Letter to Credit Unions No.: 12-CU-14 Scheduled Expiration of the TCCUSG & Unlimited Insurance on Noninterest-Bearing Transaction Accounts
NCUA published LTCU 12-CU-14 to remind credit unions that on December 31, 2012, two different unlimited insurance coverage programs will come to an end:
1) Temporary Corporate Credit Union Share Guarantee (TCCUG) – The TCCUG has provided additional share insurance coverage to funds natural person credit unions have with their corporate since March, 2009. Earlier this year, NCUA published
LTCU 12-CU-03 which contains detailed information regarding the implications for credit unions of the end of the program. In particular, NCUA reminded credit unions that on January 1, 2013, the share insurance coverage on deposits in corporates will be limited to the standard maximum share insurance amount of $250,000.
2) Insurance on Noninterest-Bearing Transaction Accounts – Pursuant to §343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 the FDIC and NCUA have provided temporary unlimited share/deposit insurance coverage on all noninterest-bearing transaction accounts in federally insured credit unions and banks. This extended coverage will expire on December 31, 2012, returning to the permanent level of up to $250,000 beginning January 1, 2013.
With the year-end deadline approaching, NCUA encourages credit unions to identify members maintaining accounts with the soon-to-be expiring unlimited insurance coverage and communicate the upcoming change in coverage. Credit unions should also ensure their account disclosures properly reflect share insurance coverage post January 1, 2013.
Letter to Credit Unions No.: 12-CU-13 Projected 2013 NCUSIF Premium and Corporate Stabilization Fund Assessment Range
NCUA published LTCU 12-CU-13 to provide credit unions a range for the premium and assessment for the NCUSIF and the Corporate Stabilization Fund, respectively. NCUA provides the range of assessments to a facilitate credit unions’ planning, however the estimates are subject to change.
NCUA stresses that credit unions should not expense the premium or the assessment or use the projections as the basis for an accrual of future expenses.
For 2013, NCUA projects a premium for the share insurance fund between 0 and 5 basis points of insured shares. The assessment for the Stabilization Fund is between 8 and 11 basis points of insured shares.
Letter to Credit Unions No.: 12-CU-12 Changes Planned for Upcoming Call Reports
NCUA issued Letter to Credit Unions 12-CU-12 to inform the credit union system of pending changes to the 5300 Call Report. The changes are being rolled out over the next three Call Report cycles.
Starting with the December 31, 2012 Call Report cycle NCUA will implement the changes resulting from the agency’s final rule on troubled debt restructuring (TDR). Specifically, the Call Report will no longer require credit unions report modified-loan information on the various schedules. Instead credit unions will report the information exclusively on troubled debt restructures.
NCUA will also make the following significant changes to the March 31, 2013 Call Report and Profile.
NCUA separated new and used vehicle loans from other loans and added fields for member and nonmember business-loan delinquency to match the business-loan categories on Schedule A, §4. The new fields include member business loans secured by real estate; member business loans not secured by real estate; nonmember business loans secured by real estate; and nonmember business loans not secured by real estate. NCUA has also added fields for unfunded commitments for the business loan fields.
NCUA added fields to capture information on loans held for sale.
A new section has been added to Schedule A to capture the number of loans outstanding, contractual balance outstanding, nonaccretable balance outstanding, accretable yield outstanding, carrying value of loans, and loans charged off against valuation adjustment account year-to-date by various loan categories.
In order to collect the book value and fair market value of investments used to fund employee benefit plans a new field has been added to Schedule B.
The diversity questions have been revised to clarify reporting and Equal Employment Opportunity Commission filing requirements.
Several fields have been added to collect information on remittance transfer services.
Starting with the March 2013 cycle, credit unions receiving grants must complete new fields for grant funding.
Effective for the June 2013 cycle, NCUA will revise the delinquent loan schedules, changing the categories from “months” to “days.” NCUA notes that this change may require credit unions modify their data processing systems in advance of the June cycle.
