WEBVTT NOTE This file was generated by Descript 00:00:00.450 --> 00:00:02.330 Samantha: Hello, this is Samantha Shares. 00:00:02.870 --> 00:00:08.300 This episode covers N C U A’s September 20 24 Board Meeting Briefing on the National 00:00:08.300 --> 00:00:10.320 Credit Union Share Insurance Fund. 00:00:11.080 --> 00:00:14.470 This is the NCUA Board and staff in there own words and voices. 00:00:15.244 --> 00:00:18.454 This podcast is educational and is not legal advice. 00:00:18.964 --> 00:00:23.004 We are sponsored by Credit Union Exam Solutions Incorporated, whose 00:00:23.004 --> 00:00:26.144 team has over two hundred and Forty years of National Credit 00:00:26.144 --> 00:00:27.984 Union Administration experience. 00:00:28.514 --> 00:00:32.144 We assist our clients with N C U A so they save time and money. 00:00:32.544 --> 00:00:36.474 If you are worried about a recent, upcoming or in process N C U A 00:00:36.474 --> 00:00:40.964 examination, reach out to learn how they can assist at Mark Treichel DOT COM. 00:00:41.354 --> 00:00:45.714 Also check out our other podcast called With Flying Colors where we provide tips 00:00:45.714 --> 00:00:48.274 on how to achieve success with N C U A. 00:00:49.004 --> 00:00:50.014 And now the briefing 00:00:50.347 --> 00:00:52.057 Good morning, everyone, and welcome. 00:00:52.087 --> 00:00:54.667 I call this meeting of the NCUA board to order. 00:00:55.577 --> 00:00:58.747 In addition to those joining us in the boardroom, I want to note for 00:00:58.747 --> 00:01:01.997 the record that today's meeting is open to the public through a live 00:01:02.067 --> 00:01:03.907 webcast with closed captioning. 00:01:04.627 --> 00:01:09.057 Before we begin with our formal agenda today, I have several announcements. 00:01:09.417 --> 00:01:13.492 First, as some of you may know, Board Member Otsuka welcomed her newest 00:01:13.492 --> 00:01:15.922 addition to her family earlier this month. 00:01:16.082 --> 00:01:18.072 Both mother and baby are doing well. 00:01:18.442 --> 00:01:22.622 Although she is unable to attend today's board meeting, I thank both Board Member 00:01:22.652 --> 00:01:27.672 Otsuka and her team for their engagement and hard work on our three agenda items. 00:01:28.212 --> 00:01:31.802 Second, I would like to welcome the Credit Union Association of 00:01:31.802 --> 00:01:36.932 New Mexico, including the League's President and CEO, Malia Heimbuch, who 00:01:36.932 --> 00:01:39.312 are here in person joining us today. 00:01:39.702 --> 00:01:43.162 We always appreciate having stakeholders learn more about our work and to see 00:01:43.162 --> 00:01:45.322 the policy making process in action. 00:01:45.412 --> 00:01:46.732 So welcome to all of you. 00:01:47.637 --> 00:01:51.917 Third, in the interest of transparency, I want to remind all stakeholders 00:01:51.977 --> 00:01:56.387 that both the 2024 fourth quarter call credit union profile and the 00:01:56.387 --> 00:02:01.507 2025 first quarter call report changes are currently out for comment. 00:02:01.897 --> 00:02:05.957 The proposed changes to the fourth quarter 2024 credit union profile. 00:02:06.197 --> 00:02:09.607 Were published on July 26th, and the comment period ends 00:02:09.607 --> 00:02:11.827 next week on September 24th. 00:02:12.367 --> 00:02:17.167 Additionally, the first quarter, 2025 call report proposed changes 00:02:17.347 --> 00:02:19.237 were published on September 16th. 00:02:19.707 --> 00:02:24.417 These changes would provide for new fields related to loans granted to credit union 00:02:24.417 --> 00:02:26.517 officials and senior executive staff. 00:02:27.032 --> 00:02:32.232 liquidity arrangements, um, brokered accounts, non member deposits, and 00:02:32.252 --> 00:02:34.982 uninsured shares, among other new fields. 00:02:35.342 --> 00:02:38.912 These changes also would eliminate fields related to the Paycheck Protection 00:02:38.912 --> 00:02:43.322 Program and credit impaired loans as those fields are no longer needed. 00:02:43.792 --> 00:02:48.332 The comment period on these post call report changes ends on November 15th. 00:02:48.902 --> 00:02:52.442 As always, we welcome stakeholder input on all of these matters. 00:02:52.767 --> 00:02:54.987 That concludes my opening announcements. 00:02:55.017 --> 00:02:58.937 I now recognize Vice Chairman Hoffman for any thoughts that he might have 00:02:58.967 --> 00:03:00.757 on any of these matters or more. 00:03:00.927 --> 00:03:02.027 Vice Chairman Hauptman: Yes, uh, thank you. 00:03:02.027 --> 00:03:06.477 We're obviously very pleased that, uh, Tanya and Zoe, Zoe, Zoe, are 00:03:06.477 --> 00:03:08.367 both uh, healthy and doing well. 00:03:08.367 --> 00:03:09.617 We look forward to having her back. 00:03:10.127 --> 00:03:12.622 Uh, also welcome the, uh, New Mexico folks. 00:03:12.652 --> 00:03:15.242 I'm a sort of adopted son of New Mexico. 00:03:15.242 --> 00:03:18.362 I married into a family from there, from Albuquerque. 00:03:18.622 --> 00:03:20.162 My wife is a UNM Lobo. 00:03:21.162 --> 00:03:24.112 I put hatch green chilies now in my eggs when I make scrambled eggs. 00:03:25.112 --> 00:03:27.472 Only place I've ever been, we're literally at McDonald's, at the 00:03:27.472 --> 00:03:30.542 kiosk, when you're making an order, it asks if you want green chilies. 00:03:30.542 --> 00:03:32.332 I assure you if you go to one here, they do not do that. 00:03:32.942 --> 00:03:36.992 And the state director of, uh, Uh, the Financial Institutions Division, Mark 00:03:36.992 --> 00:03:42.032 Sadowski, uh, I've actually never met him, and he was here last year, and I know 00:03:42.032 --> 00:03:46.592 his better half, uh, Denise, quite well, she's a rock star, but of course, when 00:03:46.642 --> 00:03:50.952 Mark finally came here and was sitting in these chairs, it was the one time I had 00:03:50.952 --> 00:03:53.962 to do the meeting virtually, because I was sitting in Albuquerque, New Mexico. 00:03:53.962 --> 00:03:57.572 So, uh, welcome folks from the land of enchantment. 00:03:57.582 --> 00:03:59.532 I'll mention for a state of 1. 00:03:59.532 --> 00:04:01.352 2 million people, I believe 50 percent. 00:04:01.902 --> 00:04:04.222 Our credit union members, that is, I don't know if it's the highest, 00:04:04.222 --> 00:04:07.302 but it's one of the highest in the country, and I hope your trip to, uh, 00:04:07.642 --> 00:04:07.822 Chairman Harper: D. 00:04:07.822 --> 00:04:08.112 C. 00:04:08.122 --> 00:04:08.772 is fruitful. 00:04:08.812 --> 00:04:09.392 Back to you, sir. 00:04:09.662 --> 00:04:11.732 Uh, thank you so much for those thoughts. 00:04:11.982 --> 00:04:15.262 Um, the first item of business today is the board briefing on the Share 00:04:15.262 --> 00:04:16.842 Insurance Fund quarterly report. 00:04:17.552 --> 00:04:21.972 Uh, our chief financial officer, Eugene Sheed, is the sole presenter. 00:04:22.002 --> 00:04:23.132 Good morning, Eugene. 00:04:23.142 --> 00:04:25.012 It's good to see you, as always. 00:04:25.242 --> 00:04:28.272 I also see that you got the purple tie memo today, so, 00:04:28.732 --> 00:04:30.392 uh, you are definitely on cue. 00:04:30.657 --> 00:04:31.217 Please begin 00:04:31.217 --> 00:04:32.077 Eugene: whenever you are ready. 00:04:32.457 --> 00:04:32.917 All right. 00:04:33.527 --> 00:04:36.017 Good morning, Chairman Harper and Vice Chairman Hoffman. 00:04:36.387 --> 00:04:40.047 I am pleased to present to you this morning the 2024 second quarter 00:04:40.047 --> 00:04:45.517 statistics of the share insurance fund and update on the NCOA budget. 00:04:46.237 --> 00:04:46.967 Slide two. 00:04:47.157 --> 00:04:47.337 This 00:04:48.337 --> 00:04:52.437 table shows the funds revenues and expenses for the second quarter of 2024. 00:04:53.437 --> 00:04:59.167 For the quarter that ended June 30th, the fund recorded net income of 86. 00:04:59.217 --> 00:05:00.507 2 million. 00:05:01.507 --> 00:05:03.267 A few highlights are as follows. 00:05:03.277 --> 00:05:05.577 Total income was 140. 00:05:05.977 --> 00:05:08.517 1 million for the quarter, mainly from investment. 00:05:08.807 --> 00:05:12.477 Investment income increased 5 percent compared to the prior quarter, 00:05:12.897 --> 00:05:16.427 and increased 38 percent compared to the second quarter of 2023. 