type: other

jurisdiction: US

text: b' NCUA 2008\n FINANCIAL STATEMENT AUDITS\n FOR\n OPERATING FUND\n SHARE INSURANCE FUND\n CENTRAL LIQUIDITY FACILITY\n COMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n\n\n\n\n For the year ended December 31, 2008\n\n Audited Financial Statements Audit Report Number\n\nNCUA Operating Fund OIG-10-05\nNational Credit Union Share Insurance Fund OIG-10-06\nCentral Liquidity Facility OIG-10-07\nCommunity Development Revolving Loan Fund OIG-10-08\n\n\n\n\n June 11, 2010\n\n\n\n\n William A. DeSarno\n Inspector General\n\x0c EXECUTIVE SUMMARY\nPURPOSE AND SCOPE The National Credit Union Administration (NCUA)\n Office of Inspector General contracted with the\nindependent public accounting firm of Deloitte & Touche LLP to perform the\nfinancial statement audits of the NCUA Operating Fund, the Share Insurance\nFund 1, the Central Liquidity Facility, and the Community Development Revolving\nLoan Fund for the year ended December 31, 2008.\n\nThe purpose of the audits is to express an opinion on whether the financial\nstatements are fairly presented. The independent firm also considered the\ninternal control over financial reporting and tested compliance with laws and\nregulations, as part of their audit.\n\nThe audits were performed in accordance with generally accepted auditing\nstandards and Government Auditing Standards issued by the Comptroller\nGeneral of the United States. The Inspector General contracted with Deloitte &\nTouche LLP in August 2006 to perform the financial statement audits mentioned\nabove. The contract was for 2006, with options for 2007 and 2008. The\nInspector General was the contracting officer for this contract.\n\nAUDIT RESULTS Deloitte & Touche LLP expressed unqualified opinions,\n stating that the financial statements present fairly, in all\nmaterial respects, the financial position of the NCUA Operating Fund, the Share\nInsurance Fund, the Central Liquidity Facility, and the Community Development\nRevolving Loan Fund, at December 31, 2008, and the results of operations and\ncash flows for the year then ended.\n\nAlthough Deloitte & Touche LLP did not express an overall opinion of the Funds\xe2\x80\x99\ncompliance with laws and regulations, their testing of compliance did not disclose\nany instances of noncompliance.\n\n\n\n\n1\n Deloitte is providing an opinion on the 2008 portion of the attached 2008/2009 comparative financial\nstatements for the Share Insurance Fund. Refer to OIG report OIG-10-10 for the 2009 opinion.\n\x0cNational Credit Union\nAdministration\nOperating Fund\nFinancial Statements as of and for the\nYears Ended December 31, 2008 and 2007, and\nIndependent Auditors\xe2\x80\x99 Reports\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nOPERATING FUND\n\nTABLE OF CONTENTS\n\n\n Page\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT 1\n\nFINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED\n DECEMBER 31, 2008 AND 2007:\n\n Balance Sheets 2\n\n Statements of Revenues, Expenses, and Changes in Fund Balance 3\n\n Statements of Cash Flows 4\n\n Notes to Financial Statements 5\xe2\x80\x939\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON INTERNAL CONTROL OVER\n FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS\n BASED UPON THE AUDIT PERFORMED IN ACCORDANCE WITH\n GOVERNMENT AUDITING STANDARDS 10\xe2\x80\x9311\n\x0cINDEPENDENT AUDITORS\xe2\x80\x99 REPORT\n\n\nTo the Inspector General of\nNational Credit Union Administration:\n\nWe have audited the accompanying balance sheets of National Credit Union Administration Operating\nFund (the \xe2\x80\x9cFund\xe2\x80\x9d) as of December 31, 2008 and 2007, and the related statements of revenues, expenses,\nand changes in fund balance, and cash flows for the years then ended. These financial statements are the\nresponsibility of the Fund\xe2\x80\x99s management. Our responsibility is to express an opinion on these financial\nstatements based on our audits.\n\nWe conducted our audits in accordance with auditing standards generally accepted in the United States of\nAmerica and the standards applicable to financial audits contained in Government Auditing Standards,\nissued by the Comptroller General of the United States. Those standards require that we plan and perform\nthe audit to obtain reasonable assurance about whether the financial statements are free of material\nmisstatement. An audit includes consideration of internal control over financial reporting as a basis for\ndesigning procedures that are appropriate in the circumstances, but not for the purpose of expressing an\nopinion on the effectiveness of the Fund\xe2\x80\x99s internal control over financial reporting. Accordingly, we\nexpress no such opinion. An audit also includes examining, on a test basis, evidence supporting the\namounts and disclosures in the financial statements, assessing the accounting principles used and\nsignificant estimates made by management, as well as evaluating the overall financial statement\npresentation. We believe that our audits provide a reasonable basis for our opinion.\n\nIn our opinion, such financial statements present fairly, in all material respects, the financial position of\nNational Credit Union Administration Operating Fund as of December 31, 2008 and 2007, and the results\nof its operations and its cash flows for the years then ended in conformity with accounting principles\ngenerally accepted in the United States of America.\n\nIn accordance with Government Auditing Standards, we have also issued our report dated February 17,\n2009, on our consideration of the Fund\xe2\x80\x99s internal control over financial reporting and our tests of its\ncompliance with certain provisions of laws, regulations, contracts and grant agreements, and other\nmatters. The purpose of that report is to describe the scope of our testing of internal control over financial\nreporting and compliance and the results of that testing, and not to provide an opinion on the internal\ncontrol over financial reporting or on compliance. That report is an integral part of an audit performed in\naccordance with Government Auditing Standards and should be considered in assessing the results of our\naudits.\n\n\n\n\nFebruary 17, 2009\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nOPERATING FUND\n\nBALANCE SHEETS\nAS OF DECEMBER 31, 2008 AND 2007\n(Dollars in thousands)\n\n\n 2008 2007\nASSETS\n\nCash and cash equivalents $ 21,592 $ 24,175\n\nDue from National Credit Union Share Insurance Fund (Note 4) 169 272\n\nEmployee advances 91 143\n\nOther accounts receivable (Note 5) 283 169\n\nPrepaid expenses and other assets 4,173 1,799\n\nFixed assets \xe2\x80\x94 net of accumulated depreciation and amortization (Note 3) 33,399 34,213\n\nTOTAL $ 59,707 $ 60,771\n\n\nLIABILITIES AND FUND BALANCE\n\nLIABILITIES:\n Accounts payable $ 4,063 $ 4,216\n Obligations under capital leases (Note 6) 300 1,246\n Accrued wages and benefits 4,118 3,225\n Accrued annual leave 8,907 8,575\n Accrued employee travel 6 5\n Note payable to National Credit Union Share Insurance Fund (Note 4) 19,779 21,120\n\n Total liabilities 37,173 38,387\n\nCOMMITMENTS AND CONTINGENCIES (Notes 9 and 10)\n\nFUND BALANCE:\n Unappopriated 21,534 21,384\n Appropriated (Note 11) 1,000 1,000\n\n Total fund balance 22,534 22,384\n\nTOTAL $ 59,707 $ 60,771\n\n\nSee notes to financial statements.\n\n\n\n\n -2-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nOPERATING FUND\n\nSTATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN FUND BALANCE\nFOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n(Dollars in thousands)\n\n\n 2008 2007\n\nREVENUES:\n Operating fees $ 72,423 $ 63,961\n Interest 773 2,213\n Other 233 303\n\n Total revenues 73,429 66,477\n\nEXPENSES (Note 4):\n Employee wages and benefits 56,030 51,902\n Travel 7,505 6,802\n Rent, communications, and utilities 1,908 1,905\n Contracted services 3,414 2,961\n Other 4,422 4,568\n\n Total expenses 73,279 68,138\n\nEXCESS OF\n REVENUES OVER EXPENSES (EXPENSES OVER REVENUES) 150 (1,661)\n\nFUND BALANCE \xe2\x80\x94 Beginning of year 22,384 24,045\n\nFUND BALANCE \xe2\x80\x94 End of year $ 22,534 $ 22,384\n\n\nSee notes to financial statements.\n\n\n\n\n -3-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nOPERATING FUND\nSTATEMENTS OF CASH FLOWS\nFOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n(Dollars in thousands)\n\n\n 2008 2007\nCASH FLOWS FROM OPERATING ACTIVITIES:\n Excess of revenues over expenses (expenses over revenues) $ 150 $ (1,661)\n Adjustments to reconcile excess of revenues over expenses\n (expenses over revenues) to net cash provided by operating activities:\n Depreciation and amortization 3,181 3,312\n Provision for loss on disposal of employee residences held for resale 283 280\n (Increase) decrease in assets:\n Due from National Credit Union Share Insurance Fund 103 (370)\n Employee advances 52 759\n Other accounts receivable (114) 3\n Prepaid expenses (2,857) (156)\n (Decrease) increase in liabilities:\n Accounts payable (153) 399\n Accrued wages and benefits 893 654\n Accrued annual leave 332 256\n Accrued employee travel 1 (6)\n\n Net cash provided by operating activities 1,871 3,470\n\nCASH FLOWS FROM INVESTING ACTIVITIES:\n Purchases of fixed assets (2,367) (2,250)\n Purchases of employee residences held for sale (1,286) (1,530)\n Proceeds from sale of employee residences held for resale 1,486 1,290\n\n Net cash used in investing activities (2,167) (2,490)\n\nCASH FLOWS FROM FINANCING ACTIVITIES:\n Repayments of note payable (1,341) (1,341)\n Principal payments under capital lease obligations (946) (858)\n\n Net cash used in financing activities (2,287) (2,199)\n\nNET DECREASE IN CASH AND CASH EQUIVALENTS (2,583) (1,219)\nCASH AND CASH EQUIVALENTS \xe2\x80\x94 Beginning of year 24,175 25,394\n\nCASH AND CASH EQUIVALENTS \xe2\x80\x94 End of year $ 21,592 $ 24,175\n\nSUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES \xe2\x80\x94\n Acquisition of equipment under capital lease $ - $ 83\n\nCASH PAYMENTS FOR INTEREST $ 814 $ 1,095\n\nSee notes to financial statements.\n\n\n\n -4-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nOPERATING FUND\n\nNOTES TO FINANCIAL STATEMENTS\nAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n\n\n 1. ORGANIZATION AND PURPOSE\n\n The National Credit Union Administration Operating Fund (the \xe2\x80\x9cFund\xe2\x80\x9d) was created by the Federal\n Credit Union Act of 1934. The Fund was established as a revolving fund in the United States Treasury\n under the management of the National Credit Union Administration (NCUA) Board for the purpose of\n providing administration and service to the Federal Credit Union System.