NCUA’s new final rule §741.3(b)(5) regarding interest rate risk and effective September 30, 2012, requires certain federally insured credit unions (FICUs) to have a written policy on interest rate risk (IRR) management and an effective implementation program. Earlier this year, NCUA published LTCU 12-CU-05 to inform credit unions of the provisions and requirements of the new rule (NASCUS summary here). NCUA is issuing LTCU 12-CU-11 to answer the most frequently asked questions that have arisen regarding implementation of the final IRR rule.
In response to questions as to why the rule was issued as a requirement for insurance NCUA states that IRR is a core risk akin to lending and investments “for which regulatory requirements for insurance already exist.” NCUA states however that the purpose of the rule is not to provide a reason to withdraw insurance. With respect to implementation of the rule by examiners, NCUA refers credit unions to the IRR questionnaire published in LTCU 12-CU-05. NCUA also stresses that the rule does not supersede existing guidance on specific sources of interest rate risk. Previous guidance on the matter includes:
LTCUs: 99–CU–12, Real Estate Lending and Balance Sheet Risk Management; 00–CU–10, Asset Liability Management Examination Procedures; 00–CU–13,Liquidity and Balance Sheet Risk Management; 01–CU–08, Liability Management—Highly Rate-Sensitive and Volatile Funding Sources; 01–CU–19, Managing Share Inflows in Uncertain Times; 03–CU–11, Non-Maturity Shares and Balance Sheet Risk; 03–CU–15, Real Estate Concentrations and Interest Rate Risk Management for Credit Unions with Large Positions in Fixed-Rate Mortgage Portfolios; 06–CU–16, Interagency Guidance on Nontraditional Mortgage Product Risk; 10–CU–06, Interagency Advisory on Interest Rate Risk Management
NCUA reminds credit unions that their board of directors is responsible for the credit union’s IRR policy. The final rule contains an Appendix that provides guidance in developing a policy. Policies should be validated and reviewed at least annually to ensure they are commensurate with the credit union’s risk exposure. The validation of the policy may be done internally.
An effective policy should:
- Identify parties responsible for an annual review of the credit union’s IRR exposure
- Direct appropriate actions to ensure management identifies, measures, monitors, and controls IRR exposure and reports to the board
- Set risk limits for IRR exposure based on selected measurements
- Provide for shock testing
- Ensure any new business activities are considered for their impact on IRR prior to implementation
- When appropriate, establish monitoring limits for individual portfolios, activities, and lines of business.
NCUA published LTCU 12-CU-10 to remind credit unions of the pending October 31, 2012 closing of U.S. Central Bridge Corporate Federal Credit Union (U.S. Central Bridge) that will affect the access of more than 6,000 natural person credit unions (NPCUs) to the Central Liquidity Facility (CLF). The LTCU also draws NPCU attention to NCUA’s recently proposed emergency liquidity rule. Both of these issues will be the subject of a NCUA webinar being held on Tuesday, August 14, 2012.
Many NPCUs rely on the CLF as their primary contingent liquidity plan. These credit unions’ access to the CLF is by way of their membership in a corporate and the corresponding membership of that corporate in US Central Bridge as the “agent” for the NPCUs. However, upon US Central Bridge’s closure on October 31, 2012, its position as agent will terminate and all NPCU’s whose access to the CLF relied on the agent relationship will lose that access.
An attachment to LTCU 12-CU-10 contains Frequently Asked Questions developed by NCUA to discuss the changes that will occur to the CLF as a result of U.S. Central Bridge’s closure, the way in which the CLF operates, and the need for credit unions to have access to emergency liquidity.
The second issue addressed in NCUA’s letter is a reminder that comments are due September 28, 2012 on NCUA’s newly proposed emergency liquidity rule. The proposed rule would implement a three tiered regulatory requirement for NPCU liquidity planning:
- FICUs with less than $10 million in assets would be required to maintain a basic written liquidity policy that establishes a credit union board-approved framework for managing liquidity and a contains a list of contingent liquidity sources for adverse circumstances
- FICUs with assets between $10 million and $100 million must have a comprehensive written liquidity plan that includes contingency funding sources and establishes strategies for addressing liquidity shortfalls in emergency situations, identifies lines of responsibility within the credit union for implementing the plan, and addresses testing and updating the plan
- FICUs with assets of $100 million or more must have a comprehensive written liquidity plan as described above as well as have access to a backup federal liquidity source for emergency situations
The complete proposed rule may be read here.
