance is 9.5% of total loans and about 6.5% of total assets. The aggressive loss estimates should be enough to withstand Arizona's stagnant economy, which he said has "shown no signs of improvement."
AFCU made the strategic decision before the bubble burst to serve members of modest means, including many construction, retail and hospitality workers, sectors that have been the hardest hit in Phoenix, Westad said.
"We've really looked for off-balance sheet revenue opportunities," he said, saying the practice of selling first mortgages to the secondary market has allowed the credit union to pick up fee and servicing income while keeping assets off the balance sheet.
Westad also booked his entire NCUSIF premium and impairment in first quarter, and Western Corporate FCU capital losses, for a total of $16 million.
The $162 million Community One Federal Credit Union, Las Vegas, fell to 2% capital, including optional assets. However, Vice President of Marketing Jerry Rosen said the credit union has a good relationship with the NCUA, which came knocking after the credit union's net worth slipped to 4.17% Dec. 31, and will continue operations and its capital recovery plan.
The credit union was on-pace to record a $550,000 net profit for first quarter 2009 until it wrote off $1.35 million in share insurance fund premium and impairment charges. Community One also posted a negative loan-loss provision for first quarter, reversing $190,000 worth of $8 million provisioned as of Dec. 31, 2008.
Delinquencies and charge-offs are high thanks to high unemployment rates in Las Vegas, Rosen said.
Doug Orth, managing partner at Miami-based credit union accounting firm Orth, Chakler, Murnane & Co., said delinquencies are giving credit union managers trouble in his firm's major markets of Miami, Charlotte and Dallas, as credit unions charge-off loans but don't see the usual resulting decrease in delinquencies. Furthermore, credit unions with home equity exposure are increasingly finding home values often don't support buying out the first mortgage, forcing them to record a total home equity loss.
Making matters worse, Orth said while many credit unions are trying to shrink their balance sheets to improve net worth ratios, some are finding it difficult because consumers are tolerating low-dividend rates in exchange for the safety and soundness of a federally insured credit union and increasing deposits.
Davidson said there's no quick fix for credit union balance sheets. Those that already had low operating expense ratios and strong collection departments before the economic bubble burst will fare the best.
Credit unions with similar asset size and field of memberships can run significantly more or less efficient shops. "If one has an expense ratio of 2%, and the other is running at 5%, you have to wonder why that is," he said.
Operating expenses and good loans are within a CEO's control, Davidson said, and rather than dwell on corporate losses or a bad economy, he's been focusing clients on improving efficiency and asset quality instead.
Some undercapitalized and even significantly undercapitalized credit unions are new to prompt corrective action territory, posting net worth ratios well above 7% just one year ago.
Harry Mateer, president/CEO of the $177 million Altier Credit Union, saw his net worth fall to 5.31% as of March 31, down from 8.23% as of Sept. 30 and 6.71% as of Dec. 31.
"What took us into the capital plan arena were the corporate stabilization costs," Mateer said. "We had just made our adjustments at the end of 2008, and took some lumps from what was a very rough year, including a fairly large amount into loan loss allowances."
The NCUA has been "very supportive," Mateer said. That's not surprising, considering the credit union has plenty of opportunities to recover. Delinquencies are down to 0.77%, and the CEO said his Tempe, Ariz., CU might see net income return later in the year.
Loan losses were primarily in indirect auto loans booked during the real estate boom years of 2005 and 2006, but the credit union began shrinking that portfolio about 18 months ago, and Mateer said he feels he has the worst behind him.
"We projected out two years, and we'll be back into adequate capitalized territory and certainly well on the way to being well-capitalized," he said. "A lot depends upon growth and the obvious things, like reducing expenses."
Like other CEOs in the Sun Belt, Mateer was pessimistic about the chances for a quick recovery, saying he's anticipating no recovery until mid-2010 or even 2011.
Altier's annual meeting was April 25, but there were "no angry outcries or anything like that," he said.
"Members are very much aware of what's happening with credit unions and corporates, and clearly, they are aware of how bad the economy is," he said.
Schenk said CUNA and credit unions are worried the press and public will misinterpret first-quarter 2009 credit union financial reports.
"It's easy to report numbers that show large declines in net worth or negative ROA, but without context, it's also easy to misinterpret what those numbers mean," Schenk said, adding that the banking industry is discussing nationalizing individual banks that are larger than the entire credit union industry.