Wisdom: On Regulation


Share Insurance & Regulatory Choice

“The fact that there is an insurance option-private insurance for state-chartered credit unions-assures that the NCUSIF will be different from the premium based FDIC fund, that it will be funded with deposits from credit unions, and can be counted as an asset on the books of credit unions.  The fact that there is an insurance option guarantees there will be a charter option, and thus a regulatory option.

This is to the good for everyone.  A single regulator is sooner or later bound to become a lazy or an arrogant regulator.  The best ideas will not bubble up; the regulated will not flourish to their maximum potential.  But with two regulatory options, competition is going to allow the best ideas to come to the fore and allow the dynamic credit unions to expand.”  (pgs 46-47)


Note: From the Coach’s Playbook,  a collection of  Ed Callahan’s observations.  These are a summary of operating values for the credit union system. Ed began his professional career as a high school math teacher and football coach.  His thirty years in credit unions included Chairman of NCUA (1981-1985), co-founder of Callahan & Associates, and CEO of Patelco from 1987 through 2002.

A Milestone, or Turning Point, from the Past

The Lead: Almost all CU savings are now insured

“More than 99% of the total savings at CUs are now insured by either NCUA or a state share insurance fund, according to the 1983 State Share Insurance Yearbook.  That translates into about $75.5 billion.

“By mid-1983, the yearbook says, only about 200 CU’s in the entire U.S. will be without share insurance.  Only 319 of the almost 20,000 CUs in operation at the end of last year were not insured.  That number will decline this year as share insurance becomes mandatory in Indiana, Nebraska, and New Jersey.   Insurance  is now required of state CUs in 44 states and Puerto Rico. 

“NCUA insurance covered  all FCUs in 1982 (11,631 active charters)  and 5,036 state CUs, while 17 state insurance plans were provided for 3,121 state CUs  in 21 states and Puerto Rico.(Total all insured credit unions 19,788)

Source:  Credit Union Magazine, June 1983, pg. 18.

An advertisement for one of the 17 state-chartered insurance funds.

Milestone or Turning Point?

Today, the NCUSIF is an insurance monopoly for all but a few state chartered credit unions.

The  insurer has become the regulator.   NCUA leaders routinely pronounce  their number one priority-“North Star”- is to protect the fund.

The NCUSIF approval is now the biggest entry barrier for new charters.

This prioritization of insurance  has changed the focus of many credit union leaders.   Instead of a social movement designing alternatives for members’ financial needs, credit unions have become me-too financial providers.

Credit unions are now fully entitled members of America’s financial system with access to governmental and market options similar to most banks.

Some continue to prioritize member well-being and their challenges of financial equity.   Others embrace the open-ended opportunities to pursue the market ambitions of their competitors.

A number of credit union leaders and academics have interpreted the insurance requirement (primarily NCUA) as the most important factor in the evolution of the cooperative financial system-for good or otherwise.

I will look at these assessments in later blogs.

A Disturbing Slide in May’s NCUA Board Meeting

If the CFO came to your May board  with a forecast that the credit union’s retained earnings margin would fall by 50% in the first six months of this year, it would get your attention.

That is what CFO Schied presented in the slide below showing a decline in the NOL from December’s 1.3% to 1.25% by the end of this June.  That would be halfway to the 1.20 NOL floor at which the NCUA must come up with a restoration plan.

As summarized in my earlier report, all of the actual credit union CAMELS data, the NCUSIF financial position and other accompanying information was good news.  Especially in the context of the first quarter banking failures and the continuing risk in interest rates.

Board members acknowledged the actual resilience of the cooperative system but then picked up the forecasted alarm.

Chairman Harper suggested the actual data was just “the calm before the storm.”

Vice Chair Hauptman opened his comments stating his objective was to protect “the taxpayers” from NCUSIF failure.

Only board member Hood attempted to get behind the numbers.  He asked how the $12 million  loss reserves expense was determined and the status of proper presentation of the 1% true up.  The answers were a polite stonewall.

Similar to a credit union’s net worth, the NCUSIF’s reserve ratio is an easy shorthand for its financial position.  The calculation is straight forward.   The ratio is simply retained earnings divided by the insured shares at the same date.

