Yet again, corporate credit union news comprises the bulk of ourfront page. And, as in the past, most of it ain't good.
WesCorp's paid-in capital and member capital accounts have beendepleted by its ongoing financial issues and must be written off byNCUA directive. Prior undivided earnings took a hit of $3.7billion, leaving the NCUSIF holding the bag as guarantor of thesecredit union deposits. The loss was recorded after a $5.7 billionOTTI charge as of March 31 based on a $5.6 billion credit loss inmortgage-backed securities. WesCorp's figures include the U.S.Central PIC I and II write-down, but it will not record its U.S.Central member capital shares loss until April.
Similarly, Members United announced that it's expecting a $511million loss, resulting in a 60% loss in capital-all PIC andretained earnings gone and a good chunk of member capital shares.About half of Members United's losses came from U.S. Centralwrite-downs and the other half was its own OTTI. The corporate wasalso nipped by the Central States Mortgage debacle and the NCUSIFimpairment.
So now, the NCUA has been running U.S. Central and WesCorp for morethan a month and is beginning to produce the “honest” numbers itwas looking for. While the corporate credit unions' situation, likemany that heavily invested in mortgage-backed securities, is dire,we are still talking about paper losses.
However, according to GAAP, OTTI once written down cannot bewritten back up. The housing market may not come back 100% over thenext couple of years, but it will turn around some as householdincome eventually crawls back upward and employment figuresimprove. The older items will be falling off the portfolios shortlyat a loss but giving the others the opportunity torebound-bolstering the value of the underlying loans-over the nextcouple of years is the way to go considering economic forecasts arebeginning to look up. The NCUA has publicly said it will holdWesCorp's securities to maturity, but the reclassification toavailable for sale has made some in the credit union communityedgy, particularly considering PIMCO's conflict of interest byplaying both sides of the fence.
Still. some in the industry have had a hard time acceptingreal-dollar losses for natural person credit unions when, so far,everything at the corporates is just paper losses. One CEOsuggested that when he started a few decades ago, credit unionswere allowed to run in the red if they looked promising. However,the NCUA has clarified that PCA no longer permits this flexibility.According to the NCUA, “A credit union can only run negative networth if NCUA does a prior undivided earnings deficit guarantee andprovides a waiver to pay dividends. This would apply if itconstitutes the least cost (versus liquidation or merger) and alsogains NCUA Board approval under specified timeframes, perrequirements of Prompt Corrective Action, to achieverecapitalization.”
On the positive side, the NCUA, in concert with the trades, wasable to push through legislation through the Senate to extend $6billion in borrowing authority from Treasury to replenish theNCUSIF, with $30 million as a back up; an agreement will have to bemade between this and the House bill. The Senate bill allows theagency to spread credit unions' recapitalization of the fund overseven years.
Some have hailed the extension as a blessing. Their credit unionscan take the hit in smaller bites rather than one big chunk. Itwill help them to continue putting money in their members'pockets.
Other credit unions have already written down the NCUSIF hit, whichled to a flood of red ink at year-end. But management figured they,and their members, won't have to look at those figures again ratherthan seeing a portion of the expense pop up over the next severalyears.
From the regulator's standpoint, I imagine the funds couldn't comefast enough. The NCUSIF is funded with 1% of insured deposits($250,000, for which CUs never ponied up after the increase) fromall federally insured credit unions, including corporates. Treasurywas backing the temporary increase.
But also consider that the NPCUs pay in 1% for up to $250,000 peraccount, an amount most people will never hit. However, corporatesalso only pay in 1% of $250,000 per account, disregarding the factthat even the smaller CUs probably have several times that in theircorporate accounts. And the NCUSIF, through its temporary guaranteeprogram has said it is covering all deposits in the corporates. Thedecision was likely necessary to keep money at the corporates, butit would be quite a hit to the insurance fund if the worsthappened. According to the insurance fund presentation at theNCUA's April board meeting, problem credit unions represented 2.95%of insured shares-three times what credit unions pay in.
Fortunately, the credit union community is working to find a creditunion solution to a credit union problem. This is the surest way tohelp guard against a single financial services-regulatorregime.
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