An Eye-Opening NCUA Board Meeting

Last week’s  NCUA board meeting had only one topic: the financial state of NCUSIF.

The interest rate context for this briefing was described by a CNBC commentator as follows:

“What we’ve seen in the last few years was a cost of money that was 0. Throughout history, that’s very rare. Now we have a cost of money that is high and going to keep going higher.”

The implications of this context were  absent in the initial presentation.

A Puzzling Omission

The CFO’s presentation of the September 30 NCUSIF financial position was the routine reciting of numbers on slides, until the questions started.

Vice Chair Hauptman referenced the fund’s cooperative nature and the importance of transparency.  He pivoted to making a pitch for CLF legislation to enhance liquidity for 3,600 small credit unions and “for the NCUSIF.”  His first question was , what is an appropriate liquidity level for the NCUSIF?  The September overnight number was $362 million.

That’s when the bombshell was dropped.  CFO Shied said that the NCUSIF now held $1.7 billion in overnights. This is almost four times the amount initially presented. This increase was partly the result of $650-$700 million in additional 1% deposits.  Partly because the fund was “pausing on long term investments.”

This $1.7 billion yields almost 4% or three times the year to date yield of 1.31%.  For over a year the fund’s declining NEV showed that the robotic laddering over 7+ years was locking in significant NCUSIF underperformance for  years in the future.

Why this  dramatic balance sheet change was not part of the initial update is puzzling.   It marks a change in the year-long investment explanation that changing the ladder approach in the face of the rise in rates would just be “timing the market.”

No one asked the obvious question.  Is this a change of investment tactics to a managed WAM approach?  Or just a temporary pause?

It was  Board member Hood who brought out the impact of the underperformance of the fund.   His three questions follow.

Q. Given how interest rates have increased, every security we have currently is underwater, correct?  

Answer: That is correct Board Member Hood.  The continued and sizable increases in interest rates mean that the entire portfolio other than the overnights is underwater at this time.

Currently the NCUSIF’s portfolio has lost over $2.0 billion in market value(NEV).  The agency continued NCUSIF’s  auto investment policies even when rates were at “historical lows.”

Now every security in the $22 billion portfolio is underwater.   Even long term securities purchased this year in the rising rate environment.

The result will lock in  below market portfolio yields for a long term (up to the WAM of 3.7 years).  This underperformance means credit unions are on the hook should the fund’s operating expenses (liabilities) exceed its annual income.

Q. At a previous board meetings on the status of the Share Insurance Fund, we discussed the outside accounting firm we hired to look at the true-up issue and how this impacts the equity ratio. For the record, at one of the last share insurance board updates, we discussed that the true-up memo by the outside accounting firm states that the timeliness and accuracy of the data is required in the Federal Credit Union Act so this provision in the law, and I quote, “May provide some latitude from a strict interpretation, that the equity ratio must be calculated based on the financial statements amounts, particularly given the knowledge of the timing effect on the calculation of the equity ratio. Accordingly, it may be permissible to use the pro forma calculation of the contributed capital amount when calculating the actual equity ratio.”  In a previous board meeting, I noted that the letter pointed out the current practice understates the equity ratio by several basis points and that there were several options for correcting this understatement.  Can you please provide an update on next steps?

CFO Schied said a committee was studying this issue.  The memo in question was presented a year earlier.  One would hope that this considerable delay would result in a more accurate NOL calculation. For as Hood noted the present calculation  understates the actual yearend ratio by 2-3 bases points.

Q. I see several sizable institutions changed in their CAMELS score.  Is there any takeaway from these data?  Do we think any of this has to do with the new “S” component–or any individual scoring component? 

Answer: This does include elevated interest rate risk, but examiners also noted increased liquidity and compliance risk in these institutions. The downgrade in CAMELS ratings also reflects a lack of governance or poor risk management practices.

Not a Liquidity Issue but Risk Management

Other board members spoke to the importance   of liquidity.  This has become more pressing as any sale of a security from the portfolio would result in a realized loss to the fund.

With an NCUSIF portfolio nearing $22 billion and regular predictable cash flow, the last concern should be liquidity.

Credit union owners should receive more than a perfunctory reading of data on slides when an NCUSIF update is presented.   The critical issues of investment performance, NEV risk management and detailed explanations of allowance expenses should be the routine.

Anyone can read numbers on a slide.  What they mean should be the substance of every update.  It should not require board questions to discover that the data presented was not timely, relevant or representative of current conditions.

Hood’s questions show the need for better risk management in the NCUSIF.  They also demonstrate the need for a more professional and current briefing by staff.




SIF’s Slippery Slope Slide Speeds Up

By Sancho Panza

As you might suspect, got a call from Don Quixote after that last opinion piece (“Tilting Windmills”). The Man from La Mancha, Illinois was, shall we say, wild-worded and a bit tilted.  Quixote claimed I had definitely blown any chance of ever serving on the NCUA Board. I attempted to express my regret.

But aghast and inconsolable, Mr. Filson mounted up and charged off into a philippic on another of his favorite windmills, the NCUSIF (a topic about which he blogs incessantly and quite opaquely!).

The National Credit Union Share Insurance Fund is your 1% deposit plus accumulated earnings, which undergirds the federal insurance of member accounts. The NCUSIF (agency staff’s nickname is SIF) is cooperatively owned by credit unions and mismanaged by the NCUA.

The continued mismanagement of the Fund is surprising for two reasons – Rodney Hood and Kyle Hauptman. Both gentleman imply in their resumes to have substantial acumen and experience in finance – Mr. Hood with Bank of America and Mr. Hauptman with Jeffries, a sophisticated, international investment house.

And of course as Republicans, one would hope that both men champion the prudent, conservative investment of your funds while under their supervision. Neither Mr. Hood nor Mr. Hauptman, however, seems to be paying attention. For the Republican-majority NCUA Board members is this yet another RINO  (“Responsible In Name Only”) example?

Robots and Ladders

Case in point, the NCUA’s “investment strategy” for the NCUSIF – your deposit, your investment, your Fund – is to invest the @$20 billion balance in U.S. Treasury securities with maturities “laddered out” over 10 years or less. “Laddering” simply means NCUA robotically spreads out that $20 billion evenly (approximately in this case) over seven or eight years.

NCUA’s investment gurus self-laud their approach, comparing it to “dollar cost averaging”; and pooh-pooh any suggestion of intelligent, strategic flexibility as  “risky market timing”. ‘Course it’s true, you can’t be called indecisive, if you never make any decisions. In investment circles this type thinking is called “real A.I.” – or true artificial intelligence.

But, let’s not argue with the “strategy”, let’s talk about the consequences to you of its’ execution. Any strategy, which defies common sense and ignores major shifts in the national economy, will invariably cause significant losses to the investor – that means you, the cooperative owners of the NCUSIF. How so? Well, did you know that any excess earnings on NCUSIF investments (over and above the legally required “net operating level” (NOL) of the Fund) are required to be paid out to the owners of the NCUSIF – hey, that’s you, your credit union and all 135 million American credit union members. Want an estimate of how much NCUA’s “real A.I.” strategy is costing member credit unions?