This ratio was 29.1 basis points or .291% of insured shares at December 2022.  As of March 2023 the ratio was 28.8 basis points. This .3 of one basis point minimal decline in the first 90 days is a far cry from the 5 basis points projected above.

The projected ratio in slide 8 is a made-up number. Its relevance depends on the assumptions used.  The estimated growth of insured shares to $1.75 trillion is a 7.2% twelve month increase from 2022.  The actual rate of increase as of March 2023 from the year earlier was 2.2%.

The addition to retained earnings for the quarter ending June is just $6 million versus a net income of $41.7 million in the NCUSIF’s just reported March quarter.

The final number in the numerator is the 1% deposit.  The calculation above reverts back to the six-month-old December 31, 2022 total deposits. By using this out-of-date number this invented ratio understates the actual 1% deposit total due from credit unions.  Including this six-month-old deposit liability misstates  the actual ratio and cash due.

The slide’s 1.25%  manufactured outcome became the lead in several press reports. It misinforms about the trend in the NCUSIF’s financial position. The ratio’s assumptions were not explained even though they were significantly different from actual trends through March.

Monitoring an accurate Fund equity ratio matters.

Per stature, the actual NOL is calculated at yearend to determine whether a dividend must be paid should the fund’s reserves exceed the NOL cap. The number is also the floor from which a potential premium could be assessed to increase the NOL to a maximum of 1.3% of insured shares.  Getting this NOL right is vital for every credit union.

More critically the use of a number from an earlier accounting period to compare with a current period’s insured risk total does not align with standard GAAP accounting practice.

Two Accounting Examples

There are direct accounting precedents with GAAP for how the 1% true up should be reported.  They show that the concurrent presentation of insured risk and the legally required true up of the capital deposit base is standard industry practice.

The first example is Deloitt & Touche’s audit of  ASI’s required deposit an identical structure to the NCUSIF.  From the December 2022 ASI audited financials:

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of

December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.   Deloitte & Touche, LLP April 11, 2023

And regarding the deposit requirement:

Participants’ capital contributions that are receivable or payable as of December 31, 2022 and 2021, are presented on a gross basis in the accompanying consolidated financial statements. Included in participants’ equity at December 31, 2022, is a receivable for capital contributions of Primary-insureds of $2,530,000 (no payable). The receivable and payable balances result from annual growth or shrinkage in participating credit union shares and the receivables were substantially collected subsequent to December 31, 2022.

Included in participants’ equity at December31, 2021, is a receivable for net capital contributions of Primary-insureds of $25,200,000. The receivable and payable balances result from annual growth or shrinkage in participating credit union shares and the receivables were substantially collected subsequent to December 31, 2021.  (page 13, Notes to the Consolidated Financial Statements)

The second example is the recognition in the NCUA’s Operating Fund of an “account receivable,” on the balance sheet and the income statement in its monthly statements postings.

From the January 30, 2023 NCUA Operating Funds monthly financial statements:

The cash position is considered sufficient to cover current and future budgetary obligations of the Fund through April 2023, at which time the Fund will collect the 2023 operating fees from its credit union members. . . Operating fee revenue reflects one twelfth of the 2023 Operating Fees.

A longer explanation of this accounting presentation for the expense receivable in the January 2022 statement:

Other accounts receivable, net had a month-end balance of approximately $10.5 million. Its balance increased by approximately $10.2 million from prior month primarily due to the unbilled receivable for the 2022 Operating Fee. The Operating Fee will be invoiced in March and collected in April.

In other words the Operating Fund recognizes a net receivable and records one twelfth of the total operating fee as income each month even though the fee is not invoiced till March and collected in April.

In these instances the amounts legally due are presented as receivables in ASI and NCUA’s    respective audited financial statements and monthly financial presentations.

The 1% True Up Topic Raised Again

Board member Hood asked again about the status of the external assessment of accounting options the NCUA board requested in 2021. CFO’s Schied characterized this external memo saying:  “Each option was “non-optimal.”  An unusual accounting conclusion.

NCUA has refused to publicly release this expert review under FOIA.  What options were reviewed, what data or precedents referenced, and how were the pros and cons presented?

The current practice leads users of the information astray. It potentially shortchanges credit unions’ dividends. NCUA self-interest is keeping the status quo.  The memo should be published for all to evaluate.

