By Christian Mullins
Last month, the NCUA issued a letter stating that corporate credit unions needed an infusion of capital to the tune of $4.7 billion dollars ($1 billion in realized losses and $3.7 billion in expected losses) and, to the discomfort of credit unions everywhere, they were told they would be footing the bill. (Note: A comprehensive look at the events leading to this program as well as discussion can be found at the EverythingCU blog.)
Credit Union National Association (CUNA) has analyzed the NCUA proposal and determined that the total cost on insured shares to natural person credit unions would be 0.8079%. It is currently the position of CUNA that the NCUA program funding come from another source.
CUNA has asked Congress for access to TARP (Troubled Asset Relief Program) funds for months, and they’re asking for it now. While it’s clear that some credit unions would benefit from TARP money, the overwhelming majority do not need a government bailout to continue operations. However, how would that change if America’s credit unions were asked to pay $4.7 billion?
The graphs below, created from data provided by CUNA, assume the following:
1. Using the most conservative estimates of the U.S. Code, a credit union will be considered:
- Well Capitalized if its Net Worth Ratio exceeds 7.00%.
- Adequately Capitalized if its Net Worth Ratio falls between 6.00-6.99%.
- Undercapitalized if its Net Worth Ratio falls between 5.00-5.99%.
- Significantly Undercapitalized if its Net Worth Ratio falls between 3.00-4.99%.
- Critically Undercapitalized if its Net Worth Ratio is less than 3.00%.
2. All CUNA estimates are fundamentally sound. When CUNA released the results of their study, year end CU data had not been made available. CUNA has projected year end CU statistics.
Using data from the 7,905 CU information database provided by CUNA, the number of CUs falling into each capitalization category is as follows:
| Net Worth Ratio | # of CUs | % of Total | # of CUs (Adj) | % of Total | ||
| Well Capitalized | 7.00% | 7764 | 98.22% | 7630 | 96.52% | |
| Adequately Capitalized | 6.00-6.99% | 65 | 0.82% | 161 | 2.04% | |
| Undercapitalized | 5.00-5.99% | 30 | 0.38% | 52 | 0.66% | |
| Significantly Undercapitalized | 3.00-4.99% | 23 | 0.29% | 35 | 0.44% | |
| Critically Undercapitalized | 3.00% < | 23 | 0.29% | 27 | 0.34% | |
| Total | 7905 | 100.00% | 7905 | 100.00% |
The NCUA Corporate Stabilization Program would increase the total number of Undercapitalized credit unions from 76 to 114. The 114 CUs represent 1.44% of CUs nationwide, with 0.78% falling into the Significantly or Critically Undercapitalized categories.
The graph below looks at the total assets of credit unions in each Net Worth Ratio category. All assets are listed in millions.
| Net Worth Ratio | Est CU Assets | % of Total | Adj CU Assets | % of Total | ||
| Well Capitalized | 7.00% | 791,023 | 98.67% | 747,675 | 93.26% | |
| Adeq. Capitalized | 6.00-6.99% | 8,784 | 1.10% | 45,105 | 5.63% | |
| Undercapitalized | 5.00-5.99% | 1,083 | 0.14% | 7,320 | 0.91% | |
| Sig. Undercapitalized | 3.00-4.99% | 690 | 0.09% | 1,466 | 0.18% | |
| Crit. Undercapitalized | 3.00% < | 112 | 0.01% | 125 | 0.02% | |
| Total | 801,692 | 100.00% | 801,691 | 100.00% |
Credit Unions with assets totaling almost $37 billion would be downgraded from Well Capitalized to Adequately Capitalized, however, even with the implementation of the NCUA program, only 0.20% of credit union assets would be Significantly or Critically Undercapitalized.
This is only a first look at the data and should be treated as such. While thousands of credit unions can afford the NCUA program at this stage without a fundamental, long term impact to their operations, some credit unions cannot. The other preferred option, asking for (and receiving) federal assistance, carries both short and long term conditions and consequences that are suspected but as yet undetermined. Whether it would mean an eventual revocation of a CUs non-profit status (leading to additional tax liability and less favorable rates for members) is unclear, though the banking industry would be able to make a stronger case for such an outcome than ever before.
Thanks for this analysis and insight! Very well-reasoned as always!
Thank you for all the effort you put into this post. I think this highlights that, while NCUA’s Corporate Stabilization Program will significantly impact all credit unions in the short run, the vast majority of credit unions are financially positioned to be able to weather the storm.
Finally… Someone willing and able to get started with a real analysis of the situation. Thank you.
Christian, thanks for doing the math. From your analysis, it looks like the TARP hand-out-back-up plan is unnecessary.
Thank you everyone for your comments. It’s still a fluid situation and even the NCUA stated today that their solution was based on well reasoned estimations.
But these are the numbers given their formula, and it shows that almost all of the CUs can pay for it. Fair? No. Asking the largest CUs to make payments of 8 or even 9 figures seems ludicrous, but by percentage it’s hurts no less than the CU that’s asked to pay $15,000.
As Matt and Tim pointed out, TARP doesn’t need to be considered at this time, but with the NCUA and CUNA openly asking for it, TARP won’t go away. Not yet anyway.
Can someone please explain why a CU that is using Wescorp as its correspondent would not be reporting its portion of NCUA Stabilization funds on it’s income statement? Is there an exemption for some reason? Where is a concise restatement of the rules surrounding this action?
Techno…
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