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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.
Samantha: Hello, this is Samantha Shares.
This episode covers N C U Aâs September 20
24 Board Meeting Briefing on the National
Credit Union Share Insurance Fund.
This is the NCUA Board and staff
in there own words and voices.
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 the briefing
Good morning, everyone, and welcome.
I call this meeting of
the NCUA board to order.
In addition to those joining us in
the boardroom, I want to note for
the record that today's meeting is
open to the public through a live
webcast with closed captioning.
Before we begin with our formal agenda
today, I have several announcements.
First, as some of you may know, Board
Member Otsuka welcomed her newest
addition to her family earlier this month.
Both mother and baby are doing well.
Although she is unable to attend today's
board meeting, I thank both Board Member
Otsuka and her team for their engagement
and hard work on our three agenda items.
Second, I would like to welcome
the Credit Union Association of
New Mexico, including the League's
President and CEO, Malia Heimbuch, who
are here in person joining us today.
We always appreciate having stakeholders
learn more about our work and to see
the policy making process in action.
So welcome to all of you.
Third, in the interest of transparency,
I want to remind all stakeholders
that both the 2024 fourth quarter
call credit union profile and the
2025 first quarter call report
changes are currently out for comment.
The proposed changes to the fourth
quarter 2024 credit union profile.
Were published on July 26th,
and the comment period ends
next week on September 24th.
Additionally, the first quarter,
2025 call report proposed changes
were published on September 16th.
These changes would provide for new fields
related to loans granted to credit union
officials and senior executive staff.
liquidity arrangements, um, brokered
accounts, non member deposits, and
uninsured shares, among other new fields.
These changes also would eliminate
fields related to the Paycheck Protection
Program and credit impaired loans as
those fields are no longer needed.
The comment period on these post call
report changes ends on November 15th.
As always, we welcome stakeholder
input on all of these matters.
That concludes my opening announcements.
I now recognize Vice Chairman Hoffman
for any thoughts that he might have
on any of these matters or more.
Vice Chairman Hauptman:
Yes, uh, thank you.
We're obviously very pleased that,
uh, Tanya and Zoe, Zoe, Zoe, are
both uh, healthy and doing well.
We look forward to having her back.
Uh, also welcome the,
uh, New Mexico folks.
I'm a sort of adopted son of New Mexico.
I married into a family from
there, from Albuquerque.
My wife is a UNM Lobo.
I put hatch green chilies now in
my eggs when I make scrambled eggs.
Only place I've ever been, we're
literally at McDonald's, at the
kiosk, when you're making an order,
it asks if you want green chilies.
I assure you if you go to one
here, they do not do that.
And the state director of, uh, Uh, the
Financial Institutions Division, Mark
Sadowski, uh, I've actually never met
him, and he was here last year, and I know
his better half, uh, Denise, quite well,
she's a rock star, but of course, when
Mark finally came here and was sitting in
these chairs, it was the one time I had
to do the meeting virtually, because I
was sitting in Albuquerque, New Mexico.
So, uh, welcome folks from
the land of enchantment.
I'll mention for a state of 1.
2 million people, I believe 50 percent.
Our credit union members, that is,
I don't know if it's the highest,
but it's one of the highest in the
country, and I hope your trip to, uh,
Chairman Harper: D.
C.
is fruitful.
Back to you, sir.
Uh, thank you so much for those thoughts.
Um, the first item of business today
is the board briefing on the Share
Insurance Fund quarterly report.
Uh, our chief financial officer,
Eugene Sheed, is the sole presenter.
Good morning, Eugene.
It's good to see you, as always.
I also see that you got the
purple tie memo today, so,
uh, you are definitely on cue.
Please begin
Eugene: whenever you are ready.
All right.
Good morning, Chairman Harper
and Vice Chairman Hoffman.
I am pleased to present to you this
morning the 2024 second quarter
statistics of the share insurance
fund and update on the NCOA budget.
Slide two.
This
table shows the funds revenues and
expenses for the second quarter of 2024.
For the quarter that ended June 30th,
the fund recorded net income of 86.
2 million.
A few highlights are as follows.
Total income was 140.
1 million for the quarter,
mainly from investment.
Investment income increased 5 percent
compared to the prior quarter,
and increased 38 percent compared
to the second quarter of 2023.
Operating expenses were 60.
4 million for the quarter, primarily
due to the overhead transfer, uh,
for agency operating expenses.
And the provision for insurance
loss reserve expenses decreased 6.
1 million during the quarter.
Slide three.
This table shows the funds
balance sheet as of June 30th
compared to the prior quarter.
As of June 30th, total
assets were valued at 21.
6 billion, of which 99 percent
were funds held with U.