The credibility of NCA’s oversight of the insurance fund is a function of the legitimacy of the numbers and explanations it provides. If NCUA is not able to present the Fund’s position accurately, at a minimum it leads to misleading conversations.

How an Inaccurate Number Distorts Discussion

The fabricated 1.25 NOL ratio forecast as of the end of next month led to several illusory discussions and unfortunate public headlines.

One board member commented how the Fund’s “margin was narrowing” before “taxpayers will have to pay.”  That unfortunate characterization shows the importance of knowing real numbers.  In the first 90 days of 2023 the ratio had changed by just .03 of one basis point.

Moreover the only “taxpayers” who are legally bound to support the NCUSIF are members of credit unions. Each sends 1 cent of every savings dollar in their credit union’s 1% deposit in the Fund.

The board member’s observation that “there is not a lot of room between 1.2 to 1.3 equity” unfortunately mischaracterizes the fund’s actual operating performance since 1984.  The long term insured loss rate for the fund is just over 1 basis point.   Even in the 2008-2010 the net cash losses from natural person credit unions were 3.5, 2.0 and 3.0 basis points of insured shares.  The highest cash losses in the three years was $228 million, nowhere close to the “billions” response in the meeting.

In the most recent four years (2019- 2022) which includes the Covid crisis, the economy’s total shutdown and a rising rate cycle, the highest loss from “old school failures” was .3 of one basis point.  In 2021 the Fund reported actual net cash recoveries.

An accurate presentation of past and current NCUSIF performance is important in understanding the unique design and resilience of the NCUSIF.  Because of this collaborative resource, the credit union cooperative system is much more stable than FDIC insured bank premiums.

The Fund’s relative size to insured risks remains stable in all circumstances.   The 10 basis point guardrails (the 1.20-1.30 operating ratio range) today equates to almost $1.8 billion. For comparison, the NCUSIF’s entire total insured losses from 2008 through 2022 were $1.9 billion.   The operating expenses in this same period were over $2.4 billion.

The legislative guardrails were put in for a reason.  Credit unions feared that open ended funding would just lead to unchecked spending by NCUA.  This is what has occurred through increasing the Overhead Transfer Rate allocation to shore up the agency’s ever increasing budgets.

Constantly rising expenses, not insured losses, are the Fund’s largest drain on reserves.

Everyone Can Project NCUSIF Yearend Outcome

Forecasting the NCUSIF’s yearend NOL ratio is simple.  Here is the link to a spreadsheet anyone can use. If any difficulty using, please email.

The inputs are portfolio yield, share growth, NCUSIF net income, insured loss and whatever assumptions a user believes are consistent with present trends.  The current numbers include the latest actual NCUSIF updates through March 2023. It projects a yearend NOL of 1.2917.

Tomorrow I will review one other slide that is vital to understanding the Fund’s management.

Today’s NCUA Board Meeting: an Opportunity for Insight into the NCUSIF

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

  1. 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.

  1. 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?
  2. 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?
  3. 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:

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.


A Critical CEO Change

Today American Share Insurance (ASI) announced that Theresa Mason will be the new President and CEO.  She succeeds the retiring Dennis Adams who has served in that capacity for over three decades.

According to the release:

“Theresa is a highly accomplished Executive within the Insurance industry, having spent the past 16 years in the Columbus Market with Grange Insurance and the Kansas City Life Insurance Company where she served as President of Grange Life Insurance and directed highly effective finance, operations, sales andIT teams.

A Certified Public Accountant that began her career with Ernst & Young in Cleveland, Theresa also carries her CGMA (Chartered Global Management Accountant) and holds affiliations with theAmerican Institute of Certified Public Accountants (AICPA) and the Ohio Society of CPA’s.”

Why This Matters

In ten states ASI is the share insurance option for state chartered credit unions instead of NCUSIF.

Today state charters hold approximately 50% of all credit union assets. The choice of share insurance is critical to a viable dual chartering system.  It allows state chartering authority to be the primary regulator.   Credit unions are closer to the legislatures and policy makers who create the laws governing their actions.

As a result, state charters have traditionally been the incubators of change for the entire credit union system.

In his final Annual Report message outgoing CEO Adams stated:

Without the option of private share insurance, I can attest that there are credit unions in America that would not be operating today. ASI has never been simply another vendor. To the contrary, we have always promoted our core value proposition as a true business partner to all of our member/owner credit unions, and our commitment to that has worked, and worked successfully, and that will never change. 