00:05:17.427 --> 00:05:18.697 Operating expenses were 60. 00:05:18.697 --> 00:05:23.517 4 million for the quarter, primarily due to the overhead transfer, uh, 00:05:23.537 --> 00:05:25.257 for agency operating expenses. 00:05:26.122 --> 00:05:30.542 And the provision for insurance loss reserve expenses decreased 6. 00:05:30.542 --> 00:05:32.762 1 million during the quarter. 00:05:33.762 --> 00:05:34.582 Slide three. 00:05:35.582 --> 00:05:38.472 This table shows the funds balance sheet as of June 30th 00:05:38.502 --> 00:05:39.882 compared to the prior quarter. 00:05:40.352 --> 00:05:43.542 As of June 30th, total assets were valued at 21. 00:05:43.572 --> 00:05:47.502 6 billion, of which 99 percent were funds held with U. 00:05:47.502 --> 00:05:47.662 S. 00:05:47.672 --> 00:05:51.852 Treasury in cash, overnight investments, and long term Treasury notes. 00:05:52.477 --> 00:05:55.487 A few highlights to take away from this slide are that the fund's 00:05:55.547 --> 00:05:59.657 capitalization deposit receivable was fully collected in the second quarter. 00:06:00.447 --> 00:06:04.727 Accounts payable and other liabilities decreased, mainly from the payment of 00:06:04.727 --> 00:06:07.917 capitalization deposit refunds of 238. 00:06:07.947 --> 00:06:12.477 8 million to credit unions, uh, whose insured shares had decreased. 00:06:13.367 --> 00:06:18.087 And the cumulative results of operation increased, uh, 142. 00:06:18.087 --> 00:06:20.417 7 million due to 86. 00:06:20.457 --> 00:06:22.007 2 million in net income. 00:06:22.372 --> 00:06:26.452 And a reduction in unrealized losses on investments of 56. 00:06:26.492 --> 00:06:27.102 5 million. 00:06:28.102 --> 00:06:28.862 Slide four. 00:06:29.862 --> 00:06:33.052 The fund records an insurance program liability comprised of 00:06:33.052 --> 00:06:35.162 both general and specific reserves. 00:06:35.732 --> 00:06:39.302 This is a contingency to cover anticipated future losses resulting 00:06:39.302 --> 00:06:41.142 from insured credit union failures. 00:06:41.972 --> 00:06:45.592 Each quarter we assess the reserve needs for potential and actual credit 00:06:45.592 --> 00:06:49.232 union failures to make a reasonable estimate of potential future losses. 00:06:50.117 --> 00:06:53.247 During the second quarter, the reserve balance decreased by 5. 00:06:53.247 --> 00:06:57.397 5 million, primarily due to a decrease in the general reserves. 00:06:57.967 --> 00:07:03.167 The reserve balance totaled 212 million, and that is comprised of 10. 00:07:03.197 --> 00:07:06.937 1 million for specific reserves and 201. 00:07:06.937 --> 00:07:08.817 9 million for general reserves. 00:07:09.817 --> 00:07:10.907 Slide number five. 00:07:10.907 --> 00:07:13.152 Through the second quarter of 2024, two credit union failures, uh, had occurred, 00:07:13.152 --> 00:07:14.533 uh, which incurred a loss to the fund. 00:07:14.533 --> 00:07:16.778 During the second quarter of 2024, two credit union failures, uh, had occurred, 00:07:16.778 --> 00:07:19.357 uh, which incurred a loss to the fund. 00:07:19.987 --> 00:07:21.537 Both were assisted mergers. 00:07:21.727 --> 00:07:25.677 The cost of the failures is estimated at 2. 00:07:25.677 --> 00:07:26.504 02 million. 00:07:26.504 --> 00:07:29.907 Fraud has not been identified as a contributing factor to 00:07:29.907 --> 00:07:31.237 either of those two failures. 00:07:32.237 --> 00:07:33.177 Slide six. 00:07:34.177 --> 00:07:38.137 As of June 30th, 2024, the fund had over 22. 00:07:38.137 --> 00:07:41.927 5 billion at par value invested in treasury securities with 00:07:41.927 --> 00:07:44.577 maturities out to November 2030. 00:07:45.167 --> 00:07:48.547 The weighted average life of the securities held by the fund is 2. 00:07:48.547 --> 00:07:48.937 3 years. 00:07:49.932 --> 00:07:53.472 The weighted average yield of the securities increased 11 basis points 00:07:53.472 --> 00:07:56.412 from last quarter up to 2.54%. 00:07:57.222 --> 00:08:01.922 During the second quarter of 20 24, 8 Treasury notes matured, uh, for 00:08:01.922 --> 00:08:05.342 a total of 700 and $750 million. 00:08:05.762 --> 00:08:11.012 These securities had yields ranging from 0.24% to 2.14%. 00:08:11.452 --> 00:08:15.562 These maturities were subsequently reinvested during the second quarter. 00:08:15.712 --> 00:08:17.582 Slide seven. 00:08:18.582 --> 00:08:19.532 The equity ratio. 00:08:20.282 --> 00:08:23.102 The equity ratio is updated on a semi annual basis. 00:08:23.312 --> 00:08:27.252 As of June 30, 2024, the equity rate was 1. 00:08:27.252 --> 00:08:31.942 28 percent and was calculated using an insured share base of 1. 00:08:31.972 --> 00:08:32.952 76 trillion. 00:08:33.952 --> 00:08:37.172 The blue line across the chart represents the normal operating level. 00:08:37.492 --> 00:08:42.522 This was last set and approved by the board in December 2021, and that 00:08:42.592 --> 00:08:45.572 currently remains unchanged at 1. 00:08:45.752 --> 00:08:47.042 33 percent. 00:08:48.042 --> 00:08:48.842 Slide eight. 00:08:49.842 --> 00:08:54.292 This presents the projected equity ratio, the projection for December 00:08:54.292 --> 00:08:57.382 31st 2024, which is also 1. 00:08:57.432 --> 00:09:01.517 28 percent unchanged from Uh, the June 30th actual. 00:09:02.237 --> 00:09:06.747 The stability is mainly due to the forecasted modest, uh, increase in insured 00:09:06.747 --> 00:09:08.587 shares during the second half of the year. 00:09:09.227 --> 00:09:13.377 The projected equity ratio is calculated on the same basis as the actual 00:09:13.417 --> 00:09:17.417 equity ratio, and that formula and calculation are shown on the slide. 00:09:18.417 --> 00:09:19.227 Slide nine. 00:09:20.227 --> 00:09:25.457 Moving to an overview of CAML's data, this slide shows the percentage of insured 00:09:25.457 --> 00:09:31.827 shares by CAML's code, uh, codes from 2019 through the second quarter of 2024. 00:09:32.827 --> 00:09:38.477 In the graph, the dark blue at the top represents CAMELS coded 4 and 5, the gray 00:09:38.477 --> 00:09:42.877 represents CAMELS code 3, and the light blue represents CAMELS code 1 and 2. 00:09:43.877 --> 00:09:47.757 During the quarter, the percentage of insured shares at credit unions, 00:09:48.007 --> 00:09:54.627 CAMELS coded 3, 4, or 5, increased, while those at CAMELS 2 decreased. 00:09:55.612 --> 00:09:59.932 The table at the bottom of the page shows the number of credit 00:09:59.932 --> 00:10:01.372 unions by the Camel's Code. 00:10:01.592 --> 00:10:07.572 The total number of credit unions as of June 30th was 4, 533, a decrease 00:10:07.602 --> 00:10:09.662 of 45 from the prior quarter. 00:10:10.662 --> 00:10:11.412 Slide 10. 00:10:12.412 --> 00:10:15.842 This slide compares credit unions Camel's Code by asset size. 00:10:16.702 --> 00:10:20.852 Camel's Code at 4 and 5 credit unions are shown on the left hand side of the graph, 00:10:20.982 --> 00:10:22.962 and Camel Code 3 is shown on the right. 00:10:23.822 --> 00:10:29.372 Looking at the 136 credit unions, Camels Code 4 and 5, most of these 00:10:29.372 --> 00:10:33.572 credit unions continue to have assets of 100 million or less. 00:10:34.172 --> 00:10:37.492 For those with assets greater than 100 million, there were 10 credit 00:10:37.492 --> 00:10:44.917 unions in the A hundred, uh, to $500 million, uh, range, uh, excuse me, 00:10:44.977 --> 00:10:47.557 for those, uh, with assets greater than a hundred million dollars. 00:10:47.557 --> 00:10:51.727 There were 10 credit unions in the 100 million to $500 million range 00:10:52.047 --> 00:10:54.117 for those greater than $500 million. 00:10:54.117 --> 00:10:58.577 There were six more credit unions, uh, in 2024, June, 2024. 00:10:58.577 --> 00:11:02.817 Then in the prior quarter, during the quarter, assets and insured shares. 00:11:03.462 --> 00:11:06.252 Uh, for credit unions, Camel Code 4 and 5 increased. 00:11:06.972 --> 00:11:12.902 Considering now the 743 credit unions, Camel Codes 3, 91 percent 00:11:12.902 --> 00:11:16.172 of these are credit unions that have less than 500 million. 00:11:16.172 --> 00:11:22.212 During the quarter, there was a decrease in credit unions with assets, uh, 00:11:22.872 --> 00:11:26.852 500 million or less, and an increase in credit unions, uh, greater than 00:11:26.852 --> 00:11:29.492 500 million for the Camel Code 3. 