SIF at 'Uncomfortable Levels' as NCUA Expects Nearly $29 Million in Excess Funds

After taking a month off, the NCUA board met for the ninth time this year on Thursday. Board members tackled a number of issues, which included taking a close look at the health of the Share Insurance Fund and voting to approve millions in surplus money for “agency needs.”

According to a presentation from NCUA CFO Eugene Schied, as of June 30, the SIF’s equity ratio was 1.23%, which is below the board-approved normal operating level of 1.38%. Schied reported a net income of $46.3 million and $19.8 billion in assets for the second quarter of this year. The SIF also reported $60 million in total income for the second quarter of 2021, according to Schied’s numbers.

“During the second quarter of 2021, the credit union system, as a whole, remained on a solid footing,” Chairman Todd M. Harper said. “But, while the economic outlook also showed signs of improvement in the first half of the year, COVID-19 pandemic-relief programs have started coming to an end, and the Delta variant has led to a rising caseload in many communities in the third quarter. We should expect delinquencies and charge-offs to rise in the months ahead, and all credit unions should pay careful attention to their capital, asset quality, earnings and liquidity. To protect the Share Insurance Fund — and, ultimately, taxpayers — against losses, the NCUA needs to stay on top of these emerging risks and problems in the credit union system.”

Vice Chairman Kyle Hauptman expressed his uneasiness to the lower levels the SIF has hovered around for several months now.

“I have to admit, it is indisputably uncomfortable for the fund to again be so close to our lower limit of 1.2%,” Hauptman said. “Neither credit unions, nor NCUA staff would enjoy an existence where we’re constantly on edge, worried that we’re one small dip away from announcing a mandatory restoration plan. So, if our projections are accurate, we’ll soon have some breathing room.”

That breathing room, according to NCUA staff, could come as the projected SIF’s equity ratio will be 1.28% at the end of 2021.

Reprogramming Surplus Funds

In a 3-0 vote, the board approved a recommendation by Schied to redistribute $2.4 million in surplus funds to provide “funding for new requirements related to cybersecurity, employee re-locations, human capital support, and executive briefings and analysis support.”

Schied’s team projected that by the end of 2021, the NCUA could be sitting on $28.6 million in excess funding. The main reason given for the excess amount revolves around significantly lower travel expenses by staff over the past 18 months due to the COVID-19 pandemic.

The approved redistribution of funds will help pay for seven new full-time positions related to the NCUA’s cybersecurity programs, the board secretary and the office of ethics counsel.

“As a steward of the credit union system, the NCUA board has a responsibility to spend — and save — these extra dollars wisely,” Harper said. “The proposed changes to the 2021 budget and staffing levels make prudent investments and pragmatic commitments aimed at achieving important policy goals related to cybersecurity, ethics, agency operations and workforce diversity, equity and inclusion.”

After the approved expenditures, the NCUA staff projected the residual budget balance for 2021 will be approximately $24.6 million “that can be used to offset future budget needs by the agency.”

Subordinated Debt Rules, Proposed Amendment

In another unanimous vote (3-0), board members approved a proposed rule that would amend the definition of “grandfathered secondary capital” in the already-approved subordinated debt rules.

Board members proposed this amended definition to include “any secondary capital issued to the U.S. government or one of its subdivisions, under an application approved by the NCUA before Jan. 1, 2022, regardless of the date of issuance.”

According to a statement from the NCUA, “This proposed change to the agency’s subordinated debt rules would benefit eligible low-income credit unions that are participating in the U.S. Department of the Treasury’s Emergency Capital Investment Program or in other programs administered by the federal government that can be used to fund secondary capital, if they do not receive these funds by Dec. 31, 2021. Additionally, under this proposed rule, the regulatory treatment of this secondary capital would expire 20 years after issuance or on Jan. 1, 2042, whichever is later.”

Chairman Harper said, “The proposed change would benefit eligible low-income credit unions that are either participating in the U.S. Department of the Treasury’s Emergency Capital Investment Program or other programs administered by the U.S. government that can be used to fund secondary capital.”

According to the NCUA, 44 eligible low-income credit unions have received approval from the NCUA to issue approximately $1.9 billion in secondary capital under the Emergency Capital Investment Program.

Comments on the proposed rule must be received 30 days after publication in the Federal Register.

New Items Added to 2021 Agenda

In a 2-1 vote, Vice Chairman Hauptman and Board Member Rodney Hood voted to approve the addition of three final rules to the board’s agenda for the last three meetings of 2021.

The three agenda items include:

• Credit Union Service Organizations, Part 712, to be placed on the agenda for the Oct.21 Board meeting.
• Field of Membership Shared Facility Requirements, Part 701, Appendix B, to be placed on the agenda for the Nov.18 meeting.
• Mortgage Servicing Rights, Parts 703 and 721, to be placed on the agenda for the on Dec. 16 meeting.

Exemption for Oregon Member Business Lending

Board members unanimously approved an exemption for Oregon’s revised member business lending rule.

According to the NCUA, in June of this year, “the Oregon Department of Consumer and Business Services submitted a request for the NCUA board to make a determination that the state’s proposed revisions to the Oregon member business lending rule would meet the standards specified in section 723.10(a) of the NCUA’s regulations. The board agreed that Oregon’s rule covers all the provisions and is no less restrictive than Part 723 of the NCUA’s Rules and Regulations.”

Under the NCUA’s member business lending rule, states wanting to have their own versions of the rule must get NCUA board approval.