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This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
Hello, this is Samantha Shares. This episode covers N C U A’s Board statements from the February twenty twenty three board briefing on the National Credit Union Share Insurance Fund (NCUSIF). This is also the only public glimpse on credit union CAMELS ratings.
The following is an audio version of the board action bulletin and each board members statements. This podcast is educational and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated, whose team has over two hundred and Forty years of National Credit Union Administration experience. We assist our clients with N C U A so they save time and money. If you are worried about a recent, upcoming or in process N C U A examination, reach out to learn how they can assist at Mark Treichel DOT COM. Also check out our other podcast called With Flying Colors where we provide tips on how to achieve success with N C U A.
And now Board Action Bulletin
CAMELS Code 3 Credit Union Assets Increase in Fourth Quarter of twenty twenty-three
The Chief Financial Officer briefed the N C U A Board on the performance of the Share Insurance Fund for the quarter ending on December THIRTY FIRST, twenty twenty-three. The Share Insurance Fund reported a net income of 71 point 7 million DOLLARS, 21 point 4 billion DOLLARS in assets, and 126 point 2 DOLLARS million in total income for the fourth quarter of twenty twenty-three. As of the fourth quarter of twenty twenty-three, the equity ratio was 1 point 30 percent.
“Overall, the Share Insurance Fund’s performance in the fourth quarter of twenty twenty-three was strong,” Chairman Harper said. “While we should recognize those positive things, today’s presentation also illustrates why we cannot become complacent in the supervision of federally insured credit unions. In recent quarters, the N C U A has seen growing signs of financial strain on credit union balance sheets and consumer financial stress. And, we continue to see that financial stress manifest itself in the number of credit unions and the percentage of assets held by composite CAMELS code 3, 4, and 5 credit unions.”
Additionally, for the fourth quarter of twenty twenty-three:
• The number of composite CAMELS code 3 credit unions decreased from 777 to 776 at the end of the fourth quarter. Assets for these credit unions increased from the third quarter to 160.2 billion dollars from $131 point 7 billion dollars.
• The number of composite CAMELS codes 4 and 5 credit unions decreased from 131 to 125 at the end of the fourth quarter. Assets for these credit unions increased from 5 point 4 billion dollars to 5 point 5 billion dollars.
“I cannot emphasize enough the importance of liquidity planning for financial institutions of all sizes, especially following the Federal Reserve Board’s decision to close the Bank Term Funding Program as scheduled on March 11,” Chairman Harper said. “Credit unions will need to ensure they have ready sources of liquidity available should they need it. In fact, access to the N C U A’s Central Liquidity Facility and the Federal Reserve’s Discount Window should be part of participating credit unions’ broader liquidity risk management plans for a variety of contingencies, not just during times of crisis.”
At the end of the fourth quarter of twenty twenty-three, three federally insured credit union failures cost the Share Insurance Fund approximately 1 point 4 million dollars in losses.
Additional information on the performance of the Share Insurance Fund is available on N C U A’s website.
And now the statements of each board member. Editorial comment first:
The statements may contain questions that are unanswered in the written prepared statements. These questions are scripted – as are the answers – in most instances. On occasion board members will ask unscripted questions but the goal is to control the narrative and that can best be achieved by scripted statements and answers. Of the current board member it appears, and we have been told, that Vice Chairman Hauptman frequently asks unscripted questions. As the newest board member Oatska is still developing her approach, so perhaps she will ask unscripted questions in the future. For a discussion of questions and answers from the board meeting we refer you to our other podcast With Flying Colors, hosted by Mark Treichel of Credit Union Exam Solutions.
Chairman Harpers entire statement:
As Prepared for Delivery on February 15, 2024
Thank you to both you, Eugene, and to your team for that insightful presentation on the National Credit Union Share Insurance Fund’s performance in twenty twenty-three. Additionally, I want to thank everyone in the Office of the Chief Financial Officer for, once again, ensuring the N C U A’s four funds each earned an unmodified, or “clean,” audit opinion in twenty twenty-three. I also want to acknowledge the Office of Inspector General and the N C U A’s independent auditor, K P M G, for their diligent efforts during the audit process.
It’s noteworthy that the N C U A has achieved unmodified audit opinions for more than 40 years. This consistency underscores the agency’s commitment to sound financial management and prudent stewardship of the resources entrusted to us. The N C U A remains committed to maintaining a high level of transparency and accountability for our financial operations, just as we expect federally insured credit unions to achieve with their financial records.
Overall, the Share Insurance Fund’s performance in the fourth quarter of twenty twenty-three was strong. As noted earlier, assets increased to more than 21 point 4 dollars billion. That’s a rise of more than 1 billion DOLLARS for the year. And, we experienced solid investment income growth. In fact, because of higher interest rates, we earned one-third of the year’s income in just one quarter of the year.
