Share insurance fund closed 2020 with 1.26% equity ratio; deposit growth pressure continues

The federal fund that insures savings in credit unions saw its equity ratio rise four basis points (bp) in the final six months of 2020 to 1.26%, growth that occurred only amid continuing pressure from an influx of deposits that federal agency staff attributed in good part to COVID-19-related relief payments.

And while that growth was an improvement in the equity ratio of the National Credit Union Share Insurance Fund (NCUSIF), the year-end fund ratio fell well short of the 1.32% level that was projected by staff last September.

There is some good news for the fund, as National Credit Union Administration (NCUA) staff told the agency board Thursday that only one insured credit union failed in 2020 (costing the fund about $1 million). But continued share growth, limited earnings on the NCUSIF’s own investments, and the ongoing pandemic effects are keeping alive the question of when credit unions may be called on to pay a share insurance premium.

The NCUSIF’s normal operating level (NOL) is set at 1.38%. From Dec. 31, 2019, to June 30, 2020, the NOL fell 13 bp, from 1.35% to 1.22%. The Federal Credit Union Act sets a floor for the fund ratio of 1.2%; if it were to fall below that, the NCUA would be required to implement a restoration plan that would bring the ratio back to the minimum within eight years.

In a briefing Thursday during the NCUA Board’s open meeting, staff reported that the NCUSIF is expected to collect some $866 million in April as credit unions adjust their 1% capitalization deposit in the fund; that payment represents about another 5bp for the fund ratio. But that is based on an insured-share base as of Dec. 31, 2020, and the next time the NCUSIF ratio is updated, deposit growth may have eliminated some or all of that progress.

The board and staff discussed a number of factors affecting the direction of the NCUSIF ratio. One is that the fund is limited in its ability to grow earnings as it’s only permitted to invest in Treasury securities, and yields are down. Another is the continued challenge of rapid share growth, which agency staff noted is being fueled by COVID-19 relief payments.

Staff noted that when the fund equity ratio is reported for June, the reported ratio will include the above-noted capitalization deposit adjustment, the update in insured shares as of June 30, and any changes in retained earnings.

NCUA Board Chairman Todd Harper said current conditions suggest it’s still just a matter of time before a premium assessment will be needed, but he also said a premium represents only “a short-term solution.”

“With credit unions and insured shares continuing to grow, a possible long-term solution is working with Congress to grant the NCUA additional flexibility to manage the fund going forward, allowing the fund to build up reserves during good times while avoiding potential premiums during bad times,” Harper said. “It is increasingly evident such reforms are needed.”

NCUSIF financial statistics, quarter ended Dec. 31, 2020 (slide presentation)

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