S.
Treasury in cash, overnight investments,
and long term Treasury notes.
A few highlights to take away from
this slide are that the fund's
capitalization deposit receivable was
fully collected in the second quarter.
Accounts payable and other liabilities
decreased, mainly from the payment of
capitalization deposit refunds of 238.
8 million to credit unions, uh,
whose insured shares had decreased.
And the cumulative results of
operation increased, uh, 142.
7 million due to 86.
2 million in net income.
And a reduction in unrealized
losses on investments of 56.
5 million.
Slide four.
The fund records an insurance
program liability comprised of
both general and specific reserves.
This is a contingency to cover
anticipated future losses resulting
from insured credit union failures.
Each quarter we assess the reserve
needs for potential and actual credit
union failures to make a reasonable
estimate of potential future losses.
During the second quarter, the
reserve balance decreased by 5.
5 million, primarily due to a
decrease in the general reserves.
The reserve balance totaled 212
million, and that is comprised of 10.
1 million for specific reserves and 201.
9 million for general reserves.
Slide number five.
Through the second quarter of 2024, two
credit union failures, uh, had occurred,
uh, which incurred a loss to the fund.
During the second quarter of 2024, two
credit union failures, uh, had occurred,
uh, which incurred a loss to the fund.
Both were assisted mergers.
The cost of the failures
is estimated at 2.
02 million.
Fraud has not been identified
as a contributing factor to
either of those two failures.
Slide six.
As of June 30th, 2024,
the fund had over 22.
5 billion at par value invested
in treasury securities with
maturities out to November 2030.
The weighted average life of the
securities held by the fund is 2.
3 years.
The weighted average yield of the
securities increased 11 basis points
from last quarter up to 2.54%.
During the second quarter of 20 24,
8 Treasury notes matured, uh, for
a total of 700 and $750 million.
These securities had yields
ranging from 0.24% to 2.14%.
These maturities were subsequently
reinvested during the second quarter.
Slide seven.
The equity ratio.
The equity ratio is updated
on a semi annual basis.
As of June 30, 2024,
the equity rate was 1.
28 percent and was calculated
using an insured share base of 1.
76 trillion.
The blue line across the chart
represents the normal operating level.
This was last set and approved by
the board in December 2021, and that
currently remains unchanged at 1.
33 percent.
Slide eight.
This presents the projected equity
ratio, the projection for December
31st 2024, which is also 1.
28 percent unchanged from
Uh, the June 30th actual.
The stability is mainly due to the
forecasted modest, uh, increase in insured
shares during the second half of the year.
The projected equity ratio is calculated
on the same basis as the actual
equity ratio, and that formula and
calculation are shown on the slide.
Slide nine.
Moving to an overview of CAML's data,
this slide shows the percentage of insured
shares by CAML's code, uh, codes from
2019 through the second quarter of 2024.
In the graph, the dark blue at the top
represents CAMELS coded 4 and 5, the gray
represents CAMELS code 3, and the light
blue represents CAMELS code 1 and 2.
During the quarter, the percentage
of insured shares at credit unions,
CAMELS coded 3, 4, or 5, increased,
while those at CAMELS 2 decreased.
The table at the bottom of the
page shows the number of credit
unions by the Camel's Code.
The total number of credit unions as
of June 30th was 4, 533, a decrease
of 45 from the prior quarter.
Slide 10.
This slide compares credit unions
Camel's Code by asset size.
Camel's Code at 4 and 5 credit unions are
shown on the left hand side of the graph,
and Camel Code 3 is shown on the right.
Looking at the 136 credit unions,
Camels Code 4 and 5, most of these
credit unions continue to have
assets of 100 million or less.
For those with assets greater than
100 million, there were 10 credit
unions in the A hundred, uh, to $500
million, uh, range, uh, excuse me,
for those, uh, with assets greater
than a hundred million dollars.
There were 10 credit unions in the
100 million to $500 million range
for those greater than $500 million.
There were six more credit
unions, uh, in 2024, June, 2024.
Then in the prior quarter, during the
quarter, assets and insured shares.
Uh, for credit unions, Camel
Code 4 and 5 increased.
Considering now the 743 credit
unions, Camel Codes 3, 91 percent
of these are credit unions that
have less than 500 million.
During the quarter, there was a decrease
in credit unions with assets, uh,
500 million or less, and an increase
in credit unions, uh, greater than
500 million for the Camel Code 3.
During the quarter, assets
and insured shares in Credit
Union's Camels Code 3 increased.
Slide 11.
I will now transition to a brief overview
of the NCOA's budget status for 2024.
Slide 12.
