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Insurance fund assessments, economic uncertainty hinder growth at credit unions

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San Diego credit unions -- along with a good portion of their peers -- are staying the course, battling and surviving continued weakness in the economy and the broader credit union industry.

“The poor economic environment is sort of embedded in everything,” said industry consultant Marvin Umholtz. “Even if (loans) were made to people with good credit histories, the economic environment is making them go bad more frequently.”

The credit union industry is also still recovering from corporate credit union losses and trying to bolster a beleaguered share insurance fund. (All credit union deposits are insured up to $250,000, a temporarily increased limit that was made permanent in the financial reform bill.)

In June, credit unions paid an assessment of 13.4 basis points -- 0.134 percent -- of insured shares to help pay for losses sustained when regulators conserved Western Corporate Credit Union and U.S. Central, the two largest of those that offer credit union services for retail credit unions.

“That’s $1.1 billion that will go to expense instead of earnings,” Umholtz said.

Another assessment to strengthen the share insurance fund is expected in the fall. Regulators have told executives to budget between 10 to 40 basis points for assessments this year. If corporate credit union losses are more than expected or troubles at retail credit unions increase, a total assessment of 60 basis points could be a feasible worst-case scenario, Umholtz said.

Executives agree that the assessments and the surrounding uncertainty can hinder plans for growth. Some credit unions would have booked a profit in the 2009 fourth quarter if not for the extra cost. Second-quarter earnings for the industry may look weaker as well.

Still, most say that their balance sheets are prepared for the hit.

“It won’t show as a blip,” said North Island Financial CEO John Tippets, who said the credit union has budgeted for 30 basis points total.

San Diego Metropolitan interim CEO Stan Abrams said the June assessment came a few months earlier than expected, but said his credit union is also prepared for the year. By some measures, credit unions headquartered in San Diego County seem to be doing OK: In aggregate, regional credit unions booked a 1 percent gain in net worth and 1.5 percent increase in deposits in the first quarter, which represents a respective $11.5 million and $171 million boost, according to the California Credit Union League.

In comparison, Los Angeles credit unions also added $11.5 million to aggregate net worth, roughly 0.35 percent, and grew deposits by $374 million, or 1.26 percent. Orange County credit unions increased their net worth by 0.36 percent, or $4.9 million, and deposits by 2.59 percent, or $315.4 million.

Granted, some credit unions are doing worse than others. According to Florida-based ratings firm BauerFinancial, four of the county’s 24 credit unions are “troubled” or “problematic,” garnering between zero and two stars, and six are “adequate,” receiving three stars.

However, the majority are considered four- or five-star institutions, BauerFinancial’s highest rating of “excellent” or “superior.”

“Generally, credit unions are in good shape, and they’re doing a great job for their members,” said California Credit Union League interim president and CEO David Chatfield, who attributed the higher credit union deposits to a “flight to quality” as well as consumers’ saving habits.

Indeed, on average, credit unions in San Diego County are well capitalized and saw aggregate net income rise in the first quarter -- the most recent data available -- from the quarter before. Total assets declined slightly as credit unions moved to shrink assets to either lower costs or maintain higher net worth ratios.

Unlike their bank counterparts, credit unions are not allowed to raise capital and thus cannot use a capital raise to improve their ratios.

“A lot of credit unions (around the country) are discouraging deposits, but there’s a flight to quality,” Umholtz said. “You’re damned if you do and damned if you don’t.”

Two San Diego credit unions received BauerFinancial’s lowest rating of zero stars in the first quarter: North Island Financial and United Services of America Federal Credit Union, or USA Fed.

North Island, which was on BauerFinancial’s zero-star list for all of 2009, posted a $52.4 million loss at the end of last year as delinquencies and losses on real estate loans mounted.

The negative trends appear to be turning around for the credit union, however, especially after a number of cost-cutting measures implemented last year.

The 70-year-old credit union posted a net profit of $11.2 million in the first quarter, improved its net worth ratio enough to be considered simply “undercapitalized” rather than “significantly undercapitalized,” and recorded a positive return on average assets after negative figures all last year.

On the other hand, delinquency and charge-off ratios have remained virtually unchanged from the quarter before, coming in at 3.6 percent and 3.0 percent of average loans, respectively.

“We are continuing to make progress,” said CEO Tippets, who added that “The Island” will soon be receiving additional income from a new office tenant. “Two steps forward, one step back is not a good description. It is gradual.”

Tippets said North Island’s net profit was because the credit union had over-reserved roughly $7 million for bad debts.

USA Fed’s trends are less positive on paper. The primarily military-oriented credit union, which joined the zero-star list last quarter and is also facing rising delinquencies and charge-offs, recorded a $4.9 million net loss in the first quarter due to an increase in provision for loan losses.

USA Fed’s return on average assets dipped further into the red in the first quarter, falling to negative 3 percent, while delinquency and net charge-off ratios rose to 6 percent and 3.1 percent, respectively. The credit union is “significantly undercapitalized,” with a net worth ratio under 4 percent.

USA Fed CEO Mary Cunningham did not return calls for comment.

Despite the macroeconomic headwinds battering their members, some executives do see signs of hope. In San Diego in particular, the small rebound in the housing market has improved the quality of property in real estate portfolios.

“Clearly there are still challenges for our industry, and those will continue for awhile,” said San Diego Metropolitan CEO Abrams. “Our goal is to provide exceptional service to our members. We’re trying to just pay very close attention to what we can control and not worry about what we can’t control.”

Most CEOs name an uptick in employment as the No. 1 change that would help their institutions, members and industry. Many credit unions also favor doubling the limit on member business lending. Currently, credit unions’ business lending can be only 12.25 percent of total assets.

An amendment to double the cap to 27.5 percent is currently before Congress. According to the California Credit Union League, there are currently $1.2 billion in outstanding member business loans in San Diego County. Increasing the limit to 27.5 percent could potentially release as much as $405 million in business loans into the market and thus increase employment by 4,400, the League said.

Credit Union stars

Five stars (excellent): Chula Vista City Employees F.C.U., Paradise Valley Federal Credit Union

Four stars (superior): Cabrillo Credit Union, Grossmont Schools Federal Credit Union, Inland Federal Credit Union, L M C C Employees Federal Credit Union, Miramar Federal Credit Union, Mission Federal Credit Union, North County Credit Union, San Diego County Credit Union, San Diego Firefighters Federal Credit Union, Sony San Diego Employees Federal Credit Union

Three stars (adequate): California Coast Credit Union, El Cajon Federal Credit Union, Escondido Federal Credit Union, Ketema Federal Credit Union, Point Loma Credit Union, S.D. Medical Federal Credit Union

Two stars (problematic): University & State Employees Credit Union

One star (troubled): San Diego Metropolitan Credit Union

Zero stars: North Island Financial Credit Union, USA Federal Credit Union

*Unrated (either has less than $1.5 million in assets or does not have federal share insurance via NCUA): Faith Based Federal Credit Union, San Diego JACL Federal Credit Union

Source: BauerFinancial Inc.

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