\n\n 2. SIGNIFICANT ACCOUNTING POLICIES\n\n Cash Equivalents \xe2\x80\x94 The Federal Credit Union Act permits the Fund to make investments in United\n States Government securities or securities guaranteed as to both principal and interest by the United\n States Government. Cash equivalents are highly liquid investments with original maturities of three\n months or less. All investments in 2008 and 2007 were cash equivalents and are stated at cost, which\n approximates fair value.\n\n Depreciation and Amortization \xe2\x80\x94 Building, furniture, equipment and leasehold improvements are\n recorded at cost. Capital leases are recorded at the present value of the future minimum lease payments.\n Depreciation and amortization are computed by the straight-line method over the estimated useful lives\n of the building, furniture, and equipment, and the shorter of the estimated useful life or lease term for\n leasehold improvements and capital leases. Estimated useful lives are forty years for the building and\n three to ten years for the furniture, equipment, and leasehold improvements.\n\n Operating Fees \xe2\x80\x94 The Fund assesses each federally chartered credit union an annual fee based on the\n credit union\xe2\x80\x99s asset base as of the preceding December 31. The fee is designed to cover the costs of\n providing administration and service to the Federal Credit Union System. The Fund recognizes this\n operating fee revenue ratably over the year.\n\n Income Taxes \xe2\x80\x94 The Fund is exempt from Federal income taxes under Section 501(c) (1) of the\n Internal Revenue Code.\n\n Fair Value of Financial Instruments \xe2\x80\x94 The following methods and assumptions were used in\n estimating the fair value disclosures for financial instruments:\n\n Cash and cash equivalents, receivables from National Credit Union Share Insurance Fund (NCUSIF)\n and National Credit Union Administration Central Liquidity Facility (NCUA CLF), employee advances,\n other accounts receivable, accounts and notes payable to NCUSIF, and other accounts payable are\n recorded at book values, which approximate the respective fair values.\n\n Use of Estimates \xe2\x80\x94 The preparation of financial statements in conformity with accounting principles\n generally accepted in the United States of America requires management to make estimates and\n assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets\n and liabilities at the date of the financial statements and the reported amounts of revenues and expenses\n during the reporting period. Actual results could differ from management\xe2\x80\x99s estimates.\n\n\n\n -5-\n\x0c3. FIXED ASSETS\n\n Fixed assets are comprised of the following at December 31, 2008 and 2007 (in thousands):\n\n 2008 2007\n\n Office building and land $ 43,358 $ 43,358\n Furniture and equipment 13,501 12,812\n Equipment under capital leases 2,782 2,846\n Assets under construction 1,000 320\n\n Total 60,641 59,336\n\n Less accumulated depreciation and amortization (27,242) (25,123)\n\n Fixed assets \xe2\x80\x94 net $ 33,399 $ 34,213\n\n Accumulated amortization balances for equipment under capital leases as of December 31, 2008 and\n 2007, were $2,523,000 and $1,718,000, respectively.\n\n4. TRANSACTIONS WITH NCUSIF\n\n Certain administrative services are provided by the Fund to NCUSIF. The Fund charges NCUSIF for\n these services based upon an annual allocation factor approved by the NCUA Board and derived from a\n study of actual usage. The allocation factor to NCUSIF was 52% in 2008 and 53.3% in 2007. The cost\n of the services allocated to NCUSIF, which totaled approximately $ 79,385,000 and $77,766,000 for\n 2008 and 2007, respectively, is reflected as a reduction of the corresponding expenses in the\n accompanying financial statements.\n\n In 1992, the Fund entered into a commitment to borrow up to $41,975,000 in a thirty-year secured term\n note with NCUSIF. The monies were drawn as needed to fund the costs of constructing a building in\n 1993. Interest costs incurred were approximately $807,000 and $967,000 for 2008 and 2007,\n respectively. The note payable balances at December 31, 2008 and 2007, were approximately\n $19,779,000 and $21,120,000, respectively.\n\n The above note requires principal repayments at December 31, 2008, as follows (in thousands):\n\n Years Ending Secured\n December 31 Term Note\n\n 2009 $ 1,341\n 2010 1,341\n 2011 1,341\n 2012 1,341\n 2013 1,341\n Thereafter 13,074\n\n Total $ 19,779\n\n\n\n\n -6-\n\x0c The variable rate on the note is equal to NCUSIF\xe2\x80\x99s prior-month yield on investments. The average\n interest rates during 2008 and 2007, were 3.95% and 4.45%, respectively. The interest rates at\n December 31, 2008 and 2007, were 3.49% and 4.39%, respectively.\n\n5. TRANSACTIONS WITH NCUA CLF\n\n Certain administrative services are provided by the Fund to NCUA CLF. The Fund charges NCUA CLF\n for these services based upon rates approved by the NCUA Board. The costs of the services provided to\n NCUA CLF were $259,000 and $240,000 for 2008 and 2007, respectively, and are reflected as a\n reduction of the corresponding expenses in the accompanying financial statements.\n\n Other accounts receivable include approximately $110,000 and $103,000 of amounts due from\n NCUA CLF as of December 31, 2008 and 2007, respectively.\n\n6. LEASE COMMITMENTS\n\n Description of Leasing Agreements \xe2\x80\x94 The Fund has entered into a number of lease agreements with\n vendors for the rental of office space, as well as the lease of office equipment that includes laptops,\n printers, monitors, and copiers.\n\n Operating Leases \xe2\x80\x94 The Fund leases office space under lease agreements that expire through 2014.\n Office rental charges amounted to approximately $922,700 and $741,500 of which approximately\n $479,800 and $395,200 was reimbursed by NCUSIF for 2008 and 2007, respectively.\n\n Capital Leases \xe2\x80\x94 The Fund leases equipment under lease agreements that expire through 2012.\n\n The future minimum lease payments as of December 31, 2008, are as follows (in thousands):\n\n Years Ending Operating Capital\n December 31 Leases Leases\n\n 2009 $ 756 $ 258\n 2010 479 18\n 2011 487 18\n 2012 479 8\n 2013 316\n Thereafter 79\n\n Total $ 2,596 302\n\n Less imputed interest (2)\n\n Present value of minimum lease payments $ 300\n\n\n Based on the allocation factor approved by the NCUA Board for 2008, NCUSIF will reimburse the Fund\n for approximately 53.8% of the future operating lease payments.\n\n\n\n\n -7-\n\x0c7. RETIREMENT PLANS\n\n The employees of the Fund are participants in the Civil Service Retirement and Disability Fund, which\n includes the Federal Employees\xe2\x80\x99 Retirement System (FERS). Both plans are defined benefit retirement\n plans covering all of the employees of the Fund. FERS is comprised of a Social Security Benefits Plan, a\n Basic Benefits Plan, and a Savings Plan. Contributions to the plans are based on a percentage of\n employees\xe2\x80\x99 gross pay. Under the Savings Plan, employees can also elect additional contributions,\n subject to Internal Revenue Service (IRS) limitations, and the Fund will match up to 5% of the\n employees\xe2\x80\x99 gross pay. In 2008 and 2007, the Fund\xe2\x80\x99s contributions to the plans were approximately\n $12,768,000 and $11,947,000, respectively, of which approximately $6,639,000 and $6,368,000,\n respectively, were reimbursed by NCUSIF.\n\n The Fund does not account for the assets of the above plans and does not have actuarial data with respect\n to accumulated plan benefits or the unfunded liability relative to eligible employees. These amounts are\n reported by the U.S. Office of Personnel Management for the Civil Service Retirement and Disability\n Fund and are not allocated to individual employers.\n\n8. DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS\n\n The carrying amount and the estimated fair value of the Fund\xe2\x80\x99s financial instruments are as follows\n (in thousands):\n\n December 31, 2008 December 31, 2007\n Carrying Fair Carrying Fair\n Amount Value Amount Value\n\n Cash and cash equivalents $ 21,592 $ 21,592 $ 24,175 $ 24,175\n Due from NCUSIF 169 169 272 272\n Employee advances 91 91 143 143\n Other accounts receivable 283 283 169 169\n Accounts payable 4,063 4,063 4,216 4,216\n Obligation under capital leases 300 300 1,246 1,246\n Note payable to NCUSIF 19,779 19,779 21,120 21,120\n\n\n\n9. CONTINGENCIES\n\n The Fund is currently a party to a number of disputes that involve or may involve litigation. In the\n opinion of management, the ultimate liability with respect to any other disputes, if any, will not be\n material to the Fund\xe2\x80\x99s financial position.\n\n10. PURCHASE COMMITMENTS\n\n The Fund has entered into a new three-year agreement to lease laptops and other computer equipment.\n Payments will commence in April 2009 and will be made quarterly throughout the life of the lease. The\n total amount of payments under the lease will be approximately $3,145,000, of which approximately\n $2,413,000 will be paid by the Fund and remaining $732,000 will be paid by NCUSIF.\n\n In addition, the Fund has entered into an agreement with the Department of Transportation for the\n implementation and hosting of a new financial system. The project has a budget in the amount of\n\n\n\n -8-\n\x0c $5,000,000 for one time implementation and licensing costs, of which $2,400,000 was paid in 2008.\n Annual hosting costs will be approximately $950,000 starting in 2010.\n\n11. RETAINED EARNINGS APPROPRIATION\n\n In 2006, the NCUA Board established an appropriation of the Fund\xe2\x80\x99s fund balance in an effort to more\n transparently disclose and communicate to stakeholders earnings that are needed for major projects that\n cannot be accrued or that do not warrant inclusion in the annual operating expense budget. The initial\n appropriation of $1,000,000 is for repairs and maintenance on NCUA\xe2\x80\x99s Alexandria headquarters\n building. In 2008, this amount did not change.\n\n ******\n\n\n\n\n -9-\n\x0cINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON INTERNAL CONTROL OVER\n FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER\n MATTERS BASED UPON THE AUDIT PERFORMED IN ACCORDANCE\n WITH GOVERNMENT AUDITING STANDARDS\n\n\nTo the Inspector General of\nNational Credit Union Administration:\n\nWe have audited the financial statements of the National Credit Union Administration Operating Fund\n(the \xe2\x80\x9cFund\xe2\x80\x9d), as of and for the year ended December 31, 2008, and have issued our report thereon dated\nFebruary 17, 2009. We conducted our audit in accordance with auditing standards generally accepted in\nthe United States of America and the standards applicable to financial audits contained in Government\nAuditing Standards, issued by the Comptroller General of the United States.