With only one agenda item, the NCUSIF’s March quarterly update, today’s NCUA board meeting presents an in-depth learning opportunity about the fund’s management.
With almost $22 billion in assets, the NCUSIF is the largest investment under NCUA’s control.
Because NCUA publishes monthly updates on its three major funds, credit unions are able to monitor how their members’ funds are being used.
The public board discussion is a vital part of this process for credit unions and board oversight.
What I Am Listening For
- There is much confusion caused by the NCUSIF’s use of Federal GAAP versus private GAAP accounting, the standard credit unions must follow. The Federal accounting terms, presentation and practice are different from private GAAP.
This is because Federal GAAP was intended for use by entities which rely on government appropriations.
Some examples. Cumulative results of operations: Following SFFAS No 7 the NCUSIF recognizes interest on investments as “non-exchange revenue” which in turn means unrealized holding gains and losses are reported as part of revenue.
In contrast, credit union “available for sale” securities are reported at book value with unrealized gains or losses recorded in a valuation account, not as an income or expense. This account is not included when computing the net worth ratio.
Credit unions report retained earnings. Federal accounting has no comparable account. This and other differences mean that NCUA staff transform NCUSIF Federal presentation into a private format, but then do not follow private accounting practice.
For example the 1% deposit true up (or refund) is treated as revenue in the NCUSIF; however credit unions record this adjustment as an investment asset on their books.
Will this confusion be addressed? How will this affect the calculation of the 1% true up when presenting the NOL ratio for the fund? Private GAAP recognizes the true up as a receivable or payable on the insurer’s books when the insured risk is reported triggering the required deposit adjustments.
- How has the NCUSIF investment committee responded to the rising interest rate environment? The market value of the NCUSIF’s investments may have fallen by as much as $1.5 billion from the peak in 2021. What changes have been made in response? How will the below market income stream from the fixed rate, lower earning. long-term bonds, affect the income of the fund and projections of the NOL in 2022?
- Credit union’s first quarter results have been summarized in Callahan’s Trendwatch. How does the first quarter’s 9.3% actual share growth compare with NCUA’s projections for the year? What impact, if any, will the rise in interest rates have on CAMELS ratings?
- What changes in NCUSIF investment policy and accounting presentation/practice is staff proposing? Or will be requested by the board?
Over the past 16 months, I have written several blogs about NCUSIF investing and accounting anomalies. Here are selected observations and additional background for the questions that may be raised in today’s meeting:
- https://chipfilson.com/2021/12/a-better-way-ncusif-losses-and-revenue-management/ (final article of three part analysis)
I’ll follow up next week on the board’s dialogue. Hopefully this will be a fresh start for improving the fund’s financial practices.