There’s a new development taking place within credit unions that you may be hearing about very soon, particularly if you read your credit union’s financials. Actually, as I understand it, banks are going through the same thing, but I don’t know their specific details. I do know the credit unions’, though.

The Scoop…

You may have already heard that the NCUA has asked credit unions to increase the amount of money they contribute to the share insurance fund…basically, this is the insurance that protects your money in the event a credit union goes under. The increase will be based on a percentage of the credit union’s total insurable funds, that is, what’s qualified to be covered by this fund. Just as a ballpark idea, my credit union will be forking over $3.5 million.

Currently, there is legislation on Capital Hill that may grant a reprieve to credit unions and allow them to pay this over seven years, but nothing has been decided as Congress is still sitting on it. I say reprieve because this large chunk of money that we’re going to be required to give is going to hurt some credit unions’ bottom lines.

What this means to the credit union…

Realistically this depends on the credit union in question. If the credit union was in a good equitable position beforehand, it’s business as usual. No one likes to hand over that kind of money, but it’s not going to cause the business to go under.

If the credit union in question was not in a strong equitable position, they may find themselves having to make cuts. This usually comes in the form of closing branches, laying off workers, that sort of thing. Credit unions across the nation are facing this decision on what to do as they examine their balance sheets and the amount of money they have to fork over. The good news is that credit unions are about people helping people, so they will do everything in their power to make layoffs and branch closures a last resort.

As this is an expected expense, credit unions are supposed to be reporting this on their first quarter financials. This may change, depending on if the legislation is passed or not; however, for now, this is the expectation. This particular expense will be very clearly marked and explained on the financial statement, but in most cases, it will show as a loss. In our case, we’re anticipating A LOT of member questions and concerns about a $3.5 million loss, and they should be concerned to see any loss as it‘s their money. Under normal circumstances, I’d be downright pissed! But, the money isn’t actually a loss in the sense that we were negligent. This is a requirement by the federal regulators.
What this means to you…

I don’t have any figures on credit unions across the nation, so I’m only guessing here, but I think about 85% of the credit unions impacted by this change will continue on with business as usual. You may not even notice anything, save the financial statement reporting the loss.  As I said, if the credit union is well capitalized, then there’s no problem. They may not be thrilled at the prospect of handing it over, but it’s not going to cause them any undue stress.

There will be some credit unions – mostly the smaller ones – that will be adversely affected by this change. Budget cuts and sales will be important in this environment to these credit unions. Rather than spending strategically, they’re simply wanting to make sure they survive the immediate situation. While I certainly understand that, they only limit their growth potential with narrow-minded thinking like that.

But, budget cuts are on the agenda for the board at these credit unions. The problem is, there are a certain amount of fixed expenses that you can’t really change. So, those won’t be a way with which they make cuts. As I mentioned earlier, one of the quickest ways to cut a budget is to cut staff. Payroll is one of the biggest overhead expenses in any company. This affects the members significantly because it decreases the number of people available to help them, it decreases the efficiency of getting things done, and it fosters low morale amongst the remaining workers which is then transferred to the members. It’s not a good situation all the way around.

Other ways this may affect you is your credit union may be more pushy sales-wise. Ultimately, they probably won’t resort to product pushing, but where before they were passive aggressive about getting you to take a product or service, now they might be simply aggressive. I’m seeing this in my own company. We NEVER offer something a member doesn’t need, but we do have sales goals. The company is cracking down on us to meet these goals, too; including formal write-ups for not meeting them. But the reality is that sales keep the credit union viable, which keeps me employed, which means members have a secure place to do business. I like that.

You may see a further decrease in savings rates. You may already know this, but financial institutions as a whole work on a spread for some of their profit. Typically we want about a 2-3% spread, which means the income we earn from loans we can’t afford to give all back to the member in the form of dividends (i.e. if your loan rate is 4.99% then your savings rate needs to be about 1% or less to give us a good spread). Rates suck right now anyway, but in order to add a little more to the bottom line, some credit unions may resort to increasing their spread by lowering your savings rate.

You may never see any of these things, and if that’s the case, great. I simply wanted to prepare you for what’s coming so that you are at least aware.

Highlights

Now that you understand what’s going on, let me recap to highlight the important things.

1. All federally insured credit unions have been asked (more like told) to increase the amount they contribute to the NCUA fund.
2. This amount will depend on the credit union’s insurable share accounts as it’s a percentage of that number.
3. Since this is an expected expense, the total amount sent to the NCUA will be reported as a loss on the first quarter’s financial statement.
4. This DOES NOT mean that your credit union will fall under. Some are taking a more aggressive stance on cutbacks than others, but all in all, the point is to strengthen the fund, not drive credit unions to insolvency.

As I mentioned, I don’t know how each credit union is performing, so I don’t know how this will impact the credit union you bank with. If you have questions or concerns, ask your specific credit union as they will have information to give you.

What questions do you have about this change beyond how it will affect your specific credit union? Have you noticed any changes in your credit union recently?

Related posts:

1. Banks vs. Credit Unions: Which is Better?
2. Shopping for a New Credit Card? Consider Credit Unions
3. Why Banks and Credit Unions Charge Fees
4. FDIC and NCUA Revisited
5. ‘Interesting’ News about the FDIC