The Critical Question

Okay, here goes. First, which way do you believe interest rates are moving – up or down? Right! How did you know? “Because I can read!” is an acceptable, sensible answer. But in addition, you might add 1) because Jerome Powell, Chairman of the Federal Reserve says so, 2) because 10,000 of the world’s finest economists at the Department of Labor say inflation in the U.S. exceeds 8%, 3) because the slope of the yield curve, and lastly 4) because Jerome Powell says so. Everyone in finance, except the folks at NCUA (including RINOs?), knows the axiom “Don’t Fight the Fed” – if you do, you’ll lose!

Second, so if Chairman Powell had been telling you all yearlong that the Fed was going to increase rates rapidly and significantly – a major national policy change – would you rush out to lock in some 7 and 8 year, long term – sure to be underwater losers – investment rates? No, me neither; nor anyone on the planet including Bank of America, Jeffries, and your 6 year old preschooler – that would truly be “real A.I.”

Yet, that is exactly what the pointy-headed, investment gnomes at NCUA are doing with your money in the NCUSIF – evidently with the full support of the NCUA Board, RINO’s [“Relevant In Name Only”) included! Reinvestment activity at the NCUSIF historically occurs around mid-month in February, May, August, and November. In February $650 million was invested for @ 7 years at a yield of 2.01%, in May $650 million for @ 7 years at a yield of @ 2.84%. The August investment results will be released today at the NCUA Board meeting. Surely the folks at the NCUSIF didn’t repeat their mistakes of February and May – right?  (Wanna bet?)

The Cost of A.I.-Artificial Intelligence

Seven-year treasury securities as of 9-19-2022 are yielding 3.62%. Every one of the NCUSIF investments made in 2022 is substantially underwater.  In fact the “unrealized loss” in the NCUSIF portfolio has increased by over $1 billion in 2022 alone, following a similar $1 billion+ decline in 2021 – with much more to follow according to the Fed!

The “real A.I.” investment gurus at NCUA self-importantly and incorrectly point out that “unrealized losses” don’t matter, because the NCUSIF “holds to maturity” all investments. In a sense that is true because “holding to maturity” does wash out all their investment missteps over a 7 or 8 year period – their mismanagement never shows up on “their” income statement, so no big deal – right? No, that’s wrong! NCUA’s “real A.I.” strategy, in the current economic environment, wastes any prospect of your credit union receiving a premium payout of greater NCUSIF earnings – you’re the loser, as are your credit union members..

So, here’s the “real Republican” estimate – well-reasoned, conservative – of what “real A. I.” is costing you and your members. To start, assume Jerome Powell is a man of his word – a real Republican. On August 15, 2022 (the last NCUSIF investment date) the 7-year treasury was yielding 2.86%, the 6-month treasury was yielding 3.13%!. What if that last $650 million had been invested for just 6 months, while we all waited to see where the yield curve settles out? An intelligent, no brainer? An irresponsible, missed opportunity? A RINO alert?

The Lost Opportunity

If one could improve the overall yield of the NCUSIF by just one-half of one percent, the “excess earnings” would exceed $750 million ($20 billion x .50% x 7 years = $750 million). Remember the 7-year yield is now at 3.62% (with Powell promising more to come!), but we’re stuck with the 2.01% February and 2.84% May investments for the next 7 years! Would credit unions have any use for $100 million or so in extra income this year? If not; don’t worry, be happy!

A couple of rhinos skiing downhill in winter is quite an amusing thought. A couple of RINO’s frolicking in “the Swamp”, while ignoring the yield curve in an election year, isn’t quite so funny and could become a slippery slope.



The NCUSIF Look Back: Its Vulnerabilities after 40 Years

The radical, cooperative redesign of the NCUSIF was approved by the NCUA board in October 1984.

In this board meeting video excerpt, Chairman Callahan thanked all who had worked to put this new “safety net” in place.  He called it a “great victory that is truly unique and sets the credit union system apart from all other financial institutions.”

Board member PA Mack stated his support of the new plan:  “I think this is an outstanding product as a partnership among government and credit unions. “

Chairman Callahan closed with these words about what it would take for this redesign to succeed:  “The real challenge now goes to the people at NCUA. The system can work beautifully for credit unions in the future. . . the real secret now is the operations.” 

This look back suggests the wisdom of Ed’s insight.  For the unique structure is only as effective as the people responsible for its implementation.

Immediate Success Brings Temptations

In NCUA’s  1985 NCUSIF’s Annual Report, the board  led by Chairman Roger Jepsen reported that in the first year the restructuring had “returned over $275 million in tangible benefits” to credit unions.  (Page 5)

The major initial concern was whether the agency’s multiple supervision efforts to resolve problem situations could reduce the losses charged to the fund.    The 1985 Report reported five-year trends that documented losses for all liquidations at only 1.5 basis points of all credit union insured savings.  Net losses in closed credit unions were $3.1 million, the lowest in the previous five years. The fund’s $29 million dividend at yearend was a payout ratio of 46% of  net income.  The Fund still maintained its 1.3% equity ratio.

But the fund’s fourfold increase in size, revenue, earnings and financial success also resulted in changing the long-standing practice of how the agency’s operating costs were allocated to the NCUSIF. From 1981 through 1985,  this allocation had ranged from a low of 30.5% to 34%.  This ratio aligned with the percentage of state charted credit unions insured by the NCUSIF.

At yearend 1986, state charters were just 33.3% of all NCUSIF insured institutions.   However the NCUA board increased the indirect expense to 50%.   As stated in that year’s Annual Report “The cost of these services which totaled $16,821,936 and $8,069,244 for the years ended September 30, 1986 and 1985, respectively, are reflected as a reduction of the corresponding (operating) expenses in the accompanying financial statements.”

The NCUA’s operating expenses charged to FCU’s “declined” from $21.5 million in 1985 to $17 million in 1986. This 100% increase in the NCUSIF’s expenses reduced the operating fee paid by federal charters. There was no change in the proportion of state chartered credit unions covered by the NCUSIF. This was an easier political option than raising the fee charged FCU’s.

This 50% increase in the expense allocation highlighted the most frequent concern expressed by credit unions about the new plan.  Here are some questions asked at a Q & A open meeting about the plan as reported in NCUA’s 1984 Annual Report:


What if the fund doesn’t operate on the interest earned?  If you don’t pay a dividend?  What happens if the agency is poorly run?  (pages 18, 19)

The concern was specific.  If the agency was given more money, wouldn’t it just be tempted to spend more?   Could the agency change the guardrails at its sole discretion?

This 50% increase in the Overhead Transfer Rate (OTR) was just the beginning of efforts to use the increased resources, not for insurance costs, but to underwrite the ever expanding agency budget.

“Building Out” The Agency

Soon after the 1986 OTR adjustment, the NCUSIF became the funding source for the NCUA’s building aspirations.  In 1988 the Operating Fund “entered into a $2,161,000 thirty-year unsecured note with the NCUSIF for the purchase of a building. . .In 1992, the Fund entered into a commitment to borrow up to $41,975,000 in a thirty-year secured term with the NCUSIF.  The monies were drawn as needed to fund the costs of constructing a building in 1993.”  (NCUA 2003 Annual Report pg 52.)

