Local credit unions largely avoided putting toxic assets on their own balance sheets. Even so, they’re going to have
to pay millions of dollars to clean up their industry’s books.
That’s because they’re entangled in the collapse of two so-called “corporate credit unions,” which provide them discounts on an array of services, from check clearing to ATM networks.
In March, the National Credit Union Administration seized Lenexa, Kan.-based U.S. Central and San Dimas, Calif.-based Western Corporate—goliaths that together hold nearly three-quarters of the assets of the entire credit union industry.
NCUA auditors were fretting because the pair carried billions of dollars in mortgage-backed securities distressed by the economic downturn and credit crunch. The regulator worried potential losses could approach $16 billion. By intervening, they hoped to limit the bleeding to $11 billion or less.
As a result, individual credit unions have to pay more to recapitalize the credit union deposit insurance system. Some credit unions also have ownership stakes in the corporates and have to write down their values.
“We are in fact bailing out the corporates,” said Roger Youngs, CEO of Finance Center Federal Credit Union, the fifth-largest credit union in the Indianapolis area. “There’s no two ways around it.”
Credit unions’ problems during the recession have been largely overshadowed by those in the commercial banking industry, which has gone through its toughest stretch since the Great Depression.
But for the nation’s 5,800 credit unions, which primarily serve consumers, the pain is substantial. In addition to tapping the 28 corporates for discounted services, credit unions use them for lending and investment services.
Youngs declined to reveal the direct impact of the failures on Finance Center, which has assets of $379 million, except to estimate it will run in the seven figures.
That’s because the tab largely depends on what price the corporate credit unions eventually fetch for their distressed securities. The best way to minimize the loss is to avoid selling them in a panic, Youngs said. So it will likely be years before the final damage is tallied.
Fishers-based Forum Credit Union, central Indiana’s largest credit union, didn’t own stakes in the failed corporates but expects to pay an extra $2 million to $3 million over five years to build up the deposit insurance system.
“From our standpoint, when we’re close to being a billion-dollar institution … that’s not a big hit to capital or net worth, by being able to spread it out,” said Andrew Mattingly, Forum’s vice president of strategy and marketing.
The impact may be hardest to absorb for small credit unions affiliated with struggling companies.
Harvester Financial Credit Union traditionally served employees of Navistar International Corp., which announced in January it will close its Indianapolis engine plant and adjacent foundry by the end of this month, wiping out about 700 jobs.
The credit union, which has $54 million in assets and two branches, has been attempting to diversify its deposit base and its book of loans for a half decade. CEO John Newett said NCUA’s seizure of the two corporates will cost it approximately $500,000 extra this year. That’s above the $50,000 to $300,000 write-off for its ownership interests in corporate credit unions.
“That’s two years’ earnings for us,” he said.
As a result, Newett said Harvester Financial will have to step up customer service to retain its members. Otherwise they’ll gravitate to larger credit unions—or banks.
“The cost will go up for the smaller credit unions. It will be a little more difficult to compete, and we’ll have to accept in all likelihood even thinner margins,” he said. “It’s OK to not be on every corner. But we have to offer services members need, or they’ll go somewhere else.”
Experts anticipate consolidation throughout the credit union industry, especially among the remaining corporates, none of which is based in Indiana. The trend is likely to continue for years because credit unions, whose structure won’t allow them to sell stock, aren’t eligible for federal bailouts like what banks received through the Troubled Asset Relief Program, or TARP.
They’ll have to slowly earn profits on the margins between their deposits and loans to meet NCUA’s standards, which will make mergers to cut costs attractive.
Credit unions that remain independent may look to pare expenses in a variety of ways, from trimming year-end dividends on savings accounts to eliminating special credits awarded to loans in good standing.
But don’t expect much sympathy from banks, which for years have complained about credit unions encroaching on their turf. Carmel-based banking consultant Mike Renninger said credit unions retain a big advantage: tax exemption.
“They’re going to get hit by assessments, just like banks did. How do they deal with the capital issue? They can gain economies of scale by merging with others,” Renninger said.
The credit union industry generally has done little to publicize the problems in its own industry—even as it uses the turmoil in the commercial banking industry to its marketing advantage. Credit Unions are beginning to wear their bailout ineligibility as a badge of honor.
Indiana Credit Union League President John McKenzie noted credit unions have capitalization requirements seven times higher than banks, which he said shields consumers and businesses from financial risk.
“Credit unions continue to be a bright spot in the financial services industry,” McKenzie said. “Nothing from the impact of the housing market or recession has changed that. Credit unions have some of the best deals anyone can find.”•