ASI’s board of directors is composed of credit unions and outside professionals elected by the credit union members.

ASI’s annual report shows the total primary insured shares of $20.4 billion with the program available in ten states.  It has received an outside audit by Deloitte and Touche and unqualified opinion following GAAP accounting standards.

The NCUSIF is A Better Way– IF Properly Managed

The NCUSIF’s redesign culminating in the October 1984 NCUA board implementation was revolutionary.   This two-minute excerpt is from NCUA’s Video Network of that historical vote:

NCUA Bd Mtg Approves NCUSIF Redesign: A Better Way .

A Partnership

Board member PA Mack summarizes his approval saying:   I’m ready to support this and think it is an outstanding product as a partnership among government and credit unions.”

NCUA wanted credit unions as partners, with mutual give and take, and together the cooperative system created the most successful federal insurance program ever. 

Can Work Beautifully

When approved by a 3-0 vote, Chairman Ed Callahan congratulated everyone for their efforts and commented:  “This is a very significant thing for credit unions.  This system can work beautifully for credit unions in the future. I think the real challenge goes to you people in NCUA now.  The real secret is in the operations.” 

Callahan believed the power of NCSIF’s redesign was that it clearly invites credit unions into “cooperation” now and as long as the system’s integrity is preserved though proper management.

A Three-Year Process

This redesign did not happen overnight.  It emerged due to the failure of the premium based approach modeled after the FDIC and FSLIC funds founded four decades earlier.  This reassessment was documented in a 120 page report NCUA sent to Congress in April 1983. It featured  comments from all segments of the credit union system. Legislation was drafted with credit unions and sent to Congress in 1984.

NCUA actively encouraged credit unions to support the legislative change.  An NCUA video outlined the plan including the NCUSIF’s financial history since 1971-1984.  This analysis was the foundation for creating A Better Way.

In the 1985, NCUA reported the outcome for credit unions following the first year of this new design:

Dividend of 5%: Because of the fund’s performance . . . for the first time ever the NCUSIF paid a dividend which represents about $30 million in equity distribution. . . The NCUSIF has returned in some form almost $270 million to credit unions: the $84 million equity distribution (when calculating the 1% deposit), the insurance premium waiver for last year, the $30 million dividend and leading into the next year, a $90 million premium waiver.  (Source:  Page 5 NCUSIF 1985 Annual Report)

The partnership approach based on transparent communication with credit unions and immediate return created another system benefit. The radical restructuring proved to be the way to something more– an action  that renewed the entire system’s hope during deregulation and that credit unions still benefit from  today.

The Operations of the Fund

The critical aspect of the NCUSIF’s cooperative design, as noted by Chairman Callahan, is how he fund is managed by NCUA staff.  These four primary responsibilities include:

  • The regular, timely and accurate reporting of the fund’s financial position.
  • Prudent oversight of  NCUA’s operating expenses charged to the fund.
  • The careful management of fund losses to ensure the least possible cost resolution for problems.
  • Intelligent and professional management of the fund’s primary revenue source- the yield on its investment portfolio.

In the aftermath of the 2008-2009 financial crisis a material change occurred in NCUA’s management of each of these responsibilities—all contributing to an increasingly confusing and misleading presentation of the fund’s financial status.

Today I will focus on the 2010 change from private GAAP accounting to Federal GAAP. Future posts will discuss the remaining three responsibilities.

The Ill-suited Change to Federal GAAP Presentation

From 1982 through 2009, the NCUSIF financials were audited and presented following private GAAP accounting standards.  This was a critical part of the NCUA commitment to follow the same reporting and presentation standards it required credit unions to implement.

Credit unions had agreed to the perpetual 1% underwriting of their NCUSIF deposit. In return the NCUA guaranteed the information to properly monitor the agency’s management of these ever- growing 1% deposit assets.

This private accounting standards in 1982 was a departure from the NCUA’s initial practice of relying on a GAO audit which was often late in completion and did not follow GAAP accounting practices.

Why Reliance on Federal GAAP is Inappropriate and Misleads Credit Union Owners and the General Public.

