Year-End 2013 NCUSIF Audited Statements Show Judgment Errors In Reserving For Losses

Backtesting NCUSIF reserve expenses for losses shows no link to actual losses for past five years

In releasing the National Credit Union Share Insurance Fund (NCUSIF) financial statements for December 31, 2013, NCUA’s press release noted only the clean opinion. There was no commentary about the fund’s performance, past or present, which leaves the credit union owners of the fund responsibile for discerning what is important from the information presented. Although the numbers might be accurate from an accounting perspective, the underlying judgments producing them are flawed and have been for at least the past five years.

Cooperatives’ Collective Capital

Because the $11.6 billion NCUSIF is owned by credit unions and represents the collective capital available individually or collectively in a crisis, its role and performance are vital to the industry’s financial confidence and credibility. The 1% deposit structure was set up so every credit union would have a vested interest in tracking how the fund is managed. From the1984 NCUA Annual Report: Don’t set it up and forget about it … it’s your responsibility to keep it working because if you don’t, it’ll go just like everything else government touches. (Page 18)

Reserving Accuracy Is The One Judgment That Matters

The most critical financial judgment made by the NCUSIF’s management is the amount for loss reserves. This provision expense flows through the fund’s income statements. A high expense estimate can cause premiums to be assessed if the fund’s net balance declines too far below the 1.3% normal operating level at year-end. The loss provision, as in a credit union, should approximate the actual cash losses incurred by the fund in its insurance responsibilities. The loss provision added to or subtracted from reserves is the single, most significant expense for the NCUSIF. The following charts make clear why credit unions should be concerned about the reserving relationships.

As shown below, this amount has ranged from a high of $737 million in 2010 to a reversal of $526 million in 2011, a variation in the expense of more than $1.26 billion in just one year.


Source: NCUSIF Audit Reports

This expense, added to the loss reserves, covers actual losses the fund incurs. When the actual losses are compared to the amount in reserves for each of the past six years, there is no relationship.


Source: NCUSIF Audit Reports

The following chart, which compares the fund’s reserves at each year-end to the actual cash losses in the following year, shows the over-reserving ranges from a low of 191% in 2008 to 1,317% in 2010. That is, more than 13 times the actual cash losses in the following 12 months of 2011.


Source: NCUSIF Audit Reports

No Correlation Between Loss Provisions And Actual Losses

The results of the past six years show there is no correlation, consistency, or logic between how NCUA estimates its provision expense and actual cash losses.


Source: NCUSIF Audit Reports

The NCUSIF’s past six years of financial statements show wildly inaccurate provision judgments. They also suggest the reserve account at year-end 2013 is still overstated. These inaccurate financial statements cost credit unions a $930 million premium in 2010 in order to create a loss provision of $1.2 billion at year-end 2010. However, the actual losses for the next year, 2011, were only $93 million that’s a 13-fold overestimate.

The unneeded 2010 premium was a $930 million expense to credit unions taken out of members’ returns and credit union capital just as the recovery was getting underway. Moreover, the unneeded premium resulted in the NCUSIF exceeding the 1.3% normal operating level for the next three years, so that $462.4 million was transferred out of the fund and into the TCCUSF which NCUA now reports as over-reserved by as much as $2.5 billion.

It’s About More Than Money

The consequences of NCUA’s exaggerated estimates for losses are more than money; they are at the core of NCUA’s ability to make reasoned and documented judgments about financial or other decisions for which it is directly responsible. The agency states in the last page of the financial footnotes under Sensitivity, Risks, and Uncertainties of the Assumptions (unaudited): our estimation model is a highly subjective process. Yet, even subjective judgments can be backtested. Those tests are disappointing not only because of the disconnect between actual events and forecasted estimates but also because NCUA provides no transparency into its own model. Nor does the auditor express an opinion about the process.

Today, NCUA is proposing that it receive even more intrusive control over credit union financial decisions in its proposed risk-based capital regulation. In the Individual Minimum Capital section of the rule, the agency seeks authority over each credit union’s reserving decision based on subjective judgments and the agency’s expertise. The NCUSIF experience is just one example of why this unilateral authority and expertise should be challenged.

