Credit unions getting slammed by federal charge

It isn't easy running a credit union - or any financial institution - in these times.

Loan demand remains stagnant. The yields available from short-term investments keep shrinking, and a faltering economy threatens the quality of existing loans.

Now credit union leaders have one more issue to deal with: The federal agency that oversees the deposit-insurance fund for credit unions wants almost $2 billion from the nation's credit unions by the end of the month.

Two weeks ago, the board of the National Credit Union Administration approved a special assessment based on the amount of each credit union's insured deposits.

For Northern Star Credit Union in Portsmouth, the assessment will come to $250,000, said Roger Early, its president and CEO.

"It's one more impediment" to profitability, he said.

That's because earnings at Northern Star and many other credit unions already are under pressure from weak loan demand.

Two-thirds of the 36 credit unions based in South Hampton Roads reported a loss for 2010.

While conditions at some credit unions improved earlier this year, 14 of the 36 - almost 40 percent - lost money during the first half of this year, according to their filings with the National Credit Union Administration.

Northern Star reported a loss of $990,753 for 2010, due partly to increased provisions for loan losses and special assessments by the credit union administration. For the six months through June, it earned $172,883.

The National Credit Union Administration's assessments are part of its effort to clean up billions of dollars in losses at five "corporate" credit unions, organizations that provide investment services, check clearing, wire transfers and other services to regular credit unions. The five suffered crippling losses three years ago from significant investments in mortgage-backed securities that soured.

Rather than allow these losses to threaten the solvency of regular credit unions, the National Credit Union Administration devised a plan to continue the corporate credit unions' services and cover their losses. The plan called for borrowing the needed funds from the U.S. Treasury and repaying them over several years with assessments from regular credit unions.

The credit union administration imposed special assessments of $1 billion in 2009 and $1.9 billion last year.

Credit unions are member-owned, member-governed organizations. While considered nonprofits, they rely on retained earnings to build a cushion against loan losses and provide capital for growth. In contrast to banks, credit unions can't call on investors for infusions of fresh capital.

Unsure how large an assessment for 2011 might be, Carl Ratcliff of ABNB Federal Credit Union and other credit union CEOs began preparing for one earlier this year.

Since January, Chesapeake-based ABNB had been setting aside $88,000 each month for a possible levy. Its assessment will amount to $780,000, and there are more to come, Ratliff said.

"We're looking at another three or four years of this," he said.

However, the amounts in coming years could be more modest. When it announced its latest assessments on credit unions, the National Credit Union Administration scaled back the range of its projected assessments to $1.9 billion to $6.2 billion from its earlier estimate of $5 billion to $7.2 billion.

These amounts could be reduced by whatever the agency can recover from settlements or litigation over the mortgage-backed securities that investment bankers sold to the corporate credit unions that the National Credit Union Administration seized.

Since June, the administration has filed lawsuits against J.P. Morgan/Chase, Royal Bank of Scotland and Goldman Sachs, contending that the banks violated state and federal securities laws when they sold the securities to the corporate credit unions. The three banks, the administration alleged, misrepresented the level of risk in the securities.

The National Credit Union Administration is seeking almost $2 billion from the three banks. It said it may file additional suits in its effort to recover the losses suffered by corporate credit unions.

Because of the pressure on credit unions' earnings, the National Credit Union Administration's latest assessment could mean the difference between a profit or a loss for some credit unions in 2011. A handful in South Hampton Roads reported having a profitable 2010 before accounting for their assessments.

Norfolk Municipal Employees Federal Credit Union, for example, earned $10,987 last year without the annual assessment of $26,314 and a separate $51,029 levy to bolster the credit unions' deposit-insurance fund. The two assessments left the Norfolk city employees' credit union with a $66,356 loss for 2010, according to its filings with the National Credit Union Administration.

Faced with the latest assessment, "all of us are looking at our expenses," said Northern Star's Early.

But cutting costs won't be easy because many are fixed, such as those for leases, he said.

At ABNB, Ratcliff said, cost-cutting will be difficult because "we don't have a lot of fat."

Reducing staff could yield some savings, but that runs counter to the credit union's emphasis on service to its members, he said.

What complicates the earnings situation are sluggish loan demand and depressed interest rates, said credit union CEOs in the region.

At the end of June, Northern Star's loans totaled $44.9 million, down almost 13 percent from one year earlier.

Much like banks, Northern Star and other credit unions rely on short-term, low-risk investments to generate income when they aren't able to put deposits to work in loans. However, the returns available from investments have been negligible, further hampering profits, Early said.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com