Following is an excerpt from the September issue of Callahan’s Credit Union Report.
“In the aftermath of Katrina, the plight of the more than 500,000 evacuees and the pictures of destruction and helplessness have prompted an outpouring of generosity by all, including general aid to the Red Cross and specific contributions for credit unions. The willingness to help and share resources is in the best American spirit. But that intent does not necessarily result in effective solutions. A belief that money and good will can resuscitate credit unions closed by the storm could compound a disaster with folly.
“Everyone wants to maintain confidence in the future of the financial and payments system. The FDIC has announced there will be no failures as a result of Katrina. The reality is likely to be a lot harsher, and the costs—especially for credit unions—could potentially result in the largest single insurance loss ever absorbed by the NCUSIF.
Estimating Possible Costs
“NCUA has listed on its website the credit unions they believe are impacted by Katrina. Sixty-nine credit unions with total mid-year assets of $284 million dollars were initially reported as not being operational or able to be contacted. This is drawn from a total of 139 credit unions with a total of $3.4 billion in assets which suffered hurricane-related losses.
“For these 69, the loan portfolios total $135 million. Total shares are $242 million and the investments $142 million. At mid-year these investments were earning approximately 1.32%; the operating expense and the loan loss provision collectively were 3.74 basis points for the first six months of 2005. If the loan income cannot be restored until all members have been contacted, say a process of four months, the credit unions will only have income from investments and some fees. Together these were just 2.00 basis points of average assets, which would mean that income less these expenses would result in an annual 1.74 basis point loss. That is, the credit unions will be eroding capital at the rate of almost 60 basis points every four months they operate with no loan income.
“What is the potential loss? With insured savings of $242 million and investments of $142 million, then assuming no loan recoveries, the shortfall in the event of a share payout or purchase and assumption on these 69 alone could be close to $100 million. Even if auto loans are insured, how long and what effort will be needed to collect the payments with members scattered around the country?
“Looking at the totals for all 139 credit unions that NCUA lists on their website and doing a similar calculation shows $2.9 billion in savings, and only $1.1 billion in investments. Depending on the recoverability from the $2.1 billion loan portfolio, the shortfall could be over $2.0 billion.
“These estimates are not to predict the future, but merely to show the potential magnitude of the difference between insured savings and recoverable assets. The final number, anywhere from a low of $100 million to over $2.0 billion, will not be known for months, if not longer. Credit unions have a lot at stake in terms of how the affected credit unions are helped to recovery.
Why the Recovery Plan Matters
“The potential losses are just one of the reasons that having a sound, proactive plan to assist credit unions is critical to the system’s well being. If NCUA and credit unions just react once the problem is known, it is much harder to build momentum for recovery, let alone keep losses low.
“Several initiatives need to be taken immediately. The first is to liquefy the balance sheets of the most severely impacted credit unions, that is, those with the greatest loan uncertainties. A subsidized CLF loan, say at 1% and guaranteed by the NCUSIF, should be extended for up to the book value of the credit union’s loan portfolio. By having liquidity, the credit union can instantly invest in overnight accounts and start earning a spread to generate necessary revenue. The credit unions will have liquidity to make new loans and to meet share withdrawals.
“The key is to act now, rather than wait, so that the credit unions have some form of income support other than their own efforts. Credit unions have no capital except through earnings. With no earnings, the credit unions will die. Liquidity will keep the credit unions with options.
“Second, all of New Orleans is an underserved area. NCUA, for federal charters, should grant a full parish FOM to any credit union that would seek to serve New Orleans residents, especially if the primary group no longer exists or cannot support a credit union. Let the credit unions have the option without a lot of red tape so they can respond as new companies begin the rebuilding process in the city….
“When great disasters occur, ineffective response can magnify losses. Credit unions were created on the foundation of self-help and cooperative strength. We should be drawing upon these principles to set in place the six-month to several-year workout that will be necessary to recreate the credit union system in New Orleans and other devastated areas.
“If we manage the Katrina challenge effectively, the credit unions system might then have created a model for any future catastrophe. Good, indeed, could come from nature’s harm.”
To read this article in its entirety and to read other thought-provoking articles about Katrina by credit union excutives affected by the Hurricane, click here to subscribe to The Callahan Report.