Through July, the Operating
Fund budget has used 80, uh, 60.
8 percent of its, uh, funding that was
made available by the Board for 2024.
A rate that's generally consistent
with expectations and prior years.
Employee pay and benefits is tracking
very close to expectations as the agency
has maintained a low vacancy rate.
Travel spending has increased compared
to recent years, and we project
most of the available travel funds
will be used by the end of the year.
Compared to recent years, we forecast
a smaller year end availability
of funds, currently projected
to be about 5 million, or 1.
3%.
This would be smaller than what we've seen
in recent years, which means there would
be less surplus funds, uh, to potentially
apply as an offset to the 2025 budget,
uh, as the board has done in recent years.
Slide 13.
The board approved a capital
budget for 2024, which is 7.
4 million.
Through July, approximately 50
percent of the funds have been used.
Key line items in the capital
budget include cybersecurity,
information technology infrastructure,
and process improvements.
As noted on the slide, a small
reallocation of funds was made to
increase funding for a personal,
uh, security case management system.
Otherwise, all the approved
projects are executing, uh, within
the amounts made by the board.
Slide 14.
The Share Insurance Fund Administrative
Budget funds certain insurance
related expenses of the agency.
Through July, 76 percent of the
Board approved budget has been used.
The line item we are monitoring
here is state examiner training.
We reallocated 100, 000 from
administrative expenses to state examiner
training line item because participation
rates at NCOA and FFIEC training classes
have been higher than anticipated.
And slide 15.
In closing, the Share Insurance Fund
is performing well year to date.
The board approved budgets are executing
within the expected parameters.
Supplemental slides provide, provided
with this presentation have additional
information to help interested parties
better understand the operations
of the Share Insurance Fund.
Thank you for your time and
this concludes my presentation.
I'd be happy to answer your questions.
Chairman Harper: Uh, Eugene, thank you
for your update on the performance of the
National Credit Union's Share Insurance
Fund in the second quarter of 2024.
The overview of the fund's projected
year end equity ratio and the status
of the NCOA's budget at the mid year.
And thank you to you and your team
and the Office of the Chief Economist
for their continued solid work in
preparing today's briefing materials.
The Share Insurance Fund's performance
in the second quarter of 2024 mirrors
much of the industry's financial
performance during the same period.
The fund, like the credit union system,
is doing well overall, but there are
warning signs that we all must heed.
First, let me start with the good news.
Since the 2008 financial crisis and the
Great Recession that followed, the U.
S.
has maintained an unprecedented
low interest rate environment
for nearly 15 years.
This economic environment prevented
the share insurance fund's investment
income from offsetting the growth
in insured shares the industry
experienced during that same time frame.
That's why there was a continual decline
in the equity ratio in the middle part
of each year during the last decade until
the closure of the Temporary Corporate
Credit Union Stabilization Fund in 2017.
In recent years, we have experienced
a large growth in insured shares.
household investments, especially
at the height of the pandemic when
large amounts of government stimulus
funds flowed into the credit union
system, gradually depressing the
strength of the equity ratio, with
the lowest ratio being reached at 1.
22 percent in June 2020.
But the current higher interest rate
environment has improved the funds
earnings, and agencies In fact,
investment income in the first two
quarters of 2024 alone exceeded
the investment income of the share
insurance fund earned in all of 2021.
So things certainly have changed.
And I think you would agree
that that's very good news
for the share insurance fund.
What's more, the fund's
yield in 2021 was just 1.
21%.
The share insurance fund
portfolio right now is yielding 2.
1%.
Five, 4% more than double 2020 ones level.
That income, along with slower growth in
insured shares helped to stabilize the
share insurance fund's rec equity ratio at
1.2 per 8%, four basis points higher than
the initial projected ratio for June 30.
So Eugene, while the share insurance
fund is overall experience best
performance in terms of investment
income in nearly 15 years.
Should we expect that performance
Eugene: to continue?
Uh, thank you for that, uh,
question, Chairman Harper.
Uh, so, both in terms of income and
the weighted average yield, uh, the
fund has seen its best performance
since at least the Great Recession.
Uh, the yield is now at 2.
54 percent and has benefited
from the higher interest rates,
especially in the overnight holdings.
We have seen the overnight
rates begin to fall, uh, from
where, uh, as recently as 5.
4 percent in early August
down to now under 5%.
very much.
Uh, as of, uh, yesterday, uh,
that represented a decrease of
about 82, 000 a day, uh, to the
fund, or about 30 million a year.
However, the laddered portfolio
has maturities every quarter,
and those maturity buckets have
average yields of generally under 1.
5 percent for the next couple of years.
As we reinvest those maturities, we
will help to offset lost earnings from
a decrease in the overnight rates.
