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Board Action Bulletin

Estimated Distribution $600 Million to $800 Million; Normal Operating Level of Share Insurance Fund Would Rise; Budget Review Projects $5.8 Million Savings

ALEXANDRIA, Va. (July 20, 2017) – The National Credit Union Administration Board held its sixth open meeting of 2017 at the agency’s headquarters here today and unanimously approved three items:

• A request for public comment on the agency’s proposed plan to close the Temporary Corporate Credit Union Stabilization Fund in 2017, four years ahead of schedule, and provide credit unions with a Share Insurance Fund distribution in 2018, estimated to be between $600 million and $800 million.
• A Notice of Proposed Rulemaking amending the agency’s share insurance requirements rule to provide greater fairness, predictability, and transparency and add a temporary provision to govern share insurance equity distributions related to the Corporate System Resolution Program.
• A proposed rule to amend the agency’s definition of “in danger of insolvency” to give the agency more flexibility to act in cases of emergency mergers.

The Board also received briefings from the Chief Financial Officer on the revised 2017 agency budget estimates and the performance of the National Credit Union Share Insurance Fund.

Agency Proposes to Close Stabilization Fund in 2017

Credit unions would avoid a possible Share Insurance Fund premium in 2017 and receive a distribution in 2018 under a proposed plan, approved by the Board, to close the Temporary Corporate Credit Union Share Insurance Fund this year.

The proposed plan, described online here, is available for public comment. The NCUA must receive comments no later than Sept. 5. The NCUA will host an industry webinar on Wednesday, Aug. 9, to answer questions about the proposed closure plan. Details about the webinar and online registration will be available in the near future.

“The closing of the Stabilization Fund in 2017 allows the NCUA to return funds to credit unions that can be put to work in the system prior to the original closure date in 2021,” Board Chairman J. Mark McWatters said. “As part of this proposal, the NCUA would raise the Share Insurance Fund’s normal operating level to account for the remaining obligations of the Corporate System Resolution Program. Even with the proposed increase to the normal operating level, the NCUA is projecting a return of excess equity to insured credit unions through a distribution from the Share Insurance Fund in 2018. The proposed plan to close the Stabilization Fund, including increasing the normal operating level for the interim, will ensure the Share Insurance Fund has the appropriate level of resiliency to protect member deposits and maintain a safe and sound credit union system, including maintaining public confidence in federal share insurance.”

Several factors make the proposed closure of the Stabilization Fund this year possible:

• There are no longer any outstanding borrowings to be repaid to the U.S. Treasury, as the agency made the last payment to the Treasury Department in October 2016;
• The balance of the legacy assets that secure the NCUA Guaranteed Notes Program and the NGN investor balance are both lower than the $13.2 billion Share Insurance Fund; and
• Due to nearly $4 billion in net legal recoveries, the Stabilization Fund has a net positive position of $1.9 billion as of May 2017.

The proposed plan includes a staff recommendation that the Stabilization Fund closure be done Oct. 1, 2017, using the closing balances as of Sept. 30, 2017.

Even if the Stabilization Fund is closed, there would be remaining obligations of the Corporate Resolution Program. Those, the Board believes, can be prudently borne by the Share Insurance Fund without inordinate risk, provided the necessary equity is maintained.

Board Proposes Raising Share Insurance Fund Normal Operating Level

To maintain the necessary equity in the Share Insurance Fund after the Stabilization Fund closes, the Board proposes to increase the normal operating level for the Share Insurance Fund to 1.39 percent.

Should the Stabilization Fund close, assets would be transferred to the National Credit Union Share Insurance Fund, and the agency projects that transfer would raise the Fund’s equity ratio as high as 1.47 percent, requiring a distribution to credit unions.

Raising the normal operating level still would allow for a distribution to credit unions in 2018. It would also allow the Share Insurance Fund to withstand a moderate recession without the equity ratio dropping below 1.20 percent, at which point federal law requires the agency to charge a premium or develop a fund restoration plan. At 1.39 percent, the Board would also ensure credit unions’ one-percent contributed capital deposit is well-protected.

Questions and answers on the proposed change to the normal operating level are available online here.

Amendments to Share Insurance Distribution Rule Proposed

Credit unions would see greater fairness, predictability, and transparency under a Board-approved Notice of Proposed Rulemaking (Part 741) to accompany the Stabilization Fund closure plan.