\n\nInternal Control Over Financial Reporting\n\nIn planning and performing our audit, we considered the Fund\xe2\x80\x99s internal control over financial reporting\nas a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial\nstatements, but not for the purpose of expressing an opinion on the effectiveness of the Fund\xe2\x80\x99s internal\ncontrol over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the\nFund\xe2\x80\x99s internal control over financial reporting.\n\nA control deficiency exists when the design or operation of a control does not allow management or\nemployees, in the normal course of performing their assigned functions, to prevent or detect\nmisstatements on a timely basis. A significant deficiency is a control deficiency, or a combination of\ncontrol deficiencies, that adversely affects the entity\xe2\x80\x99s ability to initiate, authorize, record, process, or\nreport financial data reliably in accordance with generally accepted accounting principles such that there\nis more than a remote likelihood that a misstatement of the entity\xe2\x80\x99s financial statements that is more than\ninconsequential will not be prevented or detected by the entity\xe2\x80\x99s internal control.\n\nA material weakness is a significant deficiency, or combination of significant deficiencies, that results in\nmore than a remote likelihood that a material misstatement of the financial statements will not be\npresented or detected by the entity\xe2\x80\x99s internal control.\n\nOur consideration of the internal control over financial reporting was for the limited purpose described in\nthe first paragraph of this section and would not necessarily identify all deficiencies in internal control\nthat might be significant deficiencies or material weaknesses. We did not identify any deficiencies in\ninternal control over financial reporting that we consider to be material weaknesses as defined above.\n\x0cCompliance and Other Matters\n\nAs part of obtaining reasonable assurance about whether the Fund\xe2\x80\x99s financial statements are free of\nmaterial misstatement, we performed tests of its compliance with certain provisions of laws, regulations,\ncontracts, and grant agreements, noncompliance with which could have a direct and material effect on the\ndetermination of financial statement amounts. However, providing an opinion on compliance with those\nprovisions was not an objective of our audit, and accordingly, we do not express such an opinion. The\nresults of our tests disclosed no instances of noncompliance or other matters that are required to be\nreported under Government Auditing Standards.\n\nWe noted certain matters that we have reported to the management of the Fund in a separate letter dated\nFebruary 17, 2009.\n\nThis report is intended solely for the information and use of the Inspector General, the Board of the\nNational Credit Union Administration, and the management of the National Credit Union Administration\nOperating Fund and is not intended to be and should not be used by anyone other than these specified\nparties.\n\n\n\n\nFebruary 17, 2009\n\n\n\n\n - 11 -\n\x0cNational Credit Union\nShare Insurance Fund\nFinancial Statements as of and for the Years Ended\nDecember 31, 2009 and 2008, and\nIndependent Auditors\xe2\x80\x99 Reports\n\x0cNATIONAL CREDIT UNION SHARE INSURANCE FUND\n\nTABLE OF CONTENTS\n\n\n Page\n\n INDEPENDENT AUDITORS\xe2\x80\x99 REPORTS ON FINANCIAL STATEMENTS 1-2\n\n FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED\n DECEMBER 31, 2009 AND 2008\n\n Balance Sheets 3\n\n Statements of Operations 4\n\n Statements of Changes in Fund Balance 5\n\n Statements of Cash Flows 6\n\n Notes to Financial Statements 7-21\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON INTERNAL CONTROL OVER\nFINANCIAL REPORTING WITH FINDINGS AND RESPONSE - 2009\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON COMPLIANCE AND\nOTHER MATTERS - 2009\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORTS ON INTERNAL CONTROL OVER\nFINANCIAL REPORTING ON COMPLIANCE AND OTHER MATTERS - 2008\n\nSCHEDULE OF FINDINGS AND RESPONSES - 2008\n\x0c KPMG LLP\n 2001 M Street, NW\n Washington, DC 20036\n\n\n\n\n Independent Auditors\xe2\x80\x99 Report on Financial Statements\n\n\nInspector General, National Credit Union Administration and\nthe Board of Directors, National Credit Union Administration:\n\nWe have audited the accompanying balance sheet of the National Credit Union Share Insurance Fund\n(NCUSIF) as of December 31, 2009, and the related statements of operations, changes in fund balance, and\ncash flows for the year then ended (hereinafter referred to as \xe2\x80\x9cfinancial statements\xe2\x80\x9d). These financial\nstatements are the responsibility of the NCUSIF\xe2\x80\x99s management. Our responsibility is to express an opinion\non these financial statements based on our audit.\n\nWe conducted our audit in accordance with auditing standards generally accepted in the United States of\nAmerica; the standards applicable to financial audits contained in Government Auditing Standards, issued\nby the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin\nNo. 07-04, Audit Requirements for Federal Financial Statements, as amended. Those standards and OMB\nBulletin No. 07-04 require that we plan and perform the audit to obtain reasonable assurance about whether\nthe financial statements are free of material misstatement. An audit includes consideration of internal\ncontrol over financial reporting as a basis for designing audit procedures that are appropriate in the\ncircumstances, but not for the purpose of expressing an opinion on the effectiveness of the NCUSIF\xe2\x80\x99s\ninternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes\nexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,\nassessing the accounting principles used and significant estimates made by management, as well as\nevaluating the overall financial statement presentation. We believe that our audit provides a reasonable\nbasis for our opinion.\n\nIn our opinion, the 2009 financial statements referred to above present fairly, in all material respects, the\nfinancial position of the National Credit Union Share Insurance Fund as of December 31, 2009, and the\nresults of its operations and its cash flows for the year then ended in conformity with U.S. generally\naccepted accounting principles.\n\nIn accordance with Government Auditing Standards, we have also issued our reports dated June 11, 2010,\non our consideration of the NCUSIF\xe2\x80\x99s internal control over financial reporting and our tests of its\ncompliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters.\nThe purpose of those reports is to describe the scope of our testing of internal control over financial\nreporting and compliance and the results of that testing, and not to provide an opinion on the internal\ncontrol over financial reporting or on compliance. Those reports are an integral part of an audit performed\nin accordance with Government Auditing Standards and should be read in conjunction with this report in\nassessing the results of our audit.\n\n\n\n\nJune 11, 2010\n\n\n\n\n KPMG LLP, a U.S. limited liability partnership, is the U.S.\n member firm of KPMG International, a Swiss cooperative.\n\x0cINDEPENDENT AUDITORS\xe2\x80\x99 REPORT\n\nTo the Inspector General of\nNational Credit Union Administration:\n\nWe have audited the accompanying balance sheet of the National Credit Union Share Insurance Fund\n(NCUSIF) as of December 31, 2008, and the related statements of operations, changes in fund balance,\nand of cash flows for the year then ended. These financial statements are the responsibility of NCUSIF\xe2\x80\x99s\nmanagement. Our responsibility is to express an opinion on these financial statements based on our audit.\n\nWe conducted our audit in accordance with auditing standards generally accepted in the United States of\nAmerica and the standards applicable to financial audits contained in Government Auditing Standards,\nissued by the Comptroller General of the United States. Those standards require that we plan and perform\nthe audit to obtain reasonable assurance about whether the financial statements are free of material\nmisstatement. An audit includes consideration of internal control over financial reporting as a basis for\ndesigning audit procedures that are appropriate in the circumstances, but not for the purpose of expressing\nan opinion on the effectiveness of NCUSIF\xe2\x80\x99s internal control over financial reporting. Accordingly, we\nexpress no such opinion. An audit also includes examining, on a test basis, evidence supporting the\namounts and disclosures in the financial statements, assessing the accounting principles used and\nsignificant estimates made by management, as well as evaluating the overall financial statement\npresentation. We believe that our audit provides a reasonable basis for our opinion.\n\nIn our opinion, such financial statements present fairly, in all material respects, the financial position of\nthe National Credit Union Share Insurance Fund as of December 31, 2008, and the results of its\noperations and its cash flows for the year then ended in conformity with accounting principles generally\naccepted in the United States of America.\n\nAs discussed in Note 8 to the financial statements, effective June 18, 2009, NCUSIF legally transferred\ncertain obligations to a newly formed entity, the Temporary Corporate Credit Union Stabilization Fund\n(TCCUSF). As a result, effective with that date, NCUSIF was no longer required to consolidate certain\ncorporate credit unions in accordance with Financial Accounting Standards Board (FASB) Accounting\nStandards Codification (ASC) 810, Consolidation (formerly, FASB Interpretation No. 46 (R),\nConsolidation of Variable Interest Entities). Because NCUSIF and TCCUSF are under common control,\nthis has resulted in a change in reporting entity in accordance with FASB ASC 250, Accounting Changes\nand Error Corrections, which change has been applied retrospectively.