Credit union executives here say a plan announced in September by the agency that regulates their institutions will stabilize and strengthen credit unions while keeping member deposits safe, but they will have to carve large assessments out of their earnings over an estimated 11 years to pay for the plan.

The regulatory agency, the National Credit Union Administration, has levied two types of assessments this year—share insurance premiums and corporate credit union stabilization assessments—mostly to cover losses incurred by corporate credit unions, which serve consumer credit unions.

The NCUA assessed an insurance premium in September based on 0.124 percent, or 12.4 basis points, of each credit union's insured deposits. That's on top of a 13.4 basis-point corporate credit union stabilization assessment it had levied earlier this year.

Spokane Valley-based Numerica Credit Union paid a $1 million insurance premium in September after it already had paid a $1.2 million corporate stabilization assessment in June, says Cindy Leaver, Numerica's chief financial officer.

Numerica had budgeted $2 million for expenses related to corporate credit union financial woes, Leaver says.

"We anticipated that expense," she says. "We just didn't know the timing."

While consumer credit unions typically issue conservative, conventional loans, corporate credit unions had invested in riskier mortgage-backed securities that plummeted in value during the subprime mortgage crisis, causing five of the nation's 27 corporate credit unions to collapse.

Corporate credit unions provide check-clearing and other back-office services to consumer credit unions, and also invest money for and supply loans to them.

They are owned by the credit unions that choose to do business with them, and therefore those credit unions are liable for any losses they incur.

The NCUA plan is designed to stabilize the system without a taxpayer bailout, says Jeff Adams, CEO of Spokane Valley-based Horizon Credit Union.

In September, Horizon paid a $445,000 insurance premium, which was in addition to a $465,000 corporate stabilization assessment paid earlier this year.

The stabilization fee, which is expected to be assessed annually through 2021, will cover anticipated losses related to mortgage-backed securities formerly held by the five seized corporate credit unions, Adams says.

NCUA last week sold those securities on the open market with a federal guarantee, he says.

"Consumer credit unions are on the hook for actual credit losses," or individual mortgages that go into default, Adams says.

Steve Dahlstrom, president and CEO Spokane Teacher's Credit Union, says those losses could total an estimated $8.1 billion.

Dahlstrom says NCUA's plan provides consumer credit unions some certainty and an adequate period to cover the expected losses.

It also allows time for some of the risky loans to "cure themselves," he says. "If a mortgage that's part of a security is refinanced, it's no longer a part of the security. There is no credit risk on a loan after it's repaid, or refinanced, or the house is sold," Dahlstrom says.

NCUA also sets premiums for the National Credit Union Share Insurance Fund, which insures qualified deposits of up to $250,000 per member in case a credit union fails. The agency maintains the fund at between 1.2 percent and 1.3 percent of credit unions' total insured deposits.

Well into the recession, the fund had remained stable. Numerica, for instance owed no deposit insurance premium in 2008, NCUA filings show, and the insurance fund paid dividends to member credit unions in 2007, when it exceeded 1.3 percent of insured deposits. However, using the $8.1 billion estimated remaining corporate stabilization cost, which is the equivalent of 1.06 percent of insured deposits, the fund effectively has dropped to 0.24 percent of insured deposits, triggering the large premiums, the Credit Union National Association trade group calculates in a notice to its members.

The corporate credit union stabilization assessments affect the bottom line of consumer credit unions directly. Because consumer credit unions' sole source of capital is retained earnings, the corporate assessment is taken straight from earnings, Dahlstrom says.

As of Sept. 30, STCU's year-to-date net income before the corporate credit union stabilization assessment was $12.6 million. The $1.5 million stabilization fee reduced that to $11.1 million.

The assessments don't take into account losses many consumer credit unions incurred through their investments in failed corporate credit unions.

Numerica, for instance, wrote off $400,000 in corporate stock in Southwest Corp. Federal Credit Union when regulators seized it in September, a loss Numerica hadn't anticipated in its budget, Leaver says. It earlier had written off $2 million it had invested in Western Corp. Federal Credit Union (WesCorp), which regulators seized last year.

Horizon Credit Union has been out of the corporate credit union network for almost a year, Adams says.

"We had written off all the capital we had in WesCorp a year or two ago," he says. "We decided we would solve our processing needs in a different manner."

Leaver says she anticipates that the 2011 corporate stabilization assessment will be in the range of 9 to 13 basis points. Any additional cost for the deposit insurance premium will depend on how well consumer credit unions perform, she says.

Dahlstrom says the Credit Union National Association, expects 2011 insurance-fund premiums will be in the range of 5 to 10 basis points, bringing the total estimated premium and corporate stabilization assessment next year to 15 to 20 basis points.

Barring a double-dip recession, the insurance premiums should drop off, and annual stabilization fees should average around 7 basis points after 2012, the credit union trade group says. The stabilization assessment didn't exist before this year.

Overall, the credit union industry hasn't been hit as hard by the financial crisis as banks have, NCUA says. As of late September, 66 credit unions have failed since the start of 2008, compared with nearly 300 banks.

Some credit unions here are seeing improving performance in their loan portfolios. Dahlstrom says STCU has reduced its monthly provision for loan losses by about 20 percent since midyear.

"I think we've found the peak, and we're coming down from that," Dahlstrom says. "We're seeing a lower loan-delinquency ratio, and that's very encouraging for us."

Leaver also says loan losses are trending downward at Numerica.

"We have a large auto loan portfolio, and we're not seeing as many cars come back," she says. "It's helping our loss ratio and allowing us not to have to put as much aside, but I wouldn't say we're out of the woods yet."

Dahlstrom says the corporate stabilization assessment drops the consumer credit union industry's average capital-to-asset ratio to 8.8 percent from the industry's previous ratio of 9.7 percent. To be considered well capitalized by regulators, a credit union must maintain a capital ratio of at least 7 percent, he says.

"The credit union industry's capital ratio still will be almost 2 percentage points higher than well capitalized," Dahlstrom says. "The assessments are not something the industry can't overcome."