CUES Skybox

Launched With $1.25 Deposits, CitizensFirst is Still Growing

By Barb Kachelski, CAE

"It's great to hear SOMEONE is building and growing," said my auto mechanic when I brought my car in for service after attending a groundbreaking for $300 million CitizensFirst Credit Union in Oshkosh, Wis.

The credit union is home to CUES Chairman Carla Altepeter, CCE, and 12 additional CUES executive and director members.

Before the CitizensFirst CU Board symbolically broke ground, CU Immediate Past Chairman John Bermingham, CCD, said the expansion of headquarters shows the credit union's commitment to serving its members, the community, employees and the environment.

Staff members, who dressed in green in honor of the LEED- (Leadership in Energy and Environmental Design) certified building design, each followed the board in hoisting a shovelful of earth to make way for the new building.

It is obvious the credit union is building and growing in more than one way. In a separate conversation, John mentioned to me that–-in his years as chairman which ended the night before–-the board focused on building a strong board. He shared that new chairman Brenda Haines is "perfect for the job" due to her work expertise in governance and strategic marketing, as well as her energetic and outgoing personality.

And at a staff meeting before the groundbreaking, staff saluted three employees who earned degrees this spring, growing their knowledge.

Carla (seen here exiting the digger with a helping hand from Dave Voss, president of Miron Construction) shared a story about the credit union's founders, who each contributed $1.25 to establish the credit union in 1937. Their initial investment paved the way for the groundbreaking this week, and laid a foundational attitude of hope and growth that lives on today … to inspire people like me and my auto mechanic.

Barb Kachelski, CAE, is SVP/chief operating officer for CUES and a former newspaper reporter.

 

 

Working Your Web Site

By Mary Arnold

In two earlier posts (in what seems to have turned into a series!) I wrote about 1) CEOs who blog with members about current events and their impact on members and 2) shared an example from a CEO who used his CU's newsletter to communicate a similar message.

In my final (and briefest) installment, here are two CU CEOs who used their Web sites to deliver their message: Doug Fecher, president/CEO of Wright Patt Credit Union, Fairborn, Ohio, and Shruti Miyashiro, president/CEO of Orange County's Credit Union, Santa Ana, Calif.

Which is the best method for communicating with members? Obviously, there is no one right answer. In fact, the best method is likely a combination. That way you'll be reaching members however they get their news.

 

CEO Shares Perspectives via Newsletter

By Mary Arnold

Yesterday I wrote about several credit union CEOs who blog with members. Their posts share the news of the day; how they see it affecting members and the credit union; and how the credit union can help members meet the challenges of a turbulent economy.

At the end of my post, I expressed some surprise that more CEOs don't blog with members, given the long tradition of "The President's Corner" in credit union newsletters.

Rick Craig, CEO of America First Credit Union, Ogden, Utah, penned an excellent example for the March issue of the CU's Member Line newsletter. Here it is, reprinted with Rick's permission:

Credit unions in America were formed amidst a financial crisis. The final panic of 1907, a time of recession, with stock market values falling 50% and banks failing, set the economic conditions under which the first credit union in the United States was founded. The site was New Hampshire in early 1908. The Federal Credit Union Act, which provided the regulatory authority for America First, was signed by Franklin D. Roosevelt in 1934, during the Great Depression.

In President Roosevelt’s first inaugural, he observed, “Only a foolish optimist can deny the dark realities of the moment.” President Obama noted that he was taking office “amidst gathering clouds and raging storms” of unemployment, decreasing property values, home foreclosures, a plunging stock market and tightened credit. 

We can clearly see the impact of these “raging storms” of recession on our members. Both individuals and families are experiencing increasing difficulties in meeting financial obligations. Unemployment, reduced income, failing business and bankruptcies have impacted our membership and the credit union. When a member doesn’t repay a loan, this increases the amount of money we have to write off as a loss. As we look at the anticipated level of profitability this year, loan writeoffs will be a major factor. We hope the economic stimulus package will both create jobs and increase consumer confidence. Consumer spending makes up 70% of the economy and, without that spending, financial recovery will be difficult.