LTCU 12-CU-10 Enclosure: FAQs
The LTCU included an enclosure of FAQs addressing issues related to the CLF. Below is a summary of some of the FAQs and answers. For a complete list of the questions and full answers, refer to LTCU 12-CU-10.
- Will my credit union have access to the CLF in the future?
NCUA notes that with the close of U.S. Central Bridge in October, NPCUs whose access to the CLF derived from that agent group arrangement will also terminate. At that point NPCUs intending to utilize the CLF as their contingent liquidity source would either have to become a regular (direct) member of the CLF or seek a new agent relationship such as another corporate credit union.
- Can my corporate credit union continue to serve as my liquidity backstop?
While possible, NCUA notes that the reconfigured corporate system has, in many cases, diminished capacity to access liquidity markets.
- Could my corporate credit union facilitate access to the CLF for me?
It is possible that some corporate credit unions may choose to become agents by subscribing to CLF stock on behalf of their natural person credit union members.
- Could the Federal Reserve serve as my new federal liquidity backstop?
NCUA states that a NPCU that meets the Federal Reserve Discount Window’s reserve requirements may establish borrowing privileges at the Federal Reserve. NCUA does note that it may take up to a week for an institution with no Federal Reserve relationship to file the necessary paperwork and pre-position collateral to borrow.
- Is the NCUA considering including Federal Home Loan Banks (FHLBanks) as entities that can serve as “emergency liquidity providers” to satisfy the proposed requirement for pre-arranged access to emergency liquidity?
NCUA has proposed that only the CLF or the Federal Reserve Discount Window satisfy the emergency liquidity requirement. NCUA states that FHLBanks are private institutions and as such are not obligated and may not be able to meet emergency liquidity demands in the same way the CLF and the Discount Window are statutorily designed to do.
- If my corporate will not be a CLF agent, could my credit union become a direct member of the CLF? How much would it cost?
Yes, NPCUs may join the CLF directly (96 are regular members) and while there is no explicit membership fee join a regular member NPCU must subscribe to the capital stock of the CLF and complete certain documentation. The required stock subscription is .5% percent of the credit union’s paid-in and unimpaired capital and surplus.
- Besides liquidity needs loans, what other loans has the CLF made?
In November 2008 NCUA expanded the scope of CLF lending for “other than liquidity needs” (OTLN) when in the national economic interest. This expanded authority allowed NCUA to implement the Credit Union System Investment Program (CU SIP) and the Credit Union Homeowners Affordability Relief Program (CU HARP). NCUA intended both programs to used NPCUs to provide funding to help corporate credit unions maintain credit flows to their members, while providing a needed return for the NPCUs during a time of market dislocation. In addition to making CU SIP and CU HARP loans, the CLF advanced $10 billion to the NCUSIF in 2009 to stabilize the liquidity of two troubled federal corporate credit unions in conjunction with their being placed in conservatorship.
NCUA’s LTCU 12-CU-09 announces that the 2012 assessment for the Temporary Corporate Credit Union Stabilization Fund will be 9.5 basis points (0.095% of a credit union’s insured shares as of June 30, 2012). Credit unions will receive an invoice for the assessment in September with payment due on October 9, 2012. The rest of LTCU 12-CU-09 provides answers to the following questions about the 2012 assessment.
Why is the assessment set at 9.5 basis points?
NCUA projects the assessment will raise $790.5 million to offset the estimated $3.5 billion in Stabilization Fund obligations coming due and payable through year end 2012. The remaining amount due will be covered by NCUA’s borrowing authority from Treasury, cash available in NCUA-managed Asset Management Estates (AMEs) resulting from the five failed federal corporate credit unions, and converting other corporate assets to cash.
How should my credit union account for the assessment?
Credit unions should record the assessment expense on the September 2012 Call Report using the Temporary Corporate CU Stabilization Fund Assessment line (account code 311) on the Statement of Income and Expense and consult with an accounting practitioner as needed.
