Board Action Bulletin
3 to 6 Basis Points Share Insurance Fund Premium Range Recommended for Credit Union Budgeting Purposes
ALEXANDRIA, Va. (Nov. 17, 2016) – The National Credit Union Administration Board held its tenth open meeting of 2016 at the agency’s headquarters here today and unanimously approved two items:
- Operating budgets for 2017 and 2018 to fund NCUA’s essential activities and strategic priorities, including implementing the recommendations of the Exam Flexibility Initiative.
- A final rule making technical changes to the agency’s Community Development Revolving Loan Fund regulation to improve transparency, organization and ease of use by credit unions.
Additionally, the Board received three briefings on:
- The performance of the National Credit Union Share Insurance Fund in the third quarter;
- The Share Insurance Fund’s equity ratio projections and the recommended 2017 premium range of 3 to 6 basis points for credit union budgeting purposes; and
- The 2017 overhead transfer rate.
Budgets Reflect Reduced Staffing Levels, Maintain Critical Agency Capacity
The NCUA Board-approved operating budgets for 2017 and 2018 maintain critical agency capacity and reflect reduced staffing levels.
“This is an historic budget,” NCUA Board Chairman Rick Metsger said. “It is more transparent than any previous budget, it provided more opportunities for stakeholder input than any previous budget and it represents a change in direction. It also incorporates major changes in our supervision and examination process and maintains the principle of regulatory independence while being responsive to legitimate stakeholder concerns. Finally, it is a non-partisan budget, an example of genuine partnership and how government should run.”
The Board-approved budgets adopt the 10 recommendations contained in the report of the Exam Flexibility Initiative (opens new window). The recommendations provide greater examination efficiency, greater flexibility for credit unions and the agency and improved coordination with state supervisors.
The 2017 operating budget is 1.6 percent lower than the 2017 budget approved by the Board in November 2015 and 2.5 percent higher than the 2016 budget. The 2018 operating budget represents a 4.7 percent increase over the 2017 budget.
While NCUA staffing will decrease in 2017 and 2018, all reductions will come through attrition. Total NCUA staffing will fall by 1.4 percent in 2017 and 1.8 percent in 2018.
The Board’s actions are summarized in the table below:
|NCUA Operating Budget||$298.2 million||$312.1 million|
|Maximum Full-Time Equivalent Staffing Levels||1,230||1,208|
|Temporary Corporate Credit Union Stabilization Fund Budget||$4.1 million||$4.2 million|
|Capital Budget||$15.8 million||$15.4 million|
The adoption of the budgets for 2017 and 2018 follow an Oct. 27 budget briefing.
“Last month’s budget briefing with stakeholders proved to be a significant step in making NCUA’s budgetary process more efficient, effective, transparent and accountable,” NCUA Board Member J. Mark McWatters said, “and to further increase budget transparency, NCUA has worked to post considerable information online in recent years. I am pleased we were ultimately able to develop an operating budget that took into account industry comments and, as a result, included some further expense reductions.”
“While we have made steps in the right direction, the budgetary process remains a work in progress,” McWatters said. “The next step will involve considering recommendations for the overhead transfer rate methodology early next year, and we should consider further changes at the mid-session budget review.”
NCUA staff will make recommendations to the Board about overhead transfer rate early next year. The Board also plans to continue its practice of performing a mid-year budget review, which will be presented at the Board’s July 2017 open meeting.
Detailed information about NCUA’s operating budgets for 2017 and 2018, including office budgets and agency fact sheets, is available on the agency’s Budget Resource Center.
Share Insurance Premium Range Recommended
NCUA’s Office of Examination and Insurance recommended a share insurance premium range of 3 to 6 basis points in 2017.
The proposed range is only for credit union budgeting purposes. Credit unions should not actually accrue for a premium until one is approved by the NCUA Board. The Board will decide during 2017 whether to declare a premium.
Growth in insured shares in credit unions combined with a continuing low interest-rate environment is causing a decline in the Share Insurance Fund’s equity ratio.
“Just like a homeowner who checks the roof and makes repairs before the storm comes, NCUA and credit unions must do the same for the Share Insurance Fund before the next economic downturn,” Metsger said. “In recent years, the economy has stabilized, and credit unions as a whole have experienced considerable growth in insured shares. To ensure the fund continues to have the resources it needs, credit unions next year may need to pay their first share insurance premium since 2010. Such an investment would prudently protect member deposits.”
The Share Insurance Fund is capitalized with a combination of credit union funds held on deposit and retained earnings. As of the third quarter of 2016, the size of the Share Insurance Fund was $13.3 billion, with a net position of $13.1 billion made up of $10 billion of credit unions’ one-percent capital deposit and the remainder reflecting retained earnings and unrealized gains or losses on investments.
