(Feb. 19, 2021) No premium – for now — is in the works for credit unions to pay to bring the federal credit union savings insurance fund back up to its “normal operating level,” but that could change after June, according to a discussion held by NCUA Board members Thursday.

“We may no longer be able to avoid it,” NCUA Board Chairman Todd Harper said about a future premium for credit unions. “It’s no longer a question of if, but when and how much” of a premium will be charged. He added that, whatever decision the board ultimately makes about a premium, it will be data driven – and the result of consensus among the board members, himself, Vice Chairman Kyle Hauptman and Member Rodney Hood.

During a briefing on the current equity ratio of the National Credit Union Share Insurance Fund (NCUSIF) – which describes the total reserves in the fund relative to the total credit union savings insured – the board was told the ratio at year-end 2020 stood at 1.26% — six basis points (bp) below that projected by NCUA in September.

The 1.26% equity ratio is also 12 basis points (bp) below the “normal operating level” (NOL) of the fund that is set by the agency board. The NOL is the reserve level at which the board has determined the fund can adequately cover any losses presented to the fund.

Looking ahead, the board was told by staff during the briefing, more savings are expected to flow into credit unions in the coming months, continuing a trend that surfaced last year, and spurred in 2021 by another federal economic stimulus package now in the works by Congress. (The stimulus is meant to counter the financial impact of the ongoing coronavirus crisis.) Meanwhile, earnings on the fund’s reserves are expected to remain reduced, reflecting the low-interest rate environment. The result: continued downward pressure on the NCUSIF equity ratio, making it more difficult to reach the NOL by this summer, the next time the board hears a report on the equity ratio.

NCUA Chief Financial Officer Eugene Schied, during the presentation, noted that credit unions will adjust their 1% deposits in the insurance fund (collected in April), which will total about $866 million. He said that would result in about a 5 bp bump to the equity ratio – which, when added to year-end’s equity ratio, is still well below the NOL, and will also be affected by any increase in savings in insured by mid-year.

Schied said (in answer to a question from Todd Harper), however, that it is still too early to tell where the equity ratio will be as of June 30. Nevertheless, staff agreed with Harper that the trendline for the equity ratio has been going down since 2018.

LINK:
NCUA Board Briefing: Share Insurance Fund Quarterly Report.

Harper comments at 2/18/21 NCUA Board meeting, re: NCUSIF

(Feb. 19, 2021) NASCUS President and CEO Lucy Ito commended all three board members for their vigilance in monitoring the insurance fund equity ratio, “especially in light of the root cause for the downward pressure on the ratio: a dramatic and likely continuing increase in insured shares related to economic stimulus payments, and not unsafe or unsound operating practices by credit unions.”

She also agreed with comments by both Vice Chairman Hauptman and Board Member Hood that the agency must proceed carefully regarding a premium, and with Harper about any decisions made about a premium be data driven.

“NASCUS is also intrigued by the suggestion of possible congressional action to expand the investment authority of the insurance fund that would maximize yield while assuring the protection of the fund,” Ito said, noting comments made by Harper during the meeting. “The state system will be studying the statutorily permissible investments by the NCUSIF compared to the FDIC to inform potential legislation.”

(Feb. 19, 2021) While four funds administered by NCUA all earned unmodified or “clean” audit opinions for 2020, the agency’s inspector general still outlined a number of 2021 challenges for credit unions that could have an impact on continuing that audit performance, according to a report issued this week.

The agency said its auditor, KPMG LLP, issued unmodified opinions for the National Credit Union Share Insurance Fund (NCUSIF), the agency’s operating fund, the Central Liquidity Facility (CLF), and the Community Development Revolving Loan Fund (CFRLF).

In issuing the audit opinions, the agency’s office of inspector general (OIG) also outlined as the major challenges in 2021 for credit unions (and the funds) to be: cyber threats, technology-driven changes to the financial landscape, interest-rate risk, membership trends, and a recovery from the coronavirus crisis.

“We believe the economy and credit unions’ recovery from the COVID-19 pandemic will be the NCUA’s greatest management challenge going forward in 2021 and possibly beyond,” the OIG report states.

