Plenty of people were shocked when regulators announced they had seized three failed corporate credit unions, including a major corporate out of Connecticut. But not everyone.
“I’m only surprised that it took this long to collapse,” said Claude Hanley, partner with Capital Performance Group, a D.C.-based financial consultant.
Wallingford, Conn.-based Constitution Corporate Credit Union, along with two others in Illinois and Texas, were seized by credit union industry regulator National Credit Union Administration (NCUA) on Sept. 24, after struggling under the weight of sour investments that included private-label mortgage-backed securities.
While not entirely surprising, the three corporate CUs’ lapse into conservatorship highlights trouble in the credit union world. Executives and analysts acknowledged that while some credit unions are doing very well, the weaker members of the herd are going to have a long struggle to survive.
Peter Muise, CEO of Fairhaven-based First Citizens’ Federal Credit Union, said while he wasn’t worried about his own institution, he was concerned about the long-term future of an industry bogged down by regulatory burdens and squeezed by a tough economy.
Executives paint a mixed picture, but others predict a decidedly gloomy future.
2011 ‘The Worst Year Ever’
“If somebody were to ask, ‘how do you think credit unions are going to perform in 2011?’ I would stick my neck out and say it’s going to be the worst year ever in the credit union industry,” said Frank Farone, managing director with Newburyport-based Darling Consulting Group.
“It’s scary how poorly managed these guys are,” he said, speaking in reference to a few individual credit unions that he believes are headed for a crash. Farone declined to name those institutions he felt were in trouble.
But more broadly, Farone said credit unions’ investment strategies – emphasizing short-term investments at a time when rates are at rock-bottom – are grinding growth to a halt and slowly killing many institutions. Those same strategies, however, are encouraged by the NCUA, which Farone criticized unsparingly for rewarding foolish lending and investments.
Hanley pointed to losses from investments that were held through the erstwhile corporate credit unions, which act as “bankers’ banks” for the credit union industry. The NCUA estimates their failure will cost credit unions between $8.3 billion and $10.5 billion on their investments.
These and other failures have prompted the NCUA to charge retail credit unions two major assessments to replenish its dwindling insurance fund, Hanley said. In addition, they’re battling higher loan defaults thanks to high unemployment, and a disruption in fee income as credit unions adjust to new consumer laws.
“We are by no means done with institutions merging or being taken over due to fundamental problems in their operating model,” Hanley said. He and Farrone anticipated that many credit unions were headed for closure, and so far the NCUA’s website lists 15 shuttered institutions nationwide this year – already as many as in all of 2009.
Worst Behind Us?
Meanwhile, credit union leaders themselves, while less pessimistic, are working through a gauntlet of large-scale problems.
As news of the corporate credit union’s demise went national late last month, Muise’s First Citizens promptly set about writing a message to members assuring them their money was safe and the institution was strong.
The majority of credit unions have investments in at least one of the 27 corporate credit unions nationwide, five of which are currently in conservatorship.
In late 2008, in anticipation of losses, Muise said his $503.3 million credit union wrote down some investments in a corporate credit union affected by the early 2009 seizure of both U.S. Central Federal Credit Union and Western Corporate Federal Credit Union. He said he had no connection to the three credit unions most recently seized.
On top of those investment losses, the NCUA is also levying assessments to replenish its insurance fund. As with any insurance pool, the healthy institutions will have to pay extra because of others’ failures.
“I don’t like it, but I understand it,” Muise said of the additional assessments. He said the extra fees are another burden for credit unions already straining under weak earnings.
Frederick Healey, CEO of Fitchburg-based, $756.5 million Workers’ Credit Union, said his institution has paid $1.5 million in insurance assessments thus far, and said he has hope that the worst is behind the industry.
The NCUA is working through the bad assets it has inherited, which may improve with a healthier market in the next few years. The organization also recently announced new rules intended to keep corporates from engaging in similar follies in the future.
‘It Goes On And On’
In the meantime, credit unions like Workers’ will try to untangle the sweeping regulatory changes imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Healey said he estimates the bill will send costs soaring, and likely drive small banks and credit unions to consolidate or close.
“We haven’t begun to feel the impact of that,” he said, listing the succession of new compliance measures and regulations that have come through in the past few years. “It goes on and on, and I just don’t know how small credit unions and community banks are going to have the resources to comply.”
While weaker credit unions might have a hard time surviving, Healey and Muise said they were confident that the majority of credit unions had a sturdy base to keep them alive through the current, disruptive, environment.
“We will more than survive this, we’re actually doing very well,” Muise said of his institution.
Rob Kimmett, spokesman for the Massachusetts Credit Union League, said that although membership in the state has dipped slightly, deposits and assets have grown. Last year, deposits were up by 9 percent and assets rose by 3 percent for Massachusetts institutions.
“I don’t think that speaks to an industry that’s in retreat,” Kimmett said. “Anybody who thinks they can count credit unions out is making a big mistake.”