The amount of the offset will be highly
dependent on the overnight rates, and
Uh, as well as the, uh, uh, rates that
we get on, uh, the reinvestments in the
longer end of the SIF portfolio ladder.
Uh, these challenges, uh, these are,
this is the challenge for the investment
committee is to reassess the funds
overnight holdings and potentially place
more of the funds in the investment
ladder, which would help them out.
Walk in longer term earnings.
So just help
Chairman Harper: me out here To make sure
that I understand what you're saying.
Are you saying that yes The long
term investments are paying a
lower yield now because of that we
invested them at this time, right?
But if I remember correctly, we
have five point six billion Yes in
overnights right now and that we're
going to be Moving out on the ladder.
Are you saying that as we ladder, we
expect those rates to go up, um, on,
on, on the longer term investments?
Eugene: Yeah, so I think there's
sort of two, two balances here
that we have to think about.
There's the overnights, and we
have seen those start to come
down, and those presumably would
continue to go down, uh, if the Fed
continues to reduce interest rates.
The maturities that we're seeing
right now in the longer end of the
portfolio, that the longer, uh,
Securities that we've pulled, um,
those generally have rates under 1.
5 percent, um, overall.
So the next couple of years, we'll see
those, uh, lower rates mature off, um,
if the ten year, which would, you know,
the longer term rates, uh, continue to be
somewhat higher, then that will kind of
offset, uh, so we'll, we'll kind of see
movement at both ends of the spectrum.
Um.
But how that plays out in net,
I mean, obviously it will depend
on what the rates look like.
Um, thank
Chairman Harper: you, uh,
Eugene, for that clarification.
My next question relates to
the fund's balance sheet.
Uh, if we could pull up slide three.
Um, on slide three, we see the
overall assets of the share insurance
fund declined slightly between
the first and second quarters.
This contraction may
cause confusion for some.
Would fund's total assets?
And that, why this, um, uh, slight
decline in the funds, total assets and
net position occurred and are there
any seasonal factors at play here?
Eugene: Sure.
Uh, so that's really a factor,
uh, of the refund that we did, uh,
for the capitalization deposits.
Uh, so in short, the agency refunded more
in capitalization deposit adjustments,
uh, during quarter two than we collected,
uh, because there was a overall
decrease, uh, somewhat in insured shares.
The latter half.
Of 2023.
I think what's important here,
though, is that the funds cumulative
results of operation increased.
Um, and so that's important
for the stability of the fund.
So maybe
Chairman Harper: it wasn't a seasonality,
but it was a one time event just as we've
seen this change in the composition and
makeup of credit union balance sheets.
Eugene: Well, there is a, there
is a, certainly a seasonality to
the, uh, share insurance fund, uh,
insured shares, uh, that we see.
And so there is a, a seasonality.
I would say that kind of the more
unique aspect is, um, we don't
typically see a contraction.
In insured shares and there was a
bit of that, that in the letter head.
Chairman Harper: Uh, thank
you for those clarifications.
Your response helps stakeholders to
better understand that this slight
decrease in the share insurance funds
balance sheet isn't a trend and that
the fund's total assets in that position
should improve over the remainder of
the year based on current projections.
It also reiterates the point that
the share insurance fund remains
overall in a healthy position.
My next question concerns
the fund's future income.
The higher interest rate environment
has improved the fund's earnings,
and the much anticipated drop in
interest rates will decrease unrealized
losses in the portfolio, further
improving the fund's position.
In fact, just yesterday, The Federal
Open Market Committee lowered the
federal funds rate by 50 basis points.
It signaled the potential for
additional rate decreases should
economic conditions weaken.
How are we positioning the Share Insurance
Fund so it can remain healthy in a
declining interest rate environment?
We talked a little bit about that earlier,
but I want to dive down a little deeper.
Sure.
Eugene: Uh, so a key responsibility of
the Investment Committee is to determine
how to position the fund's portfolio.
Thanks Uh, within the
policy set by the board.
We generally approach this
responsibility by considering
safety, liquidity, and yield.
Uh, and I think personally,
liquidity being the most significant
factor for us to consider.
Uh, we've increased the fund's
liquidity position in the overnight,
as we've already discussed, up to 5.
6, uh, billion dollars, uh, and that
was in response to the longer term,
uh, holding in a lost position.
So, we're, have, uh, a total of, uh.
Unrealized losses, uh, on the portfolio.
Uh, and somewhat also the softening,
uh, composite camel's ratings.
We wanna be able to respond to
liquidity events without incurring a
cost to the fund, uh, or, um, uh, to
borrow, uh, which also comes at a cost.