\n\nIn accordance with Government Auditing Standards, we have also issued our report dated June 10, 2010,\non our consideration of NCUSIF\xe2\x80\x99s internal control over financial reporting and our tests of its compliance\nwith certain provisions of laws, regulations, contracts, and grant agreements and other matters. The\npurpose of that report is to describe the scope of our testing of internal control over financial reporting\nand compliance and the results of that testing and not to provide an opinion on the internal control over\nfinancial reporting or on compliance. That report is an integral part of an audit performed in accordance\nwith Government Auditing Standards and should be read in conjunction with this report in considering the\nresults of our audits.\n\n\n\n\nJune 10, 2010\n\n\n -2-\n\x0cNATIONAL CREDIT UNION SHARE INSURANCE FUND\n\nBALANCE SHEETS\nAS OF DECEMBER 31, 2009 AND 2008\n(Dollars in thousands)\n\n 2009 2008\n\nASSETS\n\nCash and cash equivalents (Note 4) $ 817,439 $ 3,837,344\nInvestments (Note 5) 8,698,313 4,243,313\nContributions receivable from insured credit unions 17,614 992\nNote receivable due from NCUA Operating Fund (Note 7) 18,438 19,779\nPremium receivable 12,901 -\nLoans receivable (Note 7) 10,000,000 -\nAssets acquired in assistance to insured credit unions 204,525 103,175\nFixed assets \xe2\x80\x94 net of accumulated depreciation and amortization 58 80\nAccrued interest receivable 72,356 39,848\nAccrued fee receivable - 1,929\n Total assets $ 19,841,644 $ 8,246,460\n\nLIABILITIES AND FUND BALANCE\n\nLIABILITIES\nCash assistance liability $ 5,393 $ 2,000\nAmounts due to insured shareholders of liquidated credit unions 12,192 10,356\nDue to NCUA Operating Fund (Note 12) 2,257 169\nReserve for losses (Note 9) 758,741 278,343\nInterest payable 1,302 -\nObligations under capital lease - 89\nNote payable (Note 12) 10,000,000 -\nAccounts payable 27,474 56\n Total liabilities 10,807,359 291,013\n\nCommitments and Contingencies (Note 14)\n\nFUND BALANCE\nInsurance fund balance 1,889,798 1,700,003\nInsured credit unions\xe2\x80\x99 accumulated contributions (Note 11) 7,067,139 5,977,106\nAccumulated other comprehensive income 77,348 278,338\n Total fund balance 9,034,285 7,955,447\n Total liabilities and fund balance $ 19,841,644 $ 8,246,460\n\nSee accompanying Notes to the Financial Statements\n\n\n\n\n -3-\n\x0cNATIONAL CREDIT UNION SHARE INSURANCE FUND\n\nSTATEMENTS OF OPERATIONS\nFOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008\n(Dollars in thousands)\n\n 2009 2008\n\nREVENUES\n\nPremium income (Note 10) $ 727,466 $ -\nInvestment income 188,774 390,922\nInterest on note receivable due from related party 509 807\nInterest on loans 32,791 1,178\nOther income 19 2,752\n Total revenues 949,559 395,659\n\nEXPENSES\n\nEmployee wages and benefits 69,966 60,699\nTravel 10,161 8,130\nRent, communications, and utilities 2,255 2,067\nContracted services 4,646 3,698\nInterest expense 32,791 -\nOther 14,805 6,922\nProvision for insurance losses 625,140 290,354\n Total expenses 759,764 371,870\n\nEXCESS OF REVENUES OVER EXPENSES $ 189,795 $ 23,789\n\nSee accompanying Notes to the Financial Statements\n\n\n\n\n -4-\n\x0cNATIONAL CREDIT UNION SHARE INSURANCE FUND\n\nSTATEMENTS OF CHANGES IN FUND BALANCE\nFOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008\n(Dollars in thousands)\n\n Insured Accumulated\n Insurance Credit Unions\xe2\x80\x99 Other\n Fund Accumulated Comprehensive Comprehensive\n Balance Contributions Income Income Total\n\nBALANCE \xe2\x80\x94 January 1, 2008 $ 1,676,214 $ 5,585,256 $ - $ - $ 7,261,470\n -\n Contributions from insured credit unions - 391,850 - 391,850\n\n Excess of revenues over expenses 23,789 - - 23,789 23,789\n\n Other comprehensive income - changes in\n unrealized gain on available for sale investments - - 278,338 278,338 278,338\n Comprehensive income - - - $ 302,127\nBALANCE \xe2\x80\x94 December 31, 2008 1,700,003 5,977,106 278,338 $ - 7,955,447\n\n Contributions from insured credit unions - 1,090,033 - - 1,090,033\n\n Excess of revenues over expenses 189,795 - - 189,795 189,795\n\n Other comprehensive income - changes in\n unrealized gain on available for sale investments - - (200,990) (200,990) (200,990)\n Comprehensive loss - - - $ (11,195)\nBALANCE \xe2\x80\x94 December 31, 2009 $ 1,889,798 $ 7,067,139 $ 77,348 $ 9,034,285\n\n\n\nSee accompanying Notes to the Financial Statements\n\n\n\n\n -5-\n\x0cNATIONAL CREDIT UNION SHARE INSURANCE FUND\n\nSTATEMENTS OF CASH FLOWS\nFOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008\n(Dollars in thousands)\n\n 2009 2008\n\nCASH FLOWS FROM OPERATING ACTIVITIES:\n Excess of revenues over expenses $ 189,795 $ 23,789\n Adjustments to reconcile excess of revenues over expenses to cash provided by\n operating activities:\n Depreciation and amortization 82 323\n Amortization of premiums and discounts on investments \xe2\x80\x94 net 78,916 44,465\n Provision for insurance losses 625,140 290,354\n Insurance losses paid, net (144,742) (227,791)\n (Increase) decrease in assets:\n Premium receivable (12,901) -\n Assets acquired in assistance to insured credit unions \xe2\x80\x94 net (101,350) (37,291)\n Accrued interest receivable (32,508) 20,203\n Accrued fee receivable 1,929 (1,929)\n Increase (decrease) in liabilities:\n Cash assistance liability 3,393 2,000\n Amounts due to insured shareholders of liquidated credit unions 1,836 5,463\n Due to NCUA Operating Fund 2,088 (103)\n Interest payable 1,302 -\n Due to credit unions - (30,853)\n Accounts payable 27,418 21\n Net cash provided by operating activities 640,398 88,651\n\nCASH FLOWS FROM INVESTING ACTIVITIES:\n Purchases of investments (6,095,297) (2,335,125)\n Proceeds from maturities on investments 1,360,391 1,800,000\n Proceeds from sales of investments - 2,500,000\n Capital expenditures (60) -\n Collections on note receivable \xe2\x80\x94 NCUA Operating Fund 1,341 1,341\n Net cash (used in) provided by investing activities (4,733,625) 1,966,216\n\nCASH FLOWS FROM FINANCING ACTIVITIES:\n Contributions from insured credit unions 1,073,411 391,012\n Principal payments under capital lease obligation (89) (351)\n Net cash provided by financing activities 1,073,322 390,661\n\nNET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,019,905) 2,445,528\n\nCASH AND CASH EQUIVALENTS \xe2\x80\x94 Beginning of year 3,837,344 1,391,816\n\nCASH AND CASH EQUIVALENTS \xe2\x80\x94 End of year $ 817,439 $ 3,837,344\n\n\nCASH PAYMENTS FOR INTEREST $ - $ 7\n\nNON-CASH INVESTING AND FINANCING ACTIVITIES:\n Loans to Corporate Credit Unions (CCUs) financed through CLF borrowings $ 10,000,000 $ -\n\n\n\nSee accompanying Notes to the Financial Statements.\n\n\n\n\n -6-\n\x0c NATIONAL CREDIT UNION SHARE INSURANCE FUND\n NOTES TO FINANCIAL STATEMENTS\n AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008\n\n\n1. ORGANIZATION AND PURPOSE\n\n OVERVIEW OF THE NATIONAL CREDIT UNION SHARE INSURANCE FUND\n\n The National Credit Union Share Insurance Fund (\xe2\x80\x9cNCUSIF\xe2\x80\x9d) was created by Title II of the Federal\n Credit Union Act, 12 U.S.C. 1781 et seq., as amended by section 136(b) of the Emergency\n Economic Stabilization Act of 2008, 12 U.S.C. 5241(b), and the Helping Families Save Their\n Homes Act of 2009, \xc2\xa7204, Pub. L. No. 111-22, 123 Stat. 1632, 1648 (2009) (\xe2\x80\x98Helping Families\n Act\xe2\x80\x99). The NCUSIF was established as a revolving fund in the United States Treasury, under the\n Board of Directors of the National Credit Union Administration (NCUA), for the purpose of\n insuring member share deposits in all federal credit unions and for qualifying state credit unions\n requesting insurance.\n\n The NCUA exercises direct supervisory authority over federal credit unions and coordinates\n required supervisory involvement with the state chartering authority for state chartered credit unions\n insured by the NCUSIF. Insured credit unions are required to report certain financial and statistical\n information to NCUA on a quarterly basis, and are subject to periodic examination by the NCUA.\n Information derived through the supervisory and examination process provides the NCUSIF with the\n ability to identify credit unions experiencing financial difficulties that may require assistance from\n the NCUSIF.\n\n Assistance may be in the form of a waiver of statutory reserve requirements, a guarantee account,\n cash assistance, or other such form. In some cases, a merger partner for the credit union may be\n sought. Mergers between financially troubled credit unions and stronger credit unions may also\n require NCUSIF assistance. Merger assistance may be in the form of cash assistance, purchase of\n certain assets by the NCUSIF, and/or guarantees of the values of certain assets (primarily loans).\n When a credit union is no longer able to continue operating and the merger and assistance\n alternatives are not practical, the NCUSIF may liquidate the credit union, pay members\xe2\x80\x99 shares up to\n the maximum insured amount, and dispose of its assets.\n\n A change in reporting entity, related to certain variable interest entities, has been retrospectively\n presented herein. With this change in reporting entity, the NCUSIF was no longer required to\n consolidate any corporate credit unions.\n\n Recent Legislation \xe2\x80\x94 The Helping Families Act increased deposit insurance coverage to $250,000\n through December 31, 2013, and created the Temporary Corporate Credit Union Stabilization Fund\n (\xe2\x80\x9cTCCUSF\xe2\x80\x9d), 12 U.S.C. 5241(b), 1790e. The purposes of the TCCUSF are to accrue the losses of\n the Corporate Credit Union (\xe2\x80\x9cCCU\xe2\x80\x9d) system, and over time, to assess the entire credit union system\n for the recovery of such losses. The act does not permit recovery of losses ahead of funds advanced\n to pay such losses; instead, funds to pay losses are provided through borrowings from the U.S.\n Treasury. NCUA has 28 corporate credit unions which provide liquidity, investment, and payment\n services to natural person credit unions. On June 18, 2009, the NCUA Board approved actions to\n legally obligate the TCCUSF for the costs of stabilizing the CCU system. These actions included\n legally obligating the TCCUSF as the issuer and holder of a $1 billion capital note with U.S. Central\n Federal Credit Union (\xe2\x80\x9cUSC\xe2\x80\x9d), and for all liabilities arising from the Temporary Corporate Credit\n\n\n -7-\n\x0c Union Share Guarantee Program (\xe2\x80\x9cTCCUSGP\xe2\x80\x9d) and the Temporary Corporate Credit Union\n Liability Guarantee Program (\xe2\x80\x9cTCCULGP\xe2\x80\x9d). The TCCUSGP guarantees the entire share amount\n member credit unions have on deposit with CCUs. The TCCULGP guarantees timely payment of\n principal and interest on certain unsecured debt of participating CCUs.