 

If you have a financial or budgetary concern now or in the future, please call or come into a branch to discuss your situation. Our chief concern as a credit union is your financial well-being. America First is here to help and be of support during these difficult times.

 

Our budget for this year anticipates that things are going to get worse before they get better. In this recessionary environment where people are reducing their spending, increasing savings and paying off debt, America First will tighten its belt as well. We are taking steps to reduce operating costs, postponing projects, not starting any new buildings, etc., until we start to see signs of an economic recovery. We can foresee no current economic circumstance that would require us to close any branches or lay anyone off this year. We will continue to act in your best interest in a safe, sound, and prudent manner.   

However, there could be some strategic opportunities that may arise as a result of the poor economy. We are in an advantageous position, because of our strong capital, to react should favorable circumstances present themselves. It is possible that we can use the downturn to our long-term advantage.

Over the past 69 years, we have set aside money for a day where the economic conditions impact the membership. We have been conservative in our lending practices, reserving for loan losses, and building capital through earnings. Your money is safe! The credit union capital is in excess of 10% and deposits are insured to $250,000 by an agency of the federal government. 

We have been here since 1939 and will be here for your financial services in the future. The best days of the country and the credit union are still ahead of us."

Thank you for sharing, Rick!

Mary Arnold is VP/publications for CUES.

 

 

Why More CEOs Should Blog

By Mary Arnold

In an article we're prepping for the May issue of Credit Union Management, Tim McAlpine, creative director at Currency Marketing in Chilliwack, British Columbia, laments that few credit union blogs (besides the very excellent Ask Jack which is written by Members Credit Union CEO Jack Braswell, Winston-Salem, N.C.) really communicate with members about what is going on in the economy, explaining things in everyday language and reassuring them that their CU is there for them.

"If ever there was a time to create content to put on a blog," McAlpine says, "it’s now. There’s so much misinformation and misunderstanding about what is going on, and credit unions have this tremendous opportunity to be a voice of reason and to deliver vital information to their members in particular and consumers in general."

Good news, Tim. I visited some of the CU blogs in this listing and found that Ask Jack does have some pretty good company--especially these blogs, also written by CEOs:

NAECU Blog by Greg Olmsted, CEO of North Alabama Educators Credit Union, Huntsville. (Hat tip to CUES member Charles Bruen, CEO of First Entertainment Credit Union, Hollywood, and his blog for bringing Greg's to our attention.);

Corner Office by Kent Lugrand, CEO of EDS Credit Union, Plano, Texas; and

Hopewell Federal Credit Union’s Blog by CEO Alan Smith in Heath, Ohio. 

What they all have in common--and what makes me think they deliver what Tim is urging for--is that they sound like what a credit union CEO would tell his or her neighbor if they got to talking across the fence about the news of the day. Their posts don't read like prepared statements or sales pieces but honest efforts to share their expertise for their members' benefit.

Are there other blogs out there that deserve a shout-out? I bet I've missed some good ones--tell me in the comments section, below. CUES Editor Ron Jooss talks about one he likes here.

I'm actually surprised there aren't more credit union CEOs blogging with members. Letters from the CEO in credit union newsletters are pretty standard--even a tradition that I think goes back to the time before marketing departments, when CEOs wrote the newsletters. A few still do!

But that's another post. Stay tuned!

Mary Arnold is VP/publications for CUES.

 

 

NCUA Fields Questions on US Central/WesCorp

By Ron Jooss

The National Credit Union Administration was hit with 500 questions from concerned credit union leaders during yesterday's Webcast explaining its decision to put US Central Credit Union and Western Corporate Credit Union into conservatorship last Friday. About all it could offer in return was more bad news.

NCUA Executive Director David Marquis said US Central and WesCorp were placed into conservatorship to reduce the credit union system's exposure in the face of estimated loss projections, to maintain greater control over the corporates and improve the transparency of financial information provided from the two institutions.

"It's very vital that we maintain confidence of member CUs and especially the payment system," Marquis said.

The CEOs, boards and some senior executives of the corporate credit unions have been removed, with NCUA-appointed officers assigned in their place.

In what he said was "a hurtful point," Marquis said projected credit losses have entirely wiped out paid in capital and member capital share accounts at WesCorp under the NCUA's base, pessimistic and optimistic test case scenarios."