00:11:30.492 --> 00:11:33.252 During the quarter, assets and insured shares in Credit 00:11:33.262 --> 00:11:35.302 Union's Camels Code 3 increased. 00:11:36.302 --> 00:11:37.142 Slide 11. 00:11:38.142 --> 00:11:43.072 I will now transition to a brief overview of the NCOA's budget status for 2024. 00:11:43.202 --> 00:11:44.412 Slide 12. 00:11:45.412 --> 00:11:48.952 Through July, the Operating Fund budget has used 80, uh, 60. 00:11:48.952 --> 00:11:53.492 8 percent of its, uh, funding that was made available by the Board for 2024. 00:11:53.897 --> 00:11:57.277 A rate that's generally consistent with expectations and prior years. 00:11:57.857 --> 00:12:02.187 Employee pay and benefits is tracking very close to expectations as the agency 00:12:02.187 --> 00:12:03.887 has maintained a low vacancy rate. 00:12:04.757 --> 00:12:08.057 Travel spending has increased compared to recent years, and we project 00:12:08.067 --> 00:12:11.187 most of the available travel funds will be used by the end of the year. 00:12:12.057 --> 00:12:15.907 Compared to recent years, we forecast a smaller year end availability 00:12:15.907 --> 00:12:19.387 of funds, currently projected to be about 5 million, or 1. 00:12:19.657 --> 00:12:20.837 3%. 00:12:21.512 --> 00:12:25.162 This would be smaller than what we've seen in recent years, which means there would 00:12:25.172 --> 00:12:30.562 be less surplus funds, uh, to potentially apply as an offset to the 2025 budget, 00:12:30.842 --> 00:12:33.202 uh, as the board has done in recent years. 00:12:34.202 --> 00:12:34.742 Slide 13. 00:12:35.742 --> 00:12:39.522 The board approved a capital budget for 2024, which is 7. 00:12:39.522 --> 00:12:39.842 4 million. 00:12:40.842 --> 00:12:44.032 Through July, approximately 50 percent of the funds have been used. 00:12:44.422 --> 00:12:47.542 Key line items in the capital budget include cybersecurity, 00:12:47.842 --> 00:12:51.642 information technology infrastructure, and process improvements. 00:12:52.282 --> 00:12:56.212 As noted on the slide, a small reallocation of funds was made to 00:12:56.212 --> 00:13:00.352 increase funding for a personal, uh, security case management system. 00:13:00.652 --> 00:13:04.082 Otherwise, all the approved projects are executing, uh, within 00:13:04.092 --> 00:13:06.612 the amounts made by the board. 00:13:07.612 --> 00:13:08.412 Slide 14. 00:13:09.412 --> 00:13:12.712 The Share Insurance Fund Administrative Budget funds certain insurance 00:13:12.712 --> 00:13:14.472 related expenses of the agency. 00:13:14.682 --> 00:13:18.172 Through July, 76 percent of the Board approved budget has been used. 00:13:18.632 --> 00:13:22.502 The line item we are monitoring here is state examiner training. 00:13:22.982 --> 00:13:27.472 We reallocated 100, 000 from administrative expenses to state examiner 00:13:27.592 --> 00:13:33.832 training line item because participation rates at NCOA and FFIEC training classes 00:13:33.842 --> 00:13:35.342 have been higher than anticipated. 00:13:36.342 --> 00:13:37.412 And slide 15. 00:13:38.412 --> 00:13:41.602 In closing, the Share Insurance Fund is performing well year to date. 00:13:42.532 --> 00:13:45.912 The board approved budgets are executing within the expected parameters. 00:13:46.512 --> 00:13:50.612 Supplemental slides provide, provided with this presentation have additional 00:13:50.612 --> 00:13:53.842 information to help interested parties better understand the operations 00:13:53.852 --> 00:13:55.062 of the Share Insurance Fund. 00:13:55.692 --> 00:13:58.162 Thank you for your time and this concludes my presentation. 00:13:58.182 --> 00:13:59.792 I'd be happy to answer your questions. 00:13:59.942 --> 00:14:02.732 Chairman Harper: Uh, Eugene, thank you for your update on the performance of the 00:14:02.732 --> 00:14:07.052 National Credit Union's Share Insurance Fund in the second quarter of 2024. 00:14:07.447 --> 00:14:11.647 The overview of the fund's projected year end equity ratio and the status 00:14:11.647 --> 00:14:13.897 of the NCOA's budget at the mid year. 00:14:14.537 --> 00:14:17.597 And thank you to you and your team and the Office of the Chief Economist 00:14:17.607 --> 00:14:21.357 for their continued solid work in preparing today's briefing materials. 00:14:21.927 --> 00:14:26.137 The Share Insurance Fund's performance in the second quarter of 2024 mirrors 00:14:26.157 --> 00:14:29.147 much of the industry's financial performance during the same period. 00:14:29.587 --> 00:14:33.797 The fund, like the credit union system, is doing well overall, but there are 00:14:33.797 --> 00:14:35.647 warning signs that we all must heed. 00:14:36.127 --> 00:14:37.817 First, let me start with the good news. 00:14:38.452 --> 00:14:42.732 Since the 2008 financial crisis and the Great Recession that followed, the U. 00:14:42.732 --> 00:14:42.862 S. 00:14:42.862 --> 00:14:45.972 has maintained an unprecedented low interest rate environment 00:14:45.982 --> 00:14:47.292 for nearly 15 years. 00:14:47.757 --> 00:14:50.937 This economic environment prevented the share insurance fund's investment 00:14:50.937 --> 00:14:54.767 income from offsetting the growth in insured shares the industry 00:14:54.767 --> 00:14:56.797 experienced during that same time frame. 00:14:57.267 --> 00:15:01.357 That's why there was a continual decline in the equity ratio in the middle part 00:15:01.387 --> 00:15:05.667 of each year during the last decade until the closure of the Temporary Corporate 00:15:05.667 --> 00:15:09.027 Credit Union Stabilization Fund in 2017. 00:15:09.677 --> 00:15:13.027 In recent years, we have experienced a large growth in insured shares. 00:15:13.047 --> 00:15:15.597 household investments, especially at the height of the pandemic when 00:15:15.597 --> 00:15:19.017 large amounts of government stimulus funds flowed into the credit union 00:15:19.017 --> 00:15:22.957 system, gradually depressing the strength of the equity ratio, with 00:15:22.957 --> 00:15:25.127 the lowest ratio being reached at 1. 00:15:25.197 --> 00:15:27.547 22 percent in June 2020. 00:15:28.547 --> 00:15:31.267 But the current higher interest rate environment has improved the funds 00:15:31.267 --> 00:15:34.347 earnings, and agencies In fact, investment income in the first two 00:15:34.347 --> 00:15:39.537 quarters of 2024 alone exceeded the investment income of the share 00:15:39.537 --> 00:15:42.907 insurance fund earned in all of 2021. 00:15:43.027 --> 00:15:45.277 So things certainly have changed. 00:15:45.277 --> 00:15:48.087 And I think you would agree that that's very good news 00:15:48.087 --> 00:15:49.657 for the share insurance fund. 00:15:50.317 --> 00:15:54.217 What's more, the fund's yield in 2021 was just 1. 00:15:54.817 --> 00:15:55.357 21%. 00:15:55.857 --> 00:15:58.707 The share insurance fund portfolio right now is yielding 2. 00:15:58.707 --> 00:15:58.727 1%. 00:15:59.077 --> 00:16:02.827 Five, 4% more than double 2020 ones level. 00:16:03.177 --> 00:16:07.167 That income, along with slower growth in insured shares helped to stabilize the 00:16:07.167 --> 00:16:13.467 share insurance fund's rec equity ratio at 1.2 per 8%, four basis points higher than 00:16:13.467 --> 00:16:15.987 the initial projected ratio for June 30. 00:16:16.537 --> 00:16:19.927 So Eugene, while the share insurance fund is overall experience best 00:16:19.927 --> 00:16:23.557 performance in terms of investment income in nearly 15 years. 00:16:23.952 --> 00:16:25.992 Should we expect that performance 00:16:25.992 --> 00:16:26.612 Eugene: to continue? 00:16:27.442 --> 00:16:29.622 Uh, thank you for that, uh, question, Chairman Harper. 00:16:30.122 --> 00:16:33.532 Uh, so, both in terms of income and the weighted average yield, uh, the 00:16:33.532 --> 00:16:36.752 fund has seen its best performance since at least the Great Recession. 00:16:37.612 --> 00:16:39.082 Uh, the yield is now at 2. 00:16:39.292 --> 00:16:42.582 54 percent and has benefited from the higher interest rates, 00:16:42.722 --> 00:16:44.622 especially in the overnight holdings. 00:16:45.262 --> 00:16:48.782 We have seen the overnight rates begin to fall, uh, from 00:16:48.802 --> 00:16:51.582 where, uh, as recently as 5. 