\n\n Sources of Funding \xe2\x80\x94 Deposits insured by NCUSIF are backed by the full faith and credit of the\n U.S. Government. NCUSIF has multiple sources of funding. Each insured credit union is required to\n deposit and maintain in the NCUSIF one percent of its insured shares. The NCUA Board may also\n assess premiums to all federally insured credit unions as provided by the Federal Credit Union Act.\n\n In addition, the NCUSIF has $6 billion in borrowing authority, shared with the TCCUSF, from the\n U.S. Treasury for use in unforeseen emergencies. This borrowing may be temporarily increased to\n an amount not to exceed $30 billion.\n\n Under the Federal Credit Union Act, NCUSIF also has the ability to borrow from the NCUA Central\n Liquidity Facility (\xe2\x80\x9cCLF\xe2\x80\x9d). If in the judgment of the NCUA Board, a loan to the NCUSIF is\n required at any time for carrying out the purposes of its programs, the NCUSIF is authorized to\n borrow from the CLF, having access to CLF\xe2\x80\x99s unused borrowing authority.\n\n Significant Developments \xe2\x80\x94 On March 20, 2009, the NCUSIF made two $5 billion liquidity\n stabilization loans to USC and Western Corporate Federal Credit Union (\xe2\x80\x9cWesCorp\xe2\x80\x9d), respectively,\n with funds borrowed from the CLF. These advances are due to the CLF on December 21, 2010, as\n discussed further below.\n\n2. SIGNIFICANT ACCOUNTING POLICIES\n\n Basis of Presentation \xe2\x80\x94 The NCUSIF has historically prepared its financial statements in\n accordance with accounting principles generally accepted in the United States of America\n (\xe2\x80\x9cGAAP\xe2\x80\x9d), based on standards issued by the Financial Accounting Standards Board (\xe2\x80\x9cFASB\xe2\x80\x9d), the\n private sector standards setting body. In October 1999, the American Institute of Certified Public\n Accountants (AICPA) designated the Federal Accounting Standards Advisory Board (\xe2\x80\x9cFASAB\xe2\x80\x9d) as\n the standards setting body for the establishment of accounting principles generally accepted in the\n United States of America with respect to the financial statements of Federal government entities.\n The FASAB has indicated that the preparation of financial statements based upon standards\n promulgated by the FASB may be regarded as being in accordance with GAAP for those Federal\n entities, which includes the NCUSIF, that have issued financial statements based upon FASB\n standards in the past. To be consistent with historical reporting, the NCUSIF\xe2\x80\x99s financial statements\n are presented in accordance with accounting and financial reporting standards promulgated by the\n FASB. These statements include the accounts of the NCUSIF and are consolidated as necessary with\n any variable interest entities for which the NCUSIF is deemed to be the primary beneficiary. As\n explained herein, no entities were consolidated in either 2009 or 2008.\n\n Basis of Accounting \xe2\x80\x94 The financial statements are presented in accordance with the accrual basis\n of accounting. As such, the NCUSIF recognizes income when earned and expenses when incurred.\n The NCUSIF recognizes loans upon issuance and related repayments when received. The NCUSIF\n investment transactions are recognized on trade date. The NCUSIF recognizes borrowings when\n received and repayments when made. In addition, the NCUSIF recognizes interest on loans, interest\n on investments, and revenue from premium assessments when earned and recognizes interest on\n borrowings and expenses when incurred.\n\n\n\n\n -8-\n\x0cAssets Acquired in Assistance to Insured Credit Unions \xe2\x80\x94 The NCUSIF acquires the assets of\nliquidating credit unions pending their ultimate disposition. To assist in the merger of credit unions,\nthe NCUSIF may purchase certain credit union assets. In addition, the NCUSIF may provide cash\nassistance by acquiring nonperforming assets of a credit union experiencing financial difficulty.\nThese acquired assets are recorded by the NCUSIF at their estimated net realizable value.\n\nUse of Estimates \xe2\x80\x94 The preparation of financial statements in conformity with accounting\nprinciples generally accepted in the United States of America requires management to make\nestimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of\ncontingent assets and liabilities at the date of the financial statements, and the amounts of revenues\nand expenses reported during that period. Actual results could differ from estimates. Significant\nitems subject to those estimates and assumptions include reserve for losses and contingencies. The\ncurrent economic environment has increased the degree of uncertainty inherent in those estimates\nand assumptions.\n\nCash and Cash Equivalents \xe2\x80\x94 The Federal Credit Union Act permits the NCUSIF to make\ninvestments in United States Government securities or securities guaranteed as to both principal and\ninterest by the United States Government. Cash equivalents are liquid investments with original\nmaturities of three months or less.\n\nLoans and Note Receivable \xe2\x80\x94 Notes and loans receivable relate to advances and loans to credit\nunions and the National Credit Union Administration Operating Fund. They bear interest based on\nrates set by U.S. Treasury and are recorded at face value. The NCUSIF does not intend to sell these\nreceivables.\n\nAn allowance for doubtful accounts is the NCUSIF\xe2\x80\x99s best estimate of the amount of credit losses in\nthe existing notes. The allowance is determined on an individual note basis upon review of any note\nthat has a payment past due for over 60 days. A note is impaired if it is probable that the NCUSIF\nwill not collect all principal and interest contractually due. The impairment, if any, is measured\nbased on the present value of expected future cash flows discounted at the note\xe2\x80\x99s effective interest\nrate. As of December 31, 2009 and 2008, the NCUSIF had not recorded any allowances for notes or\nloans receivable nor recognized any amounts to be impaired, as the NCUSIF expects to recover\namounts across the notes and loans receivable as contractually agreed upon.\n\nThe NCUSIF does not accrue interest when a note has been considered impaired. When ultimate\ncollectability of the principal balance of the impaired note is in doubt, all cash receipts on impaired\nnotes are applied to reduce the principal amount of such notes until the principal has been recovered\nand is recognized as interest income thereafter. Impairment losses are charged against the allowance\nand increases in the allowance are charged to bad debt expense. Notes are written off against the\nallowance when all possible means of collection have been exhausted and the potential for recovery\nis considered remote.\n\n\n\n\n -9-\n\x0cVariable Interest Entities \xe2\x80\x94 An entity is referred to as a variable interest entity (\xe2\x80\x9cVIE\xe2\x80\x9d) if it meets\nthe criteria outlined in ASC 810, Consolidation (formerly FASB Interpretation No. 46 (R),\nConsolidation of Variable interest Entities (revised December 2003) (FIN 46(R)), which are: (1) the\nentity has equity that is insufficient to permit the entity to finance its activities without additional\nsubordinated financial support from other parties, or (2) the entity has equity investors that cannot\nmake significant decisions about the entity\xe2\x80\x99s operations or that do not absorb their proportionate\nshare of the expected losses or receive the expected returns of the entity.\n\nIn addition, a VIE must be consolidated by the reporting entity that is deemed to be the primary\nbeneficiary of the VIE, which is the party involved with the VIE that has the majority of the\nexpected losses or a majority of the expected residual returns or both.\n\nThe NCUSIF has variable interests in natural person credit unions (\xe2\x80\x9cNPCU\xe2\x80\x9ds) that may be deemed\nVIEs. These entities are regularly monitored by the NCUSIF to determine their status and whether\nany reconsideration events have occurred that could cause its primary beneficiary status to change.\nThese events include changes in contractual arrangements in a manner that reallocates expected\nlosses and residual returns among the variable interest holders and providing support to an entity\nthat results in an implicit variable interest.\n\nOther Receivables\n\nAccrued Interest Receivable\nThe NCUSIF recognizes accrued interest receivable for amounts of interest that have been\ncontractually earned but not yet received.\n\nContributions Receivable from Insured Credit Unions\nEach insured credit union pays to the Fund a deposit amount equal to 1% of the credit union\xe2\x80\x99s\ninsured shares. On an annual basis the NCUSIF recalculates the appropriate deposit amount for each\ncredit union\xe2\x80\x99s insured shares and reconciles the calculated deposit amount to the current deposit\namount held by the NCUSIF. Any deposit shortfalls are billed to the credit unions to true-up their\ncurrent deposited amounts, thereby returning deposit levels to the requisite 1% of insured shares.\nAny deposit surpluses over the requisite 1% of insured shares are refunded back to the credit unions.\nFor credit unions with more than $50 million in insured shares, this true-up process is performed\ntwice a year.\n\nPremium Receivable\nNCUSIF has the statutory authority according to the Federal Credit Union Act of 2003 (revised in\n2007 and 2009) Section 1782 \xe2\x80\x9cAdministration of the Insurance Fund\xe2\x80\x9d to assess the federally insured\ncredit unions for a premium charge. The NCUSIF may assess each insured credit union a premium\ncharge for insurance in an amount stated as a percentage of insured shares outstanding as of the most\nrecently ended reporting period, if the NCUSIF\xe2\x80\x99s equity ratio is less than 1.3%. Premium receivable\nrefers to premium charge amounts that have been billed to federally insured credit unions, but have\nnot been received as of the balance sheet date.\n\nInvestments \xe2\x80\x94 Investment securities at December 31, 2009 and 2008, consist solely of U.S.\nTreasuries. Effective December 31, 2008, all holdings in the NCUSIF investment portfolio were\ntransferred from held-to-maturity to available-for-sale. Management determined that NCUSIF could\nno longer assert that it had the positive intent and ability to hold these securities to maturity, as they\nmight be sold in response to a liquidity need.