Uh, the declining interest
rate environment, uh, should
lower the loss position.
Uh, so our unrealized
losses should come down.
As interest rates come down, um, and
that will give us, uh, greater, uh,
liquidity options, uh, going forward
should we, uh, need to access them.
Uh, up to this point, uh, the yield has,
um, favored the overnights, um, so the
fund has, uh, been able to maintain, uh,
that liquidity, uh, without, uh, paying
a premium, uh, which we'd normally see
in a, a more normal rate environment.
And that concludes my response.
Chairman Harper: Thank you
for that detailed response.
Lettering investments in both up and
down interest rate environments is
a proven method, uh, a proven way to
smooth out interest rate fluctuations
and maximize long term performance.
I know that's something that both the Vice
Chairman and I learned as undergraduates.
It's important, uh, that the shared
insurance fund is healthy and able
to respond quickly to any stress in
the credit union system regardless
of the economic environment and
that's also why we're maintaining
some of that liquidity right now.
Lattering investments also
helps us to achieve that goal.
Now let me turn to some
of the warning signs.
We are seeing growing signs of
concerns in loan performance, capital,
delinquency rates and earnings across
the system and at specific institutions.
The latest quarterly performance data.
For the industry showed
declining growth and weakening
performance across auto lending.
mortgages, and commercial loan categories.
Further, these trends are contributing to
a large percentage of credit unions with
Hamels composite ratings of 3, 4, or 5.
In fact, by my calculations, done by the
slide you showed earlier, approximately
1 in 5 Federal insured credit unions is
a Campbell's Code composite 3, 4, or 5.
What especially concerns me about the
information on slide 10 is the increasing
number of complex credit unions with
500 million more or in assets falling
into the troubled category, Campbell's
Code 4 or 5 ratings this last quarter.
In fact, the number of troubled complex
credit unions tripled from 3 to 9.
Um, in the last quarter alone, and
the amount of assets that these
institutions grew by more than five fold.
It's been about a decade since we
saw this proportion of share, insured
shares at risk, so we must remain
vigilant as we navigate this situation.
Eugene, we've been watching the amount
of, uh, shares and, um, composite,
Campbell's Code 3, credit unions
rise for several quarters now.
Expect these rating declines
to level off or even improve.
Eugene: Um, so I think that is
really difficult, uh, to say.
Um, and I think a lot of the factors,
uh, that you mentioned, uh, are at play.
Um, so, you know, credit unions are going
to need to, so the, you know, I think with
a declining interest rate environment, you
know, there comes, you know, a different
set of challenges than what they saw in
the increasing interest rate environment.
So I think all those factors that you
talked about in terms of their earnings,
there will be changes in borrowing
costs and their lending program.
Really difficult to say, uh, kind of
if this is represents a bottoming out
of the trend, um, or if it'll move one
direction or the other, but certainly, um,
a need that you say to remain vigilant.
Uh, and for us to continue to monitor the
potential liquidity of the fund, uh, in
case there, uh, is a, uh, failure of size.
Yeah, but
Chairman Harper: let me, let
me drill down a little deeper.
Uh, we have a policy for billion
dollar plus credit unions that we
examine them on an annual basis.
And it's been now more than a year,
uh, since we've hit those institutions.
So we've probably, if we've had changes
and downgrades because of the liquidity
events and issues related to last
year, That's been brought in already.
Um, however, for credit unions less than
a billion, that are performing fairly
well, they're on an extended cycle.
There may be some of those who aren't
performing well, so we might see
some increases still occurring there.
But in terms of liquidity,
do you sort of see the
Eugene: issues leveling off there?
Yeah, I think there's additional
concerns, though, um, that they're
seeing in credit unions, which includes
everything from record keeping and
management, uh, to other issues.
So it's not just a a single Uh,
it's a variety of factors and those
factors, you know, may be unrelated
to any movement in interest rates.
Chairman Harper: So what I'm
Eugene: hearing you tell,
Chairman Harper: we're not
quite out of the woods just yet.
Uh, I can't say that we are.
Okay.
Um, credit union leaders must therefore
continue to monitor their institution
performance and ballot sheets and
act expeditiously to prevent small
issues from turning into big problems.
The NCUA's supervisory teams,
for their part, will continue to
monitor credit union performance
through our examination process.
Offsite monitoring and
tailored supervision.
We'll work to maximize the credit union
system's preparedness and resilience for
any bumps in the road that may lie ahead.
We did that during the Great Recession
when we had $14 billion plus credit
unions that were in troubled status.
Yet none of them ultimately failed.
After all, protecting the share
insurance fund against bosses.
was then and is now a top priority for
the NCUA board, just as it always will be.