The variable rate on both notes was equal to the NCUSIF’s prior month yield on investments.  The interest was paid by the Operating Fund, 50% of whose expenses were then charged back to the NCUSIF.  The NCUSIF loaned the money and then paid half the interest on the loan!

It should be noted that during this construction and move to a new building in Alexandria , VA financed by the $42 million loan, the NCUSIF still paid a dividend  every year from 1995 through 2000, as the fund’s yearend equity ratio was above the 1.3% cap.

A Double Whammy in 2001

The Fund’s financial management which had produced six consecutive annual dividends was altered in two significant steps in 2001  by the NCUA Board.

The first was to increase the percentage of the fund’s OTR from 50% to 66.6%.   This resulted in a 37.3% growth NCUSIF’s operating expense while the operating fund reported a 31% decline in expenses in just the first year of this change.

The operating assessment for FCU’s fell by 20.4%.  The NCUA board was able to lower this fee on all FCU’s by shifting the expenses internally to the NCUSIF funded by all credit unions.

Each year since 2001, NCUA has calculated a different OTR’s based on “a study of staff time spent on insurance-related duties versus supervision-related duties.”   This ever fluctuating OTR peaked at 73.1% in 2016 under Chairman Matz.

During the past two decades of variable OTR, the percentage of state chartered credit unions in the NCUIF has remained more or less constant.    At June 30,2022 the 1,811 stare charters were only 37.3% of all FISCU’s.

The second administrative action was more consequential, because it modified how the normal operating level (NOL) was calculated and thus when the dividend is required. In a footnote 5 to the NCUSIF’s 2001 audited financials the following change was announced:

The NCUA board has determined that the normal operation level is 1.30 %  at  December 31, 2001 and 2000.   The calculated equity ratio at December 31 was 1.25%. The equity ratio at December 2000 was 1.33% which considered an estimated $31.9 million in deposit adjustments billed to insured credit unions in 2001 based upon total insured shares as of December 31, 2000.  Subsequently, such deposit adjustments were excluded and the calculated equity ratio at December 31,2000 was revised to 1.3%.

The Fund reversed its year earlier NOL determination. But even with this retroactive adjustment to the December 2000 equity ratio, the footnote continued:  Dividends of $99,490,000 which were associated with insured shares as of December 31, 2000 were declared and paid in 2001. 

Since the 1% deposit redesign in 1985, this annual adjustment has always been collected  in the following year.   And until this 2001 modification, the retained earnings/equity ratio was based on yearend insured savings.  A dividend was paid if retained earnings exceeded the .3% cap.

By not counting the 1% true up until the amount was billed results in an understatement of the actual NOL. It eliminated a dividend in years when the ratio would have exceeded the .3% cap under the prior practice, starting in 2001.

The Ultimate Guardrail Change

Since 1985, the NCUSIF normal operating level (NOL) had always been set at 1.3%.  In many years the cap was not reached, but the resulting ratio was considered adequate even if under the cap.  During and after the Great recession, the Board did not change the 1.3% cap even though they had been authorized to do so in the 1998 CUMAA.

Then in 2017 the board voted to merge the surplus from the TCCUSF into the NCUSIF.  But this surplus would have raised he NOL to greater than 1.5%.  To retain this amount above the traditional 1.3% cap, the board took two actions.  It raised the cap to 1.39%, the first time this change had ever happened.

The agency also immediately expensed and added to loss reserves $750 million from the TCCUSF surplus to pay for potential losses in natural person credit unions.   This action directly contradicted the congressional language establishing the TCCUSF that the fund “was not to be used for natural person credit union losses.”  But it did reduce the NOL to 1.39% even after setting aside a dividend for credit unions from a portion of the surplus.

This was the first time that the cap had been raised above the longstanding 1.3 level.  No verifiable details were provided about how this new level was determined except for summary data unsupported with actual calculations.

NCUSIF Success Raises Temptations

Credit unions’ concerns about supporting a perpetual 1% underwriting were well founded.  Their worry was “If we send more money to the NCUA, won’t they just be tempted to spend it because that is what government does.“

Subsequent NCUA boards have converted the “partnership” understandings referred to by Board member PA Mack into a perverse interpretation:  that to “protect the fund” the agency has to spend more and more on its operations to accomplish that objective.

From 2008 through 2021, the NCUSIF spent $2.2 billion on operating expenses and only $1.88 billion on actual cash losses.

NCUA has converted the fund into the agency’s cash cow. It has transferred much of its annual budget increases to the NCUSIF.   For example in 2012 the operating fund expense was $90.6  million; six years later in 2017 the expenses were still only  $90.3 million   All of the annual increases in the agency’s operating budget and more, in this six years, were paid by the insurance fund.

Federal credit unions became “free riders” as the operating fee paid an increasingly smaller share of the agency’s expenses.

The NCUA Board’s Responsibility: A Legacy Being Squandered

While staff proposes, the board disposes of their recommendations.  NCUA and its budget are literally exempt from any outside approval.  The agency is independent.  This absence of oversight raises responsibility of political appointees.

The annual OTR transfer have lost any connection to insured risk.  Instead they remind one of a person declaring their waistline to be 32″; but then, when you gain weight, redefining 32″ as whatever your waistline happens to be.  Insurance activity is whatever we want it to be.

The shortcomings have been bipartisan.   Republicans and democratic appointees have repeatedly affirmed transparency and actions to protect the fund.  But in practice the agency has declined to release the accounting options provided by its own outside CPA firm Cotton, the details in setting its annual NOL limit above 1.3, or the investment options and risk analysis used in managing the fund’s portfolio.

Every NCUA board member inherits a unique cooperative legacy in the NCUSIF that requires both knowledge and diligence if the fund is to be sustained.  This responsibility takes work and continual vigilance.

When the critical guardrails of the fund are modified one by one, the initial signposts of success are forgotten, and critical facts routinely omitted, then the prospect of a sound NCUSIF future is undermined.

The most important success factor in the Fund’s special public-private partnership is the ability to ask hard questions.  When this is not possible for board members to do and to followup, then it is up to credit unions or Congress.

A Lookback: The NCUSIF Four Decades after Redesign (1985-2022)

Knowing the past is essential to understanding the present and charting the future. This is true for individuals, institutions and society.

History provides us with a sense of identity. People, social movements  and institutions require a sense of their collective past that contributes to  what we are today.

This knowledge should include facts about our prior behavior, thinking and judgement.  Such information is critical in shaping our present and future.

The NCUSIF’s Transition Story


The NCUSIF legislation was passed by Congress in October 1970 authorizing  a premium based financial model imitating the FDIC’s and FSLIC’s  approach begun four decades earlier. This multi-decade head start was how those funds achieved their 1% required statutory minimum fund balance. This reserve growth occurred  during the post-war years of steady economic growth with only modest cycles of recession.

Then the economic disruption with double digit inflation and unemployment of the late 70’s and 80’s led to the complete deregulation of the financial system established during the depression.