Federal GAAP reporting was intended for use by entities that receive appropriations from the government.   The NCUSIF receives no government funding.  The  unique cooperatively designed fund relies on withdraw-able member deposits as the principal underwriting  source, not an insurance premium expense levied on credit unions.

In Federal presentation the normal balance sheet categories are divided into Intra-governmental accounts and Public accounts, a confusing description at best.  Liabilities have the same misleading divisions.  The Net Position contains a federally  defined Cumulative Results of Operations, sometimes mischaracterized  as retained earnings.  However in federal GAAP this account includes changes in the net unrealized gains and losses on the NCUSIF’s investment portfolio during the year.

Private GAAP does not include this.  As a result the monthly income and yearly audited statements present a completely misleading number from a retained earnings or equity perspective.

The traditional income and expense information is  renamed as Statement of Net Cost.” This presentation is similarly as confusing and misleading as the balance sheet categories. The presentation begins with Gross Costs , followed by Less Exchange Revenues, with a so called bottom line labelled,  Net Cost of Operations.

In 2020, Federal GAAP reported an NCUSIF  bottom line of a $239 million gain; however private GAAP net income was only $32.9 million.  The outcome is that actual retained earnings do not correspond to cumulative results of operations, thus misstating the true NOL when the 1% deposits are added. This annual over or under presentation of “fund equity ” is shown in the following chart.

Federal government accounting  reporting does not appropriately present the fund’s “equity” at yearend

This confusing presentation continues in the other required financial statements. These include the federally prescribed Changes in Net Position and the Statements of Budgetary Resources.   Neither portrays the data needed to understand traditional financial concepts of changes in cash flows, retained earnings or total equity.  These concepts were created for federally appropriated entities.

To see the full 2020 audit report following Federal GAAP presentation, click here.  Pages 13 and 14 are completely unintelligible versus private GAAP presentation.

The standard Federal GAAP presentation is so confusing that when staff updates the NCUSIF financial results to the board, the income statement and balance sheet are converted  to the standard GAAP income and balance sheet formats.

However even this monthly “translated” accounting practice is a mash up of private and federal GAAP concepts.  For example the most recent NCUSIF update showed  a quarterly net income at September 30 of $58.6 million.  The balance sheet account which would include this gain is called the Cumulative Results of Operations.  That account instead shows a quarterly  “loss” for the September quarter of $16 million.   This $75 million total difference is due to the net decline in market valuation of the investment portfolio.

Two Different NOL Calculations in the Audit

These distortions continue even when NCUA calculates the formal audited NOL ratio at yearend.  In the 2020 audit footnote 13  states the NOL is 1.26%.  This number is calculated by dividing the total Net Position of $18.9 billion by yearend insured shares of $1.5 trillion.

However in the same audited statement NCUA presents a different way to calculate the NOL and whether a dividend is due credit unions:

The NCUSIF equity ratio is calculated as the ratio of contributed capital plus cumulative results of operations, excluding the net cumulative unrealized gains and losses on investments, to the aggregate amount of the insured shares of all insured credit unions.  (pg 134 NCUA annual audit for NCUSIF, emphasis added)

Subtracting the net gain of $511 million NCUSIF net investments  at 12/20 from cumulative results of operations gives and NOL, per the above paragraph,  of 1.228 or 1.23%.   Which number are credit unions to believe?  Which NOL calculation determines the dividend?

Why Readopting Private GAAP is Critical

The confusions and misleading calculations shown above are just some of deviations from private GAAP accounting financial presentation and audit scope.

Moreover the misrepresentation even extends to how the 1% required credit union deposit true-up is included in the yearend NOL calculation.

The recognition of the 1% required capital true up was a settled financial practice until the board chose to change this in 2001.  Today that change continues to distort the true NOL.

For example the traditional method for NOL calculation followed from 1984 through 2000 would result in an NOL of 1.32% at 2020 yearend. ( a retained earnings ratio of .32 plus 1%) This is much higher than either of NCUA’s two reported calculation methods in the NCUSIF audit.

This underreporting misrepresents the NCUSIF’s actual financial strength and would deny credit unions a dividend if the historical NOL cap of 1.3% had been in place.

For users of the NCUSIF financial statements, Federal GAAP is confusing and misleading.  The NCUA in fact continues to use private GAAP in all three of its other fund annual audits and monthly presentations.

