Months after federal regulators bailed out the country’s largest corporate credit union using the industry’s insurance fund, Connecticut credit unions are facing a one-time special assessment charge to earnings that could wipe out more than a year’s worth of combined profits.
The National Credit Union Administration plans to asses the levy on all U.S. consumer credit unions to replenish the insurance fund, likely costing Connecticut’s nonprofit cooperatives at least $28 million, industry officials said.
That’s $5 million more than Connecticut’s 142 federally insured credit unions collectively made in all of 2008, according to NCUA data.
“I’m not happy this has occurred,” said state Banking Commissioner Howard Pitkin, who oversees state-chartered credit unions.
Well-Capitalized
The charge comes as a deepening recession has already put some strain on Connecticut credit unions, which posted a combined net income of $23 million in 2008, a 43 percent decline from the year-ago period.
Despite the challenging times, however, Connecticut credit unions largely remain financially healthy and sound, industry officials said.
“Connecticut credit unions as a group are very well-capitalized and most will weather the impact of the special insurance assessment reasonably well,” said Ed Danek, president and CEO of Hartford Federal Credit Union. “That’s not to say that it won’t sting.”
Expensive Rescue
The insurance fund took a $1 billion hit after the NCUA used it to bail out Kansas-based U.S. Central Federal Credit Union, the largest corporate credit union in the U.S. which posted a $1.1 billion loss in 2008, thanks to sour investments in mortgage-backed securities.
The rescue was done to stabilize the corporate credit union network, which consists of 28 credit unions that are owned and relied upon by all other U.S. credit unions.
U.S. Central sits atop of the corporate network, which aggregates and invests funds from smaller credit unions and provides liquidity and a clearinghouse for payment services.
To rebuild the fund, NCUA said it would assess a special fee on each retail credit union, equal to about 0.5 percent of their net worth.
Two of the largest retail credit unions outside of Connecticut have publicly opposed the plan, while others have complained about it to the NCUA.
The assessment will reduce profits across the board in Connecticut, and likely reduce lending in the state.
“Some credit unions will feel the impact more than others depending on how well capitalized they are,” Pitkin said.
Alternative Solutions
Tony Emerson, president and CEO of the Credit Union League of Connecticut, said most credit unions “will not see their capital position degraded in any meaningful way.”
Emerson also said there are five alternative solutions to the NCUA’s plan being considered, which range from laddering out the assessment over a period of years, to finding another guarantee mechanism altogether.
In addition to the $1 billion capital injection in U.S. Central, the NCUA also issued a blanket guarantee of the $80 billion in uninsured deposits at all corporate credit unions through February and then on a voluntary basis through Dec. 31, 2010.
Investment Write-downs
Beside U.S. Central several other corporate credit unions are also facing securities write downs including Constitution Corporate Federal Credit Union of Wallingford.
On Jan. 8 Standard & Poor’s Ratings Services lowered its short-term counterparty credit rating on Constitution Corporate to ‘A-1’ from ‘A-1+’ based on their “view that Constitution is exposed to a material amount of potential investment write-downs.”
S&P also said “There is very little credit risk from Constitution’s loans,” and that the “the vast majority of its assets is cash and very highly rated, short-term investments.”
In a Feb. 2 letter to customers Robert Nealon, president and CEO of Constitution Corporate, acknowledged that the credit union is being impacted by the financial crisis.
“Understanding the difficult and unprecedented economic environment we are all operating in, Constitution continues to operate as efficiently as possible,” Nealon said in the letter.
Nealon said that the credit union is cutting costs by reducing its capital spending by 15 percent and eliminating raises and bonuses for all managerial and supervisory staff. Since January of 2008 they’ve also laid off nine employees.
