CUNA Regulatory Comment Call


July 31, 2009

NCUSIF Premium and One Percent Deposit

EXECUTIVE SUMMARY

Please feel free to e-mail your responses to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.coop and to Regulatory Counsel Luke Martone at lmartone@cuna.coop. You may also contact us at 800-356-9655, ext. 6743, if you have questions. Click here to access the proposed rule.

BACKGROUND

Generally, the NCUA Board must maintain the NCUSIF’s equity ratio between 1.2% and 1.5%. The equity ratio is the proportion of funds in the NCUSIF compared to the amount of insured shares. The normal operating level (NOL) of the fund is set by the Board within that range—currently set at 1.3%—and any excess over the NOL is generally distributed among insured credit unions.

If the equity ratio of the fund drops below 1.2% a premium must be assessed to return it to 1.3% (its current NOL). If the fund’s equity ratio falls below 1% an assessment to replenish it to 1% must be assessed.

BRIEF DESCRIPTION OF THE PROPOSED RULE

The proposed rule provides guidance regarding an insured credit union’s rights and obligations related to the NCUSIF. The proposal addresses the 1% capitalization deposit and the premium required of insured credit unions. The objective of the proposed rule is to fill in the gaps in the current regulations for those credit unions that:

The proposal would add specific language stating that the NCUSIF has the authority to use the 1% deposit if necessary to meet its expenses, and that it may then invoice credit unions to replenish the deposit at any time following depletion.

Conversion to Federal Insurance (Direct)

Initial Funding of 1% Deposit

Institutions that convert to NCUSIF insurance coverage must immediately make a 1% deposit based on “insured shares” as of the end of the most recent reporting period. The proposal would amend the definition of “insured shares” to include the shares of an uninsured institution that would have been insured if it were federally insured. The proposal maintains the definition of “reporting period,” which means calendar year for credit unions with assets under $50 million, and semiannual period for those with $50 million or more in assets.

Premium Assessment

For years in which the NCUSIF assesses a premium, a converting institution would be required to pay an adjusted premium based on when during the calendar year the conversion took place. Specifically, the premium would be based on the institution’s insured shares as of the end of the most recent reporting period multiplied by its premium/distribution ratio. The proposed premium/distribution ratio is the number of full months remaining in the year following conversion divided by 12 (12 months).

The proposed rule includes several illustrative examples, some of which are included in this comment call.

Example A:

CU A converts to federal insurance on 5/15/01. CU A had $1,000 in insured shares on 12/31/00, $1,100 on 5/31/01, $1,200 on 6/30/01, and $1,300 on 9/30/01. On 3/15/01 NCUA declared a premium assessment and sent out the invoices for it on 9/15/01.

CU A’s premium assessment would be $583.

CU A’s premium would be based on insured shares as of the end of the most recent reporting period preceding the invoice, which would be 12/31/00 when CU A had $1,000 in insured shares. The premium/distribution ratio is the number of full months left in the year following conversion divided by 12; for CU A there are 7 full months left in 2001 following its May conversion.

Therefore, CU A’s premium is based on $1,000 multiplied by 7 and divided by 12: 7 x $1,000 / 12 = $583.

Deposit Replenishment Assessment

If the NCUSIF declares a replenishment assessment on or before the date of conversion to federal insurance, the converted credit union will not be required to pay anything for that assessment; this applies even if invoices related to the depletion are sent out after conversion.

However, if a replenishment assessment is declared any time after conversion to federal insurance, the credit union must pay an assessment based on its insured shares as of the end of the most recent reporting period.

Equity Distribution

If the NCUSIF declares a distribution in the same year a credit union converts to federal insurance and the distribution is based on the NCUSIF’s equity at the end of the preceding year, the converted credit union does not receive a distribution.

However, if the NCUSIF declares a distribution in the year following conversion based on the NCUSIF’s equity at the end of the year of conversion, the credit union will receive a distribution based on insured shares as of the end of the preceding year multiplied by the credit union’s premium/distribution ratio.

Example B:

CU B converted to federal insurance in May of 2001. A distribution is declared in January of 2002 based on the NCUSIF equity as of 12/31/01.

CU B’s premium/distribution ratio would be the number of full months in 2001 in which it was insured (7) divided by 12. Thus, CU B’s distribution would be its 12/31/01 insured shares multiplied by 7/12s.

Conversion to Federal Insurance (Indirect)

The following provisions of the proposed rule apply to indirect conversion to federal insurance through merger with another credit union.

Deposit Replenishment Assessment

In a merger of a federally insured credit union with a non-federally insured institution (merged institution) in which the insured credit union continues, the continuing credit union would be required to immediately increase its NCUSIF deposit by 1% of the merging institution’s insured shares. The increase would be based on insured shares as of the end of the merging institution’s most recent reporting period.

