TESTIMONY OF

NORMAN E. D'AMOURS
CHAIRMAN
NATIONAL CREDIT UNION ADMINISTRATION

BEFORE THE

SUBCOMMITTEE ON VA, HUD AND INDEPENDENT AGENCIES

OF THE

COMMITTEE ON APPROPRIATIONS
UNITED STATES SENATE

February 25, 1997

Mr. Chairman and Subcommittee Members. I want to thank you for the opportunity to present our request for funding limits on the NCUA Central Liquidity Facility (CLF) at current levels. Appearing with me today are Herbert S. Yolles, President, Central Liquidity Facility; Robert M. Fenner, General Counsel; David Marquis, Director of our Office of Examination and Insurance; and William C. Poling, our Budget Officer. Mr. Chairman, as you know, the CLF is a liquidity source for credit unions. It is funded by its members and can borrow from the Federal Financing Bank, even though no such borrowing has occurred in the past year.

For Fiscal Year 1998, we request a $600 million limit on new loans and a $203,000 limit on administrative expenditures. The requested loan limit has remained constant for the last 17 years. It should be noted that NCUA is not requesting an appropriation for the CLF, merely limits.

I am pleased to report to the subcommittee that we continue to streamline the CLF. The result is cost savings for credit unions. Our expenses in FY 1996 of $346,000 were significantly less than our budget limitation of $546,000. The FY 1996 expenses are more than 50 percent below the CLF expenses of $767,000 for FY 1993. All of CLF's net income in 1996 was returned to member credit unions in the form of capital stock dividends.

In our estimation, the $600 million loan limit is adequate to address unexpected liquidity needs in credit unions. The request is less than 3.55 percent of the limit set by statute -- 12 times paid-in and on-call capital or $17 billion. The borrowing authority is not used to build up loan volumes because by statute the proceeds from CLF loans cannot be used to expand credit union loan portfolios. Rather, the funds are advanced strictly to support the purposes stated in the Federal Credit Union Act and in response to circumstances dictated by market events.

Loan demand over the years has resulted in wide variances in the amount of outstanding CLF loan balances and individual advances. The relatively low utilization of our total authority can be viewed as a positive sign of credit unions' present financial condition. By the end of 1996, all loans were repaid and no direct loans were outstanding. However, because of a liquidity shortage involving one of the corporate credit unions, the CLF became an active liquidity lender from December 1994 through February 1995. The CLF made 601 loans totaling $389.8 million; the majority (509) were overnight loans.

As intended by Congress, the CLF acted successfully to provide liquidity and maintain financial stability during a temporary liquidity shortage. Mr. Chairman, we respectively request that you support our authorization request in order to continue the NCUA's and CLF's ability to respond to such adverse liquidity situations.

Mr. Chairman and members of the subcommittee, the credit union movement continues to focus on its mission of involving more people in America's free enterprise economy. By instilling habits of thrift and teaching the value and workings of financial discipline, credit unions are still fulfilling the mandate Congress gave them over 60 years ago. At NCUA, our strong commitment to the future of credit unions serving people of limited means remains as resolute as when I last reported to the subcommittee.

For Fiscal Year 1997, the subcommittee approved a $1 million appropriation to be utilized by the Community Development Revolving Loan Program (CDRLP), which NCUA has administered since 1987. By any objective standard, the CDRLP has been an overwhelming success and deserving of continued Congressional support. A $2 million authorization, the last of a four year $10 million authorization (P.L. 103-325), remains for FY 1998.

Since NCUA began making loans from an original $6 million appropriation (now a $7 million total), we have revolved $14.4 million in 113 separate loans to 79 low-income credit unions. In 1996 alone we approved $2.9 million in loans and currently we have 6 loan applications for $1.4 million in funding.

The credit unions use these loans for a variety of different purposes from housing rehabilitation and consumer loans to micro-enterprise lending.

We expect loan demand to increase smartly as the year proceeds. We have had one loss in the Revolving Loan Program for $35,000.

At mid-year 1996 we recognized 298 low-income credit unions, which translated to a 27 percent annualized growth rate. I am proud to say that 13 newly state and federally chartered credit unions in 1996 gained the low-income designation. Total assets in these financial cooperatives are $1.8 billion at mid-year 1996 and loan growth was 13.2 percent. The capital ratio is a strong 11.1 percent and loan delinquencies (loans 60 days and more overdue) are within reasonable bounds at 2 percent.

In May 1994, the NCUA adopted a new chartering and field of membership manual for credit unions replacing our previous version. These changes are set forth in Interpretive Ruling and Policy Statement (IRPS) 94-1 that became effective in July 1994. Changes contained in IRPS 94-1 allow greater flexibility for credit unions wishing to expand into low-income areas and make it easier for low-income credit unions (LICUs) to expand their fields of membership and associate themselves with other credit unions.

This initiative has been one of the more important actions taken by the Board to encourage larger, healthy credit unions to directly reach out into low-income communities to give residents a non-profit alternative to pawn shops, check cashing outlets and the like. In this way people are brought into the mainstream of the U.S. economy in a self empowering and responsible manner.

From July 1994 until October 1996 NCUA had granted 73 federal credit unions permission to open branches in these distressed neighborhoods and make their services available to a potential of 1.4 million low-income residents. However, following a decision from the U.S. Court of Appeals for the District of Columbia and then an injunction from the District Court, NCUA has had to halt this innovative approach for providing low cost financial services to those who need it the most.

The ability of credit unions to add low-income groups to their field of membership arises from an interpretation of the Federal Credit Union Act NCUA made in 1982 to allow more than one group with each group having a common bond be part of a credit union. The banks have successfully challenged this interpretation of the Act and we are currently waiting to see if the Supreme Court will take up an appeal.