What is the impact of the 2012 assessment on credit unions’ earnings and net worth?
The assessment is projected to reduce 2012 ROA by eight basis points and the aggregate net worth ratio by five basis points.
Will examiners take the effect of the assessment into account when evaluating credit union earnings and net worth?
NCUA reiterates the guidance provided examiners and industry in Letter to Credit Unions 09-CU-23, Reviewing Adequacy of Earnings, instructing NCUA examiners to take into account the assessment when evaluating a credit union’s earnings. NCUA also pledged to be flexible to the extent permitted by law in reviewing and approving net worth restoration plans for the few credit unions that fall into Prompt Corrective Action (PCA) due to the assessment.
What are the remaining projected costs of the corporate resolution program?
NCUA’s analysis of corporate resolution cost projections, based in part on modeling of the corporate credit unions’ legacy assets as of December 31, 2011 projects a cumulative net total assessment for the corporate resolution of between $6.0 billion and $9.3 billion, with a remaining projected range of $1.9 billion to $5.2 billion in remaining assessments. Future assessments will be based on a variety of factors, including:
Cash needs of the Stabilization Fund
Projections of losses and cash flows on the legacy assets
Actual performance of the legacy assets
NCUA’s LTCU 12-CU-08 provides credit unions with an update on the condition of the system, based on March 31, 2012 data. NCUA notes that the credit union system had reached several milestones:
- Total assets topped $1 trillion
- Net worth exceeded $100 billion
- Credit unions now serve more than 92.5 million members
While the number of FISCUs fell to 7,019, the system’s performance had improved in 2012 with return on assets (ROA) up to a level of 84 basis points. The increase in ROA represents a 17 basis point increase since year-end 2011 and a 66 basis point increase since 2009. Other highlights include:
- Assets increased $40.07 billion (16.67% ) on an annualized basis
- Net Worth dollars climbed $2.06 billion (8.37% annualized) to $100.32 billion
- While average net worth ration declined, it remains above 10% (10.01%)
- Loans increased from $532.72 million to $572.01 billion (.37% annualized)
- Delinquencies dropped from 1.60% to 1.44% with delinquent real estate loans as a percentage of total real estate loans declined from 2.00% to 1.87%; delinquent business loans to total business loans (less unfunded commitments) decreased from 3.82% to 3.65%; and delinquent loan participations as a percentage of total loan participations fell from 4.16% to 3.94%
- Net Loan Charge-Offs to average loans declined from 0.91% to 0.78%
NCUA concludes LTCU 12-CU-08 by noting that despite encouraging trends, supervisory concerns remain in credit risk, interest rate risk, liquidity risk, and concentration risk.
12-CU-07 Mortgage Servicing Practices Impacting Military Homeowners
NCUA issued LTCU 12-CU-07 to alert credit unions to joint guidance issued by NCUA and the other Federal Financial Institutions Examination Council (FFIEC) agencies addressing mortgage servicer practices impacting military homeowners. The FFIEC guidance applies to any credit union providing mortgage services to military service members: including credit unions that manage a member’s mortgage loan account, including collecting/ crediting monthly payments.
Specifically, the FFIEC guidance, published June 21, 2012, addresses risks related to military homeowners who have notified their mortgage servicer of receiving Permanent Change of Station (PCS) orders. A PCS order informs an active service member that they are being moved to a new base. Service members that receive PCS orders remain accountable for their financial obligations, including their mortgages. Furthermore, the economic disruption and instability for military families that result from being uprooted to new communities make them susceptible to unfair, deceptive, and abusive practices. Practices of concern to regulators include:
- Failing to provide service members who notify their servicers of such orders with accurate, clear, and readily understandable information about available assistance options available for the homeowner. Options include the Making Home Affordable Program and programs offered through Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the Department of Agriculture-Rural Development (USDA-RD).
- Asking service members to waive legal rights under the Service Members Civil Relief Act.
- Advising service members who are current and able to make the monthly payment to intentionally skip payments in order to create the appearance that they are in financial difficulty in order to obtain assistance for which they would not otherwise qualify.
- Failing to timely communicate decisions regarding requests for assistance from service members and failing to include an explanation of the reason for the denial where required.