Federal law requires the normal operating level for the Share Insurance Fund to fall between 1.20 percent and 1.50 percent. The NCUA Board decided in 2007 to set the normal operating level at 1.30 percent. Current projections indicate the equity ratio will decline to between 1.24 percent and 1.27 percent during 2017. The present low interest-rate environment makes it difficult to generate sufficient retained earnings to bring the equity ratio back to 1.30 percent.
Staff do not anticipate a Temporary Corporate Credit Union Stabilization Fund assessment in 2017.
The presentation on the Share Insurance Fund equity ratio and premium projections is available online in the agency’s Budget Resource Center.
Operating Fee Scale Increases for Federal Credit Unions
The Chief Financial Officer reported that the 2017 operating fee will increase 25.5 percent for natural-person federal credit unions, and the corporate federal credit union operating fee scale will not change.
NCUA uses the operating fee to pay for the costs of regulating federal credit unions. The agency will charge the fee in March 2017, and payments will be due April 17, 2017. Consistent with recent practice, federal credit unions with assets of less than $1 million will not be assessed an operating fee.
In all, federal credit unions will fund 67 percent of NCUA’s 2017 operating budget, while state-chartered credit unions will fund 33 percent.
More information on the operating fee is available online at NCUA’s Budget Resource Center.
Overhead Transfer Rate Declines
The Office of Examination and Insurance reported the overhead transfer rate will decline to 67.7 percent in 2017 from 73.1 percent in 2016.
The overhead transfer from the Share Insurance Fund covers expenses associated with NCUA’s insurance-related activities. The rate is calculated annually through a methodology adopted by the Board in 2003.
In January 2016, the NCUA Board approved publishing a request for comments on that methodology in the Federal Register. The agency received 40 comment letters addressing a broad range of issues requiring additional research. NCUA staff is reviewing options for the Board to consider to improve the overhead transfer rate methodology and plans to deliver a report with recommended changes to the Board by Jan. 31, 2017.
More information on the overhead transfer rate methodology, including a history of how the rate is calculated, is available online at NCUA’s Budget Resource Center.
Share Insurance Fund Has Net Income of $12.1 Million in Third Quarter
The third quarter of 2016 saw consistent trends in income and operating expenses for the Share Insurance Fund, due to recoveries on assets from failed credit unions.
For the third quarter of 2016, the Share Insurance Fund had a net income of $12.1 million. The fund ended the quarter with an equity ratio of 1.27 percent. The equity ratio is calculated on an insured share base of $999.9 billion and includes the recently billed capitalization deposit adjustment.
Third-quarter investment and other income was $57.1 million. Operating expenses were $56.7 million. The provision for insurance losses was reduced by $11.7 million.
Overall, the amount of assets in CAMEL codes 3, 4 and 5 credit unions has decreased 52 percent since reaching a high of $205.6 billion in September 2010. Assets of credit unions rated CAMEL code 4 or 5 were 0.8 percent of federally insured credit union assets for the third quarter.
For the third quarter of 2016, the Chief Financial Officer reported:
- The number of CAMEL code 4 and 5 credit unions declined 13.7 percent from the third quarter of 2015, from 233 to 201. More than half were credit unions with assets of $10 million or less.
- Assets of CAMEL code 4 and 5 credit unions were $9.7 billion, a 14.1 percent increase from the third quarter of 2015.
- The number of CAMEL code 3 credit unions declined 10.3 percent from the third quarter of 2015, from 1,297 to 1,164.
- Assets of CAMEL 3 credit unions were $88.7 billion, a 5.3 percent decline from the third quarter of 2015.
One federally insured credit union failed during the third quarter. In all, 12 credit unions have failed this year. Total losses associated with failures through the third quarter were $8.5 million.
The third-quarter Share Insurance Fund figures are preliminary and unaudited.
Board Streamlines Community Development Revolving Loan Fund Rule
The process for applying for funding from the Community Development Revolving Loan Fund will become more transparent, flexible and easier to navigate with the NCUA Board’s approval of a final rule (Part 705) amending the agency’s regulations.
The final rule is identical to the proposed rule and removes from the regulation the $300,000 aggregate limit for loans to individual credit unions, which provides NCUA with greater flexibility in designing loan programs. The final rule also makes the application process less burdensome by removing the former requirement that federally insured, state-chartered credit unions obtain approval from their state regulators before submitting a loan application.
The final rule does not change the general guidelines for Community Development Revolving Loan Fund loan and grant programs.
The final rule, available online here (opens new window), will become effective 30 days after publication in the Federal Register.
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