Credit Unions Deserve Answers to Critical Concerns

The fund’s financial results show NCUA is still trying to find a way to manage its NCUSIF responsibilities in a consistent and transparent manner so any reader of the statements can understand and have confidence in them. The lack of any discussion of the results by the president of the fund (who is the Director of Examination & Insurance), by its chief financial officer, or by board members is disappointing. Additional questions about the fund’s management will rise in importance as losses for reserving fade in magnitude. These include:

  • The Fund had $35 billion in CLF liquidity lines in 2010 but only $2.9 billion at the end of 2013 (note 10). Who has first access to this line the CLF members or the NCUSIF? What are the NCUSIF liquidity plans? What does this mean for the duration of the NCUSIF’s investments?
  • The available assets ratio (note 12) has declined from 1.32% in 2011 to 1.26% in 2013 due to the decline in market value of the fund’s investments. How will this ratio influence the NCUSIF’s future investment strategy?
  • The six-year (2008-2013) actual net losses to insured shares ratio in the Fund is .0207%, or slightly more than two basis points. As this includes the period of the Great Recession, why did NCUA set a plan goal for losses 50% higher than this six-year average at .03% (page 2)?
  • As indicated in Note 9 of the report, the NCUSIF has seen the overhead transfer rate increase from 57% in 2010 to 59.3% in 2013 to 69% in 2014. Based on NCUA’s budget, this transfer will require almost all of the investment income the fund will earn in 2014. What is the fund’s financial plan for maintaining the normal operating ratio?
  • The asset management estates activity has a material impact on the NCUSIF’s performance. In 2013, its loss reserve of $145 million (note 6) was higher than the fund’s provision expense, which showed a net reduction of $41 million. Where are the details that would help readers better understand this expense and the effectiveness of the AME’s recovery efforts?
  • Finally, the statements are unreadable by most users in the current presentation format. Why aren’t they also presented in standard income/expense and balance-sheet financial format, as summarized in the agencys annual report tables?

Regulatory agencies that oversee the performance of financial institutions live in glass houses. This is especially true for a cooperative regulator that must retain the confidence of the industry it oversees, an industry that provides the regulator’s funding for all three oversight responsibilities. A full and transparent accounting for the NCUSIF would demonstrate respect for the fund’s owners as well as the professionalism of NCUA’s management efforts.

The Bottom Line

NCUA is operating the fund each year at break-even if you sum the operating results. That means with the jump in the overhead transfer, there is nothing left for provision expense let alone to add to retained earnings to keep up with share growth. So credit unions should expect a premium just to run the share insurance fund.

Moreover, although it is clear NCUA overestimated the losses for credit unions, that might be small change compared with the TCCUSF. We know the loss estimates originally provided were too high by at least $6 billion.

Given the information presented by NCUA, there are many more questions for the agency than answers to provide confidence to the 90+ million credit union members that their monies are being well-managed.

(Readers’ note: To better understand the NCUSIF’s operating performance, information used in the graphs is summarized in the six-year spreadsheet below. Note the two lines comparing reported net income versus operating results before premiums and provision expense adjustments this is the closest approximation to a real net income before extraordinary items. )

*Numbers in $ Millions, except Insured Shares and CLF Line Of Credit Selected NCUSIF Performance Information (2008-2013)
2008 2009 2010 2011 2012 2013
Insured Shares (In $ Billion)







Gross Cash Paid Losses














Net Cash Loss







Insurance Premium







Loss Provision Expense







Loss Reserve Balance at year-end







Amount of Reserve for General Losses







Operating Results before Premium, if any, & Net Provision Adjustments







Reported Net Income







Loss Reserve as % of Following Year Cash Losses






Loss Provision as % of Cash Losses







Transferred to TCCUSF: $ Exceeding 1.3% N/A N/A





Percent Overhead Transfer Rate to NCUSIF 52.0% 53.8%





CLF Line of Credit (In $ Billion) for NCUSIF $1.5 $40.0 $35.0 $10.0 $2.3 $2.9
April 16, 2014

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