What does NCUA expect from credit unions?
LTCU 12-CU-07 informs credit unions of NCUA’s expectation that they develop and implement appropriate policies and procedures to address the risks to military homeowners who have received PCS orders. NCUA recommends credit unions train staff appropriately on consumer protection for military families and adopt the following policies:
- Provide homeowners with readily understandable information about available assistance options for which they may qualify, based on information known to the credit union
- Provide a reasonable means for borrowers to obtain information on the status of their requests for assistance
- Communicate the credit union’s decision timely to homeowners regarding requests for assistance, including explanation for denial and what deficiencies need to be addressed
NCUA will determine through the supervision and member complaint processes whether a credit union has engaged in practices that are unfair, deceptive, or abusive, or that otherwise violate federal consumer financial laws and regulations.
NCUA issued LTCU 12-CU-06 to provide natural person credit unions an update on the transition of U.S. Central Bridge Corporate FCU (U.S. Central Bridge) Automated Clearing House (ACH) Services to other ACH providers. The LTCU is presented in a question-and-answer format. NCUA notes that all of the 18 corporate credit unions (and the Members Group) that utilize U.S. Central Bridge ACH services have finalized their transition plans. Several of those have completed their transition from US Central Bridge ACH, and other are in process of completing their transition away.
Among the points in NCUA’s guidance letter:
- The transition process away from US Central Bridge are on track to be completed up to three months ahead of NCUA’s stated deadline of December 31, 2012.
- Should the of transition from US Central Bridge ACH services continue apace, NCUA should be able to complete the wind down by October 31, 2012. This early completion of the wind down should result in lower resolution costs to the credit union system.
NCUA’s LTCU 12-CU-06 contains an enclosed list of corporate credit unions that used US Central Bridge’s ACH services at the beginning of the corporate credit union system resolution. As noted above, some corporates on the LTCU’s enclosure have completed their transition away from US Central Bridge’s ACH, and others are nearing completion of their transition.
12-CU-05 IRR Policy and Program Requirements
NCUA has published LTCU 12-CU-05 to provide more information to credit unions regarding NCUA’s new final interest rate risk (IRR) policy and program rule, Part 741.3(b)(5). The new IRR rules become effective September 30, 2012. (A summary of the final IRR rule is available on the NASCUS website here.) In the LTCU, NCUA answers the following “frequently asked questions” about the new IRR rules:
1) Is your credit union subject to the new requirements? – The rule employed a tiered approach exempting credit unions with less than $10 million from the rule. Credit unions with assets in excess of $50 million, and credit unions with assets between $10 million and $50 million with the sum of first mortgage loans held and investments with maturities exceeding five years equal to or greater than 100% of net worth, are subject to the rule. The LTCU reminds credit unions that the final rule contained an appendix with guidance on developing an IRR policy and an effective IRR management program. NCUA also refers credit unions to early guidance, LTCU 10-CU-06 (May 2010). (LTCU 10-CU-06 is also summarized on the NASCUS website).
2) What are the reasons for this rule? – NCUA cites “substantial growth” to federally insured credit union (FICU) exposure to IRR from first mortgage loans and long-term investments. In particular, NCUA notes that the ratio of first mortgages and investments with maturities exceeding five years to net worth (the Supervisory Interest Rate Risk Threshold or “SIRRT”) increased from 199% at year-end 2005 to a peak of 271% in March 2011.
