CFO Focus on Line: Pay Now or Pay Later?

How Congress answers this question about corporate stabilization will critically impact many CUs.

 

By Dick Gamble

 

April 9, 2009

 

Credit Union Management's Web-only CFO Focus column runs the second Thursday of every month. This is also bonus coverage from "Tainted by Uncertainty" from the May 2009 issue of Credit Union Management.

 

 

Breaking News at Press Time As people continue to think through the implications of the corporate stabilization and how to account for it, new courses of action present themselves as the best. Such was the case this week when Bryan Mogensen, CPA, and his colleagues at Clifton Gunderson LLP, on Tuesday concluded four days of discussion about the American Institute of Certified Professional Accountant's statement of position 01-6. Because SOP 01-6 stipulates looking at National Credit Union Share Insurance Fund deposits more as a refundable deposit than as an investment, Mogensen asked to revise his quotes in this story to the following:   "Based on additional research and communications we are  now recommending that  our credit unions book the non-refundable portion of their NCUSIF deposit (69 percent of the deposit) and the estimated premium assessment (30 basis point premium) in the first quarter of 2009," says Mogensen, a partner at Clifton Gunderson LLP who specializes in audit work for CUs. "This is based on further analysis of SOP 01-6 which states that 'To the extent NCUSIF deposits are not refundable, they should be charged to expense in the period in which the deposits are made or the assets become impaired.' The treatment as a refundable deposit would also allow restitution of the deposit if funded through Congressional actions or by the NCUA Board. " CUs that already took the impairment in their 2008 financial statements can restate those financials until the final audited report has been issued, he explains. "It's better to plan on taking it in the first quarter of 2009 and wait to see what Congress does then adjust as conditions or events dictate changes," he suggests.   The liability from the seizures of U.S. Central and Wescorp won't go away, Mogensen says, but NCUA has stated an intention to hold the tainted securities rather than sell them at today's devalued prices, so the ultimate size of the liability won't be known for quite a while. "We acknowledge that recognition of the non-refundable portion of the deposit and the premium won't help credit unions in the short run to conserve capital and minimize current losses, but it is the proper accounting as these liabilities are probable and estimable. In the long run, we just don't know whether it will turn out to be better or worse than current estimates."

 

For a while, it seemed like there was an impairment in the credit union share insurance fund from the failures of US Central and Wescorp—first 51 percent of the 1-percent-of-insured-deposits contribution CUs carried as an asset, then revised to 69 percent—that had to be recognized in some accounting period, maybe 2008, maybe 2009. That was a pretty squishy mandate, but eventually accounting direction was issued and choices were made.

 

Now pending legislation means that maybe there is an impairment whose size will become clear eventually, and CUs are being given new advice not to recognize an impairment at all for the time being.

 

"We're recommending that credit unions not book any impairment at this time," says Bryan Mogensen, CPA, a partner at Clifton Gunderson LLP who specializes in audit work for CUs. "If you take the impairment and the law passes, you can never recover that impairment." CUs that already took the impairment in their 2008 financial statements can restate those financials until the final audited report has been issued, he explains. It's better to plan on taking it in 2009 and wait to see what Congress does before taking any indelible action, he suggests.

 

"The whole subject of taking an impairment is now up in the air," says Paul Meissner, CCUE, SVP/chief financial officer of $300 million Credit Union of America, Wichita, Kan. "Our auditors are now telling us that taking the impairment (for 2008) would not be GAAP compliant. The two conditions under GAAP for taking an impairment are that it is reasonably certain and the amount can be determined with reasonable certainty. For 2008 neither of those conditions seems present. Before, we were worrying about the event date for the impairment. Now we aren't sure there even is an impairment under the accounting rules because of NCUA's proposal to transfer the impact of the corporate assistance to a new and separate fund, which credit unions would be responsible for repaying through future premium assessments."

