What Solid Cooperative Performance Looks Like

Recent bank failures, growing liquidity pressures, interest rate uncertainty and falling consumer savings have created uncertainty about  credit unions’ financial outlook.

The first quarter 2023 call reports are in.  There are a range of results, as usual.  Below is Wright-Patt’s CEO Tim Mislansky’s summary of the numbers for his team.  He opens with a one sentence conclusion.

Solid Performance

“We ended the first quarter with solid financial results.

Loans to members were up a whopping $70.7MM from February, were up $724.9MM from a year ago and are $177.8MM above our budget.

Member deposits jumped a big $182.8MM from February (due to the month end on a Friday payday), were up $445.7MM from a year ago and are $70.8MM over budget.

While both are results to be excited about, it is important to remember that we fund our loan growth with deposits. Continuing a pace where loan growth is significantly higher than deposit growth is not sustainable.

Net income for March was $8.7MM and year-to-date is $25.3MM. This is $6.5MM above our budget, but $2.2MM behind last year.”

He proceeds to review key items for the month and changes year-over-year including net interest income, non interest income, loan loss provisions and operating expenses versus budget.  He concludes: “We remain pleased with our early progress in financial results.”

How Were These Results Achieved?

The important issue is not what the results are, but how they were accomplished amidst so much  macro economic uncertainty.

To understand these financial outcomes, one must  look at the other parts of  CEO Mislanksy’s monthly report.  He opens with two recognitions.

The first honors a 47-year retiring employee, Kathy Denniston, in the Member Help Center. The credit union was chartered in 1932.  This employee has been serving members for more than half the credit union’s existence, and arguably during the most difficult  competitive time frame.  Sold performance starts with culture, the commitment of the employees.

The second comment relates a story which Tim calls Moments of Impact.  They are brief descriptions of exceptional responses by employees (partners), in this case the  Enterprise Risk Manager:

I often say that it is everyone’s job to take care of members and Corey did just that recently. Corey is a part of the security team that deals with incident reports – which are commonly sent through if a member or Partner has an accident, gets hurt in one of our centers, or if there is erratic behavior.

A couple of weeks ago, an MHC Partner submitted an incident report because a member who was declined for a mortgage started making some comments about depression and wanting to end his life. When Corey saw this, he replied to the larger group and asked what we typically do in these situations, because he wanted to help. Honestly, we do not have a standard protocol for this situation.

Rather than let it go, Corey took it upon himself to call the member to see if he was okay. He made sure the member had some resources and contacts that he could call for help. Taking that extra step just showed how much Corey cared and the type of people we have here at WPCU.”

The Performance that Really Counts

While financial numbers are one way of tracking performance, for Wright-Patt the focus is not on growing assets, loans or deposits. Growth results from doing the right things. Rather the credit union starts with impact, what it can do for its  members, potential members and  employees.

While over 90% of its deposit are insured, its share stability is due to member loyalty, not insurance. The credit union is trusted by members.  Their loyalty underwrites the credit union’s ongoing success that started  91 years ago and continues to expand quarter by solid quarter. member by member.

(I thank Tim for allowing me to use this example from his monthly report to his team)


Warren Buffett’s Annual Meeting and Wisdom for Credit Unions (Part I of II)

Last Saturday was the annual meeting of Berkshire Hathaway (BRK) in Omaha, NB.  The event, called the “Woodstock of Capitalism” was attended by over 40,000 shareholders and broadcast live on MSNBC.

I believe there are valuable observations for credit unions.

Prior to the formal annual meeting agenda Warren Buffett (age 92) and Charlie Munger (age 99) answered questions from online and in-person shareholders for over five hours separated only by a short lunch break. Their goal was to take at least 60 questions.

They covered all aspects of company operations, long term strategy, and recent decisions (eg. selling TSMC stock after holding only two months) as well as questions on Fed fiscal policy, international relations and life’s most important decisions.

The full sessions and excerpts can be found from Saturday’s edition of Buffett@response.cnbc.com, the Warren Buffett Watch.

Three Important Lessons for Coops

Here are my top three takeaways with significance for credit unions.

  1. Respect for shareholders. Buffett: “For fifty-eight years we have regarded shareholders as the reason for our existence.”  The open-ended questions at the meeting came from young and old including families that had owned stock for generations.  No subjects were off limits.   The entire event was a celebration of the firm’s various businesses and designed to be both informative and a good time.

