All Hands on Deck to Shore Up NCUSIF
Credit unions are bracing to dig even deeper into their pockets.
An increase in CAMEL 3, 4 and 5 credit unions and more credit union closings are causing strains on the NCUSIF.
The fund's equity ratio is 1.21% assuming all credit unions pay their full 1% deposit, and the NCUA said if current trends continue, it could drop below 1.20% by the end of the summer.
That is when the NCUA Board is scheduled to decide what the NCUSIF portion of credit unions' assessment will be for this year. The agency has already levied a 13.4 basis point assessment to pay for this year's share of the Temporary Corporate Credit Union Stabilization Fund. The agency has said that the combined assessments will likely be between 15 and 40 basis points.
The assessments are over and above credit unions deposit on 1% of insured shares into the NCUSIF. The NCUA bases the amount due on a credit union's insured shares as of a specific date, though NAFCU President/CEO Fred Becker last week urged the agency to use average insured shares over a fiscal or calendar year.
According to the NCUA, based on the current level of $756 billion in insured shares, each basis point of the equity ratio is worth approximately $75.6 million. So, the move from 1.22% in May to 1.21% in June is about $75.6 million in additional reserve for losses beyond the income level of the NCUSIF.
In early July, CUNA projected that the NCUSIF assessment will be between six and 10 basis points. CUNA Chief Economist Bill Hampel told Credit Union Times on Aug. 3 that none of the developments since the group's additional analysis has caused him to change his prediction.
"It's still the likely range," he said.
Hampel said the association's estimate of losses from credit unions deemed most likely to fail in the next 18 months shows them to be only slightly above the $1.1 billion NCUSIF already expensed for insurance losses. He also noted that insurance loss expense in June and for all of 2010 has been slightly smaller than the NCUA projected.
According to the NCUA, 23.14% of insured shares were in credit unions with a rating of CAMEL 3 or higher at the end of June, compared with 20.8% at the end of May.
Some medium- to large-size credit unions that have experienced financial trouble. The NCUA recently placed the $800 million Arrowhead Credit Union into conservatorship, liquidated the $200 million St. Paul Croatian FCU, liquidated the $139 million Southwest Community FCU and placed the $139.5 million Family First FCU into conservatorship.
NAFCU Chief Economist Tun Wai said his group isn't making its own prediction but is urging his members to follow the projections of the NCUA and take the advice offered by NCUA Board Member Michael Fryzel, which is to plan for an assessment on the higher side of the 15-40 basis points range.
"They have more information than I do," Wai said of the NCUA.
The NCUA has been urging credit unions to take steps to shore up their finances and manage their risks to deal with the effects of the sluggish economy. During her speech at NAFCU's Annual Conference last month, NCUA Chairman Debbie Matz said by providing innovative services safely and managing their loan portfolios, credit unions can turn "red flags into green lights" and minimize the need for greater assessments to shore up the NCUSIF.
Wai said the agency has done a good job of encouraging credit unions to build up capital and that has prevented conditions from being worse than they could have been, given the severity of the recession.
"The capital has been an important buffer, but that buffer is getting smaller. The meltdown of part of the mortgage market has really hurt the corporate and natural person credit unions," Wai said. "The question is how long will credit unions continue to feel the squeeze of people not borrowing and saving more money so they get out of the low earning environment."
The NCUA has done more than just encourage credit unions to improve their financial practices. The agency has stepped up its enforcement actions.
According to NCUA data, of the 7,554 federally insured credit unions, 5,711 are operating under documents of resolution, 252 are operating under letters of understanding and agreement and 21 are operating under cease and desist orders.
Hampel said the larger number of credit unions with DORs isn't surprising given the NCUA's greater focus on enforcement. But that doesn't indicate a threat to the NCUSIF.
"A DOR isn't necessarily a big deal for safety and soundness purposes," he said. "Given the fact that there are 2,105 CAMEL 3 or above credit unions, all of which are probably operating under at least a DOR or more, that means that more than 3,000 CAMEL 1 and 2 credit unions also have DORs. Those DORs are probably for small problems."