From NCUA board members’s statements in Senate confirmation hearings to the examiner on the street, the most frequently stated goal stated by NCUA staff is to “protect the insurance fund.”
This goal is repeated even though the NCUSIF is a means and not an end in itself. The ultimate purpose of NCUSIF is to safeguard member assets.
The primary venue in which Board members demonstrate their responsibility to “protect the fund” is the quarterly statistical report provided by staff and discussed in an open meeting.
The NCUSIF’s status was the principal topic of May’s board meeting. I was unable to listen to the live broadcast. All I have is the slide deck from the agenda and posted board statements, not the actual live exchanges that took place.
Questions on the NCUSIF’s from the March Update
Here are some initial questions from the information presented. I would hope that some or many of these would be part of the dialogue in the Board’s duty “to protect the fund.”
- Since December 2021, total NCUSIF assets have declined by $130 million even after recording $578 million in new capital deposits receivable. The cumulative results of operations (equity) shows a decline of $727 million in the first quarter. How did these declines occur? How should users of this data understand Fund performance?
- The March report shows that the market value of the portfolio has fallen $806 million below cost or book value. What does this decline indicate about the management of the Fund’s interest rate risk?
- The Fund’s yield year to date is only 1.22% What is the required breakeven yield to cover the Fund’s operating expenses? How large is the revenue loss in the next 12 months as indicated by the current and continued decline in market value?
- How did the Fund’s investment committee modify their approach after the rise in rates initially forecast last October/November by Chairman Powell?
- How will the investment committee deploy the approximately $4.0 billion in funds arriving in the next 12 months from maturities, new capitalization deposits and interest payments?
- The Fund reported net income of $54.4 million in the 1st However Slide 13 shows estimated retained earnings of $4.792 billion, or an anticipated loss of $68 million in the current quarter. That would represent a $122 million net operating decline for the June quarter. How was this projected? What is causing this loss?
- Insured savings growth is estimated at 7.1% at June 30, 2022, down from 14.2% at the June 2021 quarter. Actual twelve month share growth was 9.3% as of March 31, 2022. How much additional growth slowdown is projected for this year?
- In Slide 13, the numerator and denominator use data from two different time periods to calculate the NCUSIF’s equity ratio (NOL). If the same June 30 data were used for both parts of the ratio, the resulting NOL would be 1.283 % versus 1.25 %. This three basis point difference is over $500 million at the current level of insured shares. Shouldn’t this more timely ratio be used in reporting the Fund’s actual financial position?
Fund Performance and Investment Policy
The NCUA’s immediate and ongoing opportunity to “protect the fund” arises from its management of its current $22 billion and ever growing asset base.
The questions above are vital to understanding how NCUA staff implements the Board’s twin NCUSIF investment policy objectives “To meet liquidity needs” and “To invest. . .seeking to maximize yield.”
The March financial statistics raise critical question of how the NCUSIF responded to the changed interest rate outlook over the past 12 months. And, more importantly how it will respond going forward.
I will report on Board member’s interactions and assessments to NCUSIF’s March information when the May meeting video/ transcript is available. That dialogue will be a useful example to learn how NCUA board members see their role “ to protect the fund.”