“Even if the economy continues to recover as expected, the operating environment for credit unions over the next two years could prove to be more difficult than in prior years, and credit union performance could deteriorate,” the report adds. “Credit unions should plan for a range of economic outcomes that could affect their performance and resource needs.”

In the other areas, the report notes:

Cyber threats: “Credit unions’ increasing use of technology exposes the credit union system to increasing cyber-attacks. Specifically, malware, ransomware, distributed denial of service (DDOS) attacks, and other forms of cyber intrusion affect credit unions of all sizes and will continue to require ongoing measures for containment,” and pose significant dangers to the safety and soundness of credit unions, according to the report. The report urges credit unions to continue to harden, monitor, and enhance the security of their systems.

Technology changes: In addition to products that pose competitive challenges to credit unions by mimicking deposit and loan accounts (mobile payment systems, pre-paid shopping cards, peer-to-peer lending), credit unions will also face challenges from financial technology (fintech) companies in underwriting and lending, the report asserts. “Fintech companies may be able to automate these services at a cost below levels associated with more traditional financial institutions but may not be subject to the same regulations and safeguards that credit unions and other traditional financial institutions face. As these companies and products gain popularity, credit unions may have to be more active in marketing their products and services and rethink their business models.”

Interest-rate risk (IRR): NCUA and credit unions will need to focus on managing and mitigating interest-rate risk, the report states. Deposit rates have fallen since the start of 2020 and will likely remain low, pressuring credit unions to offer competitive deposit rates to avoid deposit attrition. Meanwhile, credit unions that rely primarily on investment income may find their net income remaining low or falling.

Membership: NCUA and credit unions face the challenge of an aging demographic, the report states, “and unfortunately, these same membership concerns continue.” The report claims that although overall credit union membership continues to grow strongly, close to half of federally insured credit unions had fewer members at the end of the third quarter of 2020 than a year earlier. “All credit unions need to consider whether their product mix is consistent with their members’ needs and demographic profile,” the report states.

LINK:
NCUA’s Four Funds Receive Clean 2020 Audit Opinions

(Feb. 12, 2021) A final rule on what records can be used to support the insured status of a joint ownership share account is slated for action during an open meeting to be held virtually Thursday (Feb. 18) by the NCUA Board.

Also on the agenda for the meeting, which gets underway at 10 a.m. ET (and which will be live streamed via the Internet): a quarterly report on the National Credit Union Share Insurance Fund (NCUSIF) and a briefing for the board on the Consolidated Appropriations Act, 2021, and the Emergency Capital Investment Program (ECIP) created under that statute.

The proposal on joint ownership share accounts, issued by the board last May, would allow account records information other than a signature card support the insured status of a joint ownership share account in a credit union. The aim of the proposal – which mirrors a rule adopted in 2019 by the FDIC Board – is aimed at facilitating prompt payment of share insurance in the event of a federally insured credit union’s failure “by explicitly providing alternative methods that the NCUA could use to determine the owners of joint accounts, consistent with the NCUA’s statutory authority,” the proposed rule summary stated.

NASCUS, in its comment supporting the proposal, wrote that providing federally insured credit unions flexibility in satisfying the signature card requirement with information in joint account records acknowledges that account opening practices have evolved substantially over the last nearly 50 years. NASCUS agreed with the proposal’s overall approach – and offered a modest change: replacing the phrase “such as” with “including, but not limited to.” Doing so, NASCUS wrote, would allow NCUA to “make clear on the face of the regulation that other evidence in the account records may be sufficient to establish qualifying joint ownership of a share account.”

The insurance fund report slated for next week is expected to show the fund’s equity ratio as of Dec. 31, 2020. Last September, the agency reported a 13-basis-points (bp) decline in the ratio to 1.22% during the six months ending June 30. That ratio was 16 bp lower than the fund’s “normal operating level” (target level) of 1.38% and within 2 bp of the level (1.2%) below which the agency would be required to deploy a restoration plan.

The drop in the ratio in the first half of last year was attributed to rapid share growth amid the COVID-19 pandemic. Agency staff said during the September open board meeting that the fund equity ratio was expected to rise to 1.32% by year-end 2020, following credit unions’ adjustments in their 1% NCUSIF capitalization deposit.