00:16:51.582 --> 00:16:54.242 4 percent in early August down to now under 5%. 00:16:54.242 --> 00:16:54.937 very much. 00:16:55.827 --> 00:16:59.717 Uh, as of, uh, yesterday, uh, that represented a decrease of 00:16:59.717 --> 00:17:04.507 about 82, 000 a day, uh, to the fund, or about 30 million a year. 00:17:05.367 --> 00:17:08.867 However, the laddered portfolio has maturities every quarter, 00:17:08.997 --> 00:17:13.317 and those maturity buckets have average yields of generally under 1. 00:17:13.357 --> 00:17:15.877 5 percent for the next couple of years. 00:17:16.607 --> 00:17:22.717 As we reinvest those maturities, we will help to offset lost earnings from 00:17:22.787 --> 00:17:24.587 a decrease in the overnight rates. 00:17:25.247 --> 00:17:28.687 The amount of the offset will be highly dependent on the overnight rates, and 00:17:28.732 --> 00:17:34.462 Uh, as well as the, uh, uh, rates that we get on, uh, the reinvestments in the 00:17:34.462 --> 00:17:36.602 longer end of the SIF portfolio ladder. 00:17:37.162 --> 00:17:41.382 Uh, these challenges, uh, these are, this is the challenge for the investment 00:17:41.382 --> 00:17:45.112 committee is to reassess the funds overnight holdings and potentially place 00:17:45.112 --> 00:17:47.352 more of the funds in the investment ladder, which would help them out. 00:17:47.712 --> 00:17:49.312 Walk in longer term earnings. 00:17:49.942 --> 00:17:50.932 So just help 00:17:50.932 --> 00:17:54.452 Chairman Harper: me out here To make sure that I understand what you're saying. 00:17:54.862 --> 00:17:58.652 Are you saying that yes The long term investments are paying a 00:17:58.652 --> 00:18:03.052 lower yield now because of that we invested them at this time, right? 00:18:03.052 --> 00:18:07.042 But if I remember correctly, we have five point six billion Yes in 00:18:07.042 --> 00:18:11.112 overnights right now and that we're going to be Moving out on the ladder. 00:18:11.122 --> 00:18:16.492 Are you saying that as we ladder, we expect those rates to go up, um, on, 00:18:16.522 --> 00:18:18.322 on, on the longer term investments? 00:18:18.792 --> 00:18:21.462 Eugene: Yeah, so I think there's sort of two, two balances here 00:18:21.462 --> 00:18:22.662 that we have to think about. 00:18:22.662 --> 00:18:25.162 There's the overnights, and we have seen those start to come 00:18:25.162 --> 00:18:29.912 down, and those presumably would continue to go down, uh, if the Fed 00:18:29.912 --> 00:18:31.382 continues to reduce interest rates. 00:18:32.182 --> 00:18:34.792 The maturities that we're seeing right now in the longer end of the 00:18:34.962 --> 00:18:39.982 portfolio, that the longer, uh, Securities that we've pulled, um, 00:18:39.982 --> 00:18:41.272 those generally have rates under 1. 00:18:41.272 --> 00:18:44.192 5 percent, um, overall. 00:18:44.212 --> 00:18:48.892 So the next couple of years, we'll see those, uh, lower rates mature off, um, 00:18:48.892 --> 00:18:52.622 if the ten year, which would, you know, the longer term rates, uh, continue to be 00:18:52.632 --> 00:18:56.672 somewhat higher, then that will kind of offset, uh, so we'll, we'll kind of see 00:18:56.672 --> 00:18:59.162 movement at both ends of the spectrum. 00:18:59.302 --> 00:18:59.722 Um. 00:19:00.112 --> 00:19:03.872 But how that plays out in net, I mean, obviously it will depend 00:19:03.872 --> 00:19:05.522 on what the rates look like. 00:19:06.082 --> 00:19:06.522 Um, thank 00:19:06.522 --> 00:19:08.322 Chairman Harper: you, uh, Eugene, for that clarification. 00:19:08.672 --> 00:19:11.442 My next question relates to the fund's balance sheet. 00:19:11.882 --> 00:19:13.622 Uh, if we could pull up slide three. 00:19:14.062 --> 00:19:17.882 Um, on slide three, we see the overall assets of the share insurance 00:19:17.882 --> 00:19:21.742 fund declined slightly between the first and second quarters. 00:19:21.952 --> 00:19:25.022 This contraction may cause confusion for some. 00:19:25.142 --> 00:19:28.742 Would fund's total assets? 00:19:29.107 --> 00:19:33.277 And that, why this, um, uh, slight decline in the funds, total assets and 00:19:33.277 --> 00:19:37.437 net position occurred and are there any seasonal factors at play here? 00:19:37.647 --> 00:19:37.987 Eugene: Sure. 00:19:38.377 --> 00:19:42.137 Uh, so that's really a factor, uh, of the refund that we did, uh, 00:19:42.137 --> 00:19:43.757 for the capitalization deposits. 00:19:44.137 --> 00:19:49.377 Uh, so in short, the agency refunded more in capitalization deposit adjustments, 00:19:49.467 --> 00:19:53.447 uh, during quarter two than we collected, uh, because there was a overall 00:19:53.447 --> 00:19:55.717 decrease, uh, somewhat in insured shares. 00:19:55.727 --> 00:19:56.357 The latter half. 00:19:57.127 --> 00:19:59.457 Of 2023. 00:19:59.457 --> 00:20:02.077 I think what's important here, though, is that the funds cumulative 00:20:02.087 --> 00:20:03.667 results of operation increased. 00:20:04.187 --> 00:20:07.097 Um, and so that's important for the stability of the fund. 00:20:07.097 --> 00:20:07.497 So maybe 00:20:07.497 --> 00:20:10.697 Chairman Harper: it wasn't a seasonality, but it was a one time event just as we've 00:20:10.697 --> 00:20:14.087 seen this change in the composition and makeup of credit union balance sheets. 00:20:14.097 --> 00:20:16.647 Eugene: Well, there is a, there is a, certainly a seasonality to 00:20:16.647 --> 00:20:20.357 the, uh, share insurance fund, uh, insured shares, uh, that we see. 00:20:20.607 --> 00:20:22.207 And so there is a, a seasonality. 00:20:22.207 --> 00:20:25.587 I would say that kind of the more unique aspect is, um, we don't 00:20:25.617 --> 00:20:27.167 typically see a contraction. 00:20:27.217 --> 00:20:30.427 In insured shares and there was a bit of that, that in the letter head. 00:20:30.947 --> 00:20:32.627 Chairman Harper: Uh, thank you for those clarifications. 00:20:32.867 --> 00:20:35.837 Your response helps stakeholders to better understand that this slight 00:20:35.837 --> 00:20:39.677 decrease in the share insurance funds balance sheet isn't a trend and that 00:20:39.677 --> 00:20:42.947 the fund's total assets in that position should improve over the remainder of 00:20:42.947 --> 00:20:45.317 the year based on current projections. 00:20:45.587 --> 00:20:48.737 It also reiterates the point that the share insurance fund remains 00:20:48.737 --> 00:20:50.387 overall in a healthy position. 00:20:50.967 --> 00:20:53.667 My next question concerns the fund's future income. 00:20:54.107 --> 00:20:57.427 The higher interest rate environment has improved the fund's earnings, 00:20:57.467 --> 00:21:03.457 and the much anticipated drop in interest rates will decrease unrealized 00:21:03.467 --> 00:21:06.647 losses in the portfolio, further improving the fund's position. 00:21:07.117 --> 00:21:10.892 In fact, just yesterday, The Federal Open Market Committee lowered the 00:21:10.892 --> 00:21:12.892 federal funds rate by 50 basis points. 00:21:13.112 --> 00:21:16.592 It signaled the potential for additional rate decreases should 00:21:16.592 --> 00:21:18.232 economic conditions weaken. 00:21:18.742 --> 00:21:22.642 How are we positioning the Share Insurance Fund so it can remain healthy in a 00:21:22.922 --> 00:21:24.692 declining interest rate environment? 00:21:24.702 --> 00:21:27.982 We talked a little bit about that earlier, but I want to dive down a little deeper. 00:21:28.072 --> 00:21:28.432 Sure. 00:21:28.832 --> 00:21:32.842 Eugene: Uh, so a key responsibility of the Investment Committee is to determine 00:21:32.842 --> 00:21:35.162 how to position the fund's portfolio. 00:21:35.162 --> 00:21:37.532 Thanks Uh, within the policy set by the board. 00:21:38.152 --> 00:21:40.852 We generally approach this responsibility by considering 00:21:40.852 --> 00:21:42.742 safety, liquidity, and yield. 00:21:43.112 --> 00:21:46.552 Uh, and I think personally, liquidity being the most significant 00:21:46.552 --> 00:21:47.892 factor for us to consider. 00:21:48.482 --> 00:21:51.612 Uh, we've increased the fund's liquidity position in the overnight, 00:21:51.682 --> 00:21:53.272 as we've already discussed, up to 5. 