At US Central the best case scenario reveals that 77 percent of paid in capital and membership share accounts have been impaired. In addition, all of the NCUA's $1 billion emergency infusion is gone.

Marquis said natural person credit union shares—but not capital—are insured up to $250,000, with any additional amount guaranteed under NCUA's Voluntary Temporary Corporate Credit Union Share Program and backed "by the full faith of the U.S. Government."

Marquis said the NCUA is holding a closed board meeting on Thursday, March 26, in an effort to hammer out a way for credit unions to spread the cost of the impairment. But any fix will take legislative approval.    

When asked why the corporate credit unions weren't allowed to fail Examination and Insurance Director Melinda Love said, "One of the reasons we took the conservatorship action was to ensure that the payment system and settlement processes continued uninterrupted. Had we gone ahead and just let the two corporates fail, that would have created an interruption in the payments system that would have come back and been felt by all of the members of all your natural person credit unions."

Marquis added that allowing the institutions to fail would also have meant putting their distressed securities on the market, rather than letting them continue paying down over time.

"We can't emphasize enough that it's vital to maintain liquidity in the system," he continued. "Since Jan. 28 credit unions have done a very good job in helping in that arena as they've taken a great deal of external borrowings off the table."

Yesterday, the NCUA released a statement that due to the success of the three Credit Union System Investment Program offerings there will not be an April CU SIP offering. Over $8.2 billion was issued in the first three subscriptions. Corporate credit unions used the funds to pay down external borrowings, freeing collateral for future contingency liquidity needs. 

Although the NCUA has said its examiners will be flexible with credit unions that approach Prompt Corrective Action status because of the expected reductions in return on assets and net worth, Marquis did not provide details. (See "Corporate Stabilization: The Longer View" for a previous NCUA explanation of PCA implications.)

"Our examiners have been told and we've worked with them more than once on taking these items into consideration," Marquis said. "That doesn't mean it's a complete free pass. We do have to look at the safety and soundness of the institution as it runs its own business and how its business model is working in this environment." (See also NCUA's Supervisory Letter No. 09-01.)

More bad news on the corporate credit union front is still to come. Marquis said US Central's absorption of paid in capital and membership capital shares will roll down to other corporate credit unions with capital investments in US Central and, depending on how hard this hits their balance sheets, will affect natural-person credit unions that invest in those corporates. Members of WesCorp will lose all their PIC and MCS.

Ron Jooss is a CUES editor.

After this Webcast, CUES held a teleconference on communicating industry issues like this with your staff and the media.

 

At the Edge of Chaos: An Industry in Transformation

By Kevin Foster-Keddie

The crisis in the financial services industry will re-shape the competitive landscape for decades to come. What can past financial crises teach us? How can credit unions survive this transition period? What will the new environment look like?

The world is experiencing the first global financial crisis in modern history. While there are no roadmaps to guide us, historical records can provide some perspective and even a range of scenarios with which to plan. In the broadest terms, financial crises have one element in common: speculation. This propensity of human beings to be overly optimistic about future plans has resulted in widespread speculation in the past and has led to the crisis we face today.

In what is sure to become a classic of modern economic analysis, the University of Maryland's Carmen Reinhart and Harvard University's Kenneth Rogoff completed a study of past financial crises that is startling in its simplicity and sobering in its conclusions. While Reinhart and Rogoff do not predict the ultimate outcome of the current crisis, even a casual reader can draw their own conclusions.

Unemployment will surpass 11 percent and last close to five years (or longer), equities prices will drop at least 55 percent and begin recovery only after three years (or more), and housing pricing will not recover for at least 6 years with an average drop in value of 35 percent (or more). The worst-case scenarios (Download Table) are based on historical record. Because the current event is worldwide in scope, a more severe scenario than average is a distinct possibility–-even a probability.

Chaos and Survival: the Transition Period. In the scientific world, the term "edge chaos" is sometimes used to describe an environment that exists between randomness–-chaos–-and a stable equilibrium. As a metaphor for the current state of the financial services environment, it helps to illustrate our current rapid pace of evolution–-and the uncertainty in the ability to predict the future equilibrium.

