Yet again, corporate credit union news comprises the bulk of our front page. And, as in the past, most of it ain't good.
WesCorp's paid-in capital and member capital accounts have been depleted by its ongoing financial issues and must be written off by NCUA directive. Prior undivided earnings took a hit of $3.7 billion, leaving the NCUSIF holding the bag as guarantor of these credit union deposits. The loss was recorded after a $5.7 billion OTTI charge as of March 31 based on a $5.6 billion credit loss in mortgage-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 $511 million loss, resulting in a 60% loss in capital-all PIC and retained earnings gone and a good chunk of member capital shares. About half of Members United's losses came from U.S. Central write-downs and the other half was its own OTTI. The corporate was also nipped by the Central States Mortgage debacle and the NCUSIF impairment.
So now, the NCUA has been running U.S. Central and WesCorp for more than a month and is beginning to produce the “honest” numbers it was looking for. While the corporate credit unions' situation, like many 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 be written back up. The housing market may not come back 100% over the next couple of years, but it will turn around some as household income eventually crawls back upward and employment figures improve. The older items will be falling off the portfolios shortly at a loss but giving the others the opportunity to rebound-bolstering the value of the underlying loans-over the next couple of years is the way to go considering economic forecasts are beginning to look up. The NCUA has publicly said it will hold WesCorp's securities to maturity, but the reclassification to available for sale has made some in the credit union community edgy, particularly considering PIMCO's conflict of interest by playing both sides of the fence.
Still. some in the industry have had a hard time accepting real-dollar losses for natural person credit unions when, so far, everything at the corporates is just paper losses. One CEO suggested that when he started a few decades ago, credit unions were 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 net worth if NCUA does a prior undivided earnings deficit guarantee and provides a waiver to pay dividends. This would apply if it constitutes the least cost (versus liquidation or merger) and also gains NCUA Board approval under specified timeframes, per requirements of Prompt Corrective Action, to achieve recapitalization.”
On the positive side, the NCUA, in concert with the trades, was able to push through legislation through the Senate to extend $6 billion in borrowing authority from Treasury to replenish the NCUSIF, with $30 million as a back up; an agreement will have to be made between this and the House bill. The Senate bill allows the agency to spread credit unions' recapitalization of the fund over seven years.
Some have hailed the extension as a blessing. Their credit unions can take the hit in smaller bites rather than one big chunk. It will help them to continue putting money in their members' pockets.
Other credit unions have already written down the NCUSIF hit, which led 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 rather than seeing a portion of the expense pop up over the next several years.
From the regulator's standpoint, I imagine the funds couldn't come fast enough. The NCUSIF is funded with 1% of insured deposits ($250,000, for which CUs never ponied up after the increase) from all federally insured credit unions, including corporates. Treasury was backing the temporary increase.
But also consider that the NPCUs pay in 1% for up to $250,000 per account, an amount most people will never hit. However, corporates also only pay in 1% of $250,000 per account, disregarding the fact that even the smaller CUs probably have several times that in their corporate accounts. And the NCUSIF, through its temporary guarantee program has said it is covering all deposits in the corporates. The decision was likely necessary to keep money at the corporates, but it would be quite a hit to the insurance fund if the worst happened. According to the insurance fund presentation at the NCUA'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 credit union solution to a credit union problem. This is the surest way to help guard against a single financial services-regulator regime.
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