This model of dialogue with shareholders is one that can be emulated by credit unions.  It would increase cooperative transparency, confidence and good governance.  In Buffett’s words: “Management has an obligation to explain to shareholders everything. . .to say what they think is right.  We want owners to understand what they own. . .We are working for the people in this room, not a quarterly operating target from Wall Street.”

This question and answer with ordinary people from all over the country (and other countries) was direct and straight forward.  No talking down or 10-Q explanations.  No discounted cash flows or present value kinds of reasoning; only plain answers to hard questions.

  1. The entire US banking model is under review. After the runs caused the closures of three major banks, the two most frequent proposals have been to make deposit insurance unlimited in coverage or to eliminate short selling of public bank stocks.  Future uncertainty in the current environment seems probable.   Unlimited deposit insurance would make all deposit liabilities of shareholder owned banks an issue of federal government backing.  The second reform would reduce market discipline in the pricing of bank stock performance.

At another point in discussing property-casualty insurance (a market which operates on a margin of only 4%), Buffett noted his strongest competitor was one which created the last significant innovation: State Farm a mutual, not a stock company.  Here is his analysis from the 2019 Annual meeting:

“If you go to business school, you’re taught that it’s only because you have incentives and compensation, all kinds of things, that businesses can be successful. [But] Nobody really got rich outside of State Farm. They sat there, and they are the biggest insurance company,” he claimed.

“When Leo Goodwin started GEICO 80 years ago, he probably wanted to get rich,” he said, referring to GEICO’s founder. “And probably at Progressive, I know people wanted to get rich. And at Travelers and Aetna. You can name them, dozens and dozens of companies.

“And who wins? A mutual company,” Buffett concluded.

“In terms of presence, size, they are still the biggest company. If you omit Berkshire, they have the highest net worth by far. They have $140 billion or something in net worth,” Buffett said, speculating that Progressive’s net worth is about one-sixth that of State Farm.

“We’re spending $2 billion a year telling people the same thing we’ve been telling them for 70 or 80 years.” But when all is said and done, “State Farm still does more business than anyone else, and that shouldn’t exist under capitalism.”

“If you [had] a plan to start a state farm today and had to compete with Progressive, which would bring the capital [for] a mutual society from which you are not going to withdraw the profits? It makes no sense at all,” he said.

With the market driven banking model increasingly under question, and the example of State Farm’s mutual success, is it possible that  the cooperative credit union model is the best alternative design for resolving the uncertainties and internal contradictions of stock-owned depository financial institutions?

  1. How his insurance model benefits all BRK businesses. And why it suggests the FDIC is a flawed insurance model.

Insurance is a paid-in-advance business.  This gives a firm the ability to earn on the capital and invest the float before paying out claims expense.

As an example, last year BRK was earning 4 basis points on its $125 billion  cash, or about $50 million per year.   Recently the company bought a Treasury bill at 5.92%.  The company will earn about $500 billion this year on its cash.  This float from the insurance doesn’t cost anything. Capital stock is very expensive. Debt has to be repaid like deposits.  Importantly BRK has multiple options for investing its float.

The FDIC has no capital base.  Its primary revenue is from premiums.  The combined losses of an estimated $35 billion on the bank failures so far this year will be paid by the banking community. FDIC has not been able to accumulate earnings from its capital base to cover its risk.

The NCUSIF has a 1% capital base that matches-grows or declines-with the level of total insured shares. The earnings on this capital and additional retained earnings of .2-.3% of insured shares are sufficient to cover even the most extreme risk scenarios.  So long as the investment portfolio is well managed.  The NCUSIF’s breakeven earnings level is between 2.5%-3.0%.  That outcome should be the measure of NCUA’s management effectiveness.

The three areas above are a trifecta for credit union optimism:  the  public example of shareholder-owner engagement, the questions around the US banking model, and the sounder NCUSIF financial structure.  All three are inherent in cooperative design.

Tomorrow I will share some of Buffett and Mungers’ comments that have direct relevance for credit unions’ businesses.  As well as some of his wisdom about life.

A Prophetic Voice

Last week I asked if credit unions today needed a prophet’s wisdom.   I was motivated by one of C-Span programs which presents recordings of historical speeches by leaders at important moments in American history.

