ALEXANDRIA, Va.–During the NCUA board meeting, Board Member Rodney Hood and agency CFO Eugene Schied engaged in a lengthy Q&A related to the performance of the National Credit Union Share Insurance Fund.
Below is a look at that Q&A. See separate reporting for the update on the fund.
Hood: What are the projected retained earnings at year end?
Schied: The projected retained earnings on December 31, 2023, for Equity Ratio calculation is $5.073 billion.
Hood: What would the equity ratio be if the 1% deposit due in October was included in the equity ratio calculation using the insured shares as of June 30, 2023?
Schied: The equity ratio for June 30, 2023, would be approximately 1.29% if the 1% capital deposit cycle two due in October 2023, which will be recognized as a receivable on the third Quarter financial statements, were to be included in the equity ratio calculation for June 30.
Hood: When we hit our targeted amount in overnight reserves to prepare for a liquidity event, where do we go from here?
Schied: The Investment Committee will meet in the fourth quarter to determine the next steps. The Investment Committee may raise, lower, or keep the overnight target unchanged. The Investment Committee will base its decision on numerous factors, including, but not limited to potential liquidity needs for insured institutions, cost of liquidity versus term investments, upcoming maturities, and the portfolio’s unrealized losses.
Hood: How is the asset value calculated for the Corporate Asset Management Estates—is it the current market value of assets due from AME’s or some other method? When is the income statement impact of the receivable recognized—in other words, when the cash is received or when the assets are entered on the balance sheet in the first place? How much more upside potential is there in this receivable?
Schied: The Corporate AME legacy assets are valued at market value. The NCUSIF Receivable from Corporate Asset Management Estates includes these legacy asset market values. As the remaining Corporate AME legacy assets are monetized or their market value changes, these changes are reflected in the income statement as the Corporate AME Loss Expense. The Q2 2023 financials represent the NCUSIF’s expectations for the reporting period which is updated each quarter.
In some good news, the NCUA’s $76 million distribution of paid-in capital to the former U.S. Central corporate credit union will result in a positive impact to the NCUSIF of $12.2 million for Q3 2023.
The NCUSIF financials do not project or predict future changes in legacy asset values, recoveries from litigation or recoveries from USC capital distributions. Any further potential upside to the NCUSIF related to the Corporate AMEs would be comprised of impacts related to the WSC estate, which is the only Corporate AME which has not fully reimbursed and provisioned for claims paid by NCUA.
Hood: Shifting gears, how much more have we added in loss reserves this year compared to last?
Schied: As some background, we record an insurance program liability – comprised of general and specific reserves.
The general reserve is derived using an internal econometric model that applies estimated probability of failure and loss rates. The probability of failure is driven by CAMELS ratings and credit union level financial data; it also incorporates macroeconomic data such as the consumer price index and geographic housing prices. The loss rates take into account historical losses, CAMELS ratings, credit union level financial ratios and other economic measures. These variables are evaluated periodically to determine the reasonableness of the model output, which provides a range of forecasted losses between the 75% and 90% confidence level intervals.
Specific reserves are established for credit unions whose failure is probable and sufficient information is available to make a reasonable estimate of losses. The specific reserves are presented net of estimated recoveries from the disposition of assets held by failed credit unions.
We added approximately $18.8 million in loss reserves from December 31, 2022, to June 30, 2023, compared to $7.1 million from December 31, 2021, to June 30, 2022. This represents an increase of $11.7 million.
We added approximately $35 million in loss reserve from June 30, 2022, to June 30, 2023.
Hood: How is the loss reserve calculated?
Schied: Calculating the loss reserve is a two-step process. The general reserve is a pooled reserve for the general credit union population and forecasted using an econometric model. A specific credit union reserve is established when there is a certainty with the amount and timing of a loss to the Share Insurance Fund. The NCUA’s process is similar to loan loss reserving in credit unions.
Hood: How many in actual dollar losses have we had year to date?
Schied: Two credit union failures incurred losses to the Fund. We have experienced two losses totaling $1.25 million year to date. For the same period in 2022, we experienced three losses totaling $0.66 million. Dollar amounts quoted are loss at failure.
Hood: Is this more or less than at this point last year?
Schied: At the same time last year, three credit union failures incurred losses to the Fund with a total cost of $0.66 million. So, we had one less credit union failure than last year but a $0.59 million more cost to the Fund.
Hood: Since the payout on the taxi medallion losses, what has been the actual net cash losses (not the provision expense) for the fund as basis points of insured shares. Is it less than one basis point?
Schied: The last taxi credit union failure occurred on Oct. 1, 2018. Since the last taxi failure on October 2018, actual SIF losses was a total of $53.8 million or .0031% (.31 bps) of insured shares as of June 30, 2023. Insured shares as of June 30, 2023, was a total of $1.72 trillion.
The losses as basis points of insured shares during the time frame defined above are less than one basis point.
Hood: Related to the cap deposit, I understand there was a sharp decline because of the refunds we did. There was a net we gave back versus a collection, so can you please elaborate?
Schied: The Fund recognized the Capitalization Deposits collections of $210 million related to Cycle 1 adjustments; however, the refund of $282 million were returned to credit unions with declining insured shares, resulting in a net capital deposits refund of about $70 million. This reflects the net decline in insured shares during the second half of 2022.