NCUSIF Facing Litany of Challenges
The financial difficulties of many natural person credit unions-including some of the larger ones-have increased pressure on the NCUSIF and made assessing additional premiums on credit unions inevitable.
While the fund had a $5.3 billion reserve balance as of the end of May, the most recent data, its net income for the year has been $137.7 million, compared with the projected amount of $205.4 million.
Adding to the concern is that CAMEL 4 or 5 credit unions represent 3.99% of insured shares, compared with 1.31% a year ago. There have been 243 troubled credit unions this year, compared to 301 at year-end 2008.
NCUA Office of Examination and Insurance Director Melinda Love noted the agency is sometimes able to help those credit unions get back on stronger footing, but many will eventually cost the insurance fund either through liquidation or an assisted merger.
She declined to predict how much of an additional premium will be levied on credit unions to ensure the fund's long-term health. The agency has estimated a premium of 0.15% of insured shares this year to pay for the NCUA's rescue of corporate credit unions and the problems of some large credit unions. Additionally, federally insured credit unions have to start actually paying in 1% of the full, higher $250,000 deposit insurance coverage.
The agency has estimated that the rescue of the corporate credit unions will cost the NCUSIF $5.9 billion, and because of Congress' recent creation of the Temporary Corporate Credit Union Stabilization Fund, credit unions have eight years to replenish the fund. Congress also gave the NCUA the power to borrow $6 billion from the Treasury Department to pay for the establishment of the fund, which will be repaid by credit unions.
CUNA Chief Economist Bill Hampel said the NCUSIF's problems are part of the "collateral damage" facing the movement, even though credit unions mostly avoided the practices that triggered the housing and banking crises, which are thought to be the primary causes of the recession.
In recent years, NCUSIF losses have averaged less than $100 million annually, but they could have a few years of losses between $100 million and $300 million. He said a "really bad case" would be losses of more than $600 million, but he doesn't expect that to happen.
NAFCU Chief Economist Tun Wai said before the economy turns around, there will be "quite a few more institutions merged or liquidated;" he declined to make predictions.
He said additional premiums to make up for the NCUSIF losses will be needed, which will place an additional financial burden on credit unions already dealing with compressed margins and surviving largely on noninterest income.
The recession has caused credit unions to adjust their expectations regarding NCUSIF rebates. In 2007, the fund returned $51 million to credit unions.
So far in 2009, the insurance loss expense for natural person credit unions has been $178.4 million, compared with the $100 million that the agency projected and budgeted for. The expense for corporate credit unions has been $4.9 billion.
Through May, six credit unions had failed, compared with 18 for all of 2008 and 12 for 2007.
If those trends continue, the agency's estimate of 0.15% premium could change, depending upon the health of the NCUSIF in September and decisions the agency will make about long-term plans for U.S. Central and WesCorp. In March, the agency placed them into conservatorship.
Credit unions will see temporary relief because liability for the corporate rescue will shift from the insurance fund to the stabilization fund. Credit unions' income will increase 0.69% because they will be recovering expenses they had to impair earlier this year. That money will be deposited into the NCUSIF.
Love observed the problems facing natural person credit unions are the result of the recession and of the growth patterns over the past 10 years. She added that the agency has revamped the examination process in response.
"You can't have the kind of economic issues we've had without an increase in problem credit unions. And in the last 10 to 12 years, there has been an increase in larger credit unions-through natural growth and mergers-so that's where more of your problems will be concentrated," she said.
Love said the agency has responded to the recession by revamping its examination process, including increasing the frequency of examinations and having a more risk-based focus. Examiners now must review liquidity planning and mortgage portfolios, which previously were optional.