Why CUs oppose NCUA's plan to close the corporate stabilization fund

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The National Credit Union Administration is poised to vote on its plan to close its Temporary Corporate Credit Union Stabilization Fund and provide credit unions with a share insurance fund distribution next year--a full three years earlier than expected--but credit unions have largely come out against that plan in its current form.

With the agency slated to vote on the proposal at next week's board meeting, Credit Union Journal read through letters NCUA received during the public comment period. Those letters make two things clear: credit unions like the prospect of getting cash back, but they hate the accompanying increase in the share insurance fund’s normal operating level, which acts to tamps down the size of their rebates.

Central to NCUA’s proposal, which was first announced July 20, is a plan to fold the stabilization fund into the National Credit Union Share Insurance Fund. If the agency can close the stabilization fund’s books by Sept. 30, it will allow enough time for an audit and pave the way for the merger and a resulting distribution of excess share insurance fund equity to credit unions sometime next year.

Adding the approximately $1.6 billion currently in the stabilization fund to the $13.2 billion share insurance fund would push its equity level past 1.45 percent, well in excess of the current normal operating level of 1.3 percent. That’s enough of a cushion to trigger a substantial payout of excess equity to individual credit unions. The normal operating level is an equity target for the share insurance fund. By law it cannot be lower than 1.2 percent or greater than 1.5 percent.

Rebate slashed?
What CUs have a problem with, based on their letters, is the position NCUA is taking on the normal operating level. Leaving it as is would allow the agency to rebate as much as $1.6 billion. Because many of the assets that remain in the stabilization fund can fluctuate in value, however, NCUA wants to compensate for the added volatility by increasing the normal operating level to 1.39 percent.

The higher operating rate would have the effect of reducing the amount of excess equity available for distribution -- in this case to somewhere between $600 and $800 million.

Credit unions, unsurprisingly, prefer larger payments. A number of executives recalled the hardship that accompanied the assessments their institutions paid NCUA to resolve the corporate credit union crisis. Industry-wide, credit unions paid about $4.8 billion. Now that the opportunity for some kind of payback has finally arrived, the last thing they want to hear about, seemingly, is a plan that whittles down the size of their payouts.

“While I appreciate the NCUA’s dedication to return funds to credit unions, I believe a full refund is critical to A TCCUSF disposition strategy,” Michael Thomas, chief financial officer at $331 million-asset Service First Federal Credit Union in Danville, Pa., wrote in his letter. NCUA’s plan would reduce Service 1st’s rebate from $354,000 to $160,000 Thomas added. The $194,000 difference “could be better spent at Service 1st to better the lives of our members and the communities we serve.”

Echoing Thomas, Jason Peach, president and CEO at $200 million-asset West Community Credit Union in Brentwood, Mo., wrote reducing the amount institutions are due actually “puts the system more at risk by forcing credit unions to make less competitive decisions…avoiding investments in technology, people and other sustainable business practices.”

Tough sell
Former NCUA board member Geoff Bacino said he understood the motives behind the call to increase the normal operating level. Nevertheless, he predicted it would be a tough sell to most credit union leaders.

“The way they see it, the industry is in good shape,” Bacino said in an interview. NCUA’s plan “is like giving with one hand and taking away with the other.” On Wednesday, in his monthly newsletter “The Bacino Report,” Bacino claimed most credit unions would rather wait until the stabilization fund’s mandatory sunset in 2021 in hopes of getting a larger payout.

“The fact is that many credit unions don’t need this money,” Bacino said. “Their preference would be to get more money later rather than “some” money now. How the Board chooses to solve this will be interesting.”

The closest thing to an unequivocal endorsement of NCUA’s plan may have come from Pentagon Federal Credit Union President and CEO James Schenck, who released a statement, praising the agency for its effort to begin returning money next year.

“We thank NCUA Chairman J. Mark McWatters and Board Member Rick Metsger for their initiative to begin returning that surplus to credit unions in 2018—rather than waiting until the Stabilization Fund expires in 2021,” Schenck wrote.

Paul Gentile, president of the Cooperative Credit Union League, which serves CUs in Massachusetts, Rhode Island, New Hampshire and Delaware, termed the rate “appropriate,” but only on a temporary basis.

It “should decrease each year and ultimately return to 1.30 percent once that risk terms out with the final maturation of the assets,” Gentile wrote.

NCUA’s proposal did not lay out any such plan, although it promised to periodically review the equity needs of the share insurance fund and act if its review determines a change is warranted. For most CEOs, that assurance was hopelessly vague. NCUA should provide a full payout now and raise the normal operating level later, as circumstances dictated, they argued.

“Adding a specific ‘padding’ above the 130 basis points would make many credit union leaders uncomfortable as to when the required padding would be removed – if ever,” wrote Dean C. Wilson, president and CEO of $46 million-asset Focus Credit Union Wauwatosa, Wis. “If adverse economic conditions happened five years from now, wouldn’t it make sense to simply require the standard regulatory assessment at that time rather than keeping resources out of credit unions’ hands for that long?”

Clash of the titans
One of the most interesting aspects of the debate has been the sharp divide between the industry’s two largest trade groups, Credit Union National Association and the National Association of Federally Insured Credit Unions.

CUNA CEO Jim Nussle wrote in his comment letter that he “fully supports” closing the stabilization fund “as soon as possible.” He parted ways, however, with the plan to raise the normal operating level. Rather than the 1.39% rate NCUA is seeking, Nussle stated a 1.34% rate was appropriate, and he urged the agency to say explicitly that the higher rate would be phased out over a four year period.

NAFCU CEO Dan Berger, on the other hand, urged his members to oppose the plan in its entirety. According to Berger, the merger “would not be in the best interest of credit unions,” while the 1.39% normal operating level was nothing more than a “cash grab.”

“NCUA is attempting to distract credit unions with the promise of dividends as the agency hoards nearly $800 million for itself by increasing the NOL to the highest level in the history of the SIF,” he wrote. “That money should rightfully be returned to credit unions that made sacrifices as a result of the stabilization fund assessments.”

No guaranteed changes
While the agency will have to address the widespread opposition to plans to increase the normal operating rate, it’s no sure thing they’ll make any changes to their blueprint, former NCUA chairman Dennis Dollar wrote in a letter to Credit Union Journal.

“They are an independent agency and an independent board at NCUA, and there have been examples where a majority of the board felt that a regulatory issue was so important from an agency perspective that they proceeded even though the opposition was strong,” Dollar wrote.

For his part, Dollar said some increase in the normal operating level is probably warranted due to the assumption of the stabilization fund’s assets. At the same time, those assets “are performing quite well presently, so an increase all the way to 1.39 percent seems a bit high,” he added.

“Some increase to the 1.33 percent—or maybe 1.34 percent—level could possibly be justified until those assumed assets have all worked their way through the NCUSIF after the fund consolidation and have gone full term,” Dollar wrote.

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Financial regulations Deposit insurance Mark McWatters Rick Metsger Dennis Dollar Geoff Bacino Jim Nussle Dan Berger NCUA CUNA NAFCU