Hearing the original voices of leaders summoning their listeners to action still inspires today. The experience is both fruitful and edifying.

The reason is that the truths contained within these appeals transcend time. They are not merely words that endure in time, they are words that are beyond time.   Their underlying truths do not change with circumstance, nor are they changed by it.

The actions called forth do not merely meet the challenge at a moment in  time; they are the standard by which time itself is tested.

The paradox is that the timeless is always timely. If it is timeless and, if it’s always true, it is always relevant.

The Context for Chairman Callahan’s 1984 GAC Address

The 1980-1982 economic crisis was over.  Interest rates and inflation were in back to single digits.  Deregulation was well underway.  Credit union growth and financial performance led all financial institutions.

The NCUA’s DC bureaucracy had been reorganized to reduce central office roles and put the six regional directors in positions of administrative leadership.   The CLF had been capitalized in partnership with the corporate network so that every credit union had access.

There was a common commitment by the cooperative system to support expanding credit unions services to all Americans through new charters and increased FOM options on the 50th anniversary of the Federal Credit Union Act.

But there was one institutional innovation still needed to solidify an independent and sound cooperative system.  This was the primary topic of Chairman Callahan’s 1984 GAC presentation.

He called on credit unions to “Finish the Job.”  Here is a recording of that request which which is 12 minutes following CUNA President, Joe Cugini’s brief introduction.



The call was answered. Today the NCUSIF is still the example of insurance that has stood the test of time.


What Can Be Done about the Drought of New Credit Union Charters?

There are financial deserts in towns and cities across America; there is also an absence of new credit union charters.

Since December of 2016, the number of federally insured credit unions has fallen from 5,785 to 4.780, at yearend 2022.  This is a decline of over 165 charters per year.  In this same six years, 14 new charters were granted.

Expanding FOM’s to “underserved areas” or opening an out of area credit union branch, is not the same solution as a locally inspired and managed charter.

Obtaining a new charter has never been more difficult for interested groups. Through its insurance approval, NCUA has final say on all new applications whether for a federal or state charter.

Today, credit union startups are as rare as __________ (you fill in the blank).

At this week’s GAC convention an NCUA board member announced the agency’s latest new chartering enhancement: the provisional charter phase.  This approach does not address the fundamental charter barriers.

Could an example from the movement’s history suggest a solution?

The Chartering Record of the First Federal Regulator

Looking at the record of Claude Orchard  demonstrates what is possible for an individual government leader.   He was the first federal administrator/regulator managing a new bureau within the Farm Credit Administration to create a federal credit union system.  He was recruited for this startup role by Roy Bergengren, who along with Edward Filene, founded the credit union movement.

The story of how and why he was chosen is told here.   Bergengren nominated Orchard because he had “the proper credit union spirit.” This had been demonstrated by his efforts to charter over 70 de novo state credit unions for his employer Amour.

Orchard accepted this government role in the middle of the depression using borrowed FCA staff.  The state chartered system was the only model of how to create a federal option.  That experience and belief in the mission is what  Orchard brought to this new role.

Unlike the banking and S&L industry there was no insurance fund for credit union shares/savings.   The coop model was based on self-help, self-financing and self-governance.  Self-starters provided the human and social (trust) capital; no minimum financial capital was needed.  Credit unions tapped into the quintessential American entrepreneurial spirit to help others.

Orchard’s critical tenure as the first federal regulator is described  in a special NCUA 50th Anniversary Report published in 1984:

“He emphasized organizing as much as supervision. ‘I think in general we tried in the beginning to avoid paperwork because it seemed to me like that was a waster of effort.  After all what we were out for was to get some charters and get some organizational work done.’

When Mr. Orchard stepped down in in 1953, federal credit unions numbered over 6,500.   During his 19 year he espoused a passionate belief in the ideals of creditunionism.  ‘It seems to me that we have here a tool. If it can be made to really be responsive and to really be, in the end, under the control of the members, it can teach people in this country something about democracy which could be taught in no other way.

Deane Gannon, his successor at the Bureau of Federal Credit Unions said to Mr. Orchard on the 30th anniversary of the Federal Credit Union Act, ‘If it hadn’t been for you none of us would be here to celebrate anything.‘”

That last observation echoes today.   How many charters will be left to celebrate the 100th anniversary of the FCU Act in 2034?