3) How does this rule affect previous guidance issued by NCUA? – NCUA responds that rule and its accompanying guidance provides an overall framework for a credit union, senior management and its board to address IRR. Previous guidance tended to focus on specific areas of IRR and remain in effect as sources upon which credit union can build the mandated policies and programs. Previous guidance includes LTCUs: 99-CU-12, Real Estate Lending and Balance Sheet Risk Management; 00-CU-10, Asset Liability Management Examination Procedures; 00-CU-13,Liquidity and Balance Sheet Risk Management; 01-CU-08, Liability Management-Highly Rate-Sensitive and Volatile Funding Sources; 01-CU-19, Managing Share Inflows in Uncertain Times; 03-CU-11, Non-Maturity Shares and Balance Sheet Risk; 03-CU-15, Real Estate Concentrations and Interest Rate Risk Management for Credit Unions with Large Positions in Fixed-Rate Mortgage Portfolios; 06-CU-16, Interagency Guidance on Nontraditional Mortgage Product Risk; 10-CU-06, Interagency Advisory on Interest Rate Risk Management
4) How will NCUA implement the rule? – NCUA states that the agency will attempt to implement the rule “consistently while taking into account differences among institutions.” To facilitate credit union understanding of NCUA’s administration of the new rule the agency published the new IRR questionnaire for examiners to use when evaluating FICU policies and programs. The new questionnaire replaces the existing questionnaire and procedures referenced in LTCU 00-CU-10 published in November, 2000.
5) What should credit unions do to prepare? – NCUA instructs credit unions to the new IRR rule and guidance.
6) What additional actions is NCUA taking? – NCUA has distributed the questionnaires to examiners and have provided training on the new rules. NCUA will also host a webinar at a future date for credit unions.
The LTCU included an attachment linking to the new IRR questionnaires.
12-CU-04 NCUA Grants Available for Low-Income Credit Unions
NCUA Letter to Credit Unions 12-CU-04 announces the appropriation by Congress of $1.3 million to the Community Development Revolving Loan Fund (CDRLF). The money will provide grants from CDRLF to support low-income designated credit unions serving low-income communities. Low income designated credit union may apply for grants up to $25,000 combined for the following initiatives:
Financial Literacy & Education in School Branches
New Product/Service Development
Staff, Official & Board Member Training
Student & Job Creation Internship
Volunteer Income Tax Assistance
Eligible credit unions may apply for grants until June 29, 2012. In addition, credit unions affected by a natural disaster or other unexpected adverse event may apply to the Urgent Needs Initiative for up to $7,500 to cover resulting expenses. The Letter to Credit Unions contains an attachment detailing the Grant guidelines.
To qualify for grants, state-chartered credit unions must have the equivalent low-income designation from their state regulator and concurrence from NCUA.
12-CU-03 Temporary Corporate Credit Union Share Guarantee Expires December 31, 2012
NCUA published LTCU 12-CU-03 to remind natural person credit unions that the Temporary Corporate Credit Union Share Guarantee Program (Guarantee Program) will end as scheduled on December 31, 2012. NCUA notes that by the end of 2012, all products and services offered by conserved federal corporate credit unions will have been transitioned to other providers and all remaining corporate credit unions are meeting the new higher regulatory standards for capital, investments, and governance.
Beginning January 1, 2013, NCUA coverage on deposits in corporate credit unions will revert to the standard maximum share insurance amount of $250,000. NCUA is encouraging natural person credit unions to evaluate their account holdings with their corporate(s) to determine if those holdings need adjusting before the expiration of the Guarantee Program. When the Guarantee Program expires, some credit unions may be adverse to the risk of having funds on deposit with their corporate in excess of the standard share insurance coverage amount. LTCU 12-CU-03 provides examples of how NCUA insurance coverage will apply after termination of the Guarantee Program:
- A credit union maintains $1,000,000 in an overnight account at a participating corporate. Beginning on January 1, 2013, the $750,000 above the standard maximum share insurance amount will not be guaranteed or insured.
- A credit union presently has a $2,000,000 two-year share certificate at a participating corporate, with a maturity of June 30, 2013. The certificate is covered by share insurance of $250,000, and the remaining balance of $1,750,000 will be covered by the Share Guarantee through December 31, 2012.
- A credit union plans to purchase a $5,000,000 one-year share certificate at a participating corporate on May 15, 2012, with a maturity of May 14, 2013. The certificate will be covered by share insurance of $250,000, and the remaining balance of $4,750,000 will be covered by the Share Guarantee through December 31, 2012.