LINK:
NCUA Board Feb. 18 open meeting agenda

(Dec. 18, 2020) In other action at Thursday’s meeting, the NCUA Board issued one final rule and three proposed regulations – with three of those approved on split votes after Board Member Todd Harper (the lone Democrat appointee on the board) voted in opposition all three times.

The board:

• Approved (unanimously), an extension to Dec. 31, 2021 for a temporary final rule that increases the maximum aggregate amount of loan participations that a federally insured credit union (FICU) may purchase from a single originating lender without seeking a waiver from NCUA to the greater of $5 million or 200% of the FICU’s net worth (up from the greater of $500 million or 100% of the FICU’s net worth). The rule had been slated to expire at year’s end. The temporary rule, adopted by the NCUA Board as a relief measure for credit unions in the midst of the coronavirus crisis last spring, took effect April 21.
• Issued a proposed rule (on a 2-1 vote) on field of membership shared facility requirements (under Part 701, Appendix B, of agency rules) that NCUA said is intended to modernize requirements related to service facilities for multiple common bond (MCB) federal credit unions (FCUs). NCUA said the proposal includes any shared branch, shared ATM, or shared electronic facility in the definition of “service facility” for an MCB FCU that participates in a shared branching network. “The FCU need not be an owner of the shared branch network for the shared branch or shared ATM to be a service facility,” the agency said. “These changes would apply to the definition of service facility both for additions of select groups to MCB FCUs and for expansions into underserved areas.” Harper said he questioned the proposal’s ability, without changes, to increase service to underserved areas. The proposal will have a 30-day comment period.
• Released a second proposed rule (on a 2-1 vote), this one on mortgage servicing rights (under Parts 703 and 721 of agency rules), which would amend the agency’s investment regulation to permit FCUs to purchase mortgage servicing rights from other federally insured credit unions subject to certain conditions. Harper called the proposal “half baked,” but said he could find a way to support a final rule if changes were made. The proposal will be issued with a 30-day comment period.
• Advanced yet a third proposed rule – this one on overdraft policy (under Part 701 of NCUA rules) – also on a 2-1 vote. The proposal would remove the requirement that an FCU’s written overdraft policy establish a 45-day time limit for a member to either deposit funds or obtain an approved loan from the FCU to cover each overdraft, and replace it with a requirement that the written policy must establish a specific time limit that is “both reasonable and applicable to all members for a member either to deposit funds or obtain an approved loan from the FCU to cover each overdraft.” In May, the board tabled a proposed interim final rule to let FCUs decide how long members have to resolve account overdrafts. The proposal was tabled after failing to win a second from one of two board members when Chairman Hood asked for it (both members Harper and McWatters expressed opposition to a final rule). Back in May, Harper said the rule would (among other things) allow credit unions to garnish members’ income – including any economic stimulus relief funds – to pay off overdraft debt. Harper reiterated his objections Thursday (“I couldn’t support it then, I can’t now,” he said). Comments are due 30 days after publication in the Federal Register.

The board also set the “normal operating level” for the National Credit Union Share Insurance Fund (NCUSIF) at 1.38 for the coming year, no change from 2020. The NOL represents the target level of reserves in the fund relative to shares insured (referred to as the equity level). Generally, it is the level of reserves the board believes is needed to deal with anticipated losses from credit unions (if any) throughout the year, without lowering the reserving rate below 1.20%, the point at which an insurance premium would be required.

Along those lines, staff told Board Member Harper that it estimates the equity level of the fund at year-end will be 1.32% — well above the level at which a premium would be required. Agreeing with staff that chances of a premium in 2021 now look “next to zero,” Harper said that would be “welcome news to many credit unions.”

LINKS:
Temporary Final Rule, Regulatory Relief in Response to COVID-19

Proposed rule, Field of Membership Shared Facility Requirements

Proposed Rule, Mortgage Servicing Rights

Proposed Rule, Part 701, Overdraft Policy.

