After bringing in a remarkably strong $2.9 million in revenue for 2008, Leominster Credit Union was going to see almost all of that income head right back out the door – about $2.7 million of it was required to help replenish a projected $6 billion shortfall in the National Credit Union Administration’s deposit insurance fund.
But now, new legislation has given credit unions a massive reprieve – instead of writing down the funds all at once, they have seven years to pay the money. Largely because of serious troubles by two corporate credit unions’ investments, the credit unions’ insurance fund – like banks’ federal deposits insurance fund – finds itself strapped for cash.
All the same, Gary M. Abrams, Leominster’s CFO, would have preferred to just write off the $2.7 million payment and have done with it. As one of the few credit unions with strong positive revenue last year, Leominster didn’t really need the extra time.
Still, “It is what it is, and you do what you need to do,” he said, adding that he understood that most other credit unions weren’t in as comfortable a position.
Some Relief
Many credit unions are indeed seeing a hit to their deposit base, and the single payment would have put many in the red – or made them sink even more deeply below water.
Expensing just one-seventh of the total this year is a major relief for most, said Peter Muise, CEO of Fairhaven-based First Citizens Federal Credit Union, who was prepared to pay his required $3 million to the fund this year: “For most credit unions, that’s huge.”
Credit unions have been grappling with a similar problem as community banks across the country: because of institutional failures – or bad investments, in the case of corporate credit unions – both fund systems have had to exact enormous payments from their constituents to bail out their troubled brethren.
But the two group’s troubles differ in some key ways – unlike banks, credit unions must treat their allocation of the fund as an investment, not just an expense, said Pat Keefe, Credit Union National Association spokesman, which means it lingers on the books. Credit unions also build their capital bases slowly, based on undivided earnings, and cannot raise it from capital markets.
A lump payment would be a huge hit to credit unions in one year – especially during what was a bad year for most of them.
It also would have made many credit unions’ adequacy ratios fall below the 7 percent mark, triggering regulatory action.
“That’s a shock for people who manage their institutions conservatively and have never had a loss in their history,” Keefe said.
Even if they weren’t about to fall into the regulatory danger zone, many Massachusetts credit unions would have taken a big hit if the legislation hadn’t changed.
Bill Hampel, chief economist with CUNA, says the majority of credit unions are extremely relieved to have the “pain spread out” over seven years, although some – like Leominster – are well-capitalized and could handle it. Others are displeased – grumpy, Hampel said – that they can’t pay it all back immediately, as they’d like to get it off the books rather than have to deal with it in the future.
One other difference between bank’s FDIC fee and the credit unions’ insurance woes: the fund has to be replenished largely because of the actions of a few corporate credit unions, which made higher-risk investments that went sour when the economy tanked. But those losses haven’t actually occurred yet, Hampel said.
“The reason that this also gets goofy was [that] credit unions were going to spend $6 billion, but there as yet have been no losses on any of those securities,” he said. The $6 billion is merely an estimate of future losses that will occur in 2010 or 2011, or possibly not until 2013. But the fund must be fully stocked nonetheless.
“This is no one’s fault except for – how can I say this nicely? – the ridiculous structure of generally accepted accounting principles,” he said. With that in mind, even those credit unions that wanted to pay in a single year weren’t going to be able to fully wash their hands of it, as they might have to pay more or get a refund as the years go on, depending on what actually happens with the troubled credit unions’ securities.
Muise of First Citizens said the seven-year reprieve is a huge relief. But that doesn’t mean credit unions are entirely happy, especially with the NCUA, the insurance fund manger.
Many outright resent the group, he said. “Those in the industry don’t feel they’re getting honest answers from NCUA.” The organization wasn’t vigilant when those corporate credit unions were loading up on risky securities in the first place, and hasn’t been fully transparent in its dealings with its other constituents.
“Those questions haven’t been answered to the satisfaction of probably most in the industry,” he said.
