(May 21, 2021) There is likely no insurance premium in the immediate future for federally insured credit unions, as the estimated equity level for the federal credit union insurance fund will be slightly above the level that would trigger the process for assessing a premium, the NCUA Board was told Thursday.

During its regular monthly meeting for May, the board heard a staff report on the National Credit Union Share Insurance Fund (NCUSIF), which showed that the fund’s equity level at the end of June would stand at 1.22%. According to the Federal Credit Union Act, the board must establish a restoration plan (which would likely include a premium) for the insurance fund if the board determines the equity level will fall below 1.2% within the next six months. So far, the board has not yet made that determination.

The law only requires a premium if the equity level drops below 1.2%. Since the fund hasn’t dropped that low (at least, not yet), no premium is likely. (The board may charge a premium, under the law, if the equity ratio falls below 1.3%, but that is not a requirement.)

The likelihood of a premium could, however, change going forward. NCUA Board Chairman Todd Harper suggested that the full extent of the financial impact of the coronavirus crisis is not yet known. As forbearance programs instituted in the face of the crisis expire, Harper said, “some credit unions will likely see their performance begin to deteriorate. It is also possible that there may be no failures and losses to the fund. We just do not know.”

He added that the agency “must make sure that the share insurance fund is strong enough to weather any stresses, including failures or losses, we know may be coming.”

Vice Chairman Kyle Hauptman took a more sanguine view. “We are aware that in the next year or so, the equity ratio may well right itself without NCUA doing anything more,” Hauptman said. “I want to make that clear: we know that could happen.” But Hauptman also made it clear that no one can predict the future.

LINK:
Board Briefing, Share Insurance Fund Quarterly Report

(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.”

(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) 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