00:21:53.272 --> 00:21:58.492 6, uh, billion dollars, uh, and that was in response to the longer term, 00:21:58.622 --> 00:22:00.832 uh, holding in a lost position. 00:22:01.122 --> 00:22:03.242 So, we're, have, uh, a total of, uh. 00:22:03.672 --> 00:22:06.132 Unrealized losses, uh, on the portfolio. 00:22:06.802 --> 00:22:10.222 Uh, and somewhat also the softening, uh, composite camel's ratings. 00:22:10.602 --> 00:22:13.932 We wanna be able to respond to liquidity events without incurring a 00:22:13.932 --> 00:22:19.742 cost to the fund, uh, or, um, uh, to borrow, uh, which also comes at a cost. 00:22:20.192 --> 00:22:23.012 Uh, the declining interest rate environment, uh, should 00:22:23.012 --> 00:22:24.452 lower the loss position. 00:22:24.632 --> 00:22:27.002 Uh, so our unrealized losses should come down. 00:22:27.342 --> 00:22:31.322 As interest rates come down, um, and that will give us, uh, greater, uh, 00:22:31.492 --> 00:22:35.622 liquidity options, uh, going forward should we, uh, need to access them. 00:22:36.622 --> 00:22:42.412 Uh, up to this point, uh, the yield has, um, favored the overnights, um, so the 00:22:42.432 --> 00:22:48.582 fund has, uh, been able to maintain, uh, that liquidity, uh, without, uh, paying 00:22:48.582 --> 00:22:53.252 a premium, uh, which we'd normally see in a, a more normal rate environment. 00:22:53.842 --> 00:22:55.352 And that concludes my response. 00:22:55.702 --> 00:22:57.782 Chairman Harper: Thank you for that detailed response. 00:22:57.782 --> 00:23:01.832 Lettering investments in both up and down interest rate environments is 00:23:01.832 --> 00:23:06.282 a proven method, uh, a proven way to smooth out interest rate fluctuations 00:23:06.582 --> 00:23:08.452 and maximize long term performance. 00:23:08.472 --> 00:23:12.252 I know that's something that both the Vice Chairman and I learned as undergraduates. 00:23:12.947 --> 00:23:16.117 It's important, uh, that the shared insurance fund is healthy and able 00:23:16.117 --> 00:23:20.107 to respond quickly to any stress in the credit union system regardless 00:23:20.107 --> 00:23:23.327 of the economic environment and that's also why we're maintaining 00:23:23.327 --> 00:23:24.907 some of that liquidity right now. 00:23:25.197 --> 00:23:28.217 Lattering investments also helps us to achieve that goal. 00:23:28.657 --> 00:23:31.037 Now let me turn to some of the warning signs. 00:23:31.377 --> 00:23:34.897 We are seeing growing signs of concerns in loan performance, capital, 00:23:35.167 --> 00:23:39.767 delinquency rates and earnings across the system and at specific institutions. 00:23:40.227 --> 00:23:42.167 The latest quarterly performance data. 00:23:42.377 --> 00:23:44.767 For the industry showed declining growth and weakening 00:23:44.767 --> 00:23:46.617 performance across auto lending. 00:23:47.002 --> 00:23:49.572 mortgages, and commercial loan categories. 00:23:49.682 --> 00:23:54.182 Further, these trends are contributing to a large percentage of credit unions with 00:23:54.212 --> 00:23:57.782 Hamels composite ratings of 3, 4, or 5. 00:23:58.152 --> 00:24:02.862 In fact, by my calculations, done by the slide you showed earlier, approximately 00:24:02.872 --> 00:24:08.487 1 in 5 Federal insured credit unions is a Campbell's Code composite 3, 4, or 5. 00:24:08.967 --> 00:24:14.227 What especially concerns me about the information on slide 10 is the increasing 00:24:14.227 --> 00:24:20.417 number of complex credit unions with 500 million more or in assets falling 00:24:20.427 --> 00:24:25.787 into the troubled category, Campbell's Code 4 or 5 ratings this last quarter. 00:24:26.147 --> 00:24:31.872 In fact, the number of troubled complex credit unions tripled from 3 to 9. 00:24:32.122 --> 00:24:35.692 Um, in the last quarter alone, and the amount of assets that these 00:24:35.692 --> 00:24:38.502 institutions grew by more than five fold. 00:24:38.942 --> 00:24:42.312 It's been about a decade since we saw this proportion of share, insured 00:24:42.312 --> 00:24:46.912 shares at risk, so we must remain vigilant as we navigate this situation. 00:24:47.402 --> 00:24:52.222 Eugene, we've been watching the amount of, uh, shares and, um, composite, 00:24:52.242 --> 00:24:56.702 Campbell's Code 3, credit unions rise for several quarters now. 00:24:57.702 --> 00:25:01.622 Expect these rating declines to level off or even improve. 00:25:02.402 --> 00:25:06.322 Eugene: Um, so I think that is really difficult, uh, to say. 00:25:06.442 --> 00:25:11.232 Um, and I think a lot of the factors, uh, that you mentioned, uh, are at play. 00:25:11.542 --> 00:25:16.042 Um, so, you know, credit unions are going to need to, so the, you know, I think with 00:25:16.042 --> 00:25:20.822 a declining interest rate environment, you know, there comes, you know, a different 00:25:20.822 --> 00:25:25.752 set of challenges than what they saw in the increasing interest rate environment. 00:25:26.392 --> 00:25:30.532 So I think all those factors that you talked about in terms of their earnings, 00:25:30.542 --> 00:25:34.532 there will be changes in borrowing costs and their lending program. 00:25:35.532 --> 00:25:40.632 Really difficult to say, uh, kind of if this is represents a bottoming out 00:25:40.752 --> 00:25:47.172 of the trend, um, or if it'll move one direction or the other, but certainly, um, 00:25:47.882 --> 00:25:49.572 a need that you say to remain vigilant. 00:25:50.012 --> 00:25:54.962 Uh, and for us to continue to monitor the potential liquidity of the fund, uh, in 00:25:54.962 --> 00:25:58.222 case there, uh, is a, uh, failure of size. 00:25:58.252 --> 00:25:58.932 Yeah, but 00:25:59.222 --> 00:26:00.682 Chairman Harper: let me, let me drill down a little deeper. 00:26:00.762 --> 00:26:05.042 Uh, we have a policy for billion dollar plus credit unions that we 00:26:05.042 --> 00:26:07.702 examine them on an annual basis. 00:26:07.702 --> 00:26:11.612 And it's been now more than a year, uh, since we've hit those institutions. 00:26:11.612 --> 00:26:16.112 So we've probably, if we've had changes and downgrades because of the liquidity 00:26:16.112 --> 00:26:20.472 events and issues related to last year, That's been brought in already. 00:26:20.882 --> 00:26:25.262 Um, however, for credit unions less than a billion, that are performing fairly 00:26:25.262 --> 00:26:27.492 well, they're on an extended cycle. 00:26:27.882 --> 00:26:30.902 There may be some of those who aren't performing well, so we might see 00:26:30.902 --> 00:26:32.622 some increases still occurring there. 00:26:32.912 --> 00:26:35.952 But in terms of liquidity, do you sort of see the 00:26:35.952 --> 00:26:37.442 Eugene: issues leveling off there? 00:26:37.852 --> 00:26:41.092 Yeah, I think there's additional concerns, though, um, that they're 00:26:41.092 --> 00:26:44.322 seeing in credit unions, which includes everything from record keeping and 00:26:44.332 --> 00:26:46.312 management, uh, to other issues. 00:26:46.322 --> 00:26:51.712 So it's not just a a single Uh, it's a variety of factors and those 00:26:51.712 --> 00:26:55.152 factors, you know, may be unrelated to any movement in interest rates. 00:26:55.402 --> 00:26:56.152 Chairman Harper: So what I'm 00:26:56.152 --> 00:26:56.842 Eugene: hearing you tell, 00:26:57.012 --> 00:26:58.772 Chairman Harper: we're not quite out of the woods just yet. 00:26:59.042 --> 00:27:00.122 Uh, I can't say that we are. 00:27:00.232 --> 00:27:00.682 Okay. 00:27:00.762 --> 00:27:04.432 Um, credit union leaders must therefore continue to monitor their institution 00:27:04.522 --> 00:27:08.442 performance and ballot sheets and act expeditiously to prevent small 00:27:08.442 --> 00:27:10.662 issues from turning into big problems. 00:27:11.032 --> 00:27:14.502 The NCUA's supervisory teams, for their part, will continue to 00:27:14.502 --> 00:27:17.402 monitor credit union performance through our examination process. 00:27:17.757 --> 00:27:20.067 Offsite monitoring and tailored supervision. 00:27:20.417 --> 00:27:23.987 We'll work to maximize the credit union system's preparedness and resilience for 00:27:23.987 --> 00:27:26.267 any bumps in the road that may lie ahead. 00:27:26.537 --> 00:27:31.397 We did that during the Great Recession when we had $14 billion plus credit 00:27:31.397 --> 00:27:33.647 unions that were in troubled status. 