Premium Assessment

If a premium is assessed in same the calendar year as a merger of two institutions, the continuing credit union would pay a two-part premium. The first part would be calculated on the merging institution’s insured shares as of the end of its most recent reporting period. The other part would be calculated on the continuing credit union’s insured shares as of the end of its most recent reporting period.

Equity Distribution

If in the year following a merger a distribution is declared based on the NCUSIF’s equity at the end of the year of the merger, the continuing federally insured credit union’s distribution would be based on its insured shares as of the end of the year of the merger.

If a distribution is declared in the same year as the merger, but is based on the NCUSIF’s equity at the end of the preceding year, the continuing credit union’s distribution would still be based on its insured shares as of the end of the preceding year. The calculation is the same as above; this is because the shares of the merging institution are not relevant since they were not federally insured during the preceding year in which the distribution was based on.

Termination of Federal Insurance

Return of 1% Deposit

A federally insured credit union whose coverage with the NCUSIF terminates would receive the full amount of its deposit, less any announced depletion, immediately following termination.

Example C:

CU C converted from federal insurance on 11/15/01. As of 12/31/00 CU C had $20 million in assets. Prior to CU C’s conversion, the NCUSIF announced an expense that reduced the equity ratio from 1.3% to .75%.

CU C’s refund from it’s (previously 1% and now .75%) deposit would be decreased by any reduction in the equity ratio below 1%. Thus, rather than receiving a refund of $200,000 (1% of $2 million), CU C would receive only $150,000 (due to the 25 basis point reduction to the fund’s equity ratio).

Equity Distribution

If a distribution is declared at end of the calendar year in which a credit union’s federal insurance terminates, the credit union’s distribution would be based on its insured shares as of the end of the most recent reporting period multiplied by its modified premium/distribution ratio.

The proposal defines the modified premium/distribution ratio as 1 minus the premium/distribution ratio. The modified premium/distribution ratio represents the fraction of the year that an institution departing the NCUSIF system was insured.

Example D:

CU D converted from federal insurance on 11/15/01. As of 12/31/01 CU D had $20 million in assets. In January of 2002, the NCUSIF declared a distribution based on the equity ratio as of 12/31/01.

CU D would receive a pro rata distribution calculated as its $20 million in insured shares multiplied by its modified premium/distribution ratio. CU D’s modified premium/distribution ratio is 1 minus its premium/distribution ratio, which is 1 minus the ratio of the number of full months remaining in the year divided by 12, which is 1 minus (1 divided by 12), which is 11 divided by 12.

CU D would receive a pro rata distribution based on $20 million of insured shares times 11/12s, approximately $18.3 million in shares.

Option to Leave Nominal Sum on Deposit Following Termination

The proposal would remove the option for credit unions that terminate NCUSIF coverage to leave a “nominal sum on deposit with NCUSIF until the next distribution from NCUSIF equity.” The proposed rule suggests removing the option, in part, due to the similar affect of the above-mentioned provision on the distribution of equity—which would not require any amount to be left on deposit with the NCUSIF.

Premium Assessment

During the calendar year if the NCUSIF assesses a premium on or before the day in which a credit union’s federal insurance terminates, the credit union would be required to pay a premium based on its insured shares as of the end of the most recent reporting period multiplied by its modified premium/distribution ratio.

Example E:

CU E’s federal insurance terminates November 15. CU E had $20 million in insured shares as of the end of the most recent reporting period. A premium was declared in February and invoiced on November 15.

CU E’s premium would be based on $20 million in insured shares times 11/12s (it’s modified premium/distribution ratio), equaling about $18.3 million.

Assessment of Administrative Fee and Interest for Delinquent Payment

The proposal would delete the currently overlapping provisions for imposing both the “costs of collection” and an “administrative fee.” The proposal would also change the interest rate to a fixed rate of 6% per year. The delinquency fee would be calculated based on a 360-day year, that is, 6% times the unpaid balance divided by 360 times the number of unpaid days.

QUESTIONS TO CONSIDER REGARDING THE PROPOSED RULE

  1. Should the examples—some of which are included in this comment call—be formally included in the final rule?
















  2. Is the language regarding the NCUSIF’s authority to use the 1% as needed too broad?
















  3. Do you have any concerns with the proposed premium/distribution ratio for calculating the premium assessment?
















  4. Do you have any concerns with the proposed premium/distribution ratio for calculating the equity distribution?
















  5. Do you have any concerns with the proposed modified premium/distribution ratio for calculating the premium assessment for credit unions that have terminated NCUSIF coverage?
















  6. Do you have any concerns with the proposed modified premium/distribution ratio for calculating the equity distribution for credit unions that have terminated NCUSIF coverage?
















  7. Do you have any objection to elimination of the option to leave a nominal sum of money on deposit with the NCUSIF until its next distribution?
















  8. Any other questions or areas concern?
















  9. Other comments?
















Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Luke Martone • Senior Regulatory Counsel • (202) 508-6743 • lmartone@cuna.com