What Does The December NCUSIF Audit Mean For Credit Unions?

NCUSIF’s audited financials can help credit unions evaluate NCUA’s management of the $11 billion in cooperative system’s capital.


NCUA published the KPMG-audited NCUSIF 2011 year-end financial statements on February 15. It was one of the earliest releases in memory. This posting provides the credit union owners of the fund a timely opportunity to review NCUA’s stewardship of the cooperative system’s collective capital and to ask what the results mean.

The NCUA outlined the industry’s responsibility to monitor the NCUSIF when it established the 1% deposit funding structure: Don’t set it up and forget about it … it’s your responsibility to keep it working because if you don’t, it’ll go just like everything else government touches.” (NCUA 1984 Annual Report, page 18)

Disclosure is built into the cooperative structure, and timely transparency allows member-owners to take informed action based on their assessments of the fund’s performance.

Credit Union Insurance Fund Has A Record Year

Record NCUSIF Bottom Line In 2011 - Highest Net Ever!
NCUSIF Net Income For 2006-2011 In Millions
Callahan & Associates' NCUSIF Net Income For 2006-2011 In Millions
Source: NCUA Annual Report and Audited Statements.

The audit contains several notable numbers:

  1. The fund reported a record bottom line of $620 million, the highest ever. By comparison, the fund achieved a bottom line in 2010 of $284 million only after charging credit unions a $930 million premium. There was no NCUSIF premium in 2011.
  2. NCUA reduced the allowance for losses by $613.9 million, from $1.22 billion one year ago to $606.1 million at December 2011. This is more than a 50% reduction in just one year.
  3. The decline in the allowance for losses was driven primarily by the reversal of $525 million in overfunded reserves and not from spending the reserve for losses.
  4. This bottom line put the fund’s operating ratio at 1.32% of insured shares, which would normally mandate a dividend to the fund’s credit union owners.
  5. However, NCUA is transferring all funds exceeding the 1.32% normal operating level of $278.6 million to the TCCUSF.
  6. The NCUSIF has funded $80 million in subordinated debt in two credit unions. NCUA is using its 208 authority to sustain two credit union operations even though their net worth might be impaired. This is the first such investment reported since 2000.
  7. The portion of NCUA’s operating expenses paid by the NCUSIF increased 14.5%, from $113.6 million in 2010 to $130 million in 2011. The NCUA increased the internal transfer rate from 57.2% to 58.9%.
  8. The NCUSIF has lengthened the duration of its $10 billion plus investment portfolio, which earned 2.1% in 2011 versus 2.24% in the prior year.
  9. Treasury has reduced the NCUSIF’s borrowing authority from $41 billion one year ago to $12.5 billion at December 31, 2011.
  10. The largest non-investment assets under the fund’s management are at the Asset Management Center. These assets total more than $932 million but are carried at a net receivable value of only $114.7 million.
NCUSIF Allowance Account & Reserve For Losses For Year-End 2012-2011 In Thousands
Callahan & Associates' NCUSIF Allowance Account & Reserve For Losses For Year-End 2012-2011 In Thousands
Source: NCUA Audited Statements.

What Do These Numbers Mean?

NCUA provided no commentary or analysis of the numbers, but several observations flow from the information provided.

  • The fund has been and is still over-reserved by any statistical or experience measure. The NCUA based the 2010 premium of $930 million on estimated losses that never occurred. In a December 2011 speech at the CUES Directors Conference, NCUA Chairman Debbie Matz said credit union losses would be less than $50 million in 2011.
  • The NCUSIF’s model for reserving is not working. “Ironically, some think the NCUSIF is over-reserved,” said Larry Fazio in the September NCUA Report. There is little irony when credit unions expense a premium that was neither needed nor justified by any consistent or verifiable methodology.
  • In the September report Fazio also notes the fund’s year-end figures are audit-tested by third parties. Indeed they are, and the KPMG audit reduced the allowance by 50% from the prior year end. KPMG determined that compared to the NCUSIF’s own statements as of November 2011, the NCUSIF was over-reserved by $265.5 million. The bottom line of the fund went from $375 million in November to $620 million just one month. One would expect any board that saw such an adjustment to have some questions for the chief financial officer.
  • What are the auditors reviewing? The most important number in the NCUSIF financial statements is the reserve for losses. The auditor’s methodology requires something more than a perfunctory footnote explanation, which did not change from 2010 to 2011. As explained in the footnote, NCUA uses its CAMEL ratings as the basis for reserving. NCUA’s numbers as of November 2011 show CAMEL code 4 and 5 credit unions’ shares had declined from $35.8 billion in 2010 to $28 billion in 2011. That’s a 19.5% decline, but the allowance account fell by 50%. Moreover, NCUA does not explain the composition of the loss expense between cash losses and reserves. If Chairman Matz is correct that only $50 million in cash losses were sustained, why did NCUA add $105 million more to reserves when the allowance is still twelve times – $606 million – the actual loss?