00:27:33.797 --> 00:27:35.807 Yet none of them ultimately failed. 00:27:36.247 --> 00:27:38.737 After all, protecting the share insurance fund against bosses. 00:27:39.162 --> 00:27:45.142 was then and is now a top priority for the NCUA board, just as it always will be. 00:27:45.452 --> 00:27:47.642 That concludes my remarks on this topic. 00:27:47.642 --> 00:27:49.132 I now recognize the Vice Chairman. 00:27:49.532 --> 00:27:50.132 Vice Chairman Hauptman: Thank you, sir. 00:27:50.152 --> 00:27:54.102 And Eugene, before I chat about this topic, I want to mention, uh, Mr. 00:27:54.102 --> 00:27:56.942 Chairman, I believe you mentioned call report changes at the outset. 00:27:57.452 --> 00:28:00.882 Uh, I just want to remind people, um, submit, submit comments 00:28:00.942 --> 00:28:02.832 is not all that difficult. 00:28:03.462 --> 00:28:04.922 Uh, we encourage people to do it. 00:28:04.942 --> 00:28:05.772 We do read them. 00:28:05.782 --> 00:28:06.622 They do matter. 00:28:06.622 --> 00:28:09.832 And one of the best things about reading comments is that, uh, well, first of all, 00:28:09.832 --> 00:28:11.042 you should know they're public, okay? 00:28:11.042 --> 00:28:11.672 You put one in. 00:28:11.692 --> 00:28:12.562 Some people don't know that. 00:28:12.572 --> 00:28:13.712 It's the first time they've done it. 00:28:14.022 --> 00:28:17.702 But it also means you can read other people's and I find it very useful 00:28:17.722 --> 00:28:21.512 because people say This is such a no brainer, you know, such an obvious 00:28:21.532 --> 00:28:22.862 view on whatever the topic is. 00:28:22.892 --> 00:28:25.632 I said, okay, but there are people who feel the other way, you should 00:28:25.632 --> 00:28:26.712 know that, and you can read it. 00:28:26.712 --> 00:28:29.332 It's very useful sometimes to know what the other argument is, even if 00:28:29.332 --> 00:28:31.282 you think your view is rock solid. 00:28:31.522 --> 00:28:31.762 NCWA. 00:28:32.112 --> 00:28:35.102 gov, you select regulation and supervision from the top menu, and 00:28:35.102 --> 00:28:36.442 then rulemakings and proposals. 00:28:36.472 --> 00:28:39.832 You should find everything that is presently out, uh, for comment. 00:28:39.882 --> 00:28:41.142 These new changes that Mr. 00:28:41.142 --> 00:28:42.982 Chairman mentioned, uh, about the core report, they were 00:28:42.982 --> 00:28:44.162 just published this Monday. 00:28:44.252 --> 00:28:48.372 Might take a few days, but, uh, to be reflected, but the proposed changes to the 00:28:48.372 --> 00:28:51.512 CU profile, credit union profile, when you want to look up a credit union, just get 00:28:51.512 --> 00:28:56.532 the basic info, uh, is currently shown as Agency Information Collection Activities. 00:28:56.572 --> 00:28:58.092 We might want to do something about that name. 00:28:58.352 --> 00:28:59.422 It's not intuitive to me. 00:28:59.692 --> 00:29:00.052 I agree. 00:29:00.612 --> 00:29:01.322 Uh, click on it. 00:29:01.332 --> 00:29:02.392 It takes you to regulations. 00:29:02.762 --> 00:29:02.852 gov. 00:29:02.852 --> 00:29:04.032 You find the comment button. 00:29:04.112 --> 00:29:05.632 Um, you can comment quietly. 00:29:06.632 --> 00:29:10.312 The Federal Register will show you comments by other people and, uh, 00:29:10.372 --> 00:29:12.172 your comment again will be public. 00:29:12.202 --> 00:29:15.942 It's just something you should know, uh, to the topic at hand, the SIF update. 00:29:16.422 --> 00:29:19.752 Um, obviously yesterday, the Fed cut interest rates for the 00:29:19.752 --> 00:29:21.602 first time since March, 2020. 00:29:21.642 --> 00:29:25.722 That was, uh, if you recall, that was an emergency meeting on the Sunday when 00:29:26.182 --> 00:29:28.312 everything sort of broke loose with COVID. 00:29:28.862 --> 00:29:32.362 Uh, the Fed normally moves in 25 basis point increments. 00:29:32.362 --> 00:29:35.232 They usually cut or raise a quarter point at a time. 00:29:35.542 --> 00:29:37.122 I don't read too much into these things. 00:29:37.522 --> 00:29:39.022 There's a Fed meeting every eight weeks. 00:29:39.032 --> 00:29:44.942 So, um, but a cut of 50 since I've been an adult, this is 00:29:44.942 --> 00:29:47.212 the first non emergency time. 00:29:47.222 --> 00:29:51.932 The last three times they cut by more than 25 were all what we call emergencies. 00:29:52.372 --> 00:29:56.842 There was that Covid Sunday, the financial crisis and just after 9 11. 00:29:57.022 --> 00:29:59.242 Since I've been an adult, the only times they've lowered. 00:29:59.862 --> 00:30:01.102 Uh, by greater than 25. 00:30:01.162 --> 00:30:02.522 Again, I don't read too much into it. 00:30:02.562 --> 00:30:05.762 As Chairman Powell said, you could have done 25 in July and 25 now. 00:30:06.242 --> 00:30:10.922 Um, but markets are pricing, uh, further cuts ahead that obviously 00:30:10.922 --> 00:30:13.602 affects us and it affects our balance sheet, it affects our earnings, and 00:30:13.602 --> 00:30:14.802 it certainly affects credit unions. 00:30:15.252 --> 00:30:18.462 Uh, for what it's worth, and this is just public data I just checked, futures 00:30:18.462 --> 00:30:24.452 markets, by Christmas, the Fed has a December meeting before Christmas, the 00:30:24.452 --> 00:30:29.852 markets are pricing and the modal outcome, the most likely, is another 75 down. 00:30:30.852 --> 00:30:33.692 Christmas Eve, according to markets, the modal outcome is another 00:30:33.692 --> 00:30:35.542 75 on top of the 50 they did. 00:30:35.992 --> 00:30:42.962 One year from now, September of 2025, the modal outcome is, let 00:30:42.962 --> 00:30:47.542 me make sure I get this right, is down another 200 from today. 00:30:47.632 --> 00:30:50.752 Right, so currently the Fed, the Fed, since the finance credit is down, 00:30:50.802 --> 00:30:52.132 there's a range of a quarter point. 00:30:52.852 --> 00:30:55.032 Before yesterday, it was five and a quarter to five and a half. 00:30:56.032 --> 00:30:58.422 Today four and three quarters to five. 00:30:59.092 --> 00:31:00.742 That's the range for the overnight rate. 00:31:01.742 --> 00:31:07.012 So Christmas, this Christmas, 400 to four and a quarter. 00:31:07.042 --> 00:31:08.732 That's down 75 from where we are now. 00:31:08.782 --> 00:31:09.972 This is just market data. 00:31:09.992 --> 00:31:11.022 It moves all the time. 00:31:11.042 --> 00:31:12.212 I'm not predicting anything. 00:31:12.222 --> 00:31:12.602 Okay. 00:31:13.492 --> 00:31:17.622 And then if we have this meeting next year, it will again be 00:31:17.622 --> 00:31:18.692 right after the Fed meeting. 00:31:19.062 --> 00:31:20.382 September 17th, 2025. 00:31:21.382 --> 00:31:25.722 The modal outcome on the futures markets is two and three quarters to three. 00:31:25.772 --> 00:31:26.132 Okay. 00:31:26.152 --> 00:31:27.742 So read into that what you will. 00:31:27.932 --> 00:31:28.742 It does mean, Okay. 00:31:29.527 --> 00:31:33.027 That we will have less money in our short term investments. 00:31:33.887 --> 00:31:39.867 Um, the reason I'm talking about rate cuts, rate moves at all, uh, it matters to 00:31:39.887 --> 00:31:41.907 the shared insurance fund for two reasons. 00:31:42.347 --> 00:31:44.747 One, as stated, we parked a lot of money in overnights and other 00:31:44.747 --> 00:31:47.837 short term investments, so the SIF is going to get lower income going 00:31:47.837 --> 00:31:50.037 forward in that sort of investing. 00:31:50.527 --> 00:31:52.377 Industry rates are just the price of money. 00:31:53.067 --> 00:31:57.387 And this is a seller of money, meaning we lend it out. 00:31:58.017 --> 00:32:02.307 Like any seller of anything, we get hurt when prices are down. 00:32:03.307 --> 00:32:06.367 In our case, the only buyer is the U S government treasury. 00:32:06.977 --> 00:32:10.457 And they of course are a buyer, which means they like it when prices go down. 00:32:10.707 --> 00:32:12.347 This is the same true of any product, anytime. 00:32:13.347 --> 00:32:16.377 And the second factor, and somewhat countering the first factor, 00:32:16.407 --> 00:32:18.747 remember the first factor is lower short term income for us. 00:32:19.457 --> 00:32:22.557 The second factor is that credit unions are now faced less interest 00:32:22.557 --> 00:32:25.437 rate risk than they did during the Fed's aggressive rate hike cycle. 