As Prepared for Delivery on September 22, 2022
It is so good to be back in person again today. It is hard to believe the last in person board meeting was in March 2020.
Right now, we know we’re dealing with a tough and uncertain economic scenario. And part of the problem is that we’re seeing so many mixed signals.
The recent jobs report showed 315,000 jobs added in August, which was respectable, but not as strong as we’d like to see. In terms of recovery, we’re still only about back to where we were two and a half years ago when the pandemic started.
Inflation is still running over 8 percent, the highest in over four decades. That’s rapidly outpacing any wage gains for workers, and everyone is struggling with higher prices for food, fuel and energy, and other essentials. That dynamic has a serious impact on credit unions and their member-owners.
A few weeks ago, the Commerce Department revised the GDP estimate for the second quarter upward, but the economy is still contracting. And many experts are warning of a recession, with continued issues in the supply chain and disruptions from the war in Ukraine weighing heavily on the economy.
It’s possible this foreboding situation is transitory, and simply reflects the challenges that accompany a gradual recovery from the almost unprecedented economic shock that we experienced in 2020 when the COVID-19 emergency hit. I certainly hope that’s the case, but I am not sure that is the likely outcome. Furthermore, we can’t rule out the possibility of a recession that could have a serious impact on credit union operations. So while we hope for the best, we prepare for the worst.
I don’t mean to paint too dark a picture — because the reality is that, when it comes to credit unions, the industry continues to post strong performance numbers. Camels 1 and 2 institutions now make up 97.7 percent of total assets. Further, no credit union with more than $500 million in assets is rated a 4 or 5. So I will repeat, while we hope for the best, we prepare for the worst.
Shifting gears, Eugene, at a previous board meeting on the status of the Share Insurance Fund, we discussed the outside accounting firm we hired to look at the true-up issue and how this impacts the equity ratio. For the record, at one of the last share insurance board updates, we discussed that the true-up memo by the outside accounting firm states that the timeliness and accuracy of the data is required in the Federal Credit Union Act so this provision in the law, and I quote, “May provide some latitude from a strict interpretation, that the equity ratio must be calculated based on the financial statements amounts, particularly given the knowledge of the timing effect on the calculation of the equity ratio. Accordingly, it may be permissible to use the pro forma calculation of the contributed capital amount when calculating the actual equity ratio.” All three board members have asked for transparency at one point or another. The memo addresses a number of issues including how the NOL and equity ratio is calculated. In a previous board meeting, I noted that the letter pointed out the current practice understates the equity ratio by several basis points and that there were several options for correcting this understatement.
I would ask that the full memo be released as soon as possible. Is that possible?
Eugene, I do have some additional questions:
The Board has suggested we should disclose the specific details of the calculation of the Normal Operating Level, currently set at 1.33. Have these calculations been made public?
You show total year end shares declining by about $10 billion from June 30 levels. What is the basis for this anticipated decline? If the decline is even greater and the equity ratio rises above 1.30 using the current method, could the board declare a dividend of the amount over 1.3 percent even though the NOL is set at 1.33? In other words, could the board change the NOL after it has been set for this year?
Eugene, I want to thank you and your staff for providing my office with latest NCUSIF financials for this discussion today from August.
We are experiencing rapidly changing times. Yesterday, Federal Reserve Chairman Powell announced a 75 basis point increase in the overnight rate. He suggested more hikes to come.
I think it is important for the Board to have the latest financial data when discussing any of the three funds we manage for credit unions.
So this timely update is very helpful–thank you.
- Would it be possible to make this practice to provide the most recent data standard operating procedure for the three funds the Board oversees going forward?
The fund’s par value is $21.1 billion; its market value shows a decline of $1.317 billion. The investment summary shows the fund invested $750 million for ten years on August 15 for a yield to maturity of 2.76 percent. The fund year to date yield is 1.3 percent and its weighted average maturity was approximately 3.7 years.
- Are those numbers correct for the record?
Recently NCUA announced updates on how it would evaluate credit union’s responses in this rising interest rate environment.
- Eugene is the weighted average maturity (WAM) of a portfolio an important measure for tracking interest rate risk?
You indicated in May that you intended to extend future investments beyond seven years to ten which you did in August, so that the WAM would be close to five years. I would like to understand the value of NEV analysis, which we require all credit unions to use; especially for those credit unions managing billions in assets. In August, the decline in market value was $1.3 billion or approximately 27 percent of the fund’s retained earnings. I assume this fall in value has continued this month.
- What is the investment committee’s upper limit on NEV decline as a percent of retained earnings?
I express the importance of monitoring this because if I recall correctly in the last financial crisis, while conserving US Central, the NCUSIF injected $1 billion in cash into this corporate. So even if the possibility of having to liquidate fund securities seems unlikely at this moment in time, I believe we need to be prudent managers of the fund’s NEV position.
Is the fund’s WAM extension in this environment hurting credit unions and NCUSIFs in the future or do you still believe the 10-year ladder strategy is the best way to invest without trying to time the market?
Should we have something in our investment strategy for the ladder when the yield curve is inverted? Or is that not allowed for a government institution like the NCUSIF when investing with the Treasury?
I do have a few final questions:
- I note in the July financial statements, the NCUSIF if recognizing legal recoveries from ongoing suits of the corporates. How much recovery has occurred through August?
- And is the NCUA still paying roughly 25 percent of recoveries to the outside law firm?