NCUA Chairman Todd M. Harper Statement on the Share Insurance Fund 2024 Second Quarter Update

As Prepared for Delivery on September 19, 2024

Thank you, Eugene, for the update on the performance of the National Credit Union Share Insurance Fund in the second quarter of 2024, the overview of the fund’s projected year-end equity ratio, and the status of the NCUA’s budget at the mid-year. And, thank you to your team and the team in the Office of the Chief Economist for their continued solid work in preparing today’s briefing materials.

The Share Insurance Fund’s performance in the second quarter of 2024 mirrors much of the industry’s financial performance during the same period. The fund, like the credit union system, is doing well overall, but there are warning signs that we must all heed.

First, let me start with the good news.

Since the 2008 financial crisis and the Great Recession that followed, the U.S. has maintained an unprecedented low-interest rate environment for nearly 15 years. This economic environment prevented the Share Insurance Fund’s investment income from offsetting the growth in insured shares the industry experienced during that same timeframe.

That’s why there was continual decline of the equity ratio in the middle part of each year during the last decade until the closure of the Temporary Corporate Credit Union Stabilization Fund in 2017. In recent years, we have experienced a large growth in insured shares — especially at the height of the pandemic when large amounts of government stimulus funds flowed into the credit union system — gradually depressing the strength of the equity ratio with the lowest ratio being 1.22 percent in June 2020.

But, the current higher interest rate environment has improved the fund’s earnings. In fact, investment income in the first two quarters of 2024 alone exceeded the investment income the Share Insurance Fund earned in all of 2021. So, things have certainly changed.

What’s more, the fund’s yield in 2021 was just 1.21 percent. The Share Insurance Fund’s portfolio is now yielding 2.54 percent — more than double 2021’s level. That income, along with slower growth in insured shares, helped to stabilize the Share Insurance Fund’s equity ratio at 1.28 percent, 4 basis points higher than the initial projection for June 30.

So, Eugene, while the Share Insurance Fund is overall experiencing its best performance in terms of investment income in nearly 15 years, should we expect that performance to continue?

Thank you, Eugene. My next question relates to the fund’s balance sheet. On slide 3, we see that the overall assets in the Share Insurance Fund declined slightly between the first and second quarters. This contraction may cause some confusion. Would you please explain why this slight decline in the fund’s total assets and net position occurred? Are there any seasonal factors at play here?

Thank you for those clarifications. Your response helps stakeholders better understand this slight decrease on the Share Insurance Fund’s balance sheet isn’t a trend and that the fund’s total assets and net position should improve over the remainder of the year based on current projections. It also reiterates the point that the Share Insurance Fund remains, overall, in a healthy position.

My next question concerns the fund’s future income. The higher interest rate environment has improved the fund’s earnings and the much-anticipated drop in interest rates will decrease unrealized losses in the portfolio further improving the fund’s position. In fact, the Federal Open Market Committee yesterday lowered the federal funds rate by 50 basis points and signaled the potential for additional rate decreases should economic conditions weaken. How are we positioning the Share Insurance Fund, so it can remain healthy in a declining interest rate environment?

Thank you for that response. Laddering investments in both up and down interest-rate environments is a proven way to smooth out interest-rate fluctuations and maximize long-term performance. It’s important that the Share Insurance Fund is healthy and able to respond quickly to any stress in the credit union system, regardless of the economic environment. Laddering investments helps us to achieve that goal.

Now, let’s turn to the warning signs.

We are seeing growing signs of concern in loan performance, capital, delinquency rates, and earnings across the system and at specific institutions. The latest quarterly performance data for the industry showed declining growth and weakening performance across auto lending, mortgage loans, and commercial loan categories. Furthermore, these trends are contributing to the large percentage of credit unions with CAMELS composite ratings of 3, 4, or 5. In fact, approximately one in five federally insured credit unions has a CAMELS code rating of 3, 4, or 5.

What especially concerns me about slide 10 is the increasing number of complex credit unions with $500 million or more in assets falling into the troubled category — CAMELS code 4 or 5 ratings — this last quarter. In fact, the number of troubled complex credit unions tripled in the last quarter alone and the amount of assets grew at these institutions by more than fivefold. It’s been about a decade since we last saw this proportion of insured shares at risk. So, we must remain vigilant as we navigate this situation.

Eugene, we’ve been watching the amount of shares in composite CAMELS code 3, 4, and 5 credit unions rise for several quarters now. When should we expect these rating declines to level off or even improve?

Thank you, Eugene. It’s clear we aren’t quite out of the woods just yet. Credit union leaders must continue to monitor their institution’s performance and balance sheets and act expeditiously to prevent small issues from turning into big problems.

The NCUA’s supervisory teams, for their part, will continue to monitor credit union performance through our examination process, offsite monitoring, and tailored supervision. We will work to maximize the credit union system’s preparedness and resilience for any bumps in the road that may lie ahead. We did that during the wake of the Great Recession when 14 billion-dollar-plus credit unions were in troubled status, yet none of them failed.

After all, protecting the Share Insurance Fund against losses was then and is now a top priority for the NCUA Board, just as it always will be. That concludes my remarks. I now recognize the Vice Chairman.