00:32:25.887 --> 00:32:27.157 That was a major problem last year. 00:32:27.427 --> 00:32:29.897 That's one of the things that contributed to Silicon Valley Bank going down. 00:32:29.897 --> 00:32:31.017 It was a big topic for us. 00:32:31.037 --> 00:32:32.467 People wanted meetings about it. 00:32:33.137 --> 00:32:34.607 Um, that was a major problem. 00:32:34.607 --> 00:32:35.827 It is much less so now. 00:32:36.827 --> 00:32:39.447 That's a positive thing for the share insurance fund, uh, but 00:32:39.467 --> 00:32:42.687 it's hard to measure and it's not reflected in today's, uh, SIF report. 00:32:42.987 --> 00:32:46.397 Our short term income is going to go down, but so is the interest 00:32:46.397 --> 00:32:47.977 rate risk facing credit unions. 00:32:48.277 --> 00:32:51.607 And risk to credit unions is why we have a share insurance fund in the first place. 00:32:52.517 --> 00:32:55.647 The big picture, despite economic uncertainty, is our 00:32:55.647 --> 00:32:59.237 fund remains well capitalized and continues to perform effectively. 00:33:00.172 --> 00:33:02.702 We have a net income of 86 billion this quarter. 00:33:02.762 --> 00:33:05.902 Our equity ratio, as mentioned, uh, went down slightly from 1. 00:33:05.932 --> 00:33:07.312 30 to 1. 00:33:07.502 --> 00:33:09.442 28 as of, uh, June 30. 00:33:10.232 --> 00:33:14.162 Now, this remains well above the statutory floor, and it is below our normal 00:33:14.162 --> 00:33:15.872 operating level where we kick money back. 00:33:16.692 --> 00:33:18.752 Uh, it is higher. 00:33:19.007 --> 00:33:24.657 Then our projected 1.24 to review below 1.20 Congress mandates that 00:33:24.657 --> 00:33:27.957 we put together a plan within six months to restore it, right, which 00:33:27.957 --> 00:33:29.607 historically is meant billing everybody. 00:33:30.607 --> 00:33:32.107 So we're well above that. 00:33:32.767 --> 00:33:33.667 First off, Eugene. 00:33:33.727 --> 00:33:37.987 All right, so the mismatch, we projected 1.24, came in at 1 2 8 review the 00:33:37.987 --> 00:33:43.597 reasons that it, we, uh, missed by four and why we missed, uh, to the downside. 00:33:43.627 --> 00:33:44.677 I mean, it came in above. 00:33:44.897 --> 00:33:45.217 Eugene: Sure. 00:33:45.547 --> 00:33:49.057 Uh, so thank you for that, uh, question, Vice Chairman, and the opportunity to 00:33:49.057 --> 00:33:50.457 provide some thoughts on this matter. 00:33:50.937 --> 00:33:55.017 Uh, regarding the change between the 630 projection, uh, versus what we saw 00:33:55.017 --> 00:33:59.387 as the actual, the primary factor was a difference in insured share deposits. 00:34:00.387 --> 00:34:04.107 Uh, the projection, uh, was based on a higher growth rate in insured 00:34:04.107 --> 00:34:05.667 shares than what actually occurred. 00:34:06.177 --> 00:34:10.122 Uh, rather than 5%, Uh, growth, which was projected. 00:34:10.342 --> 00:34:11.882 The actual growth was 2. 00:34:11.912 --> 00:34:12.412 1%. 00:34:13.182 --> 00:34:17.392 Uh, the higher rate of insured share growth tends to depress the equity ratio, 00:34:17.392 --> 00:34:19.462 as we saw clearly during the pandemic. 00:34:19.972 --> 00:34:24.232 Uh, also contributing, uh, to the higher 630 equity ratio, uh, 00:34:24.262 --> 00:34:26.452 was a low loss, uh, environment. 00:34:26.452 --> 00:34:30.162 So we had fewer losses, uh, than the model projected, uh, and 00:34:30.162 --> 00:34:31.492 also slightly higher income. 00:34:32.047 --> 00:34:33.327 Uh, then what was forecast. 00:34:33.757 --> 00:34:37.667 Uh, and so for awareness, uh, slide 19 has supplemental information, 00:34:37.997 --> 00:34:41.327 uh, today's presentation that shows the change in insured shares. 00:34:42.327 --> 00:34:45.597 Vice Chairman Hauptman: We only had a, uh, like you said, a 2 percent growth 00:34:45.667 --> 00:34:47.017 the first half of the year in shares. 00:34:47.027 --> 00:34:50.237 We haven't seen a big movement out of credit unions that, for 00:34:50.237 --> 00:34:51.907 a number of reasons, that means credit unions are at least doing a 00:34:51.907 --> 00:34:55.907 good job, uh, playing offense and defense to prevent people leaving 00:34:55.907 --> 00:34:57.637 for high yielding options elsewhere. 00:34:58.177 --> 00:35:00.047 Um, but 2%, what's, um, 00:35:00.617 --> 00:35:02.557 Eugene: what's affecting credit union growth right now? 00:35:03.047 --> 00:35:06.967 Uh, so I think, as always, that deposit growth is a function of, uh, multiple 00:35:06.967 --> 00:35:11.957 factors, uh, for example, household, uh, income, uh, changes in household income. 00:35:11.957 --> 00:35:12.012 Okay. 00:35:12.332 --> 00:35:16.852 Unemployment rates, uh, interest rates, uh, there's also a seasonality, uh, to 00:35:16.852 --> 00:35:20.032 the, uh, uh, uh, insured share, uh, rate. 00:35:20.382 --> 00:35:23.572 Uh, the cumulative impact of inflation on household expenses 00:35:23.592 --> 00:35:25.012 is likely playing a role today. 00:35:25.372 --> 00:35:29.097 Uh, so while inflation rates have fallen significantly, Uh, the burden 00:35:29.097 --> 00:35:32.937 of daily expenses remains high, uh, for many households, uh, and that 00:35:32.937 --> 00:35:34.737 can translate into lower balances. 00:35:35.217 --> 00:35:39.027 Uh, the slowdown in insured share growth, I believe, is also similar 00:35:39.027 --> 00:35:44.207 to trends that the FDIC is seeing, uh, in their deposit fund, uh, and so 00:35:44.207 --> 00:35:46.037 it's not unique, uh, to credit unions. 00:35:46.867 --> 00:35:50.217 Vice Chairman Hauptman: So, I know we've, uh, resumed purchases in our bond ladder, 00:35:50.337 --> 00:35:52.027 and overnight's remained about the same. 00:35:52.047 --> 00:35:54.967 So, we've obviously seen a reduction in all the unrealized losses. 00:35:55.967 --> 00:35:59.547 Um, we had the same industry problem that credit unions do, but we 00:35:59.547 --> 00:36:02.137 have the advantage of holding the maturity the same way they're holding 00:36:02.137 --> 00:36:04.137 mortgages like mine, just under 3%. 00:36:04.167 --> 00:36:05.957 And that hurt on their balance sheet. 00:36:06.397 --> 00:36:09.137 We were holding paper we bought for 1 percent yield for five 00:36:09.137 --> 00:36:10.077 years, that sort of thing. 00:36:10.807 --> 00:36:13.887 How do we prepare for new rate environment, whatever it is? 00:36:14.887 --> 00:36:18.792 Eugene: Uh, so I think we, uh, Uh, prepare by, uh, first looking 00:36:18.792 --> 00:36:20.752 at the, uh, uh, liquidity needs. 00:36:20.772 --> 00:36:24.892 So again, safety liquidity yield is what we generally look at when we consider, 00:36:25.002 --> 00:36:29.092 uh, how to make, uh, uh, the investments of the share insurance fund, a few 00:36:29.092 --> 00:36:31.122 notes on the, uh, unrealized losses. 00:36:31.452 --> 00:36:35.532 Um, so the unrealized loss position, uh, peaked at about 1. 00:36:35.532 --> 00:36:39.022 7 billion, uh, in 2022. 00:36:39.917 --> 00:36:42.047 Vice Chairman Hauptman: Little under 10% of our bonds were underwater. 00:36:42.757 --> 00:36:44.077 Eugene: Uh, so they were worth less than we paid for them. 00:36:44.287 --> 00:36:47.977 So the overall value of the portfolio was like every single bond Yes. 00:36:47.977 --> 00:36:49.597 Was underwater itself. 00:36:49.597 --> 00:36:49.807 Right. 00:36:49.927 --> 00:36:52.777 But the, the overall position was, yeah, roughly, almost 10%. 00:36:53.317 --> 00:36:57.517 Um, and as of June 30th, so that's receded now from that high 00:36:57.517 --> 00:37:00.367 watermark by about $500 million. 00:37:00.687 --> 00:37:04.227 Uh, and the change in the second quarter alone was around $60 million. 00:37:04.697 --> 00:37:08.927 Now since June, uh, we're estimating that the unrealized, uh, losses. 00:37:09.267 --> 00:37:13.767 Uh, have come down yet again by almost 500 million more dollars, 00:37:14.037 --> 00:37:17.257 uh, which will eventually be shown in the third quarter financials. 00:37:17.567 --> 00:37:20.817 Uh, but of course, that's subject to change depending on how, on how 00:37:21.207 --> 00:37:24.657 interest rates, uh, behave, uh, between now and the end of the month. 