During this transition, credit unions can expect conditions that will create real threats to the survival of our institutions. While there are also great opportunities in a marketplace so unstable, most credit unions will seek survival over growth.

Balance sheet management is the primary objective of most financial institutions–-indeed most companies–-today. For CUs, capital preservation is the dominant concern. Many institutions should, or already have, implemented strategies to shrink the size of their institutions and increase margins as much as possible.

For credit unions whose past strategy has been price or technology leadership, such an adjustment may be difficult. Pricing to improve margins is very different from pricing that seeks increased market share and stimulates growth. Likewise, maintaining technological leadership during a severe contraction is difficult to justify.

Perhaps the biggest challenge for growth-oriented credit unions is accepting the idea that the transformation of financial services includes a contraction in the size of the entire industry. Growth for most individual financial institutions will only occur after the industry as a whole is "right-sized" to the needs of the marketplace. Those marketplace needs will be much smaller than they are now.

The hard wisdom of past industry transformations is that a survival rate of 60 percent is a good outcome. Perhaps credit unions will fare better than other financial institutions during this transition period. Perhaps not.

What will be the criteria for determining survival? Many factors will play a part, but it is a credit union's capital that will be most important. Does your credit union have sufficient capital to withstand its losses and to replenish the insurance fund for the losses of other credit unions as they fail?

The Aftermath: What will the New World Look Like? While it is impossible to predict how and when all the moving pieces will settle in the drama enveloping the financial services world, some broad elements can be identified as the chaos begins to subside.

First, there will be far more government involvement in financial services. During the transition, certainly, a pattern of government actions–-for example the introduction of "Making Home Affordable"-–will require immediate action by individual credit unions. Responding to this stream of new requirements will restrict credit unions' ability to move forward on internally generated priorities. And, after the transition, additional resources will be needed on a permanent basis to comply with the new regulations.

While increased government involvement in financial services will be a challenge, expect fewer players, less competition and higher margins. The number of financial institutions will fall. The ways in which these competitors will compete will be different. For example, Washington Mutual is gone. WAMU was a tough competitor in Washington State because it emphasized service. JP Morgan Chase is not as service oriented as WAMU. Margins will be higher because federal policy makers will need to create an operating environment to repair bank balance sheets. Also expect less innovation in financial institutions: The government will be risk-averse and seek to control and restrict risk-taking activities to a great degree.

Kevin Foster-Keddie is president/CEO of $1.3 billion WSECU, Olympia, Wash.

Considering a variety of scenarios for the future can help you succeed even in chaos. See what you think of the four scenarios outlined in the just-released 2015 Scenarios for Credit Unions in North America.

Leading in Times of Uncertainty

By Michael Neill, CSE

What were we worried about this time last year? For most of us, it was much different than what is in the front of our mind at this time. We have experienced six months that have tested us in many ways. With the mortgage loan crisis, recession, speculation about a deepening of the recession and now the news of NCUA's Corporate Stabilization Program, we are presented with choices. We can allow these challenges to cause us to react in fear or we can exhibit our leadership mettle like never before. For many of us, we are in the midst of the greatest challenge of our leadership careers. Will we pass the test as those who have gone before us did, or will we cave under the pressure of fear?

This past Thursday morning, I spoke to a couple of credit union "leaders" (not ServiStar clients) who were in the grips of fear over the NCUA's recent announcement. Now I am an optimistic guy, but I was even depressed after speaking with these two.

Fortunately, I also had the opportunity to speak with three leaders of MNA clients. They gave me hope that our client credit unions understand what it means to lead when times are tough, not just when life is easy. I was so inspired by Larry Biernacki, CEO of Arkansas Federal Credit Union; Charles Mullins, CEO of Mutual Credit Union; and Cecilia Homison, recently named CEO of Florida Commerce Credit Union, that I wanted to share their thoughts and encouragement with you.

To hear a short, but powerful, interview on how these great leaders are dealing with the current and potential challenges, click here and listen to a brief interview with Cecilia and click here for one with Larry.

When challenged by forces outside our control, leaders with vision and boldness always conquer the weak and fearful. There is no doubt that we are in times that demand we exhibit wisdom, logic and resolute fortitude, and challenge our commitment to continue growing our sales and service culture.

