is an edited version of Chip Filson's, President of Callahan
& Associates, oral comments to the NCUA Board on November
1st. Please note that since that date, the impact of the NCUSIFs
financial model is more acute. Chip Discusses the consequences
of the administrative charges at $100 million or more. However,
he looks at one other impact.
consists of the 1% deposit, which grows as credit union insured
shares grow, and the .3% equity which can increase only from
retained earnings. That .3% is approximately $1.2 billion
today. Assume share growth for this year is 15%. That means
that $180 million needs to be added to retained earnings just
to keep the normal operating ratio of the fund
at 1.3%--or it starts to decline.
income of the Fund this year will be in the $240 million range
Total income for the first 8 months was $178 on a portfolio
that was earning 5.6% as of August 31, 2001. Over half of
the Funds investments at that date were under 1 year
and $1.4 billion were less than 3 months. So although it looks
like the Fund could earn about $240 million this year, next
year the revenue could be half that amount. All of these calculations
are before taking out a projected $100 million in Administrative
costs from NCUA and assuming no insurance losses.
face is the prospect of a premium to keep the Fund at a normal
operating level in the best of times for credit unions!
is the write up of the remarks at the meeting:
Not Lived Up To
Changing the NCUSIFs Financial Model
the Funds revenue structure was converted from annual
premiums to earnings on a deposit base of 1% of insured savings
plus .3% retained earnings or equity. The simplicity of this
change was that the Funds assets grew at the same rate
as the insured risk.
this approach extensively using different assumptions about
loss rates and interest environments. The income for the Fund
became the interest earnings on the Funds assets provided
by the members 1% deposit balances. These earnings served
four uses. They covered:
costs to manage the fund;
losses from failing credit unions;
addition to equity to keep the .3% capital at the level
to maintain a normal operating level of 1.3% of insured
to the Funds shareholder owners.
were not necessary except in extreme circumstances, if ever.
Moreover, premiums were restricted to only one assessment
in any one year.
assumption is that the investment earnings would be sufficient
to meet and maintain all of the Funds obligations.
increases in Agency expenditures and increases in the overhead
transfer rate (OTR), the administrative costs alone now threaten
to eat up all of the Funds earnings. For example, at
current projected budget levels and a 67% transfer rate, the
administrative expenses alone could reach $100 million next
year. If interest rates continue to fall, say to 2-2.25%,
then it is not inconceivable that all the earnings would be
for administration. Nothing would be available for:
the .3% retained earnings; or
to the Funds owners.
model for the Fund has been turned upside down. Administrative
expenses, not insurance losses, are eating up all of the Funds
Why is it urgent that this issue be addressed?
were made to NCUSIF insured credit unions about how their
money would be used. They are documented in the Agencys
1984 Annual Report. Those promises have not been lived up
to. Confidence in the funds stability is very closely
tied to confidence in the Funds administration
not the amount of $.
one can predict how deep an economic downturn we will have,
how long the war will last or how low interest rates might
go and for how long. Any of these factors or a combination
could easily cause the fund to fall short of its ability to
maintain a normal operating level.
are in a new era in 2 respects:
are in an emergency wartime condition. Everyone needs to
tighten his or her belt business as usual will not
suffice. We must find new ways to do business faster, cheaper,
and soundness threats are not the same as in the past. Credit
unions are failing, not for traditional problems such as
bad loans or poor investment decisions, but rather through
the loss of relevance, i.e. the inability to deliver true
economic value to members. For example at mid-year:
credit unions had negative share growth
had growth less than their cost of funds
4,234 credit unions are experiencing disinvestment by members
at a time of the highest industry share growth in the last
are the issues that are central to the soundness of the credit
more urgent than ever to change the NCUAs approach to
using the Funds revenue or risk jeopardizing
the very purpose for which the fund was capitalized, promoting
confidence in the credit union system.