00:37:25.047 --> 00:37:28.887 Um, so that unrealized loss, that was a key factor, uh, in driving up our 00:37:28.887 --> 00:37:33.057 overnight holdings because we wanted to have liquidity, uh, in case there was a 00:37:33.057 --> 00:37:37.637 need for it without having to sell at a loss and realize, uh, an unrealized loss. 00:37:38.077 --> 00:37:42.787 Um, now that we're, uh, going to see sort of an increased range and liquidity 00:37:42.787 --> 00:37:48.067 options within the portfolio, uh, as we move, uh, away from, uh, the extent of 00:37:48.077 --> 00:37:52.897 the loss position, uh, I think we'll have to reassess, uh, what the appropriate 00:37:52.897 --> 00:37:54.927 amount is to have in the overnights. 00:37:55.427 --> 00:37:55.617 Did 00:37:55.617 --> 00:37:57.447 Vice Chairman Hauptman: we have kind of a Goldilocks thing for a 00:37:57.457 --> 00:38:01.012 while there, meaning that As every insurer, you have to have liquidity. 00:38:01.202 --> 00:38:02.862 You need cash on hand to pay out. 00:38:03.862 --> 00:38:06.202 Families have emergency funds, that sort of thing. 00:38:06.572 --> 00:38:08.212 That's not in the stock market, et cetera. 00:38:09.012 --> 00:38:13.702 But normally with an upward slope yield curve, that liquidity costs you money 00:38:13.972 --> 00:38:15.572 because you're not earning much on it. 00:38:15.752 --> 00:38:15.992 Right. 00:38:16.022 --> 00:38:20.832 Um, we had a situation there for a while where parking, having lots of 00:38:20.832 --> 00:38:22.992 liquidity was also the highest yielding. 00:38:23.042 --> 00:38:24.052 That is not normal. 00:38:24.632 --> 00:38:24.992 Right. 00:38:24.992 --> 00:38:28.132 And we had a Goldilocks thing that made, Not be the case anymore. 00:38:28.562 --> 00:38:32.132 Eugene: Well, I mean that as of today, it still is the old still. 00:38:32.312 --> 00:38:36.652 Yeah, it's still still inverted And so yeah, I mean that sort of plays into 00:38:36.652 --> 00:38:41.982 the you know against safety liquidity yield We weren't paying that premium 00:38:42.292 --> 00:38:46.362 That you would normally expect to pay by having as much as we had in overnights 00:38:46.532 --> 00:38:50.992 the overnights were paying more So, you know and again looking at that how 00:38:50.992 --> 00:38:54.922 that behaves going forward, you know It's another part of the sort of the 00:38:54.922 --> 00:38:59.887 equation And how to balance or consider rebalancing the overnight portfolio. 00:39:00.117 --> 00:39:00.867 Vice Chairman Hauptman: Thank you, Eugene. 00:39:00.927 --> 00:39:03.357 Uh, last thing I just want to acknowledge the hard work you guys put 00:39:03.357 --> 00:39:05.087 into the mid session budget update. 00:39:05.177 --> 00:39:08.277 Uh, it looks like we're currently running a 5 million budget surplus. 00:39:09.167 --> 00:39:11.117 Comparison 23 million surplus last year. 00:39:11.527 --> 00:39:16.007 What, um, line items have decreased and where are we seeing 00:39:16.007 --> 00:39:16.587 Eugene: increase 00:39:17.087 --> 00:39:17.557 Vice Chairman Hauptman: in the budget? 00:39:18.047 --> 00:39:20.237 Eugene: Um, so, uh, thank you for that. 00:39:20.237 --> 00:39:25.207 And the budget is executing closer to the levels approved by the 00:39:25.207 --> 00:39:27.997 board for 2024 than it did in 2023. 00:39:28.357 --> 00:39:31.277 Uh, meaning that we do expect a smaller year on balance. 00:39:31.647 --> 00:39:35.357 Um, in recent years, uh, the agency has generally underspent 00:39:35.457 --> 00:39:40.157 its budget for pay and benefits, uh, travel, uh, and contracts. 00:39:40.447 --> 00:39:43.247 Uh, to answer your question, I think the, you know, comparing, 00:39:43.587 --> 00:39:46.287 um, where we're at as of July 2024. 00:39:47.287 --> 00:39:54.117 To where we were at in July 2023, over year, uh, comparison, uh, the, uh, the 00:39:54.137 --> 00:39:58.127 couple of key changes would be, uh, first pay and benefits costs, uh, have 00:39:58.127 --> 00:40:00.577 increased, uh, by just over nine percent. 00:40:00.827 --> 00:40:04.787 Uh, it's come through this, this point this year, uh, versus last year. 00:40:05.127 --> 00:40:09.387 Uh, and a lot of that is reflective of the concerted effort, uh, that the agency made 00:40:09.407 --> 00:40:12.117 to fill vacant positions, uh, last year. 00:40:12.367 --> 00:40:14.307 Uh, and we have, uh, and we're maintaining. 00:40:14.637 --> 00:40:17.947 That low vacancy rate this year, so that effectively has increased 00:40:17.947 --> 00:40:20.277 our actual, uh, payroll costs. 00:40:20.567 --> 00:40:25.577 Uh, travel expenses are increasing, uh, they're up about 5%, uh, so far year 00:40:25.577 --> 00:40:27.287 to date this year versus last year. 00:40:27.677 --> 00:40:33.337 Uh, contract spending, uh, which often is one of our more rapidly expanding, uh, 00:40:33.337 --> 00:40:35.357 budget line items, is actually only up 1. 00:40:35.387 --> 00:40:37.147 8%, uh, for this year. 00:40:37.147 --> 00:40:39.167 And so while it's still, it's an overall increase. 00:40:39.702 --> 00:40:44.072 Um, it's lower than in recent years, and the agency has seen some reductions 00:40:44.122 --> 00:40:48.252 in specific contract re competitions, uh, so far this year that have 00:40:48.252 --> 00:40:50.162 helped keep that, uh, growth down. 00:40:50.802 --> 00:40:51.872 Pay and benefits up nine, 00:40:51.872 --> 00:40:54.222 Vice Chairman Hauptman: probably because we had a lot of vacancies last year. 00:40:54.222 --> 00:40:55.552 I was going to say, did you get a nine percent raise? 00:40:55.602 --> 00:40:55.902 I didn't. 00:40:55.902 --> 00:40:57.287 I hope I did. 00:40:57.287 --> 00:40:57.552 I, 00:40:57.552 --> 00:41:00.852 Chairman Harper: I, I have to say that my pay has remained flat, uh, 00:41:00.852 --> 00:41:04.742 for the last, how many, uh, I think it's been 12 years in Congress. 00:41:05.742 --> 00:41:06.292 Except by Congress. 00:41:06.452 --> 00:41:07.052 Vice Chairman Hauptman: It is what it is. 00:41:07.092 --> 00:41:08.142 Uh, back to you Mr. 00:41:08.142 --> 00:41:08.322 Chairman. 00:41:08.622 --> 00:41:09.652 Chairman Harper: Uh, thank you so much. 00:41:09.812 --> 00:41:12.852 If I could just build on a little bit more what you said about rates. 00:41:12.852 --> 00:41:15.282 I think rate drops are good for borrowers. 00:41:15.532 --> 00:41:20.032 Um, and credit unions are going to need to prepare for what could be a 00:41:20.032 --> 00:41:24.822 wave of refinances when it comes to auto loans, uh, as well as mortgages. 00:41:24.822 --> 00:41:30.272 It also could mean more mortgages could be made as more, uh, Buyers are be able 00:41:30.272 --> 00:41:34.192 to stretch their dollars further and reach into the housing market and certainly, 00:41:34.192 --> 00:41:38.332 of course, it will, uh, for those that have a floating rate, even though we 00:41:38.332 --> 00:41:42.052 have an interest rate cap ceiling, we'll see credit card rates coming down. 00:41:42.052 --> 00:41:43.702 That that could cause some difficulty. 00:41:44.042 --> 00:41:48.472 Um, also too, we could see some disintermediation happening for savers 00:41:48.502 --> 00:41:52.232 within the markets who are going to take money out of, uh, their short 00:41:52.232 --> 00:41:55.872 term, um, um, uh, you know, yields that have been doing really well. 00:41:56.167 --> 00:41:58.337 And move it to places where they might do better. 00:41:58.337 --> 00:42:02.837 I think the credit unions overall, as I've looked at the last quarter numbers, had 00:42:02.837 --> 00:42:08.187 been increasing, uh, the amount of cash on hand as well as overnight investments 00:42:08.287 --> 00:42:13.097 so that they can handle these changes that we anticipate coming into the market. 00:42:13.567 --> 00:42:17.007 Um, that concludes our first item of business today. 00:42:17.657 --> 00:42:21.317 Samantha: This concludes the N C U A’s September 20 24 Board 00:42:21.317 --> 00:42:24.947 Meeting Briefing on the National Credit Union Share Insurance Fund. 00:42:25.681 --> 00:42:29.861 If your Credit union could use assistance with your exam, reach out to Mark Treichel 00:42:29.861 --> 00:42:32.581 on LinkedIn, or at mark Treichel dot com. 00:42:33.151 --> 00:42:35.801 This is Samantha Shares and we Thank you for listening.