Gary Parker believes the NCUA Corporate Stabilization Fund assessments will help keep the credit union movement healthy and robust in the long term. But they aren’t doing his credit union’s net income any favors, especially in the wake of the Great Recession.
“The last several years have had a paralyzing effect on our country and its economy,” says Parker, president/ CEO of $12 million asset 1st University Credit Union in Waco, Texas. “In the past two years, our members have delayed purchasing automobiles and homes due to economic uncertainty.”
In response, the credit union has had to add fees, discontinue services, cut staff, reduce travel and training budgets, and stem growth to remain financially viable.
“We’re trying not to grow our assets, as it makes the assessment larger,” says Parker. “Growing without a place to deploy the deposits doesn’t seem logical.”
Still, “the long-term ramifications of the assessments should be positive for the future of our industry,” says Parker. “We should always strive to leave things better for the next generation of leaders and the stability of credit unions.”
Parker turns to his credit union colleagues for ideas and inspiration on how to weather the storm. “I use the resources of my league, CUNA, and other trade associations, but most important is communication with my peers,” he explains. “As we work though these challenging times, it’s important to have an open mind and keep your eyes open for opportunities.”
The last four years easily could qualify as a worstcase scenario for $2.4 billion asset Virginia Credit Union in Richmond due to the combination of the recession, corporate stabilization assessments, and other factors, says Jane Watkins, president/CEO.
She says everything hit at once—rising charge-offs, capital write-downs, and deposit insurance premiums. “And all of a sudden, loan demand fell off.”
The cost of the corporate assessments yielded no benefit to members and created an additional layer of expense to manage. As a result, Watkins estimates her credit union’s net worth reduction during the past four years to be as much as $16 million.
Fortunately, Virginia Credit Union had sufficient capital to absorb this hit and regain stable footing by implementing cost controls and stemming its growth.
“But we might have done those things anyway due to the recession,” she says. “Falling real estate values would require the same type of response.
“If you were operating with a net worth right at 7% [the minimum level to be considered wellcapitalized], you didn’t have a cushion for unusual events, and you had to slow growth or shrink in size to get back to required capital levels,” she continues. “It reinforced the importance of planning. We would have been able to pay higher returns on deposits if we didn’t have these expenses.”
Her credit union has since replenished its capital. “But for credit unions in areas more challenged by the real estate collapse, it might have led to mergers or slower growth for a longer period,” Watkins says.
“It’s a lesson learned for all of us,” she continues. “It makes us more aware of the industry’s interdependence. “You can manage in a safe and sound manner, but an issue in another state can affect you. It’s not enough to be healthy yourself; you have to keep an eye on what’s happening in the industry and prepare to deal with it.”
Is the worst behind us?
The impact of losses on corporate capital investments and the costs of Corporate Stabilization Fund and National Credit Union Share Insurance Fund assessments have had a significant impact on Allied Credit Union, Stockton, Calif.—a hit to net income of about 60 basis points [bp] per year, says Frank Michael, president/CEO of the $21 million asset credit union.
Small credit unions have been especially hard hit by net income woes. While the estimated average net income for all credit unions in 2012 will be around 90 bp of average assets, average net income for credit unions with less than $50 million in assets is only 25 bp, according to CUNA’s economics and statistics department (“Earnings back to normal range,” p. 14).
“For small credit unions in this particular economic environment—with a flat yield curve—it’s difficult to post a positive bottom line,” Michael says. “In our case, we’ve bounced around on both sides of breakeven for the past several years.”
At the same time, Allied’s assets have grown a healthy 8% per year. “Putting it all together, our capital ratio has declined by about 300 bp from year-end 2008,” says Michael. “Our saving grace is that we started from a 16.69% net worth ratio, which gave us plenty of room to absorb the costs.”
Allied is typical of many small shops, he believes. “We’ve worked hard to pare operating expenses—not just due to the assessments, but mostly to respond to the flat yield curve.”
The credit union has postponed investments in product development and service delivery. “We also haven’t used capital to develop new account relationships, which will have a longer-term impact,” Michael explains. “That’s because there’s a high frontend cost to member development, with returns far down the road.
“While our examiners appreciate the costs of the corporate meltdown,” he continues, “there are limits as to how quickly we can deplete capital, which means we can’t fund many of the investments we’d like to make.”
But Michael believes the effects of the corporate stabilization assessments haven’t been all bad. “The changes have forced all credit unions to focus on removing waste from their organizations, re-evaluate product offerings, and right-price their services. I think this is a healthy consequence. We’re seeing the results in the 2012 numbers for large credit unions.”
While small credit unions would like to achieve the same financial gains as their larger brethren, Michael notes, they’re hampered by higher fixed costs that are difficult to absorb with a smaller membership base.
“We’re just not able to drive the improvements our bigger brothers have found,” he says. “Ignore averages and stratify the data and you’ll see a greater disparity between large and small credit unions.”
Michael sees a continued widening of that disparity as larger credit unions use newfound efficiencies to compete effectively and smaller credit unions fight to survive. “Many will merge, and those that remain will find a niche within which to exist and flourish,” he says. “Looking long-term, we recognize Allied will serve a niche market.”
Michael believes the worst effects of the assessments have passed. “Examiners have adjusted down their expectations for return on assets, so we should feel comfortable adjusting our expectations. Personally, I’ve taken the assessments out of my planning and I’m returning to a focus on running my shop in the current environment and looking forward to a return to a more ‘normal’ marketplace.”