 

"We're being asked, over some time period, to absorb the effects of expanded insurance coverage for deposits at corporate credit unions, which is outside previous expectations for insurance coverage," notes Meissner, a CUES member. That CU had been planning to take the impairment in 2008 and treat the premium assessment as a 2009 event, he reports, but now is likely to hold off, following the new advice.

 

The liability from the seizures of U.S. Central and Wescorp won't go away, Mogensen says, but NCUA has stated an intention to hold the tainted securities rather than sell them at today's devalued prices, so the ultimate size of the liability won't be known for quite a while. "Delaying the recognition helps credit unions in the short run to conserve capital and minimize current losses, but it will all have to be paid in the long run. We just don't know whether it will turn out to be better or worse than current estimates."

 

What happens in Congress is more important to some CUs than others. Taking the setbacks all at once would not be traumatic for $70 million Healthcare Employees Federal Credit Union in Princeton, N.J. reports CUES member John Dawidowski, CEO. Even without spreading the losses over multiple years, capital would slip from just under 11 percent to just under 10.5 percent, leaving this CU well positioned to keep growing its balance sheet.

 

"Our members want to know their deposits are federally insured and that service, rates, fees, etc., would not change as a result of these events, and they won't," he promises. Healthcare EFCU will track its performance through 2009 with financial reports that show normal operating activity above the line and track the extraordinary events below the line. "We want to keep our focus on operating our business, not on external events," he concludes.

 

Healthcare EFCU already restated 2008 income twice—once for a 51 percent impairment and then for the additional 18 percent impairment. Now it will begin to accrue the premium assessment in 2009 to bring the insurance fund back to the statutory level.

 

However, absent mitigating legislation, the failure of the two large corporates "would add $10 million more to our projected cost, bringing it up to $28.6 million," reports Kirk Kordeleski, CCE, CEO of $3.3 billion Bethpage Federal Credit Union in Bethpage, N.Y. Potential losses could knock down capital to just below 7 percent, he says. The result: "We would need more capital, which would require more net income, which would require expense cuts. We would have to slow our growth or even reduce our deposits to stay above 7 percent capital. If it got worse, we'd have to cut expenses even more deeply." (Get more details on this in NCUA's prompt corrective action guidelines.)

 

But he's hopeful that won't happen. He'd prefer to spread some of the cost over seven years if legislation proposed by NCUA and favored by many Congressmen is passed. "I've talked with some Congressmen, and it looks now like that proposal has legs," the CUES member says.

 

This is contingency planning at its most necessary. "We were having a great year until January 29," observes CUES member Chris Anuswith, president/CEO of $37 million Guardian Federal Credit Union, Portsmouth, Va. Now he has a plan in case the impairment and anticipated assessment to replenish the insurance fund happen this year. "We'll postpone indefinitely any projects or discretionary spending on facilities that we had planned," he says. "We're also taking an aggressive look at our pricing strategy for deposits, loans and fees."

 

The impairment and assessment could take this CU's capital ratio from over 8 percent to 7.5 percent, Anuswith reports. Without mitigating legislation, the insurance assessment could be "a huge hit to take at one time," he points out. "In the worst case, that could decrease our net worth by $300,000."

 

Anuswith is far from sure that the worst case will happen. "The insurance fund is impaired, but just how badly impaired is not known. It could be better or worse than we think. We could get an insurance refund," he says.

 

One CUES member's approach is to stay calm in the midst of a storm and make decisions deliberately in the hope that she won't have to reverse them, assuming there is time to wait. Sometimes that works. Bourns EFCU, based on apparently clear information and advice, decided to book the impairment in the first quarter of 2009, according to Elizabeth Lipke, CEO of $49 million Bourns Employees Federal Credit Union, Riverside, Calif..

 

"We sought counsel from our auditor and were advised on when to book the impairment," she notes. "We took their advice, but now that decision may have been overtaken by new developments. This absolutely puts us in a bind. The auditors will be in our shop soon, and we aren't going to close the April books until we can see how to move forward."

 

Dick Gamble is a free-lance writer based in Colorado.

 

 

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