Ten years after insuring its first credit unions, the NCUSIF’s financial position at fiscal yearend September 30, 1981, was:

Total Fund Assets:   $227 million

Total Fund Equity:    $175 million

Insured CU assets:    $57 Billion

Total Insured CU’s:    17,000

Fund equity/Insured shares:   .30%

CUNA president Jim William told NCUA Chairman Ed Callahan before his GAC speech in 1982, the dominant concern of credit unions was survival.

Because the fund equity ratio was so far short of its 1% legally mandated goal,  NCUA  implemented the only available option  to increase the ratio.   Double premiums were assessed in 1983 and 1984 totaling 16 basis points of insured savings for every insured credit union.

However, the ratio continued to decline primarily due to increased losses from the country’s macro-economic challenges. These trends and the prospect of double premiums caused  credit unions to ask if there were a better way.

The history of the analysis of the fund’s first dozen years leading up to these changes is in this seven minute video from the NCUA Video Network.

In April 1984, NCUA delivered a congressionally mandated report on the history  and current state of the NCUSIF.  It included the development of private, cooperative share insurance options and league stabilization funds.  It presented four recommendations to restructure the NCUSIF from a premium revenue model, to a cooperative, self-help, self-funding one.

Today’s NCUSIF after 40 Years

The four decades of NCUSIF performance since 1985 have proven the wisdom of the redesign and generated enormous financial savings for credit unions versus annual premiums.

Today the NCUSIF is $21.2 billion in total equity giving a fund insured share ratio of approximately 1.29%.   This size represents a 12.7% CAGR since 1981 when the fund’s equity was  just $175 million.

The critical success factor  of the 1% cooperative funding model is that it tracks the growth of total risk with earning assets, whatever the external economic environment.

This was and is not the fate of the premium based funds. The FSLIC failed and was merged into the FDIC in 1994.  The FDIC has assessed an annual premium(s) on total assets every year since the 1980’s.

The FDIC’s ratio of fund equity to insured shares at March 31, 2022 was 1.23%, down from its peak of 1.41% in December 2019.   On a number of occasions, the FDIC fund has reported negative equity during financial crisis.

NCUSIF Twice the Coverage Size of FDIC

It should also be noted that FDIC insured savings are only $10 trillion (41%) of the $24.1 trillion total assets in  FDIC insured institutions at the end of the March 2022.  The FDIC  is only .51% of all banking assets.

For credit unions insured shares are 78% of total assets.  Today, the NCUSIF’s total assets are  1% of all credit union assets, a ratio two times the size  of the FDIC’s.

Five Decades of Reliable, Sound Coverage

Throughout the redesigned NCUSIF’s history, a premium has been assessed to augment the fund four times: 1991 and 1992; and 2009 and 2010.   In both situations the premiums were levied based on reserve losses expensed but then subsequently reversed in later years.

In 1985, the fund’s first full year of the redesign, NCUA reported “for the first time ever, the NCUSIF paid a dividend.”   The NCUSIF Annual Report further stated that “credit unions were returned $275 million in tangible benefits.” (page 5).  This from a fund that just four years earlier reported $175 million in total equity.

The fund continued to pay dividends including six consecutive years from 1995 through 2000, and again in 2008 when the equity ratio was above 1.3%.

These results were achieved because of a collaborative partnership between NCUA and credit unions.  The changes were based on an analysis of prior events.  Options were evaluated and based on open dialogue at every stage.  Ultimately this consensus for change was critical in obtaining congressional support for this unique cooperative solution.

The redesign included commitments by credit unions to guarantee the fund’s solvency no matter the circumstances. But it also mandated guardrails on agency options and required transparency in reporting and managing the fund’s assets.

The NCUSIF four decades of performance has also provided a valuable record for reviewing credit union loss experience in multiple economic circumstances and events.   It provides an audited account of actual losses during the many years when there are none and credit unions received a dividend.

But it also documents the actual cash losses in the four or five short recessions or economic upheavals such as the aftermath from the 9/11 attacks, the Great Recession and the most recent COVID economic shutdown.

The NCUSIF’s record is sound.  It is proven. The facts are known.   So what could possibly go wrong?

Tomorrow I will review the temptations awakened by the NCUSIF’s successful track record.





The Harm from an Absence of a Cooperative Policy Framework (Part II of II)

Yesterday (August 29) a press release from the North Dakota Credit Union League described NCUA’s turning a deaf ear to their request for their credit union members’ $10 million pro rata share of US Central’s AME surplus.

The final total may actually exceed $12.7 million based on NCUA’s March 2022 AME projected US Central distributions.

The NCUA’s Claim receipt states:  Upon final liquidation of the USC liquidation estate, this claim receipt will enable you to share  in the net proceeds, if any, to the extent of your PIC and MCA balances as of the record date.  No further action is required on your part to file or activate a liquidation claim.

The Dakota League’s title says it all: Time for NCUA to Do the Right Thing.  Its release points out Iowa credit unions are in the same situation. One might also ask how are all the corporate member shares of credit unions who were merged before AME payouts began being distributed? (example, Constitution Corporate)

Moreover, all credit unions  are still waiting for an update on the remaining $451 million of the reported $846 AME surpluses as of March 31, 2022.

These are just the most recent examples in which NCUA seems indifferent to its responsibilities to put credit unions and their members’ interests first.  This “me-first” approach is not lost on credit unions’ own activities.

Members’ Best Interests No Longer?

Lacking a cooperative policy framework, NCUA claims it is powerless when obvious conflicts of interest and direct subordination of fiduciary responsibilities by boards occur.   The members’ best interests becomes a forgotten standard.

For example, consultants overtly market “change of control” clauses for CEO’ contracts, a perverse interpretation of its real intent since coop CEO’s are the ones who initiate their own mergers.  The most recent example is a $750,000 payment in the merger of Global Credit Union. CEO contracts are a board responsibility.

A CEO and chair transferred $10 million of member equity to a private foundation they alone created upon merging.  The foundation is to be financed by another $2.5 million from the ongoing credit union-a clear conflict of interest. NCUA routinely approved this diversion of members’ equity to private party’s control.

Without a cooperative policy framework, the NCUA’s only test of a credit union’s sustainability is financial.  This is the “safety and soundness” mantra.

That standard is similar to saying that a person’s character and contribution is measured solely by their wealth. That is the value-agnostic success criteria that animates much of the capitalist system.

This policy vacuum undermines the unique advantages of the cooperative model and its long term safety and soundness.  Members become customers with profitability profiles.   A credit union’s resilience is nothing more than a quarterly tracking of net worth trends.

Soundness requires continual investments in members’ best interest, not merely fulfilling management’s personal ambitions.  A regulatory framework for cooperatives should be a collaborative effort.  It is not an NCUA internal task responsibility alone, like a budget, to be put out for comment.

Policy  would address current operational  issues that threaten the system’s character and integrity.  It will entail provocative conservations about current topics such as:

  • mergers of sound credit unions
  • the regulatory hurdles and lack of new charters
  • the suppression of members’ ability to vote for directors
  • the absence of member transparency on consequential decisions such as buying banks or adding ten-year debt/capital notes
  • reducing real regulatory burdens and enhancing NCUA transparency
  • the roles of CLF and NCUSIF-distinctly cooperative institutions reliant on credit union funding.
  • Increasing required disclosures for all credit unions including salaries for all federal credit union’s senior executives as is now required for state charters.