That concludes my remarks on this topic.
I now recognize the Vice Chairman.
Vice Chairman Hauptman: Thank you, sir.
And Eugene, before I chat about this
topic, I want to mention, uh, Mr.
Chairman, I believe you mentioned
call report changes at the outset.
Uh, I just want to remind people,
um, submit, submit comments
is not all that difficult.
Uh, we encourage people to do it.
We do read them.
They do matter.
And one of the best things about reading
comments is that, uh, well, first of all,
you should know they're public, okay?
You put one in.
Some people don't know that.
It's the first time they've done it.
But it also means you can read other
people's and I find it very useful
because people say This is such a no
brainer, you know, such an obvious
view on whatever the topic is.
I said, okay, but there are people
who feel the other way, you should
know that, and you can read it.
It's very useful sometimes to know
what the other argument is, even if
you think your view is rock solid.
NCWA.
gov, you select regulation and
supervision from the top menu, and
then rulemakings and proposals.
You should find everything that
is presently out, uh, for comment.
These new changes that Mr.
Chairman mentioned, uh, about
the core report, they were
just published this Monday.
Might take a few days, but, uh, to be
reflected, but the proposed changes to the
CU profile, credit union profile, when you
want to look up a credit union, just get
the basic info, uh, is currently shown as
Agency Information Collection Activities.
We might want to do
something about that name.
It's not intuitive to me.
I agree.
Uh, click on it.
It takes you to regulations.
gov.
You find the comment button.
Um, you can comment quietly.
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It's just something you should know, uh,
to the topic at hand, the SIF update.
Um, obviously yesterday, the
Fed cut interest rates for the
first time since March, 2020.
That was, uh, if you recall, that was
an emergency meeting on the Sunday when
everything sort of broke loose with COVID.
Uh, the Fed normally moves
in 25 basis point increments.
They usually cut or raise
a quarter point at a time.
I don't read too much into these things.
There's a Fed meeting every eight weeks.
So, um, but a cut of 50 since
I've been an adult, this is
the first non emergency time.
The last three times they cut by more
than 25 were all what we call emergencies.
There was that Covid Sunday, the
financial crisis and just after 9 11.
Since I've been an adult, the
only times they've lowered.
Uh, by greater than 25.
Again, I don't read too much into it.
As Chairman Powell said, you could
have done 25 in July and 25 now.
Um, but markets are pricing, uh,
further cuts ahead that obviously
affects us and it affects our balance
sheet, it affects our earnings, and
it certainly affects credit unions.
Uh, for what it's worth, and this is
just public data I just checked, futures
markets, by Christmas, the Fed has a
December meeting before Christmas, the
markets are pricing and the modal outcome,
the most likely, is another 75 down.
Christmas Eve, according to markets,
the modal outcome is another
75 on top of the 50 they did.
One year from now, September of
2025, the modal outcome is, let
me make sure I get this right,
is down another 200 from today.
Right, so currently the Fed, the Fed,
since the finance credit is down,
there's a range of a quarter point.
Before yesterday, it was five
and a quarter to five and a half.
Today four and three quarters to five.
That's the range for the overnight rate.
So Christmas, this Christmas,
400 to four and a quarter.
That's down 75 from where we are now.
This is just market data.
It moves all the time.
I'm not predicting anything.
Okay.
And then if we have this meeting
next year, it will again be
right after the Fed meeting.
September 17th, 2025.
The modal outcome on the futures markets
is two and three quarters to three.
Okay.
So read into that what you will.
It does mean, Okay.
That we will have less money
in our short term investments.
Um, the reason I'm talking about rate
cuts, rate moves at all, uh, it matters to
the shared insurance fund for two reasons.
One, as stated, we parked a lot
of money in overnights and other
short term investments, so the SIF
is going to get lower income going
forward in that sort of investing.
Industry rates are just
the price of money.
And this is a seller of
money, meaning we lend it out.
Like any seller of anything, we
get hurt when prices are down.
In our case, the only buyer is
the U S government treasury.
And they of course are a buyer, which
means they like it when prices go down.
This is the same true
of any product, anytime.
And the second factor, and somewhat
countering the first factor,
remember the first factor is
lower short term income for us.
The second factor is that credit
unions are now faced less interest
rate risk than they did during the
Fed's aggressive rate hike cycle.
That was a major problem last year.
That's one of the things that contributed
to Silicon Valley Bank going down.
It was a big topic for us.
People wanted meetings about it.
Um, that was a major problem.
It is much less so now.
That's a positive thing for the
share insurance fund, uh, but
it's hard to measure and it's not
reflected in today's, uh, SIF report.