As I will testify before the Financial Institutions Subcommittee of the House Banking Committee tomorrow, NCUA believes Congress should not wait for the Supreme Court to rule, but change the Federal Credit Union Act to allow initiatives, like the one described above, to move forward. In doing so, Congress will also codify two essential purposes, or rather benefits, of the 1982 policy change: 1) by permitting diversity within the membership of federal credit unions, the policy provides a strong measure of protection against difficult economic conditions that affect particular groups, industries or the reality of military downsizing with the abatement of the cold war; and 2) it makes credit union service available to individuals who otherwise do not have access to it, such as members of groups too small to run and support a viable credit union on their own.

The NCUA Board continues to explore ways to bolster low-income credit unions. Early last year, the Board voted unanimously to adopt a new interim rule permitting LICUs to immediately accept secondary capital funds from institutional investors. The additional capital will be used to support increased lending and services and provide additional "matching funds" for credit unions applying for assistance from the Community Development Financial Institutions Fund (P.L 103-325).

The rule includes safety and soundness measures to ensure that depositors and participating credit unions are aware of the nature and risk associated with these accounts. For instance, the secondary capital is not insured by the federal government and this fact must be disclosed to investors.

In September 1996, the NCUA Board adopted a change to our Rules and Regulations that removed the current cap of $120,000 for technical assistance, which is drawn from the earnings of the Revolving Loan Fund to aid LICUs. The Board believes that technical assistance is a vital component of the Revolving Loan Program and since 1992 we have disbursed 216 technical assistance grants totaling some $500,000.

I am particularly proud of the credit union movement coming together for a conference held last August in Chicago. The gathering, known among credit unions as the Serving the Underserved conference, was dedicated to bringing together credit unions of all sizes to learn how to break down the barriers keeping people from becoming a part of the American, free enterprise system. The conference was a tremendous success.

Mr. Chairman, I want to briefly update you on the overall condition of our nation's credit unions and their federal insurance fund. Overall, the credit union industry continues to be in excellent health.

The National Credit Union Share Insurance Fund (NCUSIF) had its best operating year in its 26-year history during 1996. For the second consecutive year (and the third year in its history), the Fund paid credit unions a dividend on their 1 percent deposit into the Fund. The equity level at October 1996 exceeded the statutory ceiling of 1.3 percent or $1.30 per $100 in insured shares (deposits), so NCUA returned a dividend totaling $102.8 million to federally insured credit unions. We returned a $103.9 million dividend during 1995.

Meanwhile, the number of problem credit unions (CAMEL supervisory rating 4 or 5) has continued to decline each year from 1,022 in 1988 to a record low 286 at yearend 1996. Deposits in these problem credit unions represented just 0.67 percent of total insured deposits in 1996, compared to 6 percent of the total in 1988.

The number of credit union failures during 1996 fell to a record low for the third consecutive year, dropping to 19, and requiring the Fund to payout $2.3 million, also a record low. The previous lows were 22 failures in 1995, requiring $11 million in member payouts.

Since Congress established federal share insurance for credit unions, the insurance fund has never had a losing year . Moreover, since credit unions voluntarily recapitalized their insurance fund in 1985, its equity level has ranged between 1.25 to 1.30 percent. The current level is 1.28 percent, and we are projecting that it will again climb to 1.30 percent by year-end 1997.

During 1996, federally insured credit unions performed admirably by all objective standards. The year-end 1996 call report data have just arrived at the agency and the preliminary data show that total industry assets at the 11,429 federally insured credit unions rose 6.9 percent to $327 billion. Capital accumulated at the rate of 11.1 percent during 1996, the tenth consecutive year of strong capital growth. The ratio of capital to assets of federally-insured credit unions, now averaging 11.4 percent of assets, is at a record-high level; net capital is 10.8 percent -- the former minus allowance for loan losses.

Loan delinquency and net charge-offs remain very low, actually at or near historic lows. The delinquency rate is 1 percent of total loans, while net charge-offs are 0.5 percent. Profitability, as evaluated by the return on average assets ratio, was a healthy 1.1 percent for last year. This gauge of profitability has remained unchanged over the last year; and the loan-to-share ratio now stands at 74.6 percent compared to 71.1 percent at year-end 1995.

In general, corporate credit unions (which act as bankers' banks to the 12,000 natural-person credit unions) are also in good health. The risk in their investment portfolios that concerned us two years ago when I last appeared before this panel has been reduced significantly. Between September 30, 1994, and September 30, 1996, corporate credit unions' total holdings of Collateralized Mortgage Obligations declined from $10.2 billion to $4.7 billion.

There are currently 41 corporate credit unions, of which 36 are federally insured. While capital in corporate credit unions remains low compared to that in natural person credit unions, there has been an increasing trend toward capital accumulation, perhaps in anticipation of new proposed standards the NCUA Board plans to finalize in the near future. The ratio of reserves and undivided earnings to assets grew from 2.1 percent as of December 31, 1994, to 2.65 percent as of December 31, 1996. During that same period, total capital to assets rose from 4.9 percent to 7.38 percent.

Meanwhile, our "conflict of interest" regulation took effect in January 1996. This rule eliminated any real or perceived inappropriateness in the relationship between the boards of directors at corporate credit unions and their state and national trade associations. I believe that significant progress has been made in the condition of corporate credit unions, and that proposed revisions to the corporate credit union regulation will provide additional improvements.

Mr. Chairman, thank you again, for the opportunity to appear before this subcommittee and present our requests for the Central Liquidity Facility. I would be pleased to answer any questions.