One outcome might even be a cooperative scorecard which would assess each credit union’s use of their charter’s unique abilities.

Not Perfection, but Setting Directions

A policy framework does not mean all the resulting regulatory judgments or approvals will be  uniform.   A regulatory framework should encourage better decisions  supported by objective data as well as the cooperative and legal documented processes of fiduciary oversight and care.  Conflicts of interest should be called out.

Experience suggests policy outcomes may be like the biblical parable of “weeds and wheat” grown together. That’s a risk but less so than the “anything goes” practices today.

Credit unions are and always will be a combination of good intentions and variable performance. They are run by human beings. Not all choices will be perfect. This mixed bag is the reality of freedom.

Both credit union leaders and regulators make mistakes. It is acknowledging when that happens.  Then  learning from the event, not defending the errors.

This mixed reality doesn’t mean regulators and credit unions can avoid the diligence and accountability that should characterize credit union decisions.  It’s not okay for self-interest to be the dominant standard for an action.

All are free to make mistakes and sometimes fail, but that does not mean there are no standards to be followed.

Cooperative assessments are important for another reason.  Credit unions, unlike their competitors, are not subject to the market’s daily judgments of management’s actions.   Coops lack bank’s  external check and balance on institutional performance whether through daily stock price fluctuations or the oversight of private ownership interests.

If cooperative standards are not part of the movement’s culture, then credit unions will tend to become just another financial option increasingly indistinct in a crowded marketplace. This will lead Congress to ask why this system should retain the tax exemption that would appear to be their only defining advantage.

The cooperative framework should enhance the never-ending task of credit unions becoming better cooperatives.  Nobody is perfect.  But reducing regulatory oversight to a standard that says  7% versus 14% net worth is better at meeting members’ needs is shallow and unhelpful.

Developing a Cooperative Policy Framework

In 1984 the credit union system redesigned its share insurance fund following 18 months of study, comment, and public dialogue about future options.  The recommended changes then required congressional approval.

This success was the product of extensive collaboration and interaction at every  level of the credit union system.  This effort was described in this brief introduction of NCUA’s implementation video by then chairman, Ed Callahan:


A cooperative policy process should be collaborative, transparent and yes, controversial.  It should be democratic, public  and seek consensus on shared interests. Policy must encourage credit unions as communities of possibilities, not conformity.

An Alternative Path?

Without this policy framework, continuing examples of a “race to the bottom” business practices may put all credit unions on a path similar to the S&L industry with no turning back.

That does not mean credit unions (taxed or not) will disappear.   But it does suggest their separate regulatory apparatus will be absorbed by the FDIC, OCC and the FED. This is where the 602 institutions and $1.5 trillion savings industry is now regulated.

Why have a separate NCUA cooperative regulatory system if all it does is mimic the banking model?




The Missing Framework for NCUA Success (part I of II)

It is an accepted truism for NCUA board members presenting their credentials  for Senate confirmation, or whenever the agency is justifying a new rule, reg or policy, to state their ultimate goal is “to protect the insurance fund.”

Current board members have even called that objective their goal or North Star.  Their primary job.

This assertion turns upside down the logic of means and ends.

What is NCUA’s End Purpose?

NCUA’s primary responsibility, its purpose,  is encouraging and sustaining the resilience and integrity of a cooperative financial system for American consumers.  The FCU Act states:

The term Federal credit union means a cooperative association organized in accordance with the provisions of this chapter for the purpose of promoting thrift among its members and creating a source of credit for provident and productive purposes

To achieve this end, NCUA was given multiple means in the law:  chartering, examinations, supervision, administration of charter changes, issuing regulations and providing expert guidance.   The tool least used, as it is rarely needed, is calling upon NCUSIF.

Most importantly, the FCU act specifically states the NCUSIF’s financial solvency is protected by the full faith and credit of the credit union system.   All members must deposit and maintain 1 cent of each share dollar in a credit union with the NCUSIF.  Every member is part of this collective guarantee ensuring all other member shares are indeed safe. This is a cooperative movement commitment, unique to the NCUSIF.  It is the law.

If all of NCUA’s every day tools ( the other “means”) are effectively managed, then the members should never be called upon to provide additional resources.  That is how NCUA protects the Fund.

The first four-decades of regulatory responsibility to maintain cooperative system integrity from 1934-1971 did not require the share insurance tool.

One aspect of “integrity” was certainly promoting credit union solvency as there has always been reserving and net worth requirements in the law.

But just as important, system “integrity” (as a source of credit) also included vital cooperative components to provide a distinct financial alternative for members.  These  include democratic governance, values such as education and collaboration, volunteer leadership (unpaid directors and committee members), access for all Americans regardless of financial circumstance (capital), focus on community (common bond), and contrary to the capitalist model, building common wealth versus private equity, to be used by future generations .

Over time additional characteristics have been developed including interdependence (corporates and CUSO’s) and system support augmenting the critical initial role of sponsors.

A Reward for Performance

When Congress approved the NCUSIF for credit unions in 1971, it was a reward for their performance.  As stated at that time, insurance was not due to financial problems with credit unions or the cooperative system.  Rather it recognized their growing contribution to the American economy and that they might not perceived by the public as the equal of their FSLIC/FDIC alternatives.

A Cooperative Policy Framework Is Lacking

For NCUA to faithfully fulfill its mission to protect the integrity of this cooperative financial alternative, an appropriate regulatory policy framework is necessary. Such a framework should be nonpartisan and multi-administration.  Past examples are the deregulation of shares by NCUA or the redesign of the NCUSIF.

Without a thoughtful and evolving framework, NCUA becomes a mishmash of regulatory justifications or each Chairman’s personal priorities.  What do the banking regulators do?  Or let the “free market” work its will.  Or elevating suboptimal tasks and agency operations  to define priorities.

Absent a policy framework, the unique role of cooperatives becomes increasingly confused with all the other financial activity in the marketplace.   No longer are the well-being and rights of member-owners front and center.  Bright shiny objects such as innovation and new technologies take center stage.

The ambitions of managers and boards seeking to outgrow their for-profit competitors become the industry’s defining priority.  Some credit union leaders chart success not by developing a better alternative to attract members, but rather using their decades of member reserves for buying out bank owners at a premium.

That activity would certainly seem contrary to the spirit of the Act.  And therefore worthy of public debate.

Credit union CEO’s, nearing retirement, game the system for personal enrichment  “selling their credit union” via merger.  They capitalize on the transfer of members’ accumulated wealth and loyalty for additional bonuses and extended payments beyond those merited as CEO.

In these transactions, the financial and relationship legacy, its goodwill, is turned over to boards and CEO’s with no prior connection.  And justified only with vague future promises that bigger is better.  The unique character of the charter and its local legacy and traditional focus are eliminated.

Tomorrow Part II, developing a policy framework.

The $846 Million Missing Item From Thursday’s NCUA Board Agenda

While NCUA’s $350 million annual budget is the primary Board item, that is not the most important financial issue.   For there is unfinished business stretching back over a decade.  The agency owes credit unions an amount that is 250% greater than the budget it will be discussing.

