As Prepared for Delivery on February 17, 2022
Thank you for today’s update. It is clear that last year was a great year for credit unions and therefore was also a great year for the National Credit Union Share Insurance Fund. In 2021, there was net income largely due to recoveries and no significant losses to the Fund. Eugene, in your presentation, you mentioned that we made the Share Insurance Fund’s investment policy public. This is the credit unions’ Fund since their assets are the ones that comprise the Fund that the Board oversees. So, I am glad this is now a public document.
My first question has to do with slide four and the net position. The net position of the cumulative results of operation decreased during the year.
- Eugene, can you address that and what impact this had on the equity ratio?
As I look back at 2021 and looking forward to 2022, while the pandemic remains a challenge, it has moderated, and we’ve gotten much better at coping with that reality. The January employment report, with a surge of 467,000 added jobs and evidence of wage gains, was certainly welcome news. At the same time, we also see several signs that remind us the economy is not yet back to pre-pandemic levels, and there are other looming challenges that are a matter of concern. To take the most obvious example, there’s no getting around the reality of rising prices, with inflation at 7.5 percent in January — the highest we’ve seen in nearly four decades. That poses a real concern around interest rate risk.
I am also concerned about the growing national debt and how this will eventually impact the overall economy. It’s not my intention to dwell on the negative – in fact, I do remain optimistic that things will continue to improve. But we do need to look reality squarely in the face to recognize that the conditions are still challenging and will likely continue to be so for the immediate future. We need to be planning accordingly for an environment that’s marked by tremendous uncertainty.
I would like to now address the “true-up” and its impact on the equity ratio. At a recent board meeting, the Chairman referenced a report done by an outside accounting firm regarding the “true-up.” While it is easy to let the “true-up” issue sweep you away in technicalities, it is a very critical issue. In fact, it is perhaps one of the most important issues for the credit unions whose assets comprise the Fund. Let me explain.
In simple terms, the equity ratio has a numerator and a denominator. The denominator is insured shares and the numerator is contributed capital and retained earnings. There is a timing difference that is important to discuss in calculating the equity ratio at year-end. While insured shares are as of December 31, NCUA has not yet billed for the new capital deposit balance from the December 31 insured shares and, thus, we use June 30 data at year-end for this piece of the equation. This causes a timing issue.
The true-up is relevant because today we report the equity ratio at 1.26 percent at year-end. However, if the equity ratio calculation did not have the timing difference, such that both components were derived from December 31 data, then the equity ratio would be approximately 1.29 percent.
The credit unions that own the Share Insurance Fund are directly impacted by assessments of premium charges and distributions, and in my view, the practice could lead the public to misunderstand the true strength of the Fund.
- Eugene, since 1999 how many basis points has the subsequent “true up” been?
- And what was the high-water mark then in basis points?
Credit unions follow accounting standards codified by the Financial Accounting Standards Board which are applicable to commercial entities, while the NCUA follows standards promulgated by the Federal Accounting Standards Advisory Board for the Share Insurance Fund. The NCUA changed its accounting standard for the Share Insurance Fund in 2010 from the commercial standard to the government standard. Eugene, this change did not cause the “true-up” issue, is that correct?
- Thank you for that. As I understand it, the “true-up” issue came about in 2000 and did not exist before then. Can you explain why this is?
- And to follow up with that, is it possible to improve our data collection procedures to improve the reporting under current accounting standards?
Thank you. In fact, the memo produced by the outside accounting firm states that the timeliness and accuracy of data is required in the Federal Credit Union Act so this provision in the law “may provide some latitude from a strict interpretation that the equity ratio must be calculated based on the financial statements amounts, particularly given the knowledge of the timing effect on the calculation of the equity ratio…. Accordingly, it may be permissible to use the pro-forma calculation of the contributed capital amount, when calculating the actual equity ratio.”
What are we doing to implement the outside accounting firm’s recommendations or any other of the recommendations to find a solution to the equity ratio reporting concerns I’ve outlined?
Thank you very much.