Credit unions here say they've been finding ways to absorb hefty new assessments last year to help replenish a national deposit insurance fund that was tapped to help out two big institutions in distress. They fear this year's assessments could be twice as high.

By doing everything from shaving expenses, tapping into reserves, and relying on part of their interest rate margin, credit unions say they've been able to weather the storm that was set into play when the fund advanced $10 billion to two large credit unions that had to be placed into conservatorship.

"You save for a rainy day, and when it rains, you spend some of your savings," says Steve Dahlstrom, CEO of Spokane Teachers Credit Union here.

The deposit insurance pool, the National Credit Union Share Insurance Fund (NCUSIF), insures qualified deposits to prevent credit union members from losing money if a credit union falters. Operated by the National Credit Union Association, it's the credit union equivalent of the Federal Deposit Insurance Corp., which insures bank deposits.

Until last year, the fund has been maintained at a level sufficient to insure those deposits simply by requiring credit unions to maintain an amount equal to 1 percent of their insurable deposits in the fund, says John McKechnie, a spokesman for the NCUA.

The fund keeps the earnings from those deposits, to maintain the fund at between 1.2 percent and 1.3 percent of total shares, Dahlstrom says. Credit unions are billed to maintain the fund if their deposits grow, and are reimbursed if their deposits decline.

"Credit unions had not paid a premium for the share insurance fund for close to 20 years," other than maintaining the 1 percent commitment, McKechnie says.

Given the hit the fund took in 2008, the NCUA was forced in March 2009 to assess a special premium on all the organization's some 2,700 member credit unions, based on their individual deposit level.

In the case of STCU, that assessment came to about $1.5 million, says Dahlstrom. He says the big Spokane credit union is budgeting for more than twice that amount for 2010, based on credit union industry projections.

"The FDIC and the NCUSIF have both had losses related to the downturn in the economy and especially related to losses in the mortgage market," says the NCUA's McKechnie.

He says that credit unions, though not thrilled about having to pay the special assessments, seem to understand the need to keep the insurance fund strong.

"Really, that's a consumer confidence issue," McKechnie says.

McKechnie says that credit unions in Washington state weren't hit by the economy as hard as those in other states because the housing market has been less volatile here.

The two credit unions that were put into receivership and needed the fund advances totaling $10 billion, are known as corporate credit unions, which means they serve smaller credit unions, much like federal reserve banks serve smaller banks. They are U.S. Central Federal Credit Union, of Lenexa, Kan., and Western Corporate (WesCorp) Federal Credit Union, of San Dimas, Calif. Now in conservatorship, the institutions' assets will be controlled by the NCUA for a period of time in hopes the assets will recover their value, McKechnie says.

Initially, much bigger assessments were being discussed to replenish the deposit fund after those big hits, but because it was thought that a steeper fee could have been too devastating to some credit unions, federal legislation was adopted allowing the fund to be replenished over seven years, rather than all at once, says McKechnie.

In the end, NCUA assessed a special premium of 0.15 percent, or what's called 15 basis points in the finance industry, of insurable deposits.

Though for a credit union the size of STCU to come up with an extra $1.5 million seems steep, spreading the premiums out over time will help credit unions absorb the shock much better, says McKechnie.

"It could have been 99 basis points all at once," he says.

He says it's not clear yet what the 2010 assessment will be.

McKechnie says the insurance premiums have taken a toll on the resources of credit unions.

"It hasn't sparked any real serious trouble, but there has been an effect on the bottom line," he says. "It comes from their earnings. They need to remain well-capitalized."

Dahlstrom says, "That's not a large percentage of our gross income, but it has an effect on our net income." He likens it to when a neighbor has a car wreck, and your insurance premiums rise.

The premium increase for Spokane Valley-based Numerica Credit Union came to about $1 million for 2009, says Cindy Leaver, the credit union's CFO.

"We wouldn't just write a million dollar check for the fun of it; credit unions have been fortunate enough before to not have to pay that," Leaver says.

"The good thing is it's somewhat proportional, since it's based on your outstanding deposits," she says. "Of course, if you were close to having trouble with your capital before this, this is not going to help, but for us and others here, if you're well capitalized like we think you should be," the effects can be managed.

For STCU, the extra cost was made up largely by making small incremental changes to the rates it pays on deposits and charges on loans, Dahlstrom says.

"What's compensated for that (cost) over the last 12 months is the differential between what members are paying on loans and current deposit rates has widened, so that has helped cover this," he says.

On a money market account, for example, "instead of paying 1.5 percent, we might have paid 1.35. From an individual member's standpoint it's not a lot of money, but in the collective effort it adds up. You make adjustments," Dahlstrom says.

Numerica, meanwhile, focused on reducing expenses to find the dollars to pay the assessments without tapping reserves, Leaver says.

"We made the decision that we weren't going to make any cuts" to interest rates or member services, she says. "We started doing things like looking under rocks," Leaver adds.

For instance, Numerica renegotiated contracts with vendors to save money and gave departments an incentive to cut expenses by offering rewards such as a pizza party to the department that most reduced its office supplies expenses. Leaver says those measures paid off for Numerica.

"We came in more than $2 million under budget on our expenses for 2009," she says.

Just because STCU can afford to pay the extra assessments doesn't mean it is happy to pay them, Dahlstrom says.

"Obviously, it's money that could be used to do other things. On the other hand, if we didn't have insurance, people wouldn't have the confidence we have to put their money to work. It's the cost we all pay," he says.

One of the areas in which the extra costs will affect STCU in 2010 is by slowing its growth, since it will have less money available to market itself or open additional branches, Dahlstrom says.

"Another way this impacts credit unions, there's a term in accounting called equity—the equity in our credit union runs about 10 percent of total assets—if the equity doesn't grow then the credit union can't grow. One of the ways you compensate for lower net income is it reduces your ability to grow. A member wouldn't necessarily notice that you might not be as aggressive in a marketing campaign," or that a credit union has postponed opening another branch, he says.

"Our budget for 2010 is for a little less growth than for 2009," Dahlstrom says.

He says the assessments are likely to be higher for this year, but no one knows for sure.

"$3.8 million is what we're budgeting for 2010. We won't know until we get our assessments," Dahlstrom says, which could be after the first quarter, or later, or both.

Numerica has budgeted for about $2 million for the year for the special assessments, Leaver says.

Jack Fallis, president and CEO of Global Credit Union here, says that organization is anticipating an assessment of as much as 40 basis points for 2010.

The premiums won't be permanent, however, Dahlstrom says, because there are rules about what percentage of deposits the NCUSIF can have in it, and if it gets above that level, it must return some of the excess to the credit unions.

Altogether, 15 credit unions failed in the downturn, McKechnie says. He says the NCUA has stepped up its efforts to monitor credit unions, but most have weathered the poor economy fairly well.

"They are definitely experiencing economic stress related to the downturn. Our chairman has spoken publicly in the last couple months about how we are concerned about some of the trends, but we have stepped up our vigilance, we have hired more examiners," adding 50 in the last year, with 57 more to come, he says.