Our short term income is going to
go down, but so is the interest
rate risk facing credit unions.
And risk to credit unions is why we have
a share insurance fund in the first place.
The big picture, despite
economic uncertainty, is our
fund remains well capitalized and
continues to perform effectively.
We have a net income of
86 billion this quarter.
Our equity ratio, as mentioned,
uh, went down slightly from 1.
30 to 1.
28 as of, uh, June 30.
Now, this remains well above the statutory
floor, and it is below our normal
operating level where we kick money back.
Uh, it is higher.
Then our projected 1.24 to review
below 1.20 Congress mandates that
we put together a plan within six
months to restore it, right, which
historically is meant billing everybody.
So we're well above that.
First off, Eugene.
All right, so the mismatch, we projected
1.24, came in at 1 2 8 review the
reasons that it, we, uh, missed by four
and why we missed, uh, to the downside.
I mean, it came in above.
Eugene: Sure.
Uh, so thank you for that, uh, question,
Vice Chairman, and the opportunity to
provide some thoughts on this matter.
Uh, regarding the change between the
630 projection, uh, versus what we saw
as the actual, the primary factor was
a difference in insured share deposits.
Uh, the projection, uh, was based
on a higher growth rate in insured
shares than what actually occurred.
Uh, rather than 5%, Uh,
growth, which was projected.
The actual growth was 2.
1%.
Uh, the higher rate of insured share
growth tends to depress the equity ratio,
as we saw clearly during the pandemic.
Uh, also contributing, uh, to
the higher 630 equity ratio, uh,
was a low loss, uh, environment.
So we had fewer losses, uh, than
the model projected, uh, and
also slightly higher income.
Uh, then what was forecast.
Uh, and so for awareness, uh, slide
19 has supplemental information,
uh, today's presentation that
shows the change in insured shares.
Vice Chairman Hauptman: We only had a,
uh, like you said, a 2 percent growth
the first half of the year in shares.
We haven't seen a big movement
out of credit unions that, for
a number of reasons, that means
credit unions are at least doing a
good job, uh, playing offense and
defense to prevent people leaving
for high yielding options elsewhere.
Um, but 2%, what's, um,
Eugene: what's affecting
credit union growth right now?
Uh, so I think, as always, that deposit
growth is a function of, uh, multiple
factors, uh, for example, household, uh,
income, uh, changes in household income.
Okay.
Unemployment rates, uh, interest rates,
uh, there's also a seasonality, uh, to
the, uh, uh, uh, insured share, uh, rate.
Uh, the cumulative impact of
inflation on household expenses
is likely playing a role today.
Uh, so while inflation rates have
fallen significantly, Uh, the burden
of daily expenses remains high, uh,
for many households, uh, and that
can translate into lower balances.
Uh, the slowdown in insured share
growth, I believe, is also similar
to trends that the FDIC is seeing,
uh, in their deposit fund, uh, and so
it's not unique, uh, to credit unions.
Vice Chairman Hauptman: So, I know we've,
uh, resumed purchases in our bond ladder,
and overnight's remained about the same.
So, we've obviously seen a reduction
in all the unrealized losses.
Um, we had the same industry problem
that credit unions do, but we
have the advantage of holding the
maturity the same way they're holding
mortgages like mine, just under 3%.
And that hurt on their balance sheet.
We were holding paper we bought
for 1 percent yield for five
years, that sort of thing.
How do we prepare for new rate
environment, whatever it is?
Eugene: Uh, so I think we, uh,
Uh, prepare by, uh, first looking
at the, uh, uh, liquidity needs.
So again, safety liquidity yield is what
we generally look at when we consider,
uh, how to make, uh, uh, the investments
of the share insurance fund, a few
notes on the, uh, unrealized losses.
Um, so the unrealized loss
position, uh, peaked at about 1.
7 billion, uh, in 2022.
Vice Chairman Hauptman: Little under
10% of our bonds were underwater.
Eugene: Uh, so they were worth
less than we paid for them.
So the overall value of the portfolio
was like every single bond Yes.
Was underwater itself.
Right.
But the, the overall position
was, yeah, roughly, almost 10%.
Um, and as of June 30th, so
that's receded now from that high
watermark by about $500 million.
Uh, and the change in the second
quarter alone was around $60 million.
Now since June, uh, we're estimating
that the unrealized, uh, losses.
Uh, have come down yet again by
almost 500 million more dollars,
uh, which will eventually be shown
in the third quarter financials.
Uh, but of course, that's subject
to change depending on how, on how
interest rates, uh, behave, uh,
between now and the end of the month.