The recent economic and industry challenges have revealed, as do all such challenges, two types of leader: those who retrench in fear and hope that the most recent bad news will be the last, and those who know that challenges will always exist and that we must remain committed to the attack.

To use a football analogy, it's the difference between the coach who plays the "prevent" defense hoping the clock will run out before the other team scores enough to defeat them, and the coach who says, "We earned this lead by competing and attacking. We are not going to play to prevent losing. We are playing to win."

As Charles Mullins told his staff last Thursday night at Mutual CU's ServiStar kick-off, "We are not going to sit in a corner and suck our thumb. We are going to continue to do the things that will grow our credit union." Charles told the group, "Now is the time we must be committed to improving the financial life of our members more than ever. They need us now more than ever. We must find ways to grow the credit union by getting our members to bring more of their business to us."

The employees' faces revealed the fire that Mullins' challenge had created. Folks, that's leadership!

Some are tempted to hide, wait and hope the bad news doesn't find them. Some are tempted to react by saying, "Put a hold on what we are doing to grow the credit union; we'll pick it back up when things turn around." The leaders and credit unions that will survive and thrive will be those that continue forward with the strategies and tactics that will grow business.

These leaders understand they have to improve the ability to increase income, not only to reduce expenses. They keep their attention and money invested in the things that will grow business. While the members you share with banks and other credit unions are ready to move their money and refinance loans, you must give them reasons to bring that business to you. You must show them that you want their business!

Now is the time to equip your staff to identify and close product opportunities with your existing members and earn their business. Now is the time, like never before, that your employees will see the need to join with you to grow the credit union. While others hide in the shadows keeping their fingers crossed, I urge our real industry leaders not to waiver in creating a retail-focused organization.

Your credit union has the ability to improve the financial well-being of your members. More than at any point in our lifetime, your members are looking for stability and a trusted advisor who will guide them to saving and making more money. If you give this to your members, you'll not only survive the current times but, when they pass, you'll be operating at maximum capacity while your competitors are just beginning to come out of hiding.

Leaders, think about doing these things:

• When cutting expenses, cut those things that don't create opportunities to grow business.

• Meet with your staff to tell them the importance of every employee being committed to service and sales. Enjoin them in the battle to grow the credit union at every single member interaction.

• Continue to lead, coach, train and equip your staff to generate more business for the credit union.

• Only hire and promote those who have proven their desire and ability to add value to the member experience and the credit union's earnings.

• Don't invest money in hiring new staff. Use part of the money saved through reduced staffing to invest in training existing staff to be effective sales and service champions.

• Do you track sales results? If you reduce staff, cut those who can't or won't join with you to grow the credit union. If they won't do it now, do you think they'll do it when it appears less critical to your success?

• Train, equip and lead your management team to increase performance expectations and coach to improve performance of existing staff. This will allow you to accomplish more with less people.

The times call for leadership. I am confident that some will lead while others will wilt. The decisions we are making now will resonate for years to come. Let's each of us look in the mirror and determine to lead, not hide.

Be fearless.

Michael Neill, CSE, is president of MNA Consulting Inc., Atlanta, CUES' partner in ServiStar, consultation-based sales/service training and development. 

Read "What Makes a Top Sales/Service Performer?" also by Mike.

Hear Mike in person at CUES' School of Sales & Service in June.

NCUA: Tell Us Where You Stand

By Ron Jooss

 

Credit unions should let the NCUA and their trade associations know if they are in favor of their industry accessing TARP funds to stabilize the corporate credit union system or rely on internal funding to ease the burden, NCUA Executive Director Dave Marquis said during a Webcast hosted by the regulator yesterday.

 

When one participant suggested that credit unions stand together and absorb the loss to distinguish themselves within the financial industry during a turbulent time, Marquis responded:

 

“We need to understand, and the trades need to understand, what the divide is on, because we don’t fully understand that. To the extent that you can send in your pros and cons on if we want the taxpayers to pay for it over time or do we want the credit unions to step up and take the hit to show we are a different type entity than the rest of financial institutions. We don’t know how that divides in the credit union community and that’s probably something we need to get a better handle on. Send in your e-mails to us or send them in to your trade association so we can get a better feel for what the community has a preference for out there.”

