NCUA Chairman Todd M. Harper during a meeting of the NCUA Board.
As Prepared for Delivery on November 21, 2024
Thank you, Eugene, for your insightful presentation on the National Credit Union Share Insurance Fund’s performance in the third quarter of 2024. And, thank you to the entire team in the Office of the Chief Financial Officer who help to manage the fund and produce this quarterly briefing. Kelly and Andy, I also appreciate your being available to answer questions.
Overall, the Share Insurance Fund’s performance in the third quarter of 2024 was strong. Yet, we continue to find ourselves in a good news, bad news scenario. Let me start with the good news.
The ongoing changes in the interest rate environment reduced the fund’s unrealized losses. In fact, since December 2022 until today, the fund has experienced a nearly $1 billion dollar increase. This change resulted in the fund’s total assets reaching nearly $22.6 billion. Adding to the financial strength of the fund, quarterly investment income has risen a healthy $12 million since the first quarter of 2024 thanks, in part, to the interest rate environment and the shift to higher yielding, short-term investments and overnights.
The rise in interest income, along with continuing low levels of insurance losses, contributes to an equity ratio of 1.28 percent. Although this figure is less than the Board-approved normal operating level of 1.33 percent, it ensures a healthy, countercyclical fund that maintains sufficient reserves in good times to prevent us from charging premiums in economic downturns when credit unions can least afford it.
Also, of note on slide 8, the NCUA Board will be issuing the normal operating level methodology for public comment next year. I encourage all stakeholders to look out for that request and to send in your feedback.
Eugene, my first question pertains to investment income. We saw a notable increase in income between the first and second quarters. However, the third quarter figure is generally flat as compared to the previous quarter. Why is that?
[PAUSE FOR RESPONSE]
Thank you. On slide 3, we see a more than $1 billion quarterly increase in the fund’s total assets because of changes in unrealized losses and capitalization deposits. Will this trend continue for the foreseeable future? Also, how would the potential for further interest rate cuts by the Federal Open Market Committee affect the portfolio?
[PAUSE FOR RESPONSE]
Thank you, Eugene.
Amidst the positive signs, there are a few areas for concern that reinforce the need to focus on our supervisory priorities of credit risk, liquidity risk, and interest rate risk. As noted earlier, we continue to see signs of financial strain on credit union balance sheets and consumer financial stress. And, we’re seeing this play out in the number of credit unions and the percentage of assets held by composite CAMELS code 3, 4, and 5 credit unions.
Of greatest concern for me has been the large number of troubled CAMELS code 4 and 5 credit unions, especially the nine troubled complex credit unions with more than $500 million in assets. And, although down slightly this quarter, the number of CAMELS code 3 institutions remains elevated. Together, the total assets held in composite CAMELS code 3, 4, and 5 credit unions accounts for nearly 10 percent of the system’s aggregate assets.
These conditions are another reason why our supervision of these and all federally insured credit unions must remain risk focused. They also highlight the need for the NCUA’s examiners to be ready to act expeditiously when identifying problems.
Eugene, turning to slide 4, would you discuss the changes in the reserve balance? Compared to a year ago, the reserves are up by a large margin even though losses to the fund remain relatively low. What’s at play here?
[PAUSE FOR RESPONSE]
Turning to slide 5, losses from credit union failures have remained low, yet we are seeing risks grow with some of our larger credit unions as mentioned earlier. Kelly, what are we doing to ensure that these larger credit unions remain safe and sound?
[PAUSE FOR RESPONSE]
Thank you, Kelly. Eugene, on slide 6, the 4- to 5-year balance in the portfolio dropped quite a bit from the second quarter. What’s driving that dip, and what’s driving the drop in overnights?
[PAUSE FOR RESPONSE]
Now, let’s turn to slide 9. Kelly, what accounts for the modest drop in total assets held at composite CAMELS code 3, 4, and 5 institutions quarter over quarter? Have we bottomed out?
[PAUSE FOR RESPONSE]
Thank you, Kelly. Protecting the Share Insurance Fund and the hard-earned share deposits of credit union members has always been a top priority of mine. Credit union members — and the taxpayers who ultimately guarantee the Share Insurance Fund — rely on our supervisory efforts to ensure that their savings are secure now and in the future. I have every faith in the NCUA to uphold the tradition and responsibility that comes with successfully managing the Share Insurance Fund.
That concludes my remarks. I now recognize Vice Chairman Hauptman.