Alternatives  Are  Springing Up

For the credit union movement to remain relevant it will require modern day Claude Orchards. These are leaders who believe in creditunionism.  And possess the passion to encourage new entrants to join the movement.

Regulatory process or policy improvements may help.  But the real shortfall is leadership committed to expanding credit union options.

To address the continuing financial inequities throughout American communities, alternative solutions are being created.  Many of these startups are outside the purview of banking regulators.

These community focused lenders are listed in  Inclusiv’s 2022 CDFI Program Aware Book.  The firm introduces its role with these words:

Access to affordable financial products and services is a staple of economically sound communities. Yet at least one quarter of American households do not have bank accounts or rely on costly payday lenders and check-cashing outlets.

In recent years, the lack of access to capital investments for small businesses and other critical community development projects has also led to increased need for alternative and reliable sources of financing.

Mission-driven organizations called Community Development Financial Institutions–or CDFIs–fill these gaps by offering affordable financial products and services that meet the unique needs of economically underserved communities.

Through awards and trainings, the Community Development Financial Institutions Program (CDFI Program) invests in and builds the capacity of CDFIs, empowering them to grow, achieve organizational sustainability, and contribute to the revitalization of their communities.

Of the total $199.4 million awarded to 435 organizations, only 176 or 40% were to credit unions.  The rest of the field included 213 local loan funds, 43  banks and 3 venture capital firms.

Without credit union charters, alternative organizations will be created to serve individuals and their communities.   These lenders may not put credit unions out of business, but will  attract the entrepreneurs that would have  added critical momentum to the cooperative system.

Credit unions can qualify for CDFI status and grants.   But Inclusiv has a much broader vision for implementing Claude Orchard’s  playbook.

In their listing of 2022 total awards and grants, every amount of over $1.0 million went to an organization that was not a credit union.  A few were banks, but most were de novo local community lenders or venture capital firms.

Without credit union options, civic motivated entrepreneurs will seek other solutions, and slowly replace credit union’s role.

Today it is Inclusiv carrying out Orchard’s vision.

Should NCUA delegate its chartering function to those who have “the proper spirit” to secure credit unions’ future?

It will also result in “teaching people in this country something about democracy which could be taught in no other way.”

Two Positive Updates & a Disheartening Decision

Callahan’s Trend Watch industry analysis on February 15 was a very informative event. It was timely and comprehensive.

Here is the industry summary slide:

The numbers I believe most important in the presentation are the 3.4% share growth, the 20% on balance sheet loan growth and the ROA of .89.

The full 66 slide deck with the opening economic assessment and credit union case study can be found here.

The Theme of Tighter Liquidity

A theme woven throughout the five-part financial analysis was tighter liquidity and the increased competition for savings.   Slides documented the rising loan-to-share ratio, the drawdown of investments and cash, the increase of FHLB borrowings, and the continuing high level of loan originations, but lower secondary market sales.

These are all valid points.   However liquidity constraints are rarely fatal.  It most often just means slower than normal balance sheet growth. That is the intent of the Federal Reserve’s policy of raising  rates.

Credit Unions’ Advantage

I think the most important response to this tightening liquidity is slide no. 24 which shows the share composition of the industry.  Core deposits of regular shares and share drafts are 58.3% of funding.  When money market savings are added the total is 80%.

This local, consumer-based funding strategy is credit unions’ most important strategic advantage versus larger institutions.  Those firms rely on wholesale funds, large commercial or municipal deposits and regularly  move between funding options to maintain net interest margins.  These firms are at the mercy of market rates because they lack local franchises.

In contrast, most credit unions have average core deposit lives from ALM modeling of over ten years. The rates paid on these relationship based deposits rise more slowly and shield institutions from the extreme impacts of rapid rate increases.   In fact the industry’s net interest margin rose in the final quarter to 2.86% (slide 56) and is now higher than the average operating expense ratio.

Rates are likely to continue to rise.  There will be competition at the margin for large balances especially as money market mutual funds are now paying 4.5% or more.  If credit unions take care of their core members, they will take care of the credit union.

The February NCUA Board Meeting

The NCUA Board had three topics:  NCUSIF update, a proposed FOM rule change, and a new rule for reporting certain cyber incidents to NCUA within 72 hours of the event.  The NCUSIF’s status affects every credit union so I will focus on that briefing.

