Corporate Loss Reduced, Assessment Remains
The NCUA reported March 28 that following a twice-annual review, the highest estimated amount credit unions have yet to pay in corporate assessments has declined by $900 million.
That leaves just $1.6 billion to $3.9 billion in assessments yet to pay, less than the $4.1 billion that credit unions have already paid in corporate assessments since 2009.
However, the NCUA said that wouldn’t mean a reduction in the estimated 2013 corporate assessment, which remains between 8 and 11 basis points. The exact amount will be revealed sometime this summer during an NCUA Board meeting.
The narrower range of projected remaining assessments reflects the actual performance of the failed corporate credit unions’ legacy assets to date and updated projections for the future performance of the NCUA Guaranteed Notes. Factors include changes in housing prices, interest rates, unemployment rates and mortgage prepayments. NCUA uses BlackRock, an independent securities valuation firm, to project the future performance of the legacy assets in NGNs, a key component of this analysis.
NCUA Director of Examination and Insurance Larry Fazio told Credit Union Times the board will set future assessments based on a number of factors, including projected loss ranges, the effect assessments would have on credit union financial reports, and remaining payments on borrowings to the U.S. Treasury worth $5.1 billion.
The Treasury’s variable rates are based upon the one-year Treasury rate, and Fazio said should that rise it would play into the board’s decision.
Additionally once the NGNs end, he said, there will be some value left to the legacy assets that will become available to be monetized.
NAFCU President/CEO Fred Becker said by the NCUA’s own determining factors, the 2013 corporate assessment should be reduced.
The current Treasury rate is lower than the rate of inflation, Becker said, and credit unions should be allowed to use those low rates to their advantage, repaying corporate stabilization costs more slowly with smaller annual assessments.
As the corporate stabilization fund winds down and NGNs mature, the underlying legacy assets will also mature and be worth approximately $2.5 billion, a windfall that will likely be returned to credit unions. The question facing the NCUA Board is whether to repay Treasury borrowings before legacy assets mature and return a rebate to credit unions, or extend Treasury credit terms to coincide with the stabilization fund’s wind down.
Complicating the equation is the need to also estimate future revenue generated by the fund. In 2012, according to audited statements, the stabilization fund generated $1.67 billion in net income from operations, with a little less than half coming from corporate assessments.
CUNA Chief Economist Bill Hampel said that the revised $2.75 billion midpoint of estimated remaining corporate assessments could be fully paid with just over three assessments at last year’s rate of 9.5 basis points of insured shares. Spread over nine years the annual assessment would only be about 2.5 basis points.
Hampel also said during an April 1 press call that should the NCUA rebate extra money to credit unions after corporate losses are repaid, it could create problems for industry accountants. As the corporate stabilization fund winds down, he said, the NCUA will have about $2.5 billion in excess funds that would probably be returned to credit unions. Because credit unions will have already recorded the expenses when recording annual assessments, the rebated funds would have to be added back to balance sheets as income.
"I’d expect the accounting profession would have an interesting time figuring out if that assessment is an expense, knowing there could be a future rebate," Hampel said.
Yes and no, say industry CPAs.
Dan Mahalak, principal at the St. Clair Shores, Mich.-based accounting firm Cindrich Mahalak & Co., said he thinks credit unions would record any NCUA corporate windfall as income for that year.
Timing could present a problem for accountants, Mahalak added, as could the reasons for the rebate. Should the NCUA rebate money in January, it could be interpreted as a "fix" for the prior year’s assessment. However, if a rebate would occur later, it wouldn’t present a problem for the previous year’s financial reports.
The reasons for a rebate will also affect accounting treatments, Mahalak said.
"To me, it’s contingent upon what caused the assessment to be overstated," Mahalak said. "Was this something the NCUA or credit union should have known beforehand? Was the NCUA too cautious to say anything about a potential recovery?"
Mahalak added that the NCUA is unlikely to miss the mark by much, but if the agency does, it will err on the side of overcharging.
"When we get to that point, a lot will be said about the fact that this is it, the corporate stabilization effort is finally over," he said. "And the NCUA isn’t going to want to have understated that loss estimate and have to collect more assessments if everybody thinks we’re done."
Jeff Paille, partner at the Rochester, N.Y.-based accounting firm The Bonadio Group, said recent good news about reduced loss estimates and securities lawsuit recoveries aren’t likely to translate into income for credit unions in the near future.
"It’s too early to understand the value of that to natural person credit unions at this point. We’re just not there yet," Paille said.
In the same way credit unions aren’t supposed to accrue projected corporate assessment expenses, they shouldn’t plan to receive any rebates either, he said.
Both Paille and Mahalak said credit unions do frequently accrue assessment costs against their advice. They also said even though credit unions receive exam or audit exceptions for the practice, because the assessment bill comes in the fall, by yearend the funds are already off the books.
"The only risk is that the NCUA expects to see that cost recorded in the third quarter call report, so credit unions that accrue throughout year have to reconcile previous financial reports so all the expense accrues in the third quarter," Paille said.
Total corporate resolution costs are estimated to be between $11.3 billion and $13.6 billion. In addition to the $4.1 billion in assessments, corporate credit union member capital worth $5.6 billion was also used to recover losses.
A Q&A sheet released by the agency March 28 read that all corporate legacy assets have incurred $6.1 billion in losses through fourth quarter 2012. That number now exceeds the $5.6 billion in capital seized from the five failed corporates, "underscoring that those institutions were insolvent."
The NCUA released the new projections early. Updated figures are available at NCUA.gov. n