The proposed rule amends the existing share insurance requirements rule would give federally insured credit unions greater transparency on how an individual credit union’s share of an equity distribution from the Share Insurance Fund would be calculated. The rule also would prohibit a federally insured credit union that terminates share insurance coverage from receiving a distribution for the calendar year in which that termination occurred.

Finally, the proposed rule would add a temporary provision governing equity distributions related to the Corporate System Resolution Program. The Board believes any such distribution should go first to repaying credit unions that paid special assessments rather than taking the form of a general distribution. A credit union that had not paid a special assessment would not be eligible to receive a distribution related to the Corporate System Resolution Program unless all other corporate assessments have been repaid.

Comments on the proposed rule, available online here (opens new window), must be received no later than Sept. 5.

2017 Mid-Year Budget Review Projects $5.8 Million in Savings

The NCUA’s Chief Financial Officer reported that agency expenditures are estimated to decline by approximately $5.8 million for 2017, based on current projections of agency needs.

The NCUA’s revised 2017 operating budget estimate is now $292.2 million. Reduced spending was noted for the following expense categories:

• A $2.5 million reduction in pay and benefits, based on factors such as the hiring freeze earlier this year, employee turnover, and projected hiring and attrition rates.
• A $1.4 million reduction in travel costs.
• A $1.2 million reduction in contracted services.
• A $516,000 reduction in administrative costs.
• A $122,000 reduction in rental costs.

These funds will be reserved as a contingency for anticipated costs to implement agency restructuring initiatives. No Board action is required with respect to the NCUA budget, and no reduction to the Operating Fund budget is recommended.

The NCUA currently operates on a two-year budget cycle. The 2018 budget is scheduled to be reviewed at the Board’s November open meeting. The agency plans to host a public budget briefing in the fall.

As part of its ongoing commitment to transparency in the budget process, the NCUA continues to make detailed budget information publicly available on its Budget and Supplementary Materials webpage.

Share Insurance Fund Reaches Net Position of $13 Billion

The Share Insurance Fund in the second quarter of 2017 posted net income of $49.3 million, primarily due to a decrease in the provision for insurance losses.

The fund’s net position was $13.0 billion at the end of the quarter.

Second-quarter investment and other income was $49.2 million. Operating expenses were $49.4 million. The provision for insurance losses decreased by $49.5 million.

As of June 2017, the calculated equity ratio is 1.22 percent, based on estimated insured shares of $1.1 trillion. However, when adjusted for the projected one-percent deposit capital adjustment recognized in September, for all federally insured credit unions with assets of $50 million or greater, the equity ratio is estimated to remain at 1.26 percent.

• The number of CAMEL codes 4 and 5 credit unions increased by 6.6 percent from the first quarter of 2017, to 210 from 197.
• Assets in CAMEL codes 4 and 5 credit unions increased 11.6 percent from the first quarter to $10.6 billion from $9.5 billion.
• The number of CAMEL code 3 credit unions declined 1.3 percent from the first quarter to 1,088 from 1,102.
• Assets in CAMEL code 3 credit unions declined 1.7 percent from the first quarter to $53.6 billion from $54.5 billion.

There were no credit union failures during the second quarter of 2017, compared to six credit union failures in the second quarter of 2016. Year-to-date, two federally insured credit unions failed during the first two quarters of 2017, compared to 11 in the first two quarters of 2016. Total year-to-date losses associated with credit union failures are $3.8 million, compared to $8.5 million in the first two quarters of 2016. Fraud was a contributing factor in one of the two failures.

The second-quarter figures are preliminary and unaudited.

Definition Change Would Give Agency More Flexibility in Emergency Mergers

The NCUA would have additional flexibility in situations warranting emergency mergers under a proposed rule (Part 701) approved by the Board.

The proposed rule would amend the definition of the phrase “in danger of insolvency” in the agency’s Chartering and Field of Membership Manual. The current definition requires credit unions to fall into at least one of three net worth categories over a period of time in order to be found in danger of insolvency. The proposed rule would lengthen by six months the time period for two of those categories. The proposed rule would also add a fourth category, to include credit unions that have been granted or received Section 208 assistance within the 15 months before a determination of a danger of insolvency has been made.

Comments on the proposed rule, available online here (opens new window), must be received within 60 days of publication in the Federal Register.

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