We learned the fund set a new goal of holding at least $4.0 billion in overnights which it is projected to reach by summer.  Currently that treasury account pays 4.6%.  With several more Fed increases on the way the earnings on this $4.0 billion amount alone (20% of total investments) would potentially cover almost all of the fund’s 2023 operating expenses.

Hopefully this change presages a different  approach to  managing NCUSIF.  Managing  investments using weighted average maturity (WAM, currently 3.25 years) to meet all revenue needs, versus a static ladder approach, means results are not dependent on the vagaries of the market.

At the moment the NCUSIF portfolio shows a decline from book value of $1.7 billion.  This will reduce future earnings versus current market rates until the fund’s investments mature, a process that could take over three years at current rate levels.

Other information that came out in the board’s dialogue with staff:

  • Nine of the past thirteen liquidations are due to fraud. Fraud is a factor in about 75% of failures;
  • More corporate AME recoveries are on the way. Credit unions have been individually notified. The total will be near $220 million;
  • If the NOL 1% deposit true up were aligned with the insured deposit total, yearend NOL would be about .003 of lower at 1.297% versus the reported 1.3%. Share declines in the second half of the year will result in net refunds of the 1% deposits of $63 million from the total held as of June;
  • Staff will present an analysis next month of how to better align the NOL ratio with actual events;
  • The E&I director presented multiple reasons for NCUSIF’s not relying on borrowings during a crisis, but instead keeping its funds liquid;
  • The E&I director also commented that the increase in CAMELS codes 3, 4, 5 was only partly due to liquidity; rather the downgrades reflected credit and broader risk management shortfalls;
  • NCUSIF’s 2022 $208 million in operating expenses were $18 million below authorized amounts;
  • The funds allowance account ($185 million) equals 1.1 basis points of insured shares. The actual insured loss for the past five years has been less the .4 of a basis point.

Both the Callahans Trend Watch industry report and NCUA’s  insured fund update with the latest CAMELS distributions suggest a very stable, sound and well performing cooperative system.

A Disappointing NCUA Response

Against this positive news, is a February 15  release from the Dakota Credit Union Association.   It stated NCUA had denied claims of 28 North Dakota credit unions for their $13.8 million of US Central recoveries from their corporate’s  PIC and MCA capital accounts.

These credit unions were the owners of Midwest  Corporate which placed these member funds in the US Central’s equity accounts, a legal requirement for membership.   The NCUA claimed that the owners of Midwest Corporate had no rightful claim, even though a claim certificate for these assets was provided by NCUA.

Nothing in this certificate says that the claim is no longer valid if a corporate voluntarily liquidates.

Under the corporate stabilization program corporate owners were forced to choose between recapitalizing after writing off millions in capital losses in 2009, merge with another corporate, or voluntarily liquidate.

Both the Iowa  and Dakota corporates chose to voluntarily liquidate versus facing the prospect of further corporate capital calls.

The NCUA oversaw the liquidation of both Corporates in 2011. The NCUA’s liquidating agent knew  that claim certificates were issued, that there was no wording that voluntary liquidation would negate future recoveries for the corporates’ owners and that NCUA’s legal obligation is to return recoveries to the credit union’s owners, whether in voluntary or involuntary liquidation.

The claim receipt specifically states: “No further action is required on your part to file or activate a liquidation claim.”  Yet that is just the opposite of what NCUA is now saying the credit unions must do.

For example NCUA continues to pay recoveries to the owners of the four corporates who were conserved and involuntarily liquidated by the agency.

According to Dakota League President Olson, NCUA has failed even to inform the league  in what accounts these funds are now held.  Are they being distributed to all other US Central owners? To the NCUSIF? Or held in escrow?

“This is a clear case of obstruction through bureaucratic hurdles and complicated language where the process is the punishment, and does not provide justice,” stated Olson.

These funds  ultimately belong to the member-owners of these credit unions  The NCUSIF is in good shape.  This is not a legal issue.  It is common sense.

NCUA controlled all the options for every corporate through through its stabilization plan. It took total responsibility for returning funds-no further action required. No one will critique returning members’ money.  But failure to do so undermines trust in the Board ‘s judgment, its leadership of staff, and its fiduciary responsibility for credit union member funds.

