11 THE NAFCU JOURNAL SEPTEMBER–OCTOBER 2022 References 1. Note that unrealized gains and losses on SIF investments are not included in the equity ratio calculation. 2. See discussion during NCUA Board Meeting, May 26, 2022. Note that the agency had a similar strategy of investing in Treasuries with maturities up to 10 years as recently as 2017. That year the agency changed its investment policy to shorten maturities to no more than seven years. Later that same year, the agency announced that it would be conserving several large credit unions with concentrations in taxi medallion loans. 3. Note that the recent stability of the equity ratio is partly the result of the WesCorp asset management estate (AME), which has consistently outperformed forecasts. This has allowed that estate to repay a larger amount of its obligations to the SIF than anticipated. NAFCU does not include AME performance in its forecast. chart) would generally provide enough income to increase the equity ratio absent any major loss events. Prior to the Great Recession, the SIF was generally able to clear the hurdle rate, and during this period fund distributions out of surplus equity were common. However, the post-Great Recession era has been markedly different. In the first few years of the 2010s, the fund operated very close to the hurdle rate, but that was only because share growth was weak by historical standards. As share growth strengthened in the latter half of the decade, investment yield consistently fell short of the hurdle rate, precipitating a steady decline in the equity ratio (see Chart 2). COVID exacerbated this trend by driving up share growth to historically high levels. Relief may be on the way. Higher interest rates are already having an impact on the fund’s investment yield. Furthermore, the agency announced that it would resume investing in Treasury securities out to 10-year durations, up from a maximum of seven years previously.2 That means that substantially all of the upcoming investments purchased by the SIF will be at longer maturities until the portfolio is balanced. However, even if rates remain higher than they were prior to COVID, it will still take time for the SIF yield to improve. NAFCU estimates that with share growth near the historical average (roughly six percent), the fund’s yield will only improve by 30 basis points per year over the medium term. That means that, holding rates constant, the SIF would not earn a yield equal to the hurdle rate until 2025, assuming normal share growth.3 So, to the question of the day on whether a premium is likely for 2023? The answer is: “not very,” barring an unforeseen loss event. But NAFCU forecasts the equity ratio to resume a slow decline over the next few years before hopefully stabilizing in 2025. The last couple of years have taught us to be humble about forecasting the future. Who would have imagined in early 2020 that a potential outcome of COVID would be higher interest rates? NAFCU will continue to counsel caution from the NCUA, so that premiums are not assessed prematurely, and those funds can do what they ought to be doing: serving the needs of your members. “Who would have imagined in early 2020 that a potential outcome of COVID would be higher interest rates? NAFCU will continue to counsel caution from the NCUA, so that premiums are not assessed prematurely, and those funds can do what they ought to be doing: serving the needs of your members.” Chart 2: NCUSIF Equity Ratio (%) 1.45 1.40 1.35 1.30 1.25 1.20 1.15 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Notes: (1) Equity ratio shown is a 4-quarter moving average; (2) the large increase in the equity ratio in 2017–18 was the result of the merger or the Temporary Corporate Credit Union Stabilization Fund; (3) NAFCU forecast assumes 6 percent annual share growth, zero loss expense, constant Treasury rates as of June 30, and an overnight rate consistent with FOMC projections. Sources: NCUA, NAFCU analysis Historical NAFCU Forecast
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