Here’s the details.

In March 2009 NCUA Board member Rodney Hood along with Chair Michael Fryzel and member Gigi Hyland voted to conserve US Central Credit Union and WesCorp, the two largest corporate credit unions.

My hunch is that board member Hood never expected to be overseeing the continued distribution of US Central’s almost $2.0 billion surplus thirteen years later during a second term on the Board.

Credit Unions Due $846 Million

As of the March 2022 AME financial reports for the five liquidated corporates, NCUA projects over $846 million is remaining to be paid. The majority, $556 million, is from US Central’s estate.

When completed total AME payments to credit union member shareholders will exceed $3.2 billion.   As a comparison, the total capital of the eleven active corporates at December 2021 was only $2.5 billion.

Put bluntly, the collective funds returned by the four liquidated corporates is 132% great than all the equity in corporates active today.  Closing these solvent corporates was a catastrophic error in  judgment!

The March 2022 AME financials presents the total forecasted payments to the four corporate’s members and the remaining amounts due.

US Central:     $1.832 billion with $ 556 million due

Mbrs United:  $  622  million with $130 million due

Southwest:      $  613 million with $127 million due

Constitution:   $     48 million with $  32 million due

There are no payments for the $1.1 billion of credit union member capital at WesCorp.  NCUA projects a WesCorp deficit after all recoveries at $2.1 billion.  This is the only loss to the NCUSIF from the five corporate liquidations.  (from line B4-Due to Government March 2022 AME financials)

Total Corporate Surplus Now Tops $5.8 Billion

The above amounts do not include the $2.563 billion added to the NCUSIF when the TCCUSF surplus was merged on October 1, 2017.   Adding this amount brings total recoveries to almost $5.8 billion.

This surplus continues to point the need for an objective review of the entire corporate resolution effort.

When US Central was seized in March of 2009 NCUA Chair  Fryzel was quoted in a Wall Street Journal March 21 article:  “With us in control, we’d get honest numbers.”

If subsequent events have shown anything, it is that  “honest” numbers in an environment of uncertainty depends on who does the accounting.   Especially when the underlying process relies on valuation  models that claim to project the economic climate and related cash flows  years or even a decade into the future.

The Core Regulatory Failure

The problem is not the models or their incorrect assumptions, both of which were wrong.  The error is that predictions should not be the primary basis for resolution strategy.  All models are wrong; some are useful.

The required response is managing the daily dynamics as markets change.  Trying to predict the future  as the basis for today’s tactics led to disastrous decisions in NCUA’s  assessment of the corporate assets.

With NCUA’s ALM/NEV supervisory tests becoming more prominent in today’s rising rate environment, the limitations of financial modeling  is a much needed lesson to bear in mind.

The Need for a Look Back

But a look back is important for another reason.   Still today NCUA Chair Harper and senior staff use the apocalyptic estimates and conjectures thrown out in 2009 as NCUA  projected future events.  The hyperbolic forecasts were incorrect then; it is double injury to repeat them today when the actual facts are known.

In the same WSJ article above, Chairman Fryzel was quoted:  “regulators aren’t concerned about the health of any other wholesale credit unions besides the two brought into conservatorship.”  Yet just a year later when no longer chair, member Fryzel supported the liquidation of three more corporates, a decision that was devastating for the system and individual corporates.  Both Southwest and Members United are paying liquidating dividends on top of returning all their members’ capital shares.

By forecasting disaster, NCUA took unilateral action without any industry involvement except paying the bills.  There was no check and balance, no transparency and no alternative solutions developed.

Unfortunately, that unilateral regulatory mindset continues today.  It undercuts the unique cooperative advantage of collaboration represented in the common credit union funded resources  in the NCUSIF and CLF for individual turnarounds.

The most important takeaway from the corporate debacle is not estimation failures or the value of patience when resolving problems.  Rather it is NCUA’s failure to understand the unique cooperative capabilities when developing regulatory work out plans.

That lesson should include respect for the institutions in difficulty and a willingness to work together for solutions versus liquidating problems to make them go away.

The one board member who is best positioned to state the importance of this learning opportunity is Rodney Hood.  He was there at the Alpha and now hopefully, the Omega.

His counsel should be heard.  And credit unions should get their funds back ASAP. Enough delays!

PS:  I hope a board member will ask what the additional $10 million in liquidation expenses paid (outside the NCUA budget) in the first quarter from the AME recoveries was used for.


When Less Is More: NCUA Board’s Mid-Year Operating Budget Review

This coming Thursday the NCUA board will review the agency’s midyear budget.  To do so thoughtfully, it is useful to put the operating budget’s long term and recent trends in perspective.

Below is a summary of the growth rate of NCUA’s operating fund budget from 1999-2001.  The first column shows the compound annual growth (CAGR) for the entire period; the second column for the most recent five years.   Note the annual growth rate is per year.

  Annual Growth of NCUA’s Operating Fund Expenses (1999-2021)


Account CAGR’99-’21 CAGR ’16-’21
Beginning Cash Balance $MN 11.47% 22.43%
Operating Fee Receipts $MN 4.27% 8.97%
Operating Expenses $MN 3.66% 9.48%
Net Fund Bal at Yearend $MN 16.92% 26.01%
Ending Cash Balance $MN 12.32% 21.33%

What the Recent Numbers Mean: Expenses Out of Control

During these 22 years, NCUA has transferred ever higher amounts of its operating expenses to the insurance fund.    This is via the Overhead Transfer Rate (OTR) process. That rate of expense allocation has been as low as 52% in 2008 and as high as 73.1% in 2016.   Currently it is 62.7% an increase from 2021.

This overhead transfer has exceeded 50% even though state charters have always had fewer than 50% of total insured shares this entire time.  NCUA is subsidizing its regulation of federal charters by shifting costs  onto state credit unions.

Following this arbitrary, open-ended expense transfer however, operating expenses still increased 3.66% annually or faster than inflation for the entire period.  Most recently in the five years 2016-2021 this annual growth accelerated to 9.84 % or three times faster than the overall 22 year average.

NCUA invented inflation five years before the rest of the economy could catch up.

After this OTR allocation, the Operating Fee charged to FCU’s exceeded actual operating expenses by an average of 104.5% for this entire period– some years more than 100% and others less. Since 2015 however, the NCUA’s the operating fee collected has exceeded actual expenses every year.

Building NCUA Cash  from Credit Union Funds

The result of these excess fees is that yearend cash on hand has grown from $13 million to $129.6 million (or ten times-1000% ) in this 22 year period.   During these same years, while  annual expenses grew by just 3.6%, NCUA grew cash balances at 12.3%, or four times as fast.

The 2021 year end cash balance of $129 million was 110%  more than that year’s total expenses, and  double the 46% average for the entire period.

NCUA held cash balances for the first 16 years of this analysis  between 30-40% of the actual expenditures.  Since 2016 NCUA has retained  more and more credit union funds.  Yet there has been no change in either the agency’s ability to assess its fee or in its operations to require this ever growing cash and fund balance.

