Credit Unions Pay a Premium for Doing the Right Thing

I was thinking after my last few Heartland-centric posts that I should probably get back to covering the basics of our practice and re-focus on all things regulatory. So I started skimming through my notes from recently completed fieldwork looking for ideas. The last few engagements happened to be with Credit Union clients, and the only thing that kept jumping off the pages at me was their struggles addressing the NCUA's actions to restore the National Credit Union Share Insurance Fund (NCUSIF) equity ratio to sufficient levels.

It's an action that I've come to think of as the anvil hanging over the heads of the Credit Union community.

In short, the NCUA declared "a premium assessment to restore the National Credit Union Share Insurance Fund (NCUSIF) equity ratio to 1.30 percent, which will be collected in 2009." For those in the audience who hang out in banks, the NCUSIF is the equivalent of the FDIC. What's distinctly different beyond that is it's entirely funded by the NCUA and its member organizations. Or rather, no taxpayer dollars are involved. And what the aforementioned premium assessment really mean is that every credit union has to pay a one-time assessment fee in order to ensure that it's properly funded to guarantee NCUA deposits.

The one-time fee is not optional. Member Credit Unions cannot decline the invitation, cannot claim hardship or defer payment. They have to pay up to stay in the game (so to speak). And beyond that, they can't rely on the old "checks in the mail" scam to buy some extra time because the NCUA is going to draw the amount directly from their reserves (sort of like your bank deducting fees directly from your account). Under normal circumstances this would be an inconvenience, but this economy does not allow for normal anything. Thus the problem for what I now believe to be the majority of Credit Unions is that once the money is drawn from their cash reserves, it will drop them below the required 7 percent minimum. Up until 2009 that would be a huge deal, maybe even an end-of-life scenario for some of the institutions. Again, up until 2009.....

It turns out that Credit Unions are exposed to most of the same pressures brought to bear upon banks. Their loan portfolios are taking a beating as members lose jobs, have their investment portfolios plummet in value and suddenly find their houses to be worth way less than just a couple of years ago. Thus deposits are down, loan delinquencies are up, and loan portfolios are suddenly worth way less than expected. And so while Credit Unions are struggling with these new and escalating harsh realities and scrambling to find ways to keep their cash reserves at or above required levels, their parent organization steps in and lowers the boom.

I suppose it's not all bad. On a recent conference call with its members, the NCUA shared some insights into how this was all going to be handled. CAMEL ratings of 4 will not necessarily be viewed the same way as in the past (think of 4 as the new 3). What this ultimately means is that having cash reserves below the required 7 percent will no longer be considered a huge no-no for the foreseeable future. NCUA examiners are also encouraged to take into account all potential concepts and considerations when conducting their fieldwork in order to try and assess the Credit Union based on the new reality we're all dealing with. So maybe you get a Document of Resolution (DoR), but it will be a kinder, gentler version of what you'd expect. Oh and while all laws and regulations will still need to be applied, there will be a degree of understanding mixed in to the process so that what might have been a huge problem in 2008 is something akin to a passing comment in 2009.

And while I'm taking some creative liberties in interpreting what I heard, this depiction is not as far removed from what was said as you might think (or hope).

There was one piece of good news issued by the NCUA: The premium assessment will not actually be applied until September, so member Credit Unions have more time to look under seat cushions, rifle through pants pockets and look for as many coins as is possible to help pay that bill. I'd thought of that positively at first until someone pointed out that now they'll have it hanging over their heads for another six months rather than be forced to deal with it now and try and recover and move forward. When you consider that the odds of the economy looking better in six months than it does right now are not very good, you sort of see their point.

So here's the kicker. The NCUA and its members are in this mess because historically they have never needed or relied upon taxpayer monies to be in business. The only reason they are in this mess is because they are trying to stay true to that same spirit of independence and solve this problem on their own. When you consider how the Bank of Americas and CitiGroups keep showing up in Washington with their hands out looking for more money, it makes you stop and think. Look, I'm no banker, no accountant, no business analyst; I am however a taxpayer, and if I was asked to vote as to where my share of TARP was allocated, I would insist someone stuff a few billion dollars into the hands of the NCUA and help bolster their operations. Seems to me the ones to lend the money to are the ones who really don't want to be a bother and are trying to take responsibility for their own situation. But maybe that's just me.