By Mary Arnold
Yesterday Ron Jooss and I reported on the CUNA audioconference and the NAFCU Webcast held concurrently on Feb. 4. Now, highlights from yesterday's CUES Webinar, "NCUA's Corporate Stabilization Program: What Will it Mean to Your CU?" featuring Callahans' Chip Filson and Jay Johnson and John Kutchey, acting director of NCUA's Office of Examination & Insurance:
While all three programs have featured extensive Q&A between participants and NCUA representatives, the CUES Webinar also sought to put the situation into a going-forward context. According to Filson, this time of corporate stabilization is actually the first steps of establishing what credit unions will be like in the 21st century. He suggested looking at how the CU system can benefit from the issues that are coming to light and avoid "letting the problem claim us."
For example, the Central Liquidity Facility doesn't currently have authority to lend directly to corporates, hence the need for the System Investment Program, or SIP, which lends money to natural-person CUs so they can loan it to the corporates. Now is the time to get authority to use the fund to meet existing needs, Filson suggested.
Additionally, NCUA has said it is instructing examiners to look at CU financial results net of the insurance assessments necessary for corporate stabilization. Kutchey confirmed this in the Webinar, saying, "We would discount these actions in their CAMEL rating. I want to make this crystal clear to the universe."
However, if a CU fell below minimum reserve requirements, it would still need to file a capital restoration plan. Kutchey explained during the CUES Webinar that this is a statutory requirement under Prompt Corrective Action. NCUA must have the plan. But, he added, the agency has the discretion to evaluate it in light of the assessment.
Filson saw this as an opportunity to ask Congress to modify PCA.
Sharing a range of comments posted on the CUES Net listserve since NCUA first announced its corporate stabilization plan on Jan. 28, Filson illustrated how executives' responses quickly moved from shock and outrage, to denial and finger pointing, to a "how-can-we-work-together-to-survive-this-challenge" stance. It's the same repsonse you typically see as humans deal with any great change, including the death of a loved one.
"The challenge now," Filson continued, "is to convert this energy into positive opportunity. Credit union leaders across the board are eager to do more."
Kutchey opened his portion of the program by saying, "I know the impact on each credit union is substantial and significant. The industry is going to get a chance to not just tell its story as it has in the past, but to live a story." He said CUs' ability to right their own system would provide immeasurable "clout on Capital Hill."
He came back to this point later in the Webinar, as he addressed a participant question on whether CU members are being "double-whacked" by first paying for TARP through their tax dollars and then paying to stabilize corporates via their own CU's financial results.
Kutchey paused, then answered that "yes," he believed they are. "But you have to decide how you want to invest your political capital," he said, whether it should go into CU earnings and ROA or fixing this problem. "If we fix it ourselves, we gain political capital going forward--to articulate the strongest possible argument against taxation" and against having CUs fall under a single regulator.
Regarding the temporary guarantee on all corporate deposits, Kutchey confirmed that it would end on Feb. 29 for any corporates not signing a supervisory agreement with NCUA. "We are actively working with every corporate," he said. "The largest corporates that hold the bulk of the troubled securities are the priority, the corporates that are under the most stress.
"I couldn't imagine a corporate not participating," he said, suggesting that corporates' member CUs would urge them to do so to maintain the guarantee. Kutchey added that the $3.7 billion NCUA is reserving is based on all corporates participating.
Responding to another participant question, he noted that "as early as 2007, NCUA has had some supervisory agreements in place" concerning how certain corporates could invest their funds.
Kutchey also addressed a number of questions regarding the insurance fund assessments:
By statute, the assessments will be based on $100,000 of member deposit insurance, not the temporary $250,000 level. It will be based on insured shares as of June 30, 2009. (To figure out how much your credit union would owe, go here.)
He confirmed that the $1 billion capital infusion to U.S. Central will come back to the fund if it is not needed, explaining that the arrangement had been "structured with incentives" for U.S. Central to pay it back. Any dividends the $1 billion earns will also be returned to the fund. If the share insurance fund becomes over-capitalized, CUs will receive a dividend.
Kutchey clarified that the $1 billion infusion will result in an immediate expense for credit unions, but that the premium assessment expected to be billed in September would be considered an asset. Read more on this in Accounting Bulletin 09-01. He added that national CU accounting practitioners are meeting this week with the American Institute of Certified Public Accountants about when the expense needs to be booked.
Regarding the $3.7 billion, Kutchey emphasized that it is "not an estimate of losses on U.S. Central's portfolio; that's just one factor. It's our best estimate of what we'd need if we had to perform on the (temporary) guarantee (on deposits)." He added that keeping liquidity in the corporates gives them "not only the intent but the ability of hold those (troubled) securities. Liquidity reduces the risk exponentially"--and thus reduces the risk of needing the guarantee.
To help NCUA get a better handle on potential real losses in U.S. Central's portfolio, the agency has engaged PIMCO to study each investment and its underlying mortgages and analyze the market for the investments. Results of the first, baseline, study are due in two to five weeks, Kutchey said.
What should credit unions do in the meantime? Filson suggested they should look for ways to improve their business, with helping homeowners at the top of the list. If you need help funding that, consider asking NCUA about the possibility of offering a second round of CU HARP (Credit Union Homeowners Affordability Relief Program), he said.
If your balance sheet will be severely hurt by the insurance assessment, be proactive about alerting NCUA.
Above all, "start thinking about the redesign of the corporate system (direct your comments to NCUA here.) Get involved in setting the legislative agenda ASAP."
And, finally, Filson said, "It's time to re-engage the corporates themselves in these conversations."