 

NCUA Insurance Director John Kutchey said the NCUA does not favor one solution over the other. “Where the industry wants to go, as the regulator, we’re behind it. But you as an industry, you’ve got two ways of solving this. If you solve it internally, the con of that is the charge-up funds that you've got to deal with, and there’s going to be a hit to your bottom line and there’s going to be a hit to your net worth.

 

"The pros of that is the political capital that the industry could gain in relation to future taxation, in relation to maintaining an independent regulatory and insurance structure and having the influence over that system in future legislation as it relates to your institution. The flip-side of that is TARP funds or Treasury injection. The pro of that is being able to spread the cost over time or forgoing the cost altogether. The negative of it is credit unions become, as I understand it, much more susceptible to taxation.”

 

Another issue under consideration is if the system should take a one-time hit or spread the charges over four to five years years. Pursuing the latter option would require legislative and Treasury approval.

 

“There has not been a consensus on how to approach some of these things but one of the core questions that comes up is if the industry wants to take this loss in one year or do you want to stretch it over several years so that you’ll be taking a 12 to 15 point hit over four to five years to pay for this or would you rather deal with a 60 basis point approach in year one,” explained Kutchey.

 

He likened the first strategy to removing a Band-Aid gradually, and the second approach to ripping it off quickly.

 

“That’s something you’re going to decide as an industry and you’re going to need to work through the legislative process to decide what the majority of the industry wants,” Kutchey said. “I encourage you to talk to your trades and your organizations so your voice is heard about whatever direction you want to go.”

 

What is the likelihood that more capital will be required from natural-person credit unions?

 

The short answer is that the NCUA doesn’t now, but “the market is not in our favor right now,” said NCUA Loss/Risk Analysis Officer Steve Farrar.

 

NCUA representatives said the regulator considered alternatives such as liquidating or purchasing the undervalued corporate credit union investments.

 

In regard to purchasing the undervalued assets, WHO? said, “The share insurance fund has “$7.5 billion in assets to draw from and the total investment portfolio of the corporate system is $80 billion, so there’s no way the insurance fund could fund a purchase of those investments. Secondly, the purchase of those assets does nothing to reduce the liability and exposure to natural-person credit unions because if the NCUSIF actually took those in they would have to bring them in at market value, so that market value basically becomes a realized loss and that downstream effect would be higher than the uninsured share guarantee and capital notes that we already used.”

 

The undervalued portfolios also created a problem for liquidating the problem institutions. Marquis said even if the undervalued assets were sold at 50 cents on the dollar, the NCUSIF would take a $30 million to $35 million dollar hit, which would downstream to natural-person credit unions.

 

"Think in terms of what does that does to you in terms of retraction to your lending ability,” Marquis said. “We don't want to economically create the effect of not making any loans in the community right now. If that retraction took place it really does some serious damage to your ability to make loans in the years to come.”

 

Kutchey added: “The approach we took we feel very strongly that it is the least-cost alternative to the credit union system. It was not an easy decision to make. This alternative gave us two things: the least cost to credit unions and the most flexibility for resolving this on a go-forward basis."

 

Ron Jooss is a CUES editor. 

Corporate Stabilization: The Longer View

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."

 

Thousands Dial in to Discuss Stabilization Plan

By Ron Jooss

3,000 people called in for CUNA's audio conference yesterday on NCUA's corporate stabilization plans. Here are some highlights:

CUNA President/CEO Dan Mica said CUNA's official position on the NCUA recent action was mixed. While the association agreed the regulator had to take action, CUNA is not convinced the proper mechanism has been prescribed.

"There are two parts with regard to our feelings about what's happened at NCUA. One, we have reviewed the information as to what NCUA has done and we feel they had no other course of action but to act. They had to do something, whether it was an injection of cash, whether it be conservatorship, they had to do something. Second, we do disagree at this point with the approach that they've taken and we are working as hard we can to find alternatives that are workable. NCUA has indicated to us as recently as today .... that any alternatives ... that are realistic responsible, and legal they will consider."

