Kansas City's Lenexa-based credit union’s woes will cost the entire industry

This credit union's behavior is really astonishing as most credit unions are very cautious and in good financial conditions. I belong to two credit unions.---BBB

Posted on Sun, Mar. 15, 2009
Lenexa-based credit union’s woes will cost the entire industry
By MARK DAVIS
The Kansas City Star

Kansas City is at the epicenter of one shock wave in the financial crisis " credit unions.

The industry already faces a tough year because of the deepening recession. Now, credit unions nationwide face an extra burden to help shore up Lenexa-based U.S. Central Credit Union.

Dramatic declines in the value of mortgage-backed securities bought by U.S. Central have left the industry behemoth owing others more than its own assets are worth.

U.S. Central’s deficit, which exceeds $5 billion, helped trigger a $4.7 billion assessment against the country’s 8,400 credit unions, from the billion-dollar giants to the throng of one- and two-employee shops.

Collectively, the added financial load dwarfs the entire industry’s profit last year. Only one in six Kansas City-area credit unions, which serve nearly 500,000 members, earned enough last year to cover its coming bill.

Still, each credit union, profitable or not, has to pay, even if it means dipping into its own capital to do so.

“Credit unions are cooperatives. We try to take care of our own,” said Robert Givens, the president and CEO of Mazuma Credit Union in Kansas City.

Generally speaking, the industry hasn’t broken the news to credit union members, and at least some managers fear their members won’t understand that the losses aren’t their credit union’s fault.

Managers also say they are forced to cut costs to help cover the assessment, but they have tried to avoid changes that would reduce services to credit union members.

That does not threaten customers’ accounts, which remain insured up to $250,000.

Not all credit unions accept the assessment willingly. Alabama’s credit union association told regulators that the cost “creates a question of survival” for some credit unions.

Indeed, there is no certainty that U.S. Central’s problems are over. Credit unions could be asked to pay more.

Shared sacrifice

For its part, U.S. Central says it’s sorry.

In an open letter last month, CEO Francis Lee apologized for the “significant sacrifice credit unions have been asked to make to support the corporate network.”

U.S. Central heads a sprawling nationwide network of 27 corporate credit unions that provide a variety of services for regular credit unions.

With $33.4 billion in assets and 230 area employees, U.S. Central essentially serves as a credit union for those corporate credit unions.

U.S. Central has cut costs in the wake of its financial calamity. Employees were told last week that job cuts were coming, though managers couldn’t say how many or when.

U.S. Central’s problem stems from the mortgage-based securities it owns. They once were highly rated and, management insists, continue to pay on schedule. But the financial crisis essentially destroyed the market for these securities, leaving little value for U.S. Central to count.

Its deficit prompted the National Credit Union Administration, the industry’s version of the Federal Deposit Insurance Corp., to inject $1 billion into U.S. Central out of the industry’s insurance fund.

The NCUA also guaranteed $80 billion that regular credit unions have on deposit among the corporate network, helping to keep them stable.

These steps cut the industry’s insurance fund in half. Customers’ accounts still remain insured up to $250,000.

To make the insurance fund whole again, all credit unions are being asked to replace the lost dollars and pay an extra 30 percent to bulk up the insurance fund.

The NCUA also has opened debate on whether to restructure, or possibly even dismantle, the corporate credit union network.

“I wouldn’t speculate necessarily on what the results will be,” said Austin Braithwait, a senior vice president at U.S. Central. “I think everything’s on the table.”

KC pays

At $1.6 billion, CommunityAmerica Credit Union is easily the area’s largest traditional credit union. And, despite the recession, CEO Dennis Pierce said business is looking up.

Car loans have grown, partly because automakers’ own lending units have pulled back. Mortgage demand is strong, pushed by refinancing activity and some home purchases.

“We have reasonably optimistic expectations for 2009,” Pierce said.

That is, the year looked profitable until the credit union’s $8 million assessment overshadowed its expected $4.7 million profit this year.

“We would have a net loss” with the assessment, he said.

So would the entire credit union industry, based on last year’s profits. The NCUA estimates that two out of three credit unions will report a loss this year after paying their assessments.

“2009 will be a tough year for them without this,” said John Smith, the chief regulator of Kansas’ state credit unions.

The entire Kansas credit union industry earned roughly as much money last year as it is expected to pay for the corporate credit union rescue this year, but only one in three credit unions in the state could say that about its own profit.

In Missouri, about one in five earned as much last year as it must pay this year.

For the 61 credit unions based in the Kansas City area, expected assessments roughly equal what they’ve earned in the last three years combined.

But local institutions have signed on to the plan.

“It’s working the way it was set up,” said John Beverlin, the president and CEO of the $218 million Credit Union of Johnson County.

To cushion the impact of assessments, some area credit unions have frozen managers’ pay, stopped hiring or renegotiated contracts with vendors.

“We’re looking at when to turn lights off, when to adjust thermostats. The whole nine yards,” Beverlin said.

Tapping taxpayers

Several executives of area credit unions said they don’t want the industry to seek federal help.

“I’m opposed to taxpayer money. We should be able to fund this for ourselves,” said Rogers Zirbel, the president and CEO of Metropolitan Credit Union in Kansas City.

Many in the industry draw a distinction between credit unions’ problems and the plight of banks, particularly the large banks such as Citigroup that have gotten federal aid more than once.

Credit unions generally avoided direct participation in subprime mortgages, they say. The industry’s problems stem from the financial crisis " they didn’t cause it.

Others, however, aren’t so willing to share U.S. Central’s problems or cut Uncle Sam out of the picture.

A Texas credit union president cited a bleak forecast for 2009 and wrote regulators that the industrywide assessment “may create more problems than it will solve.”

The letter sent by a Spokane, Wash.-based credit union’s president said the capital infusion given to U.S. Central amounted to “charity.” It also asked: “Who will show small credit unions any charity when we start to falter and fail?”

Larry Fazio, the deputy executive director of the NCUA, said a review showed only a handful of already troubled credit unions won’t be able to absorb the assessment.

“We’re talking five or six credit unions, and they were all on their way out anyway,” Fazio said.

State and federal regulators also have told examiners to make a distinction between losses from the assessment and losses from credit unions’ own operations.

And the U.S. House of Representatives has passed a bill that would allow credit unions to pay the assessment over five years, instead of this year.

Bay Federal Credit Union CEO Carrie L. Birkhofer admits she was upset when, in a letter, she implored NCUA to find another solution.

She has since accepted the assessment as a reality, but she would like to see federal funding through the Treasury’s bank capital program available as a backup.

Margaret Rhodes, the president of Tavis County Credit Union in Austin, Texas, knows she can’t avoid the assessment. But she still argues that her credit union shouldn’t have to pay it.

Besides, Rhodes doesn’t expect this year’s payment to clear the decks.

“This assessment … will not be the last assessment,” Rhodes said. “It’s causing problems for all of us who run a good credit union.”
--------------------------------------------------------------------------------

U.S. CENTRAL CREDIT UNION
Headquarters: Lenexa
Employees: 230
Founded: 1974
Assets: $33.4 billion
Debt rating: AA from Moody’s Investors Service Inc.