The NCUA board should do the “right thing” for these credit unions and their members.


Quick Takes on NCUA’s Four KPMG December 2022 Audits

On February 13, 2023 NCUA posted the December yearend audits of its four managed funds.

Publishing this audited information plus the interim monthly financial updates is an important resource for credit unions to monitor the Agency’s financial performance.

Today’s NCUA board meeting will include a public discussion of the NCUSIF, the largest and most critical report because it relies on the credit unions’  1% capital deposit as its funding base.

General Audit Observations

Three of the four funds are presented following GAAP accounting standards.  These three financial statements and footnotes are easy to follow.   However the NCUSIF is presented using Federal GAAP accounting.  There are fundamental differences in presentation and transparency between these two approaches.  I’ll address these below.

Total NCUA expenses in its three main funds (NCUSIF, Operating and CLF) total $ 332.1 million, an increase of $14.5 million (4.6%) from 2021.   The NCUSIF paid 63% of this expense total.   It should be noted that all NCUA’s revenue is from credit unions and interest on their funds held by the agency.

The smallest of the four, the community Development Revolving Loan Fund does not have allocated expenses and has minimal activity-only $1.5 million in “technical assistance grants.”

The NCUSIF’s Audit

The Board meeting is only discussing the NCUSIF today. It is the most consequential for credit unions in terms of credit union impact and support.

The NCUSIF had a  stable year.  Total expenses rose to $208 million or 4.5%.   Net cash losses were just over $10 million.  However $33 million additional expense was added to the reserve account raising its total by $ 23 million to $185 million.  That reserve balance  equates to 1.1 basis points of insured shares, a  ratio greater than the most recent five years net cash loss rate.

Several very important issues are not directly addressed in the audit.  But hopefully will be raised by Board members.

The first is the Federal GAAP presentation that uses completely misleading terms for a non-appropriated government entity.  Fed GAAP has no accounting concept of retained earnings, but rather presents “cumulative result of operations.”   This number includes any changes in the market value of the fund’s major asset-treasury securities as of the audit date.

Other accounting categories such as intragovernmental assets, exchange revenue, public liabilities, net position and order of presentation are completely foreign concepts for standard GAAP financial statements.  They obscure  understanding of financial performance.  Even NCUA staff converts the information to a standard GAAP format for the board.

The accounting term “cumulative results of operations”  which replaces “retained earnings” shows a decline  from $4.8 billion to $3.2 billion due to the $1.6 billion difference in market and book value of the NCUSIF’s investments.  Also the fund’s total capital which includes  the 1% deposit shows a fall from $20.6 billion to $20.2 billion.

This is how the balance sheet is reported even though the NCUSIF had a positive bottom line of $185 million using standard GAAP accounting.  Any reporter or other user of this statement would be left with a very negative impression of the Fund’s balance sheet financial position from this presentation.

Also Federal GAAP considers all AME and NCUSIF managed estates as “fiduciary” and therefore not part of the NCUSIF’s balance sheet.   As a result only the net amount of the corporate and natural person combined AME numbers is shown in footnotes.  Expenses are netted against income.  Tracking the reasons for increases and decreases in “net liabilities” is impossible as only totals are provided.

This off-balance sheet accounting means the corporate AME’s and NPCU estates are not part of the monthly NCUSIF updates.  Their  revenue and expenses are not reported.  And the amounts under management are large, in the hundreds of millions for the Corporate estates, that are still owed credit unions.

This is a situation ripe for error and mismanagement.  Timely and full disclosure of these off-balance sheet funds are material to understanding the fund’s actual performance.

The All Important NOL

The most important yearend result is the NOL calculation.  A footnote reports the “NCUA’s calculation” as 1.3% or below the board’s 1.33% cap.

This is a ratio composed of the June 2022, 1% capitalization balance, an audited retained earnings (note the switch to GAAP) at December 2022, and an unaudited insured shares total as of February 10, 2023.  Two different accounting dates are used in the numerator (June 30 and December 31) and an unaudited total in the denominator.   The result is a misleading NOL ratio.

Share growth in 2023 was just 3.4% with credit unions reported lower total insured shares at December 31 than at June 30.  However the larger June 1% deposit number is used in the denominator even though net deposit refunds will be sent from this total.   In essence the actual NOL is slightly overstated.