Moreover, the equity ratio now stands at 1 point 30 percent, higher than the N C U A’s initial year-end projection of 1 point 27 percent. This increase results from declining share and deposit growth within the system, continuing low levels of insurance losses, and rising interest income on the Share Insurance Fund’s investment portfolio.
While we should recognize those positive things, today’s presentation also illustrates why we cannot become complacent in the supervision of federally insured credit unions. In recent quarters, the N C U A has seen growing signs of financial strain on credit union balance sheets and consumer financial stress. And, we continue to see that financial stress manifest itself in the number of credit unions and the percentage of assets held by composite CAMELS code 3, 4, and 5 credit unions.
A particular concern for me is the sizable increase in assets in composite CAMELS code 3 institutions, which as shown in the sand graph on slide 12, now stands at 7 point 81 percent of the system’s total assets. It’s been about a decade since we last saw this proportion of insured shares at risk. So, we must remain attentive as we navigate these new economic realities.
What’s even more concerning for me is the growth rate of these changes, especially among complex credit unions with more than 500 million dollars in assets. Slide 13 shows that assets in the composite CAMELS code 3 group for credit unions of all sizes increased to 160 point 2 billion dollars, just over a 20 percent increase for the quarter. But, what really caught my attention is that total shares in CAMELS code 3 complex credit unions have more than tripled during the last year, growing from 32 billion dollars at the end of twenty twenty-two to 102 point 3 billion dollars at the end of twenty twenty-three.
This brings me to my first question. Eugene, why do we see modest increases in assets for composite CAMELS code 4 and 5 institutions and dramatic increases in assets for composite CAMELS code 3 credit unions? And, what’s driving the downgrades in the CAMELS ratings? Note this is an example of the scripted questions, and the answer is only available on Youtube – or referenced in our other podcast.
Thank you, Eugene, for that explanation. With a large and growing proportion of the credit union system’s insured shares and assets residing in complex credit unions, we must all stay focused. That’s more than just the work of N C U A’s examiners. Credit union executives, administrators, and boards of directors must especially remain diligent in managing the identified safety-and-soundness and consumer financial protection risks within their institutions. In short, today’s marketplace requires active — not passive — management by all.
Fortunately, the Share Insurance Fund is well-positioned to handle any contingency. Over the last few quarters, the N C U A has moved more of the investment portfolio into overnight investments, which as shown on slide 7, now exceeds 5 billion dollars. Investment plans now call for moving one-half of remaining notes once they mature into overnights and the other half further out on the investment ladder to protect the Share Insurance Fund for the future.
Eugene, would you explain how these actions will simultaneously ensure the Share Insurance Fund has enough liquidity to see us through any potential downturn in the near term and secure its continued strength and stability in the long term?
Thank you for that explanation. As a quick follow up, has the Share Insurance Fund ever had this much liquidity?
Thank you, Eugene. It’s vital that the N C U A Board balance the Share Insurance Fund’s long- and short-term needs. While the Share Insurance Fund has not experienced an increase in actual losses compared to projected losses, we must remain cautious given the current economic uncertainty and the growing number of assets in composite CAMELS code 3, 4, and 5 institutions. Therefore, I believe it’s prudent for now to keep the Share Insurance Fund’s normal operating level at 1.33 percent and to eventually reevaluate the methodology for calculating that metric to account for other factors beyond just credit risk.
After all, protecting the Share Insurance Fund against losses is job number one for the N C U A Board. As such, the Board will continue to closely monitor credit union and Share Insurance Fund performance. And, engaging in a public discussion to review the methodology for setting the normal operating level is a prudent and transparent thing to undertake.
Before closing, I cannot emphasize enough the importance of liquidity planning for financial institutions of all sizes, especially following the Federal Reserve Board’s decision to close the Bank Term Funding Program as scheduled on March eleventh. This program helped to stabilize the banking and financial system after the collapse of Silicon Valley, Signature, and First Republic banks last year.
With the sunset of this temporary program, credit unions will need to ensure they have ready sources of liquidity available should they need it. In fact, access to the N C U A’s Central Liquidity Facility and the Federal Reserve’s Discount Window should be part of participating credit unions’ broader liquidity risk management plans for a variety of contingencies, not just during times of crisis.
Also, credit unions should not be concerned about using the Central Liquidity Facility for fear of negative consequences as part of an examination. As a reminder, the more members and capital stock the Central Liquidity Facility has, the better it can serve the liquidity needs of credit unions. In fact, when the credit union system navigated treacherous waters in the wake of the corporate credit union crisis more than 15 years ago, it was the Central Liquidity Facility that helped to maintain the strength of the Share Insurance Fund.