The Latest Numbers: May 2022

As of end of May, cash balances are $191.8 million slightly higher than 12 months earlier.   Operating expenses for the first five months are $48.3 million exactly the same as the prior year.

The net fund balance (equity) is at an all-time high of $141.3 million for this time of year.  In 1999 the net fund balance was just $6 million.   The numbers and trends suggest that  $75 million or more of this excess cash could be returned to credit unions and NCUA still have more than enough to cover all operating expense.

The Board’s Budget Review

American author Edward Abbey observed:  “Growth for the sake of growth is the ideology of the cancer cell.”

This Thursday if expenses lag budget, the NCUA’s habit is to repurpose unspent funds  and/or approve new positions not in the original budget.

Normal business practice would be to reduce the budget, not find new ways to spend a surplus.

How will the board view this ever-growing cash hoard? The traditional government mindset is to spend all the money on hand, whether that is necessary or effective.  Staff is always fearful that if money is left over, it will justify reducing the budget request for the following year.

Chairman Harper has been very public in of his ambition to grow staff, the NCUSIF and the budget at every opportunity.

Will the rest of the board go along with this six-year pattern of uncontrolled operating expenses and buildup of excess cash? Or will they stop the spread of NCUA’s operating fund cancer?

After all this is the members’ money.





A Review of the NCUA Board’s Oversight of the NCUSIF

NCUA’s open board meeting In May had only one agenda item, the quarterly staff update on the NCUSIF.

This was an opportunity to focus on many topics that have swirled around the management of the Fund over the past year.   These include:

  • The fund’s investment strategy especially in the rising rate environment;
  • The accounting confusions using  Federal not private GAAP presentation;
  • Projections for the fund’s operating outcomes later in the year;
  • Options to more accurately present the Normal Operating Level (NOL). The ratio now uses two separate accounting period’s data;
  • The prospect of lowering the NOL to its historic range of 1.2 to 1.3% from 1.33%.

The NCUSIF’s $22 billion  is its largest asset . The fund’s unique cooperative design means credit unions have a direct financial stake in its performance.  Credit unions  should receive a dividend in years of strong performance and pay a premium in the event of mismanagement or a catastrophic loss.

As noted by Vice Chair Hauptman in the meeting:  it’s a mutual asset of the credit union movement and NCUA. . . it’s worth reminding everybody that every dollar of that one percent contribution belongs to credit union members and no other.  NCUA has the obligation to credit unions and their members to manage that fund prudently and effectively.

Board member Hood reiterated:   The 1% capital deposit which comprises most of the Share Insurance Fund’s equity is also an asset of the credit union.  We should never forget this.

I would add that the unique coop design intended the 1% deposit be an earning asset for credit unions.

The Fed’s Response to the Current Economy

As reported by CNBS:  Minutes from the Fed’s June meeting, which were released Wednesday, revealed that the central bank is prepared to use even more restrictive measures to tame surging inflation. They indicated that July’s meeting would bring another rate hike of up to 75 basis points, and acknowledged that the economy could suffer a slowdown.

“Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” the minutes said. Treasury yields, meanwhile, continued to rise.”

This is not new news.   Since October 2021 the Fed has indicated that it would change its accommodative monetary policy in response to signs of growing inflation.   That intent became explicit in December with forecasts of interest rate hikes from the historically low levels engineered in 2020 to respond to the Covid economic shutdown.

The market’s response was swift.   Through this year’s second quarter,  bond  fund valuations have fallen almost 20% in market value. The NCUSIF has gone from a market gain of over $500 million in 2020 to a market valuation loss of $1.1 billion as of the April 2022 NCUSIF report.

The NCUSIF Staff”s Response to Rising Rates

The staff’s response to this dramatic change in rates was provided in May’s presentation:  Extend the investment portfolio further by going from a maximum term of 7 years to 10 years.   Rick Mayfield, capital market specialist. stated  this strategy would place approximately 10% of the portfolio in annual buckets over the 10 year range in a one to two year time frame.

The result would raise the average weighted duration from 3.5 years to almost 6 years—at a time when the overwhelming consensus and Fed intent is that rates will continue to rise.

The continuing decline in the NCUSIF’s market value in the past 18 months shows how far the portfolio is falling short of current rates.  This below market return is lost revenue in the tens of millions of dollars.  The continuing decline is a specific indicator of the portfolio’s performance gap from current market rates.

To mechanically continue  investing in equal “buckets” over ten years is a failure of  management.

This investment extension aligns with neither the current policy nor experienced investment judgment.   No objective data or analysis was offered to support this extension to a 5-6 year duration.

Extending a portfolio does not automatically bring higher rates.  Yield curves do not always slope upward.

As an example, when yield curves invert, that is the two year bond pays more than the 10 year,  how does purchasing the lower return 10 year bond “maximize yield” per fund policy?

Managing the portfolio’s duration is the most critical function to match the liabilities for which the fund is responsible.  These include  paying operating expenses, growing retained earnings in line with insured shares, and if necessary, covering insurance losses.   Those expense liabilities can be easily quantified and monitored monthly to align with investment earnings (yield) decisions.

For example, a 2% fund yield would generate $400+ million in revenue easily meeting the operating expense and projected equity growth goals.  A 3% earnings rate should result in a dividend to the owners if insurance losses are at, or below, long term trends.

This is the integrated ALM/IRR management NCUA expects all credit unions to practice.   This management responsibility is not a fixed formula followed routinely whatever the market conditions or future outlooks.  Rather modeling tools, forecasts and judgment are used to align asset returns and the cost of  liabilities as market events change.

No Free Lunch

Even more disappointing was the assertion by CFO Schied that the portfolio’s new extension to ten years would be initiated this quarter-despite the explicit forecast of further raises from the Federal Reserve.

“ . . .with respect to the investment portfolio and consistent with the existing board approved investment policy. the investment committee has decided last month to begin to extend the portfolio ladder out to 10 years.  This is not reflected in today’s quarter one presentation because the decision to do so does not show up until quarter two which will be evident in my quarter two presentation as well as our monthly reporting that we post on the website going forward.”

Naively extending investments to “chase yield” is a common examiner criticism of poorly documented credit union investing.  Such extensions  may produce a short term income jolt but at significantly increased ALM/IRR risk.

Vice Chair Hauptman remarked:   I can say as somebody who worked in fixed income markets for years you know there is no free lunch.  We can get more income by taking more risk and in no other fashion.

There was no data presented to justify a decision to extend from 7 to 10 years in a rising rate environment, an action contradictory to traditional sound portfolio practice.  This extension was also taken in the face of increasing market losses.  This mechanical approach underperforms in the current interest rate environment.

Making a fixed rate 10-year investment  in the face of inflation and other economic uncertainties, is extremely speculative.  It severely limits management options for responding to market events and any changes in credit union insurance needs. It results in  a fixed revenue cap for an even longer period than the current practice.

The result is that NCUA’s hands are tied responding to events during this extended average life of almost 6 years. The Fund becomes dependent on other sources for liquidity or revenue, a contradiction in the fund’s fundamental financial role.