Um, so that unrealized loss, that was
a key factor, uh, in driving up our
overnight holdings because we wanted to
have liquidity, uh, in case there was a
need for it without having to sell at a
loss and realize, uh, an unrealized loss.
Um, now that we're, uh, going to see
sort of an increased range and liquidity
options within the portfolio, uh, as we
move, uh, away from, uh, the extent of
the loss position, uh, I think we'll have
to reassess, uh, what the appropriate
amount is to have in the overnights.
Did
Vice Chairman Hauptman: we have
kind of a Goldilocks thing for a
while there, meaning that As every
insurer, you have to have liquidity.
You need cash on hand to pay out.
Families have emergency
funds, that sort of thing.
That's not in the stock market, et cetera.
But normally with an upward slope yield
curve, that liquidity costs you money
because you're not earning much on it.
Right.
Um, we had a situation there for a
while where parking, having lots of
liquidity was also the highest yielding.
That is not normal.
Right.
And we had a Goldilocks thing that
made, Not be the case anymore.
Eugene: Well, I mean that as of
today, it still is the old still.
Yeah, it's still still inverted And so
yeah, I mean that sort of plays into
the you know against safety liquidity
yield We weren't paying that premium
That you would normally expect to pay by
having as much as we had in overnights
the overnights were paying more So,
you know and again looking at that how
that behaves going forward, you know
It's another part of the sort of the
equation And how to balance or consider
rebalancing the overnight portfolio.
Vice Chairman Hauptman: Thank you, Eugene.
Uh, last thing I just want to
acknowledge the hard work you guys put
into the mid session budget update.
Uh, it looks like we're currently
running a 5 million budget surplus.
Comparison 23 million surplus last year.
What, um, line items have
decreased and where are we seeing
Eugene: increase
Vice Chairman Hauptman: in the budget?
Eugene: Um, so, uh, thank you for that.
And the budget is executing closer
to the levels approved by the
board for 2024 than it did in 2023.
Uh, meaning that we do expect
a smaller year on balance.
Um, in recent years, uh, the
agency has generally underspent
its budget for pay and benefits,
uh, travel, uh, and contracts.
Uh, to answer your question, I
think the, you know, comparing,
um, where we're at as of July 2024.
To where we were at in July 2023, over
year, uh, comparison, uh, the, uh, the
couple of key changes would be, uh,
first pay and benefits costs, uh, have
increased, uh, by just over nine percent.
Uh, it's come through this, this
point this year, uh, versus last year.
Uh, and a lot of that is reflective of the
concerted effort, uh, that the agency made
to fill vacant positions, uh, last year.
Uh, and we have, uh,
and we're maintaining.
That low vacancy rate this year,
so that effectively has increased
our actual, uh, payroll costs.
Uh, travel expenses are increasing, uh,
they're up about 5%, uh, so far year
to date this year versus last year.
Uh, contract spending, uh, which often
is one of our more rapidly expanding, uh,
budget line items, is actually only up 1.
8%, uh, for this year.
And so while it's still,
it's an overall increase.
Um, it's lower than in recent years,
and the agency has seen some reductions
in specific contract re competitions,
uh, so far this year that have
helped keep that, uh, growth down.
Pay and benefits up nine,
Vice Chairman Hauptman: probably because
we had a lot of vacancies last year.
I was going to say, did you
get a nine percent raise?
I didn't.
I hope I did.
I,
Chairman Harper: I, I have to say
that my pay has remained flat, uh,
for the last, how many, uh, I think
it's been 12 years in Congress.
Except by Congress.
Vice Chairman Hauptman: It is what it is.
Uh, back to you Mr.
Chairman.
Chairman Harper: Uh, thank you so much.
If I could just build on a little
bit more what you said about rates.
I think rate drops are good for borrowers.
Um, and credit unions are going to
need to prepare for what could be a
wave of refinances when it comes to
auto loans, uh, as well as mortgages.
It also could mean more mortgages could
be made as more, uh, Buyers are be able
to stretch their dollars further and reach
into the housing market and certainly,
of course, it will, uh, for those that
have a floating rate, even though we
have an interest rate cap ceiling,
we'll see credit card rates coming down.
That that could cause some difficulty.
Um, also too, we could see some
disintermediation happening for savers
within the markets who are going to
take money out of, uh, their short
term, um, um, uh, you know, yields
that have been doing really well.
And move it to places
where they might do better.
I think the credit unions overall, as I've
looked at the last quarter numbers, had
been increasing, uh, the amount of cash
on hand as well as overnight investments
so that they can handle these changes
that we anticipate coming into the market.
Um, that concludes our first
item of business today.
Samantha: This concludes the N
C U Aâs September 20 24 Board
Meeting Briefing on the National
Credit Union Share 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.