Moreover, It is easy to estimate what credit unions’ 1% deposit net liability is. Just take 1% of the denominator’s total for insured shares.   That is how private GAAP would present the ratio—and how the NCUA did the calculation until 2001.   As a consequence this  ratio misstates actual NOL and potentially, dividends due to credit unions.

The NCUSIF’s Investment Management


The fund’s most important asset is its $21 million of treasury investments.  The yearend audit shows a larger overnight cash position than in 2021.  However the fund’s weighted average life of 3.3 years has been largely unchanged during the past 12 months of Fed tightening.

The portfolio’s decline in market value is almost $1.7 billion at yearend.  This is important because the decline equates to over 10 basis points of the fund’s 30 basis point in retained earnings.  This  amount, on top of the 1% deposit, must remain at or above 1.2% or an equity restoration plan is required.

What is the fund’s interest risk management monitoring process?  Why would the NCUSIF keep investing long term in a rising rate environment?  Especially when there is an inverted yield curve?

As of Wednesday’s Feb 15’s market close, the one year treasury yield was 4.96% and the seven year was 1% lower at 3.94%.   This inverted yield curve has existed for almost six months.  All of the fundamentals suggest a shorter WAM for the NCUSIF’s portfolio.

The consequence of a 3.3 year weighted average maturity (WAM) is that NCUSIF investments will underperform market rates until the yield curve stabilizes at a new normal.   If today’s environment were representative of the future, it would take the fund over three years to recover its market losses.   During this adjustment, the NCUSIF revenue is shortchanged from current market returns.  Credit unions will suffer the shortfall either in lost dividends or, in a worst case scenario, a fee to maintain the NOL.

So today’s meeting is an important opportunity to see what the board and staff take away from this year’s NCUSIF performance.   The numbers are in, now what do they mean?  How can the fund’s presentation and management be more transparent to its credit union owners?   In short, how can performance be improved?

The Central Liquidity Facility


The CLF had a most interesting year financially as it reported $546 million in capital stock redemptions by agent corporates, partially offset by a $132 million increase in regular member shares.  Total capital declined by a net amount of $400 million due to these  stock paybacks and new purchases.

As has been the case since 2010, the CLF made no loans.  It paid out 97.3% of its $20.7 million net income in quarterly stock dividends totaling $3.69 per $50 share over the entire year.   That  equates to  a 7.4% annual dividend yield.

The CLF’s borrowing authority reverted to 12 times its capital and surplus with the expiration of the CARES Act temporary increase.   As a result, and also due to the decline in total capital , the CLF’s maximum borrowing amount fell from $35.7 in 2021 to $17.5 at yearend 2022.

All the CLF’s revenue is from interest on investments, which are kept at Treasury., even though CLF has broader statutory investment authority than the NCUSIF.   Income jumped from $4.5 to $22 million. Most of this increase was passed through as a dividend.

A point of inquiry would be why the liquidity facility had 7.6% of its investments in the 5-10 year maturity bucket.  Or why it keeps almost 40% in the 1-5 year range.   It would seem prudent that the CLF should place  investments no longer than the limit the NCUA places on corporates, or two years.

Operating Holds Fund Balance Exceeding Annual Expenses


The Operating Fund had expenses of $122.8 after all internal transfers, a $5.3 million (4.7%) increase over 2021.

The Fund retained an equity surplus of $133 million or 108% of 2022’s  total operating expenditures.  Interest on this fund balance did grow from nil to $2.4 million  as market rates rose.

Even though NCUA said it would reduce the credit union funds held by assessing a lower 2022 operating fee, the ending balance is still over three times the agency levels of earlier years.  It is far in excess of any cash flow coverage necessary  until the new year’s operating fees are received.

Transparency Only Matters if Credit Unions Pay Attention

One of the most important checks and balances credit unions requested in 1984 which NCUA committed to,  was an annual external CPA (not GAO) audit of the NCUSIF in return for the open ended 1% deposit funding base.

In addition, monthly financial updates would help monitor the fund’s expenses, reserves and overall management.

However, if the reports are not used by credit unions and only the press releases are followed, then the reporting and transparency model will not work.

For credit unions used to monthly financial analysis, this responsibility should be a “walk in the park.”   Take it.








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.