\n\n\n\n\n - 10 -\n\x0cAvailable-for-sale securities are recorded at fair value. Unrealized holding gains and losses are\nexcluded from earnings and reported as a separate component of accumulated other comprehensive\nincome until realized. Realized gains and losses from the sale of available-for-sale securities are\ndetermined on a specific identification basis.\n\nA decline in the market value of any available-for-sale security below cost that is deemed to be\nother-than-temporary results in an impairment to reduce the carrying amount to fair value. The\nimpairment is charged against earnings and a new cost basis for the security is thereafter established.\nTo determine whether an impairment is other-than-temporary, the NCUSIF takes into consideration\nwhether it has the ability and intent to hold a particular investment long enough until a market price\nrecovery occurs, which entails consideration of evidence to indicate the cost of the investment is\nrecoverable. Evidence considered in this assessment includes the reasons for the impairment, the\nseverity and duration of the impairment, expected changes in value of the investment subsequent to\nyear-end, forecasted performance of the investee, and the general market condition in the geographic\narea or industry the investee operates in.\n\nPremiums and discounts are amortized or accreted over the life of the related available-for-sale\nsecurity as an adjustment to yield using the effective interest method. The aforementioned\namortization and accretion of a premium and discount, respectively, is recorded in the following\nmanner: (1) for premiums, the amortization of that premium is recorded to a valuation adjustment\naccount (contra-asset), which is netted against the security\xe2\x80\x99s carrying amount to bring the recorded\namount of the investment back to down to par, (2) for discounts, the accretion of a discount is\nrecorded directly to the security\xe2\x80\x99s carrying amount to bring the recorded amount of the investment\nback up to par. Dividend and interest income are recognized when earned.\n\nFixed Assets \xe2\x80\x94 Property, plant, equipment, and related intangible assets, subject to amortization,\nare carried at amortized cost. Depreciation and amortization are recognized over the useful life.\n\nLong-Lived Assets \xe2\x80\x94 In accordance with FASB ASC 360, \xe2\x80\x9cAccounting for the Impairment or\nDisposal of Long-Lived Assets\xe2\x80\x9d, long-lived assets, such as property, plant, and equipment, and\npurchased intangible assets subject to amortization, are reviewed for impairment whenever events or\nchanges in circumstances indicate that the carrying amount of an asset may not be recoverable. If\ncircumstances require a long-lived asset or asset group to be tested for possible impairment, NCUA\ninitially performs a comparison between the undiscounted cash flows expected to be generated by\nthat asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset\ngroup is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the\nextent that the carrying value exceeds its fair value. Fair value is determined through various\nvaluation techniques including discounted cash flow models, quoted market values, and third party\nindependent appraisals, as considered necessary.\n\nAmounts due to Insured Shareholders of Liquidated Credit Unions \xe2\x80\x94 The NCUSIF recognizes\na liability for monies to be paid to insured shareholders of failed, federally insured credit unions.\n\nRevenue Recognition \xe2\x80\x94 The NCUSIF recognizes revenue when interest on investments or loans\nare earned and when assessments to credit unions have been invoiced.\n\nReserve for Losses \xe2\x80\x94 The NCUSIF records a contingent liability and a loss provision for losses\nincurred in the resolution of troubled institutions. Through NCUA\xe2\x80\x99s supervision process, NCUA\napplies a supervisory rating system to assess each credit union\xe2\x80\x99s relative health in the adequacy of\nCapital, the quality of Assets, the capability of Management, the quality and level of Earnings, and\nthe adequacy of Liquidity (\xe2\x80\x9cCAMEL\xe2\x80\x9d), applying a value ranging from \xe2\x80\x9c1\xe2\x80\x9d (strongest) to \xe2\x80\x9c5\xe2\x80\x9d\n\n\n - 11 -\n\x0c (weakest). The contingent liability is derived by applying expected failures based on CAMEL\n ratings and historical loss rates. In addition credit union-specific analysis is performed on those\n credit unions where failure is imminent or where additional information is available that may affect\n the estimate of losses.\n\n Income Taxes \xe2\x80\x94 The NCUSIF is exempt from federal income taxes under Section 501(c)(1) of the\n Internal Revenue Code.\n\n Commitments and Contingencies \xe2\x80\x94 Liabilities for general loss contingencies arising from claims,\n assessments, litigation, fines, and penalties and other sources, are recorded when it is probable that a\n liability has been incurred and the amount of the assessment and/or remediation can be reasonably\n estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.\n\n Fair Value of Financial Instruments \xe2\x80\x94 The NCUSIF adopted ASC 820-10, Fair Value\n Measurements and Disclosures. The statements defines fair value, expands disclosure requirements\n around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to\n those valuation techniques are observable or unobservable. Observable inputs reflect market data\n obtained from independent sources, while unobservable inputs reflect the NCUSIF\xe2\x80\x99s market\n assumptions. This hierarchy requires the NCUSIF to use observable market data, when available,\n and to minimize the use of unobservable inputs when determining fair value.\n\n Related Party Transactions \xe2\x80\x94 The NCUSIF is one of the five funds under the common control of\n the NCUA Board. The NCUSIF had related party transactions during 2009 with the NCUA\n Operating Fund, the CLF and the TCCUSF, as discussed further within the notes to the financial\n statements.\n\n3. NEWLY IMPLEMENTED ACCOUNTING STANDARDS\n\n In 2009, NCUSIF adopted an amendment to the accounting standards on the GAAP hierarchy\n (FASB ASC 105). This amendment changes the GAAP hierarchy used in the preparation of\n financial statements of non-governmental entities. It establishes the FASB Accounting Standards\n Codification as the source of authoritative accounting principles recognized by the FASB to be\n applied by non-governmental entities in the preparation of financial statements in conformity with\n GAAP in the United States. Rules and interpretive releases of the U.S. Securities and Exchange\n Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP\n for SEC registrants. The adoption of this amendment had no impact to the financial statements.\n\n In 2009, the NCUSIF adopted the amendment to the accounting standards for subsequent events\n (FASB ASC 855). This amendment establishes general standards of accounting for, and disclosing\n events that occur after the balance sheet date but before financial statements are issued or are\n available to be issued. In particular, this statement sets forth (a) the period after the balance sheet\n date during which management of a reporting entity should evaluate events or transactions that may\n occur for potential recognition or disclosure in the financial statements, (b) the circumstances under\n which an entity should recognize events or transactions occurring after the balance sheet date in its\n financial statements, and (c) the disclosures that an entity should make about events or transactions\n that occurred after the balance sheet date. It also requires entities to disclose the date through which\n subsequent events were evaluated, and determine whether that date is the date that financial\n statements were issued or the date they were available to be issued. The adoption of this amendment\n did not have a material impact on the financial statements.\n\n\n\n\n - 12 -\n\x0c4. CASH AND CASH EQUIVALENTS\n\n NCUSIF\xe2\x80\x99s cash and cash equivalents at December 31, 2009 and 2008, are as follows:\n\n 2009 2008\n (Dollars in thousands)\n Deposits with U.S. Treasury $ 217 $ 384\n U.S. Treasury overnight investments 817,222 3,836,960\n Total cash and cash equivalents $ 817,439 $ 3,837,344\n\n\n\n5. INVESTMENTS\n\n The Federal Credit Union Act, Section 1783 (c) as amended provides guidance regarding holding\n U.S. Treasury securities. The NCUSIF currently does not hold any corporate debt or equity\n securities. All investments at the NCUSIF pertain to U.S. Treasury securities of varying maturities.\n\n In addition, the NCUSIF does not maintain any investments in securities that have been classified as\n trading or held-to-maturity as per FASB ASC 320, \xe2\x80\x9cInvestments \xe2\x80\x94 Debt and Equity Securities.\xe2\x80\x9d\n\n The carrying amount, gross unrealized holding gains, gross unrealized holding losses, and fair value\n of available-for-sale debt securities at December 31, 2009 and 2008, were as follows:\n\n\n Gross\n Unrealized Gross Unrealized\n Carrying Amount Holding Gains Holding (Losses) Fair value\n (Dollars in thousands)\n At December 31, 2009\n Available for sale:\n U.S. Treasury securities $ 8,620,965 $ 127,388 $ (50,040) $ 8,698,313\n\n\n At December 31, 2008\n Available for sale:\n U.S. Treasury securities $ 3,964,975 $ 278,338 $ - $ 4,243,313\n\n\n\n Maturities of debt securities classified as available-for-sale at December 31 were as follows:\n\n Fair value\n (Dollars in thousands)\n Available for sale:\n Due prior to one year $ 1,470,781\n Due after one year through five years 6,788,485\n Due after five years through ten years 439,047\n $ 8,698,313\n\n\n\n\n - 13 -\n\x0c Proceeds from the sale of investment securities classified as available-for-sale were $0 and\n $2.5 billion in 2009 and 2008, respectively; gross realized gains included in investment income in\n 2009 and 2008 were $0 and $106 million, respectively; and there were no realized losses in 2009 or\n 2008.\n\n Gross unrealized losses on investment securities, for which other-than-temporary impairments have\n not been recognized, in addition to the fair values of those securities, aggregated by investment\n classification and length of time the investments have been in a loss position, at December 31, 2009,\n were as follows:\n\n Duration of Losses - Less than 12 months\n Unrealized Unrealized\n losses gains Fair value\n (Dollars in thousands)\n Available for sale:\n U.S. Treasury securities $ (50,040) $ 127,388 $ 8,698,313\n\n\n\n The unrealized losses on investments in U.S. Treasury securities, included in the table above, were\n the result of lower interest rates. The contractual terms of those investments do not permit the issuer\n to settle the securities at a price less than the amortized cost of the investment. Because the NCUSIF\n asserts the ability and intent to hold these investments until a market price recovery occurs or until\n maturity, these investments are not considered other-than-temporarily-impaired.