NCUA’s reserving process is in urgent need of review, and the best way to do this is for NCUA to be more transparent about the methodology. Credit unions paid a severe price (almost $1 billion) for over-expensing in 2010.

This over-reserving raises the more fundamental question of whether the same error has occurred in the TCCUSF and estimates of corporate losses. In that case, the NCUA has reserved more than $12 billion from corporates for potential OTTI losses. Surely the NCUA can compare the results of those early projections to actual outcomes more than three years later.

Several additional comments may be helpful as readers try to develop conclusions:

  • The fund’s financial presentation and statement format are barely understandable. Nothing prevents the NCUSIF from presenting the financial statements in standard GAAP format. This would help all readers to follow the information more easily.
  • Credit unions are the cooperative owners of the NCUSIF. NCUA added the following statement to the footnotes this year: “Additionally NCUA entity assets are non-fiduciary.” What could this possibly mean? Is NCUA is accountable to the fund’s owners or not?
  • The footnotes also contain this statement: “Deposits insured by the NCUSIF are backed by the full faith and credit of the United States.” There is no statutory cite supporting this statement.  Other footnotes reference actions when they are based on a specific legal authority. So what is the statutory basis for this assertion?
  • A full accounting of the Asset Management Estates is necessary. When these assets were small and recoveries immaterial to the NCUSIF’s financial outcome, a summary footnote might have been sufficient. Today the AME has almost $1 billion in assets; this does not include the TCCUSF assets. For example, entries of $25 million, $52 million, and $34 million are made with no more than a summary description. It appears that entries to and from the AME net receivable to the NCUSIF are used to adjust the allowance account. Full disclosure of the management of these assets and the impact on loss reserves are critical for both internal accountability and external confidence.

It’s Time For Credit Unions To Comment

NCUA has put numbers out in a timely manner for the industry to use. Now it is the responsibility of credit unions to provide their views on the issues raised — as they would expect their own members or directors to do with their own financial statements.

Data almost always has a context. Interpretations of what data means is important. Cooperatives benefit from different eyes looking at their information — be they the eyes of members, the press, analysts, Congress or the community at large. Fostering multiple views of NCUA’s management of the the NCUSIF should be a vital credit union regulatory advantage by enhancing the fund’s reporting and functioning.

The NCUSIF numbers support the system’s positive, and in some areas record-breaking, year. But they also appear to reflect an inability to keep accurate financial reporting within the agency. Much can still be done to improve the management of this vital $11 billion pool of credit union collective capital.




Feb. 22, 2012


  • Great analysis
  • The fund's financial performance should be in GAAP format - if the intent is full transperancy. NCUA needs to be reminded that it is members deposits that is at stake and CU Directors and CEOs take that "fiduciary resonsibility" seriously.

    Looks like NCUA motto is "Do as I tell you and not as I do".

  • Excellent point by Mr. Fogg. Where is CUNA on these issues? Are they more interested in maintaining open door relationships with ncua management than in addressing these historical, critical issues? For that matter, where is congressional oversight? Credit Unions are in need of lobbying representation and we are not getting any effective lobbying from the trade organizations.
  • The shameful shenanigans of the NCUA, as profoundly described in Chip's analysis, is one more reason a rational credit union would have for wanting to change charters just to change regulators.
  • It is time for the credit unions to make the NCUA accountable. Who is willing to begin?
  • Once again Mr. Filson brings to our attention matters of critical importance to the credit union movement. I do not hear CUNA's voice representing credit unions against NCUA's mismanagement. Nor do I see any effort by Chairman Matz to address these concerns. Quite the opposite. One easily gets the impression that the NCUA feels it does not need to justify its actions and can not be held accountable.
    Brian Fogg
  • What's ironic is that this is the same NCUA that beats us up, down and sideways over our own allowance methodology. They have no problem telling us that we are over-reserved, under-reserved and what type of inane methodology to employ. Our footnote disclosures this year for allowance are larger and more detailed than ever.
  • The is very good insight and analysis of the NCUSIF. They should improve the allowance methodology for the industry for the years to come and more disclosure just like the natural CUs.
    Richard Lie