Given the importance of such liquidity, the N C U A Board has unanimously and repeatedly called on Congress to allow corporate credit unions to purchase capital stock in the Central Liquidity Facility to help smaller credit unions access liquidity. We will continue to engage with Congress on this legislative priority and consider — going forward — other actions to ensure sufficient liquidity at individual credit unions and within the credit union system.
That concludes my remarks. I now recognize Vice Chairman Hauptman.
Vice Chairman Hauptman’s statement follows:
Congratulations on another clean year-end audit.
While the Fed appears to be done hiking interest rates, and in fact the market currently estimates 100 bps of rate cuts by year-end, credit unions are still dealing with balance damage due to the last couple years of rate hikes.
However, I want to stress that credit unions have performed well and remained resilient. In twenty twenty-three there were only three credit union failures, totaling just 1.4 million dollars in Share Insurance Fund losses. Of course, we’re all also aware that the insurance business, by nature, is about unpredictable events. Share insurance, like any insurance, is there for the chaotic times that often follow years of calm.
We have some more good news. The National Credit Union Share Insurance Fund also performed well last year. Net income increased to 210 million dollars, almost double the 119 million dollars net income recorded twenty twenty-two. This is one of the best operating results the N C U A has ever seen.
In addition to having no significant realized losses and stronger income than expected, the Share Insurance Fund had very little growth in insured shares, around 300 million dollars. These three factors contributed to the year-end equity ratio rising to 1.30 percent, higher than our last update and above our projection of 1.27 percent.
Finally, overnight rates are projected to remain above 5 percent for the first half of 2024. As of December 31, twenty twenty-three, the Share Insurance Fund’s investment portfolio contains almost 5 point 2 billion dollars in overnight investments. In the current rate environment, N C U A plans to continue to keep a big share of the fund in overnights.
Tanya Otsuka’s statement.
First and foremost, the N C U A’s job is to insure deposits at credit unions, and the Agency cannot fulfill its mission of protecting our system of cooperative credit without an adequately funded Share Insurance Fund. I appreciate the balance that is necessary when considering what constitutes an adequate Share Insurance Fund. The Fund must be large enough to absorb losses from failed credit unions while minimizing the potential for credit unions to recapitalize the Fund during a period of economic turmoil. It’s important that the Fund can withstand the potential for large losses and not rely on taxpayers for support. We want to make sure the Fund is proportionate to the risks and that credit unions can deploy capital to support members and their community. Balancing these factors is something I will continue to consider as we move forward.
I am encouraged by the strong performance of the Share Insurance Fund. Fewer failures and higher yields appear to have resulted in substantial net income for the Fund. The Fund had its highest yield in a decade at 2 point 33 percent. Additionally, I believe it is prudent to distribute the net income evenly in investments with varying maturities. This will provide balance to the weighted average life of the Fund and ensure more stable returns in the future, particularly if interest rates fall over time.
It’s also good to see that the Fund exceeded the predicted equity ratio of 1 point 27 percent. However, I have some concerns that the Share Insurance Fund has been below the Normal Operating Level since June twenty nineteen; though I appreciate that it appears stable around 1 point 3 percent. Eugene, do we expect the Share Insurance Fund to reach 1 point 33 percent through retained earnings?
Editorial note: example of scripted question from the new board member.
Thank you. Another concern is the percentage of insured shares held by CAMELS 3 credit unions. The percentage of shares held by CAMELS 3 credit unions has more than tripled in the last two years and more than doubled this last year. The increase has largely come from a decline in CAMELS ratings for credit unions over 500 million dollars. In fact, in the third quarter of twenty twenty-three, small credit unions under 100 million dollars were the only category of credit unions that saw CAMELS ratings increase across the Board. But, the rising percentage of CAMELS 3 credit unions combined with a 5 million dollars reduction in the Fund’s reserve for future losses appears unusual. Eugene, do the reserves historically decrease as the number of CAMELS 3 credit unions increase?
Thank you. I understand we had few credit union failures this year and that the necessary reserves decreased in part due to greater economic stability forecasted in the macroeconomy, but this is a concerning trend that I will be focused on as the year progresses.
This may be one of the moments where it is good to be prepared and think about the “what ifs.” While there are several positive factors to be encouraged about, there are some worrying signs as well. An adequate Share Insurance Fund today means that in the future credit unions will not have to pay into the Fund during a potential crisis, at the exact moment when spare funds are the hardest to come by.
This concludes the N C U A board statements on the Insurance Fund.
If your Credit union could use assistance with your exam, reach out to Mark Treichel on LinkedIn, or at mark Treichel dot com. This is Samantha Shares and we Thank you for listening.