NCUSIF Briefing Shows Need for a Plan

Credit unions had a phenomenal year in 2001 with share growth over 15%. Unfortunately a little noticed change in The Credit Union Membership Access Act (HR 1151) could mean that credit unions are on the hook for insurance fund premiums-in years of exceptional performance as well as in times of problems.

 
 


Credit unions had a phenomenal year in 2001 with share growth over 15%. Unfortunately a little noticed change in The Credit Union Membership Access Act (HR 1151) could mean that credit unions are on the hook for insurance fund premiums-in years of exceptional performance as well as in times of problems.

The new law requires a premium charge if the fund's equity/insured savings ratio is less than 1.2%. Prior to this, premiums were discretionary as the NCUA board set the normal operating level each year, unless the fund's ratio fell below the 1% capital deposit level.

The Results from 2001

This issue is more urgent following the NCUSIF briefing at NCUA's January Board meeting. Looking at the monthly trends for all of 2001, total income continues to fall while expenses continue to rise each month. Total revenue was $29.3 million below budget and net income was $24 million under budget for the whole year. The bottom line of $164.1 million was $40.1 million lower than last year and the lowest amount in the last four years.

As a result, no dividend will be paid to the owners even though insurance losses are zero for the seventh consecutive year. The fund's equity ratio will fall to between 1.25-1.26 as of December 2001.

The earnings decline and subsequent fall in the equity ratio reflects three forces:

  1. The falling yield on the Fund's $5.0 billion investment portfolio;
  2. The expenses charged to the Fund of running the Agency (almost $100 million in 2002) and,
  3. The double digit increase in insured share growth in 2001 of almost 15%.

Should a combination of these forces continue in 2002, then the Fund's ratio could easily fall to the 1.2% floor. Note these trends assume there would be no dividend and the Fund could continue to avoid any insurance losses.

What is needed most is a plan. If these trends and capital constraints were in a credit union, examiners would be asking for projections and options. Clearly the financial model of the NCUSIF and the 1% deposit is under strain. Is it unreasonable for credit unions who own the Fund and who are foregoing dividends in "good times" to see a game plan from the Fund's board of directors-before the Board asks for more of their money?

 

 

 

Feb. 18, 2002


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