“Fairly presenting” the NCUSIF results for credit unions requires a return to an accounting system which credit unions can understand so they  can monitor their investment in the fund.

Tomorrow I will look at how NCUA has changed the way it charges the NCUSIF for its operating expenses.  And the consequences on the fund’s financial performance.






GAO’s NCUSIF Study Omits the Most Important Data Point

The GAO  released a report in October analyzing the causes of credit union failures from 2010-2020.   The news stories and report lead with two facts:  145 credit unions caused $1.55 billion in losses to the NCUSIF in these eleven years.

The full report  took 16 months to complete and contains appendices full  of math correlations and sophisticated looking analysis.

However it omits the most important fact about these losses.  That is the NCUSIF’s 1.30 Normal Operating Level (NOL) is 93 times larger than the rate of insured losses for this period.  That is a critical actuarial finding.

The GAO failed to put its analysis in any context or perspective.  Any loss is too much.  All credit unions operate in a competitive market.  As noted by Ed Callahan when Chair of NCUA discussing deregulation, “Some credit unions will do better than others.”

The most important issue is the financial impact of losses on the NCUSIF and credit unions.   Using the GAO’s $1.55 bn total, this results in a loss rate on insured savings in this eleven-year period of 1.4 basis points.

The loss  trend is also declining as noted in the study.  Of this total, the report (page 13) says $831.7 million was from the failure of three taxi medallion credit unions in 2018.   That means the 142 remaining credit unions lost $718 million for a loss rate of only .65 of 1 basis point.

In the context of a $20 billion insured fund with total capital equal to 1.3% of insured savings, the fund is 200 times larger than the insured losses if the disruptive event of the taxi medallions is not included.  If counted, the fund as noted, is 93 times larger than the eleven-year  insured loss rate.

Reasons for Failures

Figure 7 on page 19 is a table labelled: Top Material Loss Review Causes or Contributors to Failure by Number of Times Mentioned.

This is the list of the six causes from most to less frequently cited:

  1. Credit Union Board or Committee Oversight
  2. Failure by NCUA examiners
  3. Weak or missing NCUA Guidance
  4. Fraud
  5. Management integrity
  6. Lack of timely and aggressive NCUA action

All of these six areas are why there is an examination of every insured credit union.  These “causes of failure” should be covered in every exam.

The report does not cite economic circumstances or external disruptive events, as in the taxi medallion credit unions, as reasons for losses.  The report began after the Great Recession with losses in 2010 when the economic recovery was well underway.

What the report makes clear is that NCUA’s exam program has much room for improvement.

At yesterday’s November board meeting, the CFO commented that the positive NCUSIF AME recoveries from prior loss estimates has continued into November.   So the net loss reserving expense for 2021 is, in effect, negative.   This means the two most recent NCUSIF loss ratios cited above should be even lower when this year’s results are added to this study’s total.




NCUSIF Investment Decisions Are Hurting Credit Unions

Several days ago, NCUA posted the August financial results for the NCUSIF.

The good news is that the fund continues to show positive net income.  For the first 8 months the year-to-date net is $122.2 million versus $45.4 for 2020.

However, only 13% of the fund’s $19.2 billion portfolio matures in less than one year.

In contrast, at June 30 credit unions reported 53% of their total investments were under one year.  Of that amount over half, or 38% of all investments were in cash and overnights.

Both credit unions and NCUA have access to the same economic forecasts.   Why is there such a dramatic difference in how investments are being positioned in this part of the rate cycle?

At the September board meeting CFO Schied promised to publish the NCUSIF’s investment policy in response to a question from a board member.   The $1.2 billion reported in new August investments shows why this transparency is so urgent.

The most important monthly  decisions by the fund are selecting investment maturities.   The board and credit unions should know  the assumptions committee members used when making these decisions.

The NCUSIF’s August Investments

As listed in the NCUSIF financial report:

8/16/21 T – Note 600,000,000 $ 8/15/2028 1.01%

8/26/21 T – Note 100,000,000 $ 8/15/2026 0.84%

8/26/21 T – Note 100,000,000 $ 8/15/2027 0.97%

8/26/21 T – Note 100,000,000 $ 8/15/2028 1.11%

8/26/21 T – Note 100,000,000 $ 8/15/2025 0.66%

8/26/21 T – Note 100,000,000 $ 8/15/2023 0.22%

8/26/21 T – Note 100,000,000 $ 8/15/2024 0.45%

I calculate an average weighted life of 5.7 years and a portfolio yield at .943% for these seven investments.