NCUA issued LTCU 12-CU-02 to inform natural person credit unions receiving ACH services from 18 specified corporates and The Members Group (together “ACH Providers”) that their ACH Providers will be themselves transitioning to a new provider in light of the winding down of US Central Bridge Corporate and its payment services. The affected Service Providers are:
- Alloya Corporate Federal Credit Union
- Catalyst Corporate Federal Credit Union
- Central Corporate Credit Union
- Corporate America Credit Union
- Corporate Central Credit Union
- Corporate One Federal Credit Union
- First Carolina Corporate Credit Union
- First Corporate Credit Union
- Kansas Corporate Credit Union
- Kentucky Corporate Federal Credit Union
- Louisiana Corporate Credit Union
- Missouri Corporate Credit Union
- Southeast Corporate Federal Credit Union
- SunCorp Credit Union
- Treasure State Corporate Credit Union
- TriCorp Federal Credit Union
- Volunteer Corporate Credit Union
- Western Bridge Corporate Federal Credit Union
- Non-Corporate Credit Union Users: The Members Group
In the LTCU, NCUA notes that all corporates were required to prepare payment service transition plans in anticipation of the winding down of US Central Bridge. NCUA expects that the above listed ACH Providers will work with any of their affected natural person credit union members. Each corporate’s timeline for transition will likely be unique and it will not be possible to transition all services to all credit unions at the same time. Therefore, NCUA is facilitating a transition period for the final wind-down of U.S. Central Bridge’s ACH services, to be completed December 31, 2012. NCUA will continue to communicate information on this issue.
Letter to Credit Unions No.: 12-CU-01 Supervisory Focus for 2012
NCUA’s first Letter to Credit Unions (LTCU) of 2012 reported on improving financial trends in the credit union system in the first three quarters of 2011 and outlines specific risks and corresponding mitigating actions credit unions should take in order to manage those risks.
- Net income during the first nine months of 2011 exceeded net income for all of 2010
- ROA .66% annualized
- Deposits, loans, assets, and net worth all rose during the third quarter 2011
- The aggregate net worth ratio continued to increase up to 10.15%
- There are 2681 FISCUs [4,498 FCUs]
Additional statistics on the first three quarters of 2011 were included in an enclosure with LTCU 12-CU-01.
2012 Supervisory Concerns
The LTCU notes that several lending trends raise areas of concern. NCUA cites growth in low-rate first mortgages continuing to exceed growth in overall loans. The concern is that credit unions holding high concentrations of long-term fixed-rate loans will be subject to negative margins when interest rates rise and short-term funding costs exceed income from fixed-rate mortgages. In addition, NCUA also cites increases in loans with delinquencies 12 months or longer as an indicator of a possible spike in charge-offs in the near future.
2012 Supervisory Focus
In 2012, NCUA will focus supervisory efforts on credit unions with elevated levels of:
- Credit risks: Delinquencies and charge-offs in real estate, business, and participation loans remain historically high, and credit unions must ensure Allowance for Loan and Lease Loss (ALLL) accounts are adequately funded. Given that modified loans also carry a high risk of re-default, NCUA also encourages credit unions establish prudent loan modification policies and procedures. The guidance also states that NCUA expects credit unions enact policies and procedures, and implement risk mitigation strategies for other high risk portfolios such as non-federally guaranteed student loans, third-party indirect loan programs, and vendor or affiliated party transactions. NCUA also refers readers to previous guidance: LTCUs 10-CU-15, 07-CU-13, and 04-CU-13.
- Interest rate risks: NCUA states that a majority of credit union member balances are in rate-sensitive accounts, which are less stable funding sources than regular shares or share drafts. The guidance states that before interest rates rise and strain earnings, it is vital for credit unions with high exposure to interest rate risk to re-structure their balance sheets by selling off excessive concentrations of long-term loans, and re-pricing share products. before rates begin to rise.
- Liquidity risks: NCUA notes that some credit unions seeking the higher yield of longer term maturities have created short term liquidity risks. This, coupled with the uncertainty of the future of the Central Liquidity Facility (CLF) as a general source of emergency liquidity for the credit union system is of concern to NCUA.
- Concentration risks: Because concentration risks are compounded when credit unions hold both mortgages and mortgage-backed securities, NCUA will expect credit unions with high levels of concentration risk implement risk mitigation and diversification strategies to prevent concentrations from reaching unsafe levels.