Credit unions can expect what National Credit Union Administration board member Rick Metsger termed an “unprecedented” distribution of between $600 million to $800 million from the agency’s Share Insurance Fund next year, but that payout amounts to about half of what many institutions felt they were due.
The distribution will come from the coffers of the Temporary Corporate Credit Union Stabilization Fund, which the board voted Thursday to merge into the Share Insurance Fund, effective Oct. 1. While NCUA’s vote means a hefty rebate for CUs, the board – in a more controversial move – moved also to retain nearly $1 billion from the Stabilization Fund and use it to increase the Share Insurance Fund’s equity ratio to 1.39 percent, a figure that will serve as the fund’s normal operating level going forward.
The vote approving the merger means the Stabilization Fund will close significantly earlier than its originally scheduled sunset date of 2021. The fund was created in May 2009 to resolve massive, potentially ruinous losses that arose when five NCUA-insured corporate credit unions failed within a few months of each other during the financial crisis. Paid for by credit union assessments totaling $4.8 billion – as well as a $5 billion loan from the U.S. Department of the Treasury, which has since been repaid – the Stabilization Fund has benefitted from proceeds it received from liquidating assets held by the failed corporate credit unions, as well as more than $4 billion in legal recoveries. NCUA’s loan from the Treasury was repaid last October and the fund currently has a net positive balance of $2 billion. Further liquidations and additional recoveries could bump that figure even higher.
Indeed, Metsger said the planned 2018 distribution could be the first in a series, adding the additional payments could reach as high as $1.1 billion.
“This is only the beginning, because additional dividends are likely between now and 2022 as remaining legacy assets are sold and converted to cash,” Metsger said.
NOL still a sticking point
While there was broad support among credit unions for NCUA’s plan to merge the two funds four years early, the sticking point lay in a proposal to increase the NCUSIF’s normal operating level. Credit unions, it seems, would have preferred a larger up-front payment.
NCUA said it received more than 660 comment letters, with only a dozen or so supporting the plan to boost the Share Insurance Fund’s normal operating level. Fully two-thirds of the correspondents opposed the increase outright. A smaller but still significant number suggested limiting it to about 1.34 percent or 1.35 percent.
One of the industry’s leading trade groups, the National Association of Federally-Insured Credit Unions had actually opposed the plan to merge the two funds, claiming credit unions would be better off waiting until 2021, when the payout would likely be larger. Dan Berger, the group’s president and CEO, expressed disappointment at Thursday’s outcome.
"NAFCU and the credit unions we represent appreciate the NCUA's work on this issue, but this approach and outcome are not ideal," Berger stated in a press release. "Raising the normal operating level by 9 basis points is unprecedented and unnecessary. Two-thirds of all who commented on the proposal, including our members, opposed such a dramatic increase and rightly so."
The industry’s other major national trade group, the Credit Union National Association, took a more calculated approach, supporting merging the funds while also coming down on the side of a smaller normal-operating-level increase. President and CEO Jim Nussle called Thursday’s vote a “victory for credit unions” but reiterated CUNA’s concern over the higher normal operating level.
“Going forward, we will continue to engage with the agency to ensure any raise is merely temporary.”
Board defends its position
Both Metsger and NCUA Chairman J. Mark McWatters forcefully defended raising the normal operating level.
The current normal operating level is 1.30 percent, but the actual equity ratio is closer to 1.25 percent, as the agency struggles to balance slow growth in the Share Insurance Fund’s investment portfolio against a quickening influx of share deposits at insured credit unions. NCUA is forecasting an additional decline of approximately two basis points, creating the likelihood a premium would have to be paid in 2019.
According to McWatters, merging the funds and bumping up the normal operating levels would serve both to replenish the Share Insurance Fund and head off the possibility of out-of-pocket costs for insured credit unions.
“Credit unions do not manage their level of capital and liquidity so close to the bare minimum that even a relatively small, unexpected loss means the difference between being safe and sound and being a troubled institution,” he said Thursday. Rather, credit unions retain earnings in good times to build up a cushion against reasonably foreseeable future economic challenges.”
The new 1.39 percent normal operating level will enable the share insurance fund to withstand the shock of a moderate recession without having to tap credit unions with additional premiums, NCUA said.
For his part, Metsger noted the Federal Credit Union Act gives NCUA authority to set the share insurance fund’s normal operating level anywhere between a minimum of 1.20 percent and a ceiling of 1.50 percent of total credit union share deposits.
“The normal operating level was never intended to be a static number,” Metsger said. He added that losses to the share insurance fund due to credit union failures have been running at historic lows. But neither that trend, nor the current economic expansion, can extend indefinitely, he said.
“We can’t ignore these risks. They are real,” Metsger said.