Owen Cole, director of the Office of Capital Markets and Planning at NCUA, said the proposed remedy by the NCUA was actually the least costly way to stabilize the credit union system. "By stabilizing the situation, even if we end up having to absorb the full $4.7 billion dollars in losses, that is significantly lower than the cost every CU would have borne, including the CUs that did not participate in the corporate system, through a premium expense based on the losses we would have realized if we had to liquidate these assets and subsequent assets of natural person credit unions that would have failed as a result at these fire-sale prices in this dysfunctional market," Cole said.

Bill Hampel, SVP/research/chief economist at CUNA noted that given the economic times credit unions already faced an uphill battle achieving profitability in 2009. "This is not the only bad thing happening to credit union financial statements this year," Hampel said. "Other bad things are going to. There are going to other negative pressures on credit unions this year."

Hampel did not mince word on the effect the NCUA proposal would have for natural personal credit unions--some 60 percent would finish in the red. "There is no sugar coating this. This would be horrible. I've been in this business 30 years. Never in my experience have over 60 percent of credit unions lost money in a year which is what would happen if these charges went through as they are."

Mary Dunn, CUNA SVP/deputy general counsel, outlined alternatives to be considered by the NCUA:

• injection of capital from natural person CUs through member capital accounts, paid-in capital accounts, subordinated notes and term deposits;
• greater use of the Central Liquidity Fund;
• natural person credit unions could purchase corporate CU assets (a group of natural person credit unions has expressed interest in this idea, according to Dunn); 
• expanding the System Investment Program;
• corporates could deposit capital to defray the deposit guarantee;
• explore extent to which NCUA can defer from GAAP rules for funding the premium and
• explore the Temporary Asset Relief Program.

As for pursuing TARP funds, Dunn said, "Even the critics of going to TARP are diminishing, as the need for assistance increases. So we are exploring all options and all opportunities to working with NCUA, Treasury and Congress."

Dunn said CUNA reps, including herself and Hampel, will be meeting with Vice President Joe Biden's economist, chief economist Jared Bernstein, next week and access to TARP funds is "tops on our list."

Regarding TARP funds, Mica said: In my conversation with Chairman Fryzel, they are now pursing aggressively TARP funds as backup funds for NCUSIF. Fryzel is requesting a meeting with Secretary of Treasury Geithner to discuss that this next week.

When asked if credit unions would concede lobbying power in legislation battles with bankers if they accepted TARP funds, Mica said: "Absolutely, we would love to see an internal solution, but I want to be realistic. Looking at the size and scope of the problem, it would be irresponsible not to have a back-up. We hope we never use it.  We don't want to use it. But it's a little like not having insurance."

Dunn said under the alternatives under consideration, natural-person credit unions would fund the first $1 billion if there were losses in the corporates. The next $5 billion would be sought from TARP. "Even though we are seeking funds from TARP, if would be in a much defined and circumscribed way," Dunn said.

NCUA Deputy Executive Director Larry Fazio was asked why the NCUA requires the 1.3 percent balance in the share insurance fund and why it can't be reduced. "The statute requires us to charge a premium when the equity ratio falls below 1.2 percent. We cannot charge a premium to increase the fund above 1.3 percent. That's the framework in which we currently operate.

"The board decided as part of its January action to replenish the fund all the way up to the 1.3 percent because of the continuing uncertainty regarding the economy and other potential losses in the corporate system as well as challenges being faced by natural person credit unions and potential further pending losses and also with the hope to provide a cushion that we would only have to charge the premium once."

Fazio was also asked, if the market turns around would the funds be returned to credit unions? "How we structured both the capital note and the guarantee program—the capital note has a $1 billion reserve implication for the fund, and the guarantee has a $3.7 billion guarantee implication for the fund—to the extent that we are repaid on all or any part of the $1 billion capital note given to U.S. Central and to the extent that we don't have to exercise on the guarantee for the uninsured deposits, that money would flow back to the share insurance fund and be returned to the credit unions."

Mica asked Fazio if $15 billion were to flow into the corporates, in term deposits for example, if that would mitigate "a great deal" the current problem. Fazio responded, "Yes, sir, that's correct.

Ron Jooss is a CUES editor.