The critical question is what were the committee’s assumptions that caused them to lock up $1.2 billion for 5.7 years at a yield under 1%.  These actions also reduced the overnight account of over $1.0 billion in June to just $230 million in August.   It lengthened the portfolio’s average maturity by over 100 days.

The decisions show a seeming absence of any market awareness. Two investments have the same seven-year final maturity.  However between the August 16, $600 million first note purchase, and the August 26 $100 million second note at exactly the same maturity, the yield rose 10 basis points!

This 10 basis point lower yield on the first $600 million will cost the fund and credit unions $600,000 per year for seven years, or a total of $4.2 million over the life of the note.  How did the committee make such an obviously untimely decision?  Why has the committee continued to invest further out the yield curve when the consensus of most economists is that rates will be rising?

Shouldn’t the fund instead be rolling over these  notes in 13 week, 6 month or one year Treasury bills yielding .05% to .15% in order to reinvest these funds as the markets move? For example the two year treasury bill has more than doubled in yield from the .22% return NCUA received in August.

I know of no credit union that would have made these investments with this average maturity and this yield with member funds.   But that is what the committee did.

At the markets close today, the seven-year treasury note yielded 1.414% and has traded as high as 1.5%.

If the $600 million had yielded 50 basis points higher, this would generate $21.0 million over next seven years for the NCUSIF.

Going Forward

For the quarter the major topic on the economy has been inflation.   Is it transient due to temporary structural issues or shooting way beyond the Fed’s 2% target?

The economy’s continued supply shortages are now estimated to extend into mid 2022.  Today  the Fed will release its interest rate and monetary policy steps going forward.   The tapering of bond purchases is expected and many forecasters foresee a Fed rate increase sometime in 2022.

Unfortunately recent NCUSIF investments will be a drag on its revenue for years to come.   Continuing to invest in a period of historically low interest rates using the same ladder approach as in years of more normal rates makes no sense.  These unusual investment decisions hurt credit unions and their members by causing revenue shortfalls for the fund.

The NCUSIF’s incremental investments should instead be rolled over in very short maturities and then re-invested as rates move into ranges consistent with the yield requirements for the NCUSIF’s operations.

The investment committee is presumably the same senior NCUA officials who oversee examination and supervision priorities.  What would their response be to a credit union making these investment decisions?

Timely and transparent presentations of the cooperatively-owned NCUSIF financials is a commitment made by the agency when the 1% underwriting deposit was implemented.   Fund results should be posted as soon as they are ready.

There needs to be a discussion in the published report of the investment actions, or none, made during the month.  That is one critical way to build confidence in the management of this unique credit union resource.   And to insure decisions are made in credit union members’ best interests.








“The Best Damned System in the Country”

NASCUS members’ Annual State Summit meeting  begins today.  It includes a “fireside” chat with new NCUA Chair Harper.  Hopefully this dialogue will be enlightening.  For two of his recent proposals pose an existential threat to the dual chartering system.

The first would fundamentally alter the legal framework of the unique, cooperatively designed NCUSIF, by removing all the guardrails on expenditure.  Harper defends these changes by reference to the FDIC, a premium based fund that has failed repeatedly since the NCUSIF 1984 redesign.

The second Harper initiative is a new three-pronged capital structure for all NCUSIF insured credit unions.  Some credit unions would be allowed to follow the current risk based net worth (RBNW) model. Others would be required to follow the 2015 risk based capital (RBC) rule, yet to be implemented.  A third group of so-called complex credit unions could elect a new CCULR ratio that would raise their well-capitalized requirement by 43% from the current 7% to 10%.

All of these capital changes would take effect on January 1, 2022, or in five months, if Harper is able to get a second board vote.

The End of Dual Chartering

Aside from the lack of any substantive basis for these proposals, the outcome would effectively end the dual chartering system.   Risk based capital would throw a single regulatory blanket over every asset and liability decision made by an NCUSIF insured credit union.