\n\n6. FAIR VALUE MEASUREMENTS AND DISCLOSURES\n\n Fair Value of Financial Instruments\n The NCUA adopted ASC 820-10, Fair Value Measurements and Disclosures. The statement defines\n fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation\n techniques based on whether the inputs to those valuation techniques are observable or\n unobservable. Observable inputs reflect market data obtained from independent sources, while\n unobservable inputs reflect NCUSIF\xe2\x80\x99s market assumptions.\n\n Cash and Cash Equivalents, Receivables and Payables, Due to the NCUA Operating Fund, and\n Amounts Due to Insured Shareholders of Liquidated Credit Unions\n The carrying amounts, at face value or cost plus accrued interest, approximate fair value because of\n the short maturity of these instruments.\n\n Investment Securities\n Debt securities classified as available-for-sale are measured using quoted market prices multiplied\n by the quantity held when quoted market prices are available. These instruments are determined to\n be Level 1 inputs.\n\n The following tables present the carrying amounts and estimated fair values of NCUSIF\xe2\x80\x99s financial\n instruments at December 31, 2009 and 2008. FASB ASC 825, \xe2\x80\x9cFinancial Instruments\xe2\x80\x9d, defines fair\n value as either the price received to sell an asset or the price paid to transfer a liability, as part of an\n orderly transaction between market participants at the measurement date.\n\n\n\n\n - 14 -\n\x0cThe fair values of the financial instruments shown in the below table as of December 31, 2009 and\n2008, represents management\xe2\x80\x99s best estimates for either the amount that would be received to sell\nthose assets, or the amount that would be paid to transfer those liabilities in an orderly transaction\nbetween market participants at that date. Those fair value measurements maximize the use of\nobservable inputs. However, in situations where there is little, if any, market activity for the asset or\nliability at the measurement date, the fair value measurement reflects the judgment by the NCUSIF,\nregarding the assumptions market participants would consider, in pricing the asset or liability. The\nNCUSIF\xe2\x80\x99s judgment, in this instance, was developed through utilizing the best information available\nat the time, under the given circumstances.\n\n(Dollars in thousands)\n 2009 2008\n Carrying value Fair value Carrying value Fair value\nFinancial assets:\n Cash and cash equivalents $ 817,439 817,439 3,837,344 3,837,344\n Investments 8,698,313 8,698,313 4,243,313 4,243,313\n Contributions receivable from insured credit unions 17,614 17,614 992 992\n Due from NCUA Operating Fund 18,438 18,438 19,779 19,779\n Premium receivable 12,901 12,901 - -\n Loans receivable 10,000,000 10,000,000 - -\n Assets acquired in assistance\n to insured credit unions 152,423 152,423 71,216 71,216\n Accrued interest receivable 72,356 72,356 39,848 39,848\n Accrued fee receivable - - 1,929 1,929\nFinancial liabilities:\n Cash assistance liability 5,393 5,393 2,000 2,000\n Amounts due to insured shareholders of\n liquidated credit unions 12,192 12,192 10,356 10,356\n Due to NCUA Operating Fund 2,257 2,257 169 169\n Interest payable 1,302 1,302 - -\n Obligations under capital leases - - 89 89\n Note payable 10,000,000 10,000,000 - -\n Accounts payable 27,474 27,474 56 56\n\n\n\n(Dollars in thousands) Fair value measurements at\n reporting date using\n Quoted prices\n in active Significant\n markets for other Significant\n identical observable unobservable\n December 31, assets inputs inputs\n 2009 (Level 1) (Level 2) (Level 3)\nAssets:\n Investments $ 8,698,313 8,698,313 - -\n\n\n\n\n - 15 -\n\x0c (Dollars in thousands) Fair value measurements at\n reporting date using\n Quoted prices\n in active Significant\n markets for other Significant\n identical observable unobservable\n December 31, assets inputs inputs\n 2008 (Level 1) (Level 2) (Level 3)\n Assets:\n Investments $ 4,243,313 4,243,313 - -\n\n\n\n The carrying amounts shown in the tables above are included on the balance sheets under the\n indicated captions.\n\n7. LOANS AND NOTES RECEIVABLE\n\n U.S. Central and Wescorp Liquidity Stabilization Loans\n On March 20, 2009, the NCUSIF made two $5.0 billion liquidity stabilization loans (with funds\n borrowed from the CLF) to USC and WesCorp respectively. These advances were issued for\n settlement on March 20, 2009, by the NCUSIF and are fully collateralized by the assets of the\n borrowers referred to herein. Both advances have a fixed interest rate of 0.528% as of December 31,\n 2009. Interest payments are scheduled for June 21, 2010, in the amount of $13.1 million (per\n advance) and for December 21, 2010, in the amount of $13.2 million (per advance), with the\n principal due on December 21, 2010, in the amount of $5.0 billion (per advance).\n\n The notes were originally issued to both USC and WesCorp on March 20, 2009, by the NCUSIF,\n with a maturity date of June 22, 2009 (with principal and interest due on that date). Upon maturity,\n both notes were extended with a maturity date of December 21, 2009. Upon maturity on\n December 21, 2009, both notes were extended once more for a full year, with a current maturity date\n of December 21, 2010.\n\n National Credit Union Administration Operating Fund\n In 1992, the NCUSIF lent approximately $42 million to the NCUA Operating Fund, pursuant to a\n thirty-year note secured by the NCUA premises in Alexandria, Virginia. Interest income recognized\n was approximately $509 thousand and $807 thousand for 2009 and 2008, respectively. The note\n receivable balances at December 31, 2009 and 2008, were approximately $18.4 million and\n $19.8 million, respectively.\n\n The variable rate on the note is equal to NCUSIF\xe2\x80\x99s prior-month yield on investments. The average\n interest rates during 2009 and 2008, were 2.56 % and 3.95%, respectively. The interest rates at\n December 31, 2009 and 2008, were 2.06 % and 3.49%, respectively.\n\n\n\n\n - 16 -\n\x0c The above note requires principal repayments at December 31 as follows (in thousands):\n\n Years Ending Secured\n December 31 Term Note\n\n 2010 $ 1,341\n 2011 1,341\n 2012 1,341\n 2013 1,341\n 2014 1,341\n Thereafter 11,733\n\n Total $ 18,438\n\n\n8. VARIABLE INTEREST ENTITIES\n\n National Person Credit Unions\n During the year ended December 31, 2009, NCUA held variable interests in the natural person credit\n unions (\xe2\x80\x9cNPCUs\xe2\x80\x9d) it supervises and regulates in the form of insurance on member deposits up to\n $250,000. Reconsideration events (e.g. conservatorships) could result in such credit unions being\n deemed VIEs and NCUA becoming the primary beneficiary of the NPCU VIEs. Total insured shares\n for NPCUs, or maximum exposure to loss, as of December 31, 2009 and 2008, were $724.8 billion\n and $658.9 billion, respectively.\n\n NCUA has documented herein the process for identifying needed reserves, both specific and general,\n to cover expected losses due to insurance on member deposits. Expected losses are only a fraction of\n the maximum exposure to loss; approximately 1.0 percent for 2009 and less than 0.5 percent for\n 2008. The total reserves for identified and anticipated losses resulting from NPCU failures are\n $758.7 million and $278.3 million at December 31, 2009 and 2008, respectively.\n\n Corporate Credit Unions\n During 2008 and through June 2009, there was significant discussion at NCUA regarding the\n variable interests held in corporate credit unions (CCUs\xe2\x80\x9d), which resulted from NCUA actions to\n stabilize the CCU system. It was concluded that for 2008 the NCUSIF would be the primary\n beneficiary of certain identified VIEs based on variable interests held by the NCUSIF at\n December 31, 2008, and therefore, the NCUSIF would have been required to consolidate such VIEs\n in its financial statements for the year ended December 31, 2008. However, based on the actions\n discussed below, it was concluded that the TCCUSF would be the primary beneficiary of these same\n VIEs based on variable interests held by the TCCUSF at December 31, 2009. The shift in primary\n beneficiary from 2008 to 2009 was the result of the June 18, 2009, actions of the NCUA Board to\n transfer the legal obligations related to CCUs from the NCUSIF to the TCCUSF. Such actions\n relieved the NCUSIF for the costs and related obligations of stabilizing the CCU system, as provided\n by Public Law 111-22, which was enacted May 20, 2009.\n\n Given the shift in 2009 for the responsibility for corporate stabilization efforts from the NCUSIF to\n the TCCUSF, the NCUSIF has applied ASC 250 Accounting Changes and Error Correction\xe2\x80\x9d, as\n discussed in the next paragraph.\n\n\n\n\n - 17 -\n\x0c On June 18, 2009, the NCUA Board approved actions to legally transfer corporate stabilization\n efforts to the TCCUSF and relieve the NCUSIF of such activities. Accordingly NCUSIF is no longer\n required to consolidate any corporate credit unions. Furthermore, because the NCUSIF and the\n TCCUSF are under common control, this resulted in a change in reporting entity. This change in\n reporting entity has been applied retrospectively to 2008. Accordingly, the accompanying financial\n statements for the year ended December 31, 2008 do not reflect the consolidation of any CCUs.\n\n9. RESERVE FOR LOSSES\n\n Management identifies credit unions experiencing financial difficulty through NCUA\xe2\x80\x99s supervisory\n and examination process. Management on a specified case basis determines the estimated losses\n from these supervised credit unions. Management also evaluates overall economic trends and\n monitors potential system-wide risk factors, such as increasing levels of consumer debt,\n bankruptcies, and delinquencies. NCUA applies a rating system to assess a credit union\xe2\x80\x99s financial\n condition and operations in the areas of Capital Adequacy, Asset Quality, Management, Earnings,\n and Asset/Liability Management (\xe2\x80\x9cCAMEL\xe2\x80\x9d). The CAMEL Rating System is a tool to measure risk\n and allocate resources for supervisory purposes. NCUA periodically reviews the CAMEL Rating\n System to respond to continuing economic and regulatory changes in the credit union industry. For\n general reserve requirements, risk profile categories are established based on the CAMEL ratings of\n problem credit unions, and probable failure and loss rates are applied based on historical data. The\n anticipated losses are net of estimated recoveries from the disposition of the assets of failed credit\n unions.