WASHINGTON (5/21/08)--The provision for loss reserve account for the National Credit Union Share Insurance Fund (NCUSIF) is more than $200 million so far in 2008, according to Alonzo Swan, National Credit Union Administration (NCUA) regional director. Swan spoke Tuesday afternoon at the CUNA CFO Council's 14th annual conference and roundtable in Fort Myers, Fla. Nevertheless, Swan said a recent stress analysis of the insurance fund shows it’s much stronger now than it has ever been and able to absorb the expected losses. Swan outlined seven areas of risk NCUA examiners will be focusing on as they examine credit unions. He placed four of those risks in the “high” category and three in the “moderate” category. The risks in the high category are:
* Credit risk due to rising delinquencies and losses on real estate loans, increased member business lending activity, and a growing number of loan participations. * Interest rate risk due to a higher concentration of real estate loans funded by rate-sensitive shares. In 1996, real estate loans represented 33% of total loans. By 2007, real estate loans represented 51% of total loans. “Borrowing is becoming a more common funding strategy,” according to Swan. “And there’s growing stress on balance sheets from illiquid investments.” * Strategic risk due to weak overall earnings performance and growing dollar losses among larger credit unions. Seventy-one credit unions had net losses of more than $1 million in 2007, with an average loss of $5.1 million, according to Swan. By comparison, only 33 credit unions had net losses of more than $1 million in 2006, with an average loss of $3.6 million. “Our view of earnings has changed—-we’re now happy with anything on the positive side,” Swan joked. * Transaction risk due to fraud and due-diligence exposures. Swan said the evaluation of third-party relationships will be “a huge area of focus for examiners” in the future.
The three risks in the moderate category were:
* Liquidity risk due to the growing ratio of rate-sensitive shares credit unions hold. Thirty-five percent of credit union deposits are now rate-sensitive, according to Swan. * Compliance risk due to high-levels of Congressional interest. * Reputation risk that could suffer in the event of negative media coverage.
Despite Swan’s concerns, he said, “Real estate lending is a very good product and I see a lot of opportunity for credit unions right now. Member business lending represents additional fertile grounds for credit unions.”