The prime agenda item for Thursday’s NCUA board is the NCUSIF’s year end audit and setting the NOL cap for December 2025. The political context in Washington at this moment makes this meeting critically important.
Will the public discussion reinforce the understanding of the Fund’s extraordinary performance and its unique cooperative design? Will its decade long performance of insured losses below a basis point, confirm its critical role in credit union’s unique purpose in America’s financial system?
The Political Context
The 2024 external CPA audit was released last week. It continues to show the financial stability of the cooperative system and the strength of its unique deposit insurance model.
This track record is especially vital in this time of an administration challenging all aspects of federal agency performance. This includes the federal regulatory structures, including FDIC’s oversight. For some the NCUSIF’s functions appear quite similar. Could its future also hang in the balance?
It will be vital that the Fund’s uniqueness be affirmed during this update. Especially these three characteristics:
- A unique funding model; Every credit union member contributes directly 1 cent of their insured savings dollars to the NCUSIF’s 1% deposit base. This member-centric capitalization is a direct copy of cooperative business design.
- Explicit statutory guardrails on fund performance: There is complete and timely transparent reporting marked by the annual independent CPA audit and monthly public financial postings. Statutory limits are provided on total balances and a dividend paid to the owners, when this CAP is exceeded. Premium assessments in the event of catastrophic events, are clearly defined. Premiums have been used only three times in the fund’s 40 year history.
- The right to withdraw. If a credit union changes its charter or insurer their accumulated 1% deposit is returned. All 1% deposits are returned if NCUA ceases to manage the fund.
How Board members present the NCUSIF’s demonstrated financial success may be crucial to its continued independence, not to mention NCUA’s. If credit unions lose their fund in a regulatory realignment, would the singular credit union system be far behind?
Key Performance Issues
We knew yearend 2024 financial outcomes would be superb based on the November 21, 2024 NCUSIF board update as of September 30. The yearend equity ratio is above .302% showing the importance of the NOL cap. If it had been at its longtime cap of 1.3%, credit unions could have received a small dividend for 2024.
Will the Board’s discussion of this and other topics be anchored by full transparency, supported by real facts and the historical record versus hypothetical conjecturing?
The fund’s effectiveness is not based on its total assets, but rather, as in all insurance underwriting, its size to relative to insured risk. For example, the allowance account at $237 million is set aside from retained earnings. It equals 1.3 basis points of insured savings at yearend. Only once in the past ten years have total cash insured expense losses exceeded reserve level.
Specific areas of importance for board oversight include:
- How will the NOL cap for December 2025 be set? This limit triggers a dividend when earnings raise the yearend ratio above this number. There was no data provided when the Board set the NOL for 2024. It simply extended the prior year’s limit, no analysis provided. Even the detailed assumptions used by staff in the prior two years did not support their 1.33% recommendation. Will real numbers be provided with full details of any hypothetical assumptions? Or, might the board simply endorse the historical 1.3% cap used in the first 33 years following its redesign?
- The greatest internal risk to the Fund’s effectiveness is the management of its $23 billion investment portfolio. Since December 2022, the portfolio’s maket value has been less than its book, that is underwater. The portfolio’s 2024 full year return is 2.5%. The overnight cash portion yields approximately 4.5%. The below book term portfolio earned just 1.92%.
Yet the fund continues to invest long in November, extending its duration risk, at a time of a reset in what a normal yield environemnt may be. To sustain the Fund’s equity ratio a yield between 2.5-3.0% is necessary based on 40 years of actual operating results. The critical topic is what will the board require to improve the Fund’s interest rate risk management and turn around this continuing portfolio underperformance?
- The fund’s transparency is critical to its public credibility and trust. The allowance account is determined using an “internal econometric model.” The model’s details and assumptions should be included in the staff’s presentation.
The continued use of Federal, not private GAP accounting misleads, mischaracterizes and distorts the fund’s actual financial standing. The terminology and schedules used with the Fund’s accounts are totally irrelevant since the NCUSIF is not an appropriated entity.
Federal GAAP removes specific information accounts from the NCUSIF’s financial statements. For example is the portfolio’s actual value $22 or $23 billion? Where is the net income total? Or retained earnings? These traditional GAP terms do not appear.
The federal terms and schedules used are not relevant for the NCUSIF and convey an incorrect impression that the NCUSIF is somehow a federally appropriated fund. Or red meat for an uninformed DOGE analyst.
At a minimum private GAP financial statements presentation should be presented alongside the Federal GAP. For private GAP is how all three of NCUA’s other managed funds are presented.
I am looking forward to the meeting. Every credit union should as well.