This extension announcement doubles down even after the mounting evidence of NCUSIF investment management shortcomings.  The investment policy referenced has not been updated since 2013.   But most concerning is that there appears to be no ability to objectively evaluate investment practice.

Projecting the Equity ratio And Slowing Share Growth

In addition to presenting the current investment approach, CFO Schied’s projected the NCUSIF’s NOL to June 30, providing two interesting data disclosures.

The first is that he projects an operating loss of $68 million for the NCUSIF  in the second (June) quarter versus a net income of $54.4 million in the March quarter.  That is a $122 million reversal in operating results.

Since investment revenue more than offsets operating expenses, the only possible reason for such a reversal is insurance loss reserves.  Yet all the CAMEL results are positive.  There was no indication of any major unaddressed issues.  So why this dismal forecast?

Secondly Schied also gave the agency’s 12-month insured share growth forecasts for 2022.  Actual share growth was 9.3% for the March quarter.  The projections are  7% growth at June 30, year over year; and only 4.3% for the full calendar 2022.  A significant slowdown from the past two years.

A Board Meeting with Mixed Outcomes


The Agency’s mechanical NCUSIF investing in the face of dramatic rate changes and increasing portfolio devaluations was a disappointment.  Extending the investment duration to almost six years (versus current 3.5 years), will only reduce the Fund’s flexibility responding to changing rates and future industry risk events.

Both Chair Harper and CFO Schied downplayed or even denied there was any real risk to extending the portfolio. Here is the Chairman’s summary observation:

The changes in the value of these(investment) assets were expected. That is because as interest rates go up the value of these bonds go down. I learned that in my finance 301 class back in college.

These unrealized losses fortunately do not impact the equity ratio and do not increase the likelihood of a premium just as unrealized gains do not increase the equity ratio. What the unrealized losses signal is a change in the interest rate environment. We are moving forward to address this issue.   The NCUA is adjusting its investment strategy from a seven year ladder to a ten-year ladder. . .

This observation is incorrect in two respects:

  1. Extending the ladder increases the portfolio’s risks, especially as it relates to meeting its matching  liability/expense requirements.
  2. As the portfolio continues to carry underwater investments, that is returns below market, then the fund’s revenue is short changed. It is credit unions that may have to pay a premium for NCUA’s mismanagement due to potential  revenue shortfalls.

Confusing Financial Presentations

The staff continues to present financial information following Federal GAAP that both confuses and misinforms readers about the actual state of the NCUSIF.

The federal presentation of the balance sheet shows that both the assets and Fund equity  have fallen this year from yearend.  That is because the decline in market value is is subtracted from both investment assets and the cumulative results of operations (equity) on both sides  of the balance sheet.  This understatement is $1.1 billion as of April 30 and increasing each month as portfolio valuations decline further.

To the user of this information, the NCUSIF appears to be reducing in size and value.

The accounting category, year to date retained earnings, is not reported under Federal GAAP.  Calculating  the Fund’s NOL trends requires this number.  However it  is not  presented in the financial statements, but must be derived from the information presented.

Finally the issue of how the NOL is being calculated using numbers from two different accounting periods was again raised by Board Member Hood. He referenced the Cotton accounting firm’s review from  2021 and its reported description of several ways the 1% true up could be presented in the  Fund’s yearend financial statements.

CFO Schied’s response to Hood’s query was:

We are reviewing and doing the due diligence over alternative approaches including that pro forma idea that you’ve mentioned in order to have a complete picture of the relative costs and benefits and to understand any potential hidden implications of any alternatives. 

Because I’m not sure back then that they realized that the change was going to lead to the timing gap that we have today.  I would look forward to updating you on these findings over the summer.

Credit unions will certainly be looking for this review!

Overall  this single-topic open board meeting identified, but failed to resolve, these ongoing  issues of NCUSIF investment management, fund financial presentation and more accurate NOL calculation.

(Editor’s note:  Later updates corrected earlier spelling error of Vice Chair Hauptman’s name)

“Protecting the Insurance Fund”

From NCUA board members’s statements in Senate confirmation hearings  to the examiner on the street, the most frequently stated goal stated by NCUA staff is  to “protect the insurance fund.”

This goal is repeated even though the NCUSIF is a means and not an end in itself.  The ultimate purpose of NCUSIF is to safeguard member assets.

The primary venue in which Board members demonstrate their responsibility to “protect the fund” is the quarterly statistical report  provided by staff and discussed in an open meeting.

The NCUSIF’s status was the principal topic of May’s board meeting.   I was unable to listen to the live broadcast.  All I have is the  slide deck from the agenda and posted board statements, not the actual live exchanges  that took place.

Questions on the NCUSIF’s  from the March Update

Here are some  initial questions from the  information presented.  I would hope that some or many of these would be  part of the dialogue in the Board’s duty “to protect the fund.”

  1. Since December 2021, total NCUSIF assets have declined by $130 million even after recording $578 million in new capital deposits receivable. The cumulative results of operations (equity) shows a decline of $727 million in the first quarter.  How did these declines occur?  How should users of this data understand Fund performance?
  2. The March report shows that the market value of the portfolio has fallen $806 million below cost or book value. What does this decline indicate about the management of the Fund’s interest rate risk?
  3. The Fund’s yield year to date is only 1.22% What is the required breakeven yield to cover the Fund’s operating expenses?  How large is the revenue loss in the next 12 months as indicated by the current and  continued decline in market value?
  4. How did the Fund’s investment committee modify their approach after  the rise in rates initially forecast last October/November  by Chairman Powell?
  5. How will the investment committee deploy the approximately $4.0 billion in funds arriving in the next 12 months from maturities, new capitalization deposits and interest payments?
  6. The Fund reported net income of $54.4 million in the 1st However Slide 13 shows estimated retained earnings of $4.792 billion, or an anticipated loss of $68 million in the current quarter.  That would represent a $122 million net operating decline for the June quarter.  How was this projected?  What is causing this loss?
  7. Insured savings growth is estimated at 7.1% at June 30, 2022, down from 14.2% at the June 2021 quarter. Actual twelve month share growth was 9.3% as of March 31, 2022. How much additional growth  slowdown is projected for this year?
  8. In Slide 13, the numerator and denominator use data from two different time periods to calculate the NCUSIF’s equity ratio (NOL).  If the same June 30 data were used for both parts of the ratio,  the resulting NOL would be 1.283 % versus 1.25 %.   This three basis point difference is over $500 million at the current level of insured shares.   Shouldn’t this more timely ratio be used in reporting the Fund’s actual financial position?

Fund Performance and Investment Policy

The NCUA’s immediate and ongoing opportunity  to “protect the fund” arises from its  management of its current $22 billion and  ever growing asset base.

The questions above are vital to understanding how NCUA staff implements the Board’s twin NCUSIF investment policy objectives  “To meet liquidity needs” and “To invest. . .seeking to maximize yield.”

The March financial statistics raise critical question of how the NCUSIF responded to the changed interest rate outlook over the past 12 months.  And, more importantly how it will respond going forward.

I will report on Board member’s interactions and assessments to NCUSIF’s   March information  when the May meeting video/ transcript is available.   That dialogue will be a useful example to learn how NCUA board members see their role  “ to protect the fund.”