ALEXANDRIA, Va.–NCUA has offered an update on the closure of the Temporary Corporate Credit Union Stabilization Fund, including what has led to the surprise announcement that a payout is likely in the first half of 2018.
The additional details came during a webinar hosted by the agency.
As recently as 2009, the total unpaid principal balance on the legacy assets was $52.7 billion, noted Larry Fazio, NCUA’s director of examination and insurance. At the same time, the market value of the securities held by NCUA was just $22 billion. “It could have been catastrophic,” said Fazio.
But instead of a catastrophe, credit unions are now looking at an unexpected refund on at least some of the assessments paid to shore up the insurance fund. NCUA said during the webinar that based on its current projections, it believes account-holders will be receiving recoveries through 2021.
As was addressed during the webinar, 2021 was supposed to be the first year credit unions might see any payouts from the fund. But the scenario has changed as the underlying securities NCUA holds from the failed corporates have performed better than expected and the agency has recovered $4 billion from litigation against the big banks that sold faulty mortgage-backed securities to the corporates.
Waiting on Year-End
NCUA noted that the law does not permit the TCCUSF to pay distributions. But it can be shut down early, as the NCUA board discussed at its more recent board meeting, and the funds shifted to the NCUSIF in the event three conditions are met. The NCUSIF, in turn, can pay distributions.
NCUA CFO Rendell Jones said that as of Dec. 31 all NCUSIF shareholders will be able to see the insurance fund’s equity ratio, which in turn will guide the agency in how much of a distribution can be made.
Addressing a $1-billion capital note that NCUA holds from the failed U.S. Central Credit Union in Kansas, Jones said it had been written down to zero, but NCUA now expects to see between $500 million and $800 million in value from the note.
Fazio said NCUA is estimating the net position of the NCUSIF to be between $15.7 billion and $16 billion by year end. The resulting equity ratio will then be used to calculate any payout. The NCUSIF typically operates with a statutory base of 1.20%, but the NCUA board recently proposed raising the current ratio to reflect the increased risk presented by merging in the TCCUSF.
A Reevaluation
Fazio explained NCUA has had to reevaluate what a normal operating level would be, and that it has built models that take into account the effect of a moderate and a severe recession.
“The equity needs to cover the remaining corporate resolution exposures if the fund is closed,” Fazio said.
The NCUA board recently proposed to increase the normal operating level of the NCUSIF—to 1.39%--as a result.
The agency’s position is that “NCUA should really increase the operating level of the fund during a time of economic prosperity and allow it to decrease or decline so as not to have to assess premiums during downturns,” said Fazio.
Based on that, NCUA concluded the fund needs to be at 1.33% to withstand a moderate recession and 1.54% for a severe recession.
Based on its latest projections, which NCUA emphasized can change, the agency is forecasting a return of between $2.6 billion to $3 billion of the $4.8-billion in total assessments credit unions paid. Some $400 million in equity is being set aside in case of any downturn.
Credit Union Questions
During a Q&A following the webinar, credit unions had a number of questions, including:
Q: When can members of corporate CUs expect recoveries, and will all members get recoveries?
NCUA: That depends on clearing any senior obligations of the corporate estates. The earliest we are projecting that to occur is 2021. Not every estate is projecting the covers.
Q: If you raise operating level to 1.39%, will you be lowering it once investments have matured?
NCUA: The NCUA board will have to determine that in the future. “But I think if everything were to hold constant, yes, you wouldn’t need the extra four basis points,” said Fazio.
Q: It is clear from the presentation that a share insurance premium assessment will not be needed during 2017. Will there be an assessment?
Fazio: That depends on two things. One, a board decision, and two, if the projected equity ratio were to fall below 1.20%. That is really a function of future events. Having said that, if the stabilization fund is closed it will add significant equity to the NCUSIF, and barring unexpected losses would eliminate the need for a premium.
Q: Is there a timetable for refunds?
Fazio: We don’t have a specific timetable. Each year we would look at the projections and the ratio and that data would indicate whether a distribution would be made.
Q: When will board decide if a premium assessment is needed?
Fazio: The next board meeting is in September. But they would have to decide before the end of the year.
Q: NCUA has always said there would be no payouts until 2021. Why is one coming in 2018?
Fazio: I want to be clear about that. NCUA has always said it was unlikely until 2021. The reason we said that was up until recently, the performance of the fund had not improved enough. We also hadn’t paid off the Treasury until October of 2016, which was a legal requirement to close the fund. The net proceeds from the legal recoveries have now made it possible to have fully repay Treasury and the strong performance of fund has reduced risk going forward. It’s not zero risk, but we now think we are in a position to recommend (a refund).
Q: How do credit unions account for any payout?
Fazio: Our two pieces of advice are one to work with your accounting advisors and two, we do typically give basic information on how to account for assessments or refunds. Accounting guidance will be given.
Q: For those of us who paid into the stabilization fund, do we have any sense of what we can expect to be paid back?
Fazio: We projected (total) payments of $600 to $800 million in Q2 2018. In terms of the individual amounts to credit unions, that is up to separate rulemaking by the board. We are not covering that here today.