Board Briefing, Share Insurance Fund 2021 Normal Operating Level

(Nov. 20, 2020) NASCUS President and CEO Lucy Ito shared the board members’ call for vigilance, but also urged the agency to husband its resources, as NASCUS did in a comment letter last month. Writing to the agency on its proposed methodology to calculate the overhead transfer rate (OTR) – the rate at which the agency transfers dollars from the insurance fund to the agency’s operating budget to cover “insurance-related costs” – NASCUS wrote that a higher rate means the insurance fund has less resources to face financial troubles for credit unions.

“As we wrote earlier this month, every dollar the agency pulls from the insurance fund to cover the expenses of the agency is a dollar not available to cover credit union losses, such as those resulting from the financial impact of the coronavirus pandemic,” Ito said. “It also means that’s a dollar that may need to be replaced in the insurance fund through an insurance premium being charged.”

LINK:
NASCUS Comment: Request for Comment, OTR and Operating Fee Schedule Methodologies

(Nov. 20, 2020) A premium for the federal credit union savings insurance program for this year is unlikely, but the outlook for next year and beyond is not so clear following conversation by members of the NCUA Board on Thursday.

Meeting for their regular monthly meeting for November, the three NCUA Board members heard a quarterly report on the National Credit Union Share Insurance Fund (NCUSIF) that showed the assets of the fund grew significantly in the third quarter. However, that was largely because credit unions adjusted their deposits in the fund to be equal to 1% of insured shares. Total assets expanded to more than $19 billion from midyear, fueled largely by more than $1.5 billion injected by federally insured credit unions to adjust their 1% deposits.

Nevertheless, all three board members advised vigilance by federally insured credit unions going forward. NCUA Board Chairman Rodney Hood said the agency would take “all necessary actions” to ensure the fund remains strong and retains public confidence. “Vigilance needed to manage, monitor the situation.”

But NCUA Board Member Todd Harper agreed, saying that the agency must be “on guard” going forward. However, he noted that with rising assets, falling loan demand, compressed interest rates, decreased earnings and subdued consumer confidence under the pandemic-affected economy, credit unions need to be prepared for increased member delinquencies, loan defaults, bankruptcies and even credit union failures.

“We have a number of higher-risk credit unions that we were already closely supervising,” Harper said. “So it seems very likely that we will see higher than average failures over the next two years. What is more, we also know that growth in credit union assets seems likely to continue to exceed the ability of the share insurance fund to earn interest given the new reality of very low interest rates for the next few years.”

He said because the insurance fund equity ratio will continue to drop and decline, “it is really not a question of whether we will charge an insurance fund premium, but a question of when.” He indicated the timing is uncertain for a premium – next year, or even the year after that. However, he said bluntly: “Credit unions need to brace themselves for that eventual reality,” adding later that charging a premium during an economic downturn is “less than optimal.”

Harper reiterated past comments about the need for the agency to work with Congress about modifying the way the agency manages the fund going forward. He noted the FDIC’s higher reserve requirements for banks, greater administrative flexibility, and the ability to charge risk-based premiums as ripe for consideration for NCUA and credit unions.

Board Member Mark McWatters took a similar tack to Harper’s, saying he remains focused on the equity ratio of the fund. Under federal law, the NCUA Board may charge a premium if the equity level of the fund drops below 1.3%; if the equity ratio falls below 1.2%, the law demands a restoration plan that include a premium to help bring the equity back above 1.3%

McWatters indicated he wants credit unions to be prepared – and recommended that NCUA modify its policy to present a transparent calculation of the equity ratio each month (rather than every six months), with a detailed analysis of the numerator and denominator of the fraction that describes the insurance fund equity. (As of now, the agency will next calculate the equity ratio based on Dec. 31, 2020, credit union financial results.)

“The public dissemination of this information is of particular relevance as the COVID pandemic rages, and the resulting stresses on the credit union community and the insurance fund continue,” McWatters said. He added that the agency should also work with all constituencies to “address these critical issues in a transparent matter so as to mitigate the need for future premium assessments” in the context of the financial impact of the pandemic on CUs.

LINK:
NCUSIF Financial Statistics For the Quarter Ended September 30, 2020