WASHINGTON–During testimony before the Senate Banking Committee NCUA Chairman Rodney Hood offered an update on the state of credit unions and called on Congress to extend beyond year-end a number of provisions put in place as a result of the pandemic.
Hood told the committee credit unions entered the pandemic with high levels of net worth and “ample liquidity” that has allowed credit unions to “adapt to a myriad of operational challenges” to meet needs.
In response to the pandemic, he said the agency has also provided regulatory relief where it can and adjusted its supervision and examination program to “protect the safety of our staff and staffs of the credit unions we oversee, while addressing emerging risks and implementing statutory and regulatory changes that have occurred in response to COVID-19.”
Despite the economic slowdown of the first half of the year, Hood said the 2.7% year-over-year decline in the number of credit unions was mainly to the long-running trend of consolidation across all depository institutions, and he noted membership was up 3.4% to 122.3 million.
Other Mid-Year Numbers
Other points made by Hood during his testimony included:
- As of mid-year, Hood said total assets in federally insured credit unions rose by $229 billion, or 15.%, to $1.75 trillion.
- CU net worth increased by $11.6 billion, or 6.8%, over the year to $182.9 billion in the second quarter of 2020, with the overall net worth ratio declining slightly to 10.46%.
- Total loans outstanding increased to $1.14 trillion in the second quarter of 2020.
- Through Q2, 833 credit unions participated in the PPP and collectively extended 171,000 loans totaling $8.4 billion, with an average loan amount of $49,000.
- The delinquency rate at federally insured credit unions was 58 basis points in the second quarter of 2020, down five basis points compared with the second quarter of 2019
“While economic conditions are improving, the effects of the recent downturn will likely affect credit union performance through the end of the year and into 2021,” Hood said. “System-wide delinquency rates, which remained low through the second quarter, could begin to rise as forbearance programs end, particularly given the current high level of unemployment. Interest rates across the maturity spectrum have fallen to historically low levels. A prolonged period of low interest rates also poses risks, particularly to credit unions that rely primarily on investment income. NCUA is actively monitoring economic conditions and assessing these and other risks to credit unions and their members.”
State of the Share Insurance Fund
The Share Insurance Fund reported net income of $20.5 million based on total income of $149.1 million through the second quarter of 2020, Hood told the Senate. The fund reported $17.7 billion in assets as of June 30, with an equity ratio at approximately 1.32%.
“The NCUA’s staff have performed multiple scenario analyses of additional share growth and projected losses to determine under what conditions the Share Insurance Fund’s equity ratio might fall below the statutory minimum of 1.20%,” Hood said. “The agency will take all necessary action to ensure the Share Insurance Fund remains strong and retains the public’s confidence. While the NCUA remains above the minimum equity ratio for the Share Insurance Fund, vigilance is needed to manage and monitor this situation.”
Additional Points
Hood further told Congress:
- NCUA’s response to COVID-19 has been “robust,” with a “strict offsite examination and supervision policy that continues to this day.”
- NCUA issued its updated supervisory priorities to account for the pandemic and its economic disruptions, and is reviewing credit unions’ good-faith efforts to comply with the CARES Act.
- NCUA examiners will continue to assess a credit union’s liquidity risk-management practices and planning, and will focus on the effects of loan payment forbearance, loan delinquencies, projected credit losses and loan modifications on credit union liquidity and cash flow forecasting.
- In April, the NCUA committed the majority of its 2020 CDRLF allocation to COVID-19 assistance. The agency awarded $3.7 million in grants and no-interest loans to 162 low-income credit unions in 40 states and the District of Columbia to help them better serve their members and communities during the pandemic, Hood said.
- The NCUA also awarded more than $960,000 in urgent need grants to 148 eligible credit unions in 42 states and the District of Columbia. Four urgent need grants, totaling $30,000, were made to repair damage to credit unions from a natural disaster not covered by insurance.
- The NCUA awarded $75,000 in grants to three low-income, MDI credit unions to support mentoring programs with larger credit unions.
- As of October 9, 2020, the number of regular members of the Central Liquidity Facility was 340, up from 283 members in April. In total, 4,145 credit unions, or 80% of all federally insured credit unions, have access to the CLF, either as a regular member or through their corporate credit union. New memberships have added $989.8 million in additional subscribed capital stock to the facility. As of October 9, the facility’s borrowing authority stood at $32.2 billion, an increase of $21.7 billion since April.
Rulemakings since May
Hood said his goal is to “create a regulatory environment that allows for innovation and flexibility, creates new avenues for growth, and accounts for the constantly evolving economic, competitive, and regulatory environment.”
Among the rulemakings he highlighted:
- NCUA has approved an interim final rule that makes two temporary changes to the agency’s prompt corrective action regulations to provide relief to credit unions that temporarily fall below the well-capitalized level.
- NCUA has approved a final rule that changes the agency’s chartering and field-of-membership regulations for community charter approvals, expansions, or conversions.
- NCUA has proposed a rule that would phase-in the day-one adverse effects on regulatory capital that may result from the current expected credit losses (CECL) accounting methodology. Under the proposed rule, the NCUA board would phase-in the day-one effects on a federally insured credit union’s net worth ratio over a three-year period under the NCUA’s prompt corrective action regulations. The proposed rule would temporarily mitigate the adverse consequences of the day-one capital adjustments, while requiring that credit unions account for CECL for other purposes, such as on their Call Reports, Hood said.
- Under the same proposal, federally insured credit unions with less than $10 million in assets would no longer be required to determine their charges for loan losses under GAAP. Instead, these credit unions could use any reasonable reserve methodology if it adequately covers known and probable loan losses.
- NCUA has proposed a rule that amends the agency’s derivatives rule in Subpart B to Part 703 to allow more flexibility for federal credit unions to manage their interest rate risk through these financial instruments.
- NCUA has invested in greater diversity and inclusion, with Hood saying over the past five years, racial and ethnic diversity in the agency’s management-level staff, those in grades 13 through 15, has increased by more than 5%. During the same period, racial and ethnic diversity among its senior staff positions has increased by almost 12%.
- NCUA has launched a new initiative called ACCESS, or Advancing Communities through Credit, Education, Stability & Support, which is comprised of representatives from across the agency and is designed to “refresh and modernize regulations, policies, and programs that support financial inclusion within the agency and, more broadly, throughout the credit union system.”
- Hood asked Congress extend the authority it granted the NCUA in the CARES Act for the length of the pandemic, especially as related to the Central Liquidity Facility with increased flexibility and borrowing authority.