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Despite a struggling economy, Iowa’s credit unions loaned 12 percent more money last year than in 2007, nearly twice the rate of increase in lending by credit unions nationally. And they remain well-capitalized, despite stiff write-downs for expected loan losses, said Patrick Jury, president and CEO of the Iowa Credit Union League (ICUL).

“Credit unions have saved for a rainy day, and now we’re kind of having a rainy day and we’re using some of that capital to cover delinquencies in loans and loan losses,” said Patrick Jury, the ICUL’s president and CEO. Despite that, Iowa credit unions have an average capital ratio of 10.8 percent relative to assets. “So we’re really in pretty good shape as we stand here right today.” The organization represents all but one of the state’s 140 credit unions, which serve more than 900,000 members.

However, the cooperatively owned, nonprofit institutions will have some big checks to write later this year to rebuild the National Credit Union Share Insurance Fund (NCUSIF), the industry’s self-financed deposit insurance fund. By the end of this month, the credit unions are required to record the impact on earnings of the assessments, which ICUL officials say will exceed $42 million for Iowa credit unions. And much like banks, credit unions face further assessments that will extend over the next several years to replenish their deposit insurance fund.

At the same time, some Iowa credit unions are receiving assistance through a program created in December known as the Credit Union System Investment Program (CU SIP). The CU SIP was created by the National Credit Union Administration to provide additional liquidity for corporate credit unions. Through CU SIP, credit unions can borrow from the Central Liquidity Facility (CLF), a backup lending fund for credit unions, and invest the funds in corporate credit unions. Though funded by the credit unions, the CLF is backed by the U.S. government. Nine well-capitalized credit unions in Iowa have borrowed a total of $70 million so far through that program, which has extended $7.7 billion in additional capital.

Three-tiered system

In late January, the National Credit Union Administration (NCUA) board approved a $1 billion capital injection to U.S. Central Corporate Federal Credit Union, the wholesale financial center for the network of 34 corporate credit unions that provide services to credit unions throughout the country. That move was made to shore up U.S. Central, which posted $1.1 billion in losses in the fourth quarter due to impaired real estate loans.

U.S. Central serves as “the credit union of corporate credit unions,” providing liquidity for the corporate credit unions, including Iowa Corporate Credit Union. The corporate credit unions were formed in the mid-1970s to provide credit unions with economies of scale for cash management functions and better rates on their invested funds.

In turn, the corporates, considered “the credit unions for credit unions,” are owned by the individual credit unions. In Iowa, all but two of the smallest credit unions are members of Iowa Corporate Central Credit Union, and collectively have about $100 million in funds invested in it. Iowa Corporate currently enjoys the strongest capital position of any of the nation’s corporate credit unions, with a 25 percent capital ratio. The minimum capital ratio is 4 percent.

To replenish the funds extended to U.S. Central, the NCUA this year will assess each credit union a 51-basis-point deposit replenishment fee plus a premium assessment to bring the deposit fund back to 1.3 percent of deposits. The NCUA estimates the cumulative impact of these fees at 62 basis points, or 62 cents for every $100 in share deposits they hold. Iowa credit unions, which collectively held more than $6.8 billion in share deposits at the end of 2008, will pay an estimated $41 million in assessments this year.

Jury said Iowa’s credit unions aren’t immune from the financial crisis, but their strong capital positions will enable them to weather the storm.

Substantively different

At the end of 2007, loan delinquencies at Iowa credit unions averaged 0.84 percent of total loans. By comparison, 1.3 percent of all credit union loans in Iowa, which include home, vehicle and consumer loans, were delinquent at the end of 2008. “So it’s increased, but it’s still a pretty good number given the economy,” Jury said.

Accordingly, credit unions have used some of their capital reserves to increase their loan loss reserves, which reduced capital reserves to 10.8 percent of assets from 11.2 percent at the end of 2007. To be considered well-capitalized, credit unions must maintain capital ratios of at least 7 percent of assets.

Credit unions will continue to loan out their deposits as much as possible, Jury said.

“The purpose of a credit union is to serve its members, so when a credit union takes deposits, really the best investment it can make with those funds is to make loans to its members,” he said. “So we have high loan-to-deposit ratios. We’re at about 87 percent, so we loan about $87 out of every $100 taken in.”

Twenty-seven credit unions, ranging in size from $1.4 million to $1.4 billion in assets, are based in or have branches in Greater Des Moines. Of those, 20 reported declines in net income in 2008 compared with 2007, while seven had increased net income, according to data provided by the ICUL. (See chart.) Nationwide, credit unions’ net income declined by nearly 48 percent in 2008.

“I think we’ll feel the effects of the economy just like everybody else,” Jury said. “If there’s unemployment, it’s very difficult to pay back the loan.”

Though some credit unions elsewhere in the country have failed or merged with larger credit unions, particularly in states hit hardest by declining home prices and bankruptcies such as California, Nevada and Florida, that hasn’t been the case in Iowa.

“We’re pretty stable in Iowa, not a lot of mergers,” Jury said. “Certainly none of any substance in the last year or two and none that I know of because of unhealthiness. We’ve got pretty stable employment and we don’t have the skyrocketing and deep dives in housing prices.”

Prudent management

Credit union leaders in other states have expressed concern that the NCUA assessments could put many smaller credit unions out of business. Don’t tell that to Lois Gorman, manager of Anderson Erickson Credit Union in Des Moines.

“For years we’ve been very prudent,” said Gorman, a 23-year employee of the credit union. “We’ve never done any of the risky lending you’re hearing about now; we’ve always been conservative and that’s paid off. If it’s a good loan, we do it, but if they don’t qualify, we don’t do it at all.”

As a precaution, however, at the end of 2008 the 962-member credit union added all of its net income to loan-loss reserves rather than adding to its capital, Gorman said.

“So far, (2009) hasn’t been bad,” she said. “Delinquencies have been low and we haven’t had any (vehicle repossessions). I think that’s one advantage of being small; we know our members personally. And since we’re a closed credit union, not open to the public, I think members feel an obligation to not hurt the credit union; we’re all in this together.”

Gorman said she hasn’t seen the NCUA directive yet regarding the NCUSIF capital assessment, but “if we have a choice, I’m going to ask the board to (take the assessment) in one year,” rather than spread it over several years, she said. “We’ve been around since 1952 and we’re extremely well-capitalized.”

Iowa Corporate Central Credit Union, meanwhile, “has not even entertained the idea” of reducing its members’ lines of credit during this economic crisis, said Sara Flynn, Iowa Corporate’s president and CEO.

“We don’t foresee significant challenges in this next year,” she said. “However, it is a very fluid situation. But we can’t foresee a situation where we would have an impairment to any of our credit unions’ investments.”

Iowa Corporate has actively sought additional liquidity for its members in the past couple of years, but has maintained investments that include high-quality U.S. Treasury securities and bank certificates of deposits. Earlier this month, it opted not to participate in a temporary share guarantee program that would have enabled it to extend share coverage beyond the current $250,000 per account limit through the end of 2010. “The benefit of saying ‘yes’ did not outweigh the costs,” she said.

However, as long as credit unions continue lending and building up the network of corporate credit unions, it should help mitigate the impact of the assessments, Flynn said.

“I really look at it as an opportunity for them,” she said.