NCUA would be the single hegemonic regulator for all coop charters. This single lens for risk evaluation would create a homogenous cooperative balance sheet.  Instead of increasing safety and soundness, if this uniform approach to risk analysis is wrong, it could lead the cooperative system over a cliff.

The One Sure Defense: Choice

This prospect of NCUA dominance was foreseen decades ago.   The following is a timely and timeless reminder of this threat in a speech by former NCUA Chair Ed Callahan in 1986.   The excerpt of these remarks to the Association of Credit Union League Executives is under three minutes. https://www.youtube.com/watch?v=cTMGvXPnVa8

“The insurer is the regulator.  The system only works when there are choices.”

When Leaders Lack Confidence in their Organization

What would you think if you learned that Warren Buffet was shorting Berkshire stock? Or Elon Musk prefers driving a Lexus?  Or Jeff Bezos doesn’t want to test fly his Blue Origin Space capsule?

None of these situations is true.  And because the opposite is the case, observers’ trust in these leaders and their organizations is sustained.

A Credit Union Example

Seven years ago, in October 2015, NCUA over the objection of board member Mark McWatters, approved a final 424-page RBC rule. This was NCUA’s second attempt to impose this new reg which was as equally unsupportable as the first.  Both attempts were universally opposed by credit unions.

One of the rationales for the rule stated in the 2014 NCUA Annual Report was “the issuance in 2013 of new risk-based capital rules by the FDIC, the office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System.” (page 12)

Certainly, an impressive endorsement by banking regulators.  However, in September 2019 the FDIC with the full concurrence of the Comptroller and Federal Reserve removed RBC requirements for all community banks under $10 billion.  Did NCUA follow its peer’s decision? No, It plodded on, kicking the can down the road even though one of their primary justifications was gone.

What the Rule Says About NCUA’s Self Confidence

But there is another insight, besides bureaucratic obstinacy, to take from the final proposal.

The agency published a two-page summary — Risk Weights At a Glance –as the final summary of absolute and relative risk of every possible balance sheet asset. Three judgments are illuminating.

Credit unions investing in the capital of the CLF have 0 risk.  Since the CLF has not made a loan for over a decade, it suggests how the agency is thinking about the CLF’s role assisting credit unions in the future.

The FHLB’s do make loans to credit unions. To qualify for these, a credit union must buy stock in the bank. NCUA determined these stock purchases should be assigned a 20% risk weighting.

Even though no FHLB organization has ever failed, the agency believes there is still a small risk.  But it is nowhere near the risk of a credit union investing in a CUSO, which requires a 100-150% weighting.

But the most ominous risk is for credit unions’ 1% capital deposit in the NCUSIF.  According to the chart, the 1% deposit cannot even be counted as an asset.  It must be subtracted in full from the numerator of the credit union’s net worth and from the denominator’s total of all risk weighted assets.

It is counted as having no value despite having been untouched for almost 40 years.  It is an earning asset, withdrawable in a voluntary liquidation or conversion to private insurance. On both credit union and NCUSIF balance sheets it is carried at full value.  Multiple national accounting firms have stated this asset “fairly presents” both aspects of this transaction.

What would subtracting this asset mean for the NCUSIF’s Risk Based Capital ratio!  If credit unions cannot count this as an asset, how can NCUA include these deposits in the NCUSIF’s net worth?

One interpretation is that this is just one of many foolish aspects of the final RBC rule which becomes effective January 1, 2022. But there may be more intention than one might think.

A Scary Thought

This NCUSIF total write-off of the 1%  from net worth, like the hypothetical made up examples first above , points to an uncomfortable reality.  This is an agency whose leaders lack confidence when managing the ever growing resources credit unions provide.  And if they lack the understanding of this cooperative fund’s operations, what message is sent to credit union members?

Today the NCUSIF equity level above the 1% deposit totals over $4.7 billion.  Should a loss of that magnitude or more occur, the primary question will not be about the status of the 1% deposit, but where was the regulator?

The cumulative loss rate for he NCUSIF over the past 12 years and two financial crises, is 1.5 basis points.  To project a loss at least 20 times this recent real world experience, is deeply troubling. (2,000 percent, i.e. 30/1.5)

That potential accountability is why the agency wants to eliminate the 1% from credit unions’ net worth today.  NCUA wants to avoid explaining how its oversight allowed such a situation to develop.

Now that is a scary thought.