\n\n Total insured shares for natural person credit unions as of December 31, 2009 and 2008, were\n $724.8 billion and $658.9 billion, respectively. The total reserves for identified and anticipated\n losses resulting from supervised credit unions\xe2\x80\x99 failures are $758.7 million and $278.3 million at\n December 31, 2009 and 2008, respectively.\n\n In exercising its supervisory function, the NCUSIF will at times, extend guarantees of assets\n (primarily loans) to third-party purchasers or to existing credit unions to facilitate mergers. The\n NCUSIF would be obligated upon nonperformance. No such guarantees were outstanding at\n December 31, 2009 and 2008. Estimated losses resulting from asset and merger guarantees are\n evaluated by management on a case-by-case basis.\n\n In addition, the NCUSIF may grant a guaranteed line-of-credit to a third-party credit provider, such\n as a corporate credit union or bank, if a particular credit union were to have a current or immediate\n liquidity concern and the credit provider has refused to extend credit without a guarantee. The\n NCUSIF would thereby be obligated if the credit union failed to perform. Total line-of-credit\n guarantees of credit unions at December 31, 2009 and 2008, are approximately $1.0 million and\n $50.0 million, respectively. The total balances outstanding under these line-of-credit guarantees at\n December 31, 2009 and 2008, are approximately $0.0 and $22.0 million, respectively. The carrying\n amount of the liability as of December 31, 2009 and 2008, for the outstanding NCUSIF guarantees is\n $18.5 thousand and $1.1 million, respectively. The guarantees expire in March of 2010.\n\n On rare occasions, the NCUSIF provides indemnifications, as part of a merger assistance agreement,\n to acquiring credit unions. Such indemnifications make the NCUSIF contingently liable based on the\n outcome of any legal actions. There was one such indemnification contingency at December 31,\n 2009, for $37,000, which expires in December 2010. As of December 2008, there was one\n indemnification contingency for $37,000, which expires in December 2010.\n\n\n\n\n - 18 -\n\x0c The activity in the reserve for losses from supervised credit unions for the years ended December 31,\n 2009 and 2008, was as follows:\n\n 2009 2008\n (Dollars in thousands)\n\n Beginning balance $ 278,343 $ 215,780\n Insurance losses paid (161,685) (284,626)\n Recoveries 16,943 56,835\n Provision for insurance losses 625,140 290,354\n\n Ending balance $ 758,741 $ 278,343\n\n The increase in the provision for insurance losses is due to the following (in thousands):\n\n Specific reserves \xe2\x80\x94 increased from $46,043 at December 31, 2008, to $161,841 at December 31,\n 2009.\n\n General reserves \xe2\x80\x94 increased from $232,300 at December 31, 2008, to $596,900 at December 31,\n 2009. Reserve amounts pertaining to the CCU system included $3.7 million for 2008. In 2009, the\n amount pertaining to the CCU system was $0, as all of the reserves pertaining to the corporate credit\n unions were obligated to the TCCUSF.\n\n In addition to these recorded contingent liabilities, additional adverse performance in the financial\n services industry could result in additional loss to the NCUSIF. The ultimate losses for supervised\n credit unions will largely depend upon future economic and market conditions and accordingly,\n could differ significantly from initial estimates.\n\n10. PREMIUM INCOME\n\n The fund may assess each insured credit union a premium charge for insurance in an amount stated\n as a percentage of insured shares outstanding as of the most recently ended reporting period if the\n Fund\xe2\x80\x99s equity ratio is less than 1.3%. When the Board projects that the equity ratio will, within six\n months, fall below 1.2%, the Board shall establish and implement a restoration plan within 90 days,\n which meets the requirements and conditions that the Board determined appropriate. In order to\n meet the requirements established by the Board, the plan must provide that the equity ratio will meet\n or exceed the minimum amount specified before the end of the 8-year period beginning upon the\n implementation of the plan (or such longer period as the Board may determine to be necessary due\n to extraordinary circumstances). In November 2009, the NCUA Board assessed a .1027 percent\n premium of insured shares totaling $727.5 million.\n\n11. INSURED CREDIT UNIONS\xe2\x80\x99 ACCUMULATED CONTRIBUTIONS\n\n In 1998, the Federal Credit Union Act was amended to mandate changes to the NCUSIF\xe2\x80\x99s\n capitalization provisions effective January 1, 2001. 12 U.S.C. 1782(a). The Credit Union\n Membership Access Act of 1998 (CUMAA) mandated changes to the NCUSIF\xe2\x80\x99s capitalization\n provisions effective January 1, 2000. Each insured credit union shall pay to and maintain with the\n NCUSIF a deposit in an amount equaling 1% of the credit union\xe2\x80\x99s insured shares. The amount of\n each insured credit union\xe2\x80\x99s deposit shall be adjusted as follows, in accordance with procedures\n determined by the NCUA, to reflect changes in the credit union\xe2\x80\x99s insured shares: (i) annually, in the\n case of an insured credit union with total assets of not more than $50 million; and (ii) semiannually,\n\n\n - 19 -\n\x0c in the case of an insured credit union with total assets of $50 million or more. The annual and\n semiannual adjustments are based on member share deposits outstanding as of December 31 of the\n preceding year and June 30 of the current year, respectively. The 1% contribution will be returned to\n the insured credit union in the event that its insurance coverage is terminated, or is obtained from\n another source, or the operations of the NCUSIF are transferred from the NCUA.\n\n Beginning in 2000, the CUMAA mandates that dividends are determined from specific ratios, which\n are based upon year-end reports of insured shares. Accordingly, dividends associated with insured\n shares at year-end are declared and paid in the subsequent year.\n\n In December 2007, the NCUA set the normal operating level at 1.30%. The calculated equity ratios\n at December 31, 2009 and 2008, were 1.23% and 1.26%, respectively.\n\n Total insured shares as of December 31, 2009 and 2008, were $724.8 billion and $658.9 billion,\n respectively. The equity ratio for 2008 was calculated based on an insured share base of $611.6\n billion. Although deposit insurance coverage was increased from $100,000 to $250,000, the\n calculation for the equity ratio was based on the $100,000 level due to the temporary nature of the\n increase in insurance coverage. Insurance coverage at the $250,000 level was subsequently extended\n to December 31, 2013.\n\n12. RELATED PARTY TRANSACTIONS\n\n Central Liquidity Facility\n On March 19, 2009, the NCUA Board took steps to stabilize the corporate credit union system when\n it placed USC and WesCorp into conservatorship. The NCUSIF has in place with the CLF, a\n Funding Commitment and Agreement and a Short-Term Revolving Promissory Note dated\n March 20, 2009, to fund $20.0 billion with a final maturity date of any advance at December 31,\n 2010. There was $10.0 billion remaining on this commitment as of December 31, 2009. CLF\n approved an advance of $10.0 billion to NCUSIF in order for NCUSIF to make $5.0 billion in\n liquidity stabilization loans to both USC and WesCorp. The notes were originally issued to both\n USC and WesCorp on March 20, 2009, by the NCUSIF, with a maturity date of June 21, 2009 (with\n principal and interest due on that date). Upon maturity, both notes were extended with a maturity\n date of December 21, 2009. Upon maturity on December 21, 2009, both notes were extended once\n more for a full year, with a current maturity date of December 21, 2010. The advance bears interest\n at a rate of 0.528% per annum at December 31, 2009.\n\n NCUA Operating Fund (OF)\n Certain administrative services are provided to the NCUSIF by the OF. The OF charges NCUSIF for\n these services based upon an annual allocation factor approved by the NCUA Board and derived\n from a study of actual usage. As of December 31, 2009 and 2008, the NCUSIF had accrued\n $2.3 million and $169,000, respectively, in amounts due to the NCUA Operating Fund. The\n allocation factor was 53.8% to NCUSIF for 2009 and 52.0% for 2008. The cost of the services\n allocated to NCUSIF, which totaled approximately $90.2 million and $79.4 million for 2009 and\n 2008, respectively, is reflected as an addition to the corresponding expenses in the accompanying\n financial statements.\n\n The NCUSIF issued a secured term note in 1992 to fund the costs of constructing a building in 1993\n for the OF. The amount funded through the note was approximately $42.0 million. Interest costs\n incurred were $509,000 and $807,000 for 2009 and 2008, respectively. The note payable balances at\n December 31, 2009 and 2008 were approximately $18.4 million and $19.8 million, respectively.\n\n\n\n\n - 20 -\n\x0c The variable rate on the note is equal to NCUSIF\xe2\x80\x99s prior-month yield on investments. The average\n interest rates during 2009 and 2008, were 2.56 % and 3.95%, respectively. The interest rates at\n December 31, 2009 and 2008, were 2.06 % and 3.49%, respectively.\n\n Temporary Corporate Credit Union Stabilization Fund (\xe2\x80\x9cTCCUSF\xe2\x80\x9d)\n On June 18, 2009, the NCUA Board approved actions to legally obligate the TCCUSF, and thereby\n relieve the NCUSIF, for the costs of stabilizing the CCU system as previously described herein. As a\n result, the status of issuer and holder of the Capital Note was legally obligated to the TCCUSF and\n relieved from the NCUSIF. The Board also approved to legally obligate the TCCUSF for the liability\n arising from the TCCUSGP and TCCULGP; both programs having also been relieved from the\n NCUSIF.\n\n13. CONCENTRATIONS\n\n The NCUSIF has the following concentrations of risk: 10 of the largest natural person credit unions\n hold 13.6 percent of the total assets within the credit union system and account for 13.0 percent of\n the contributed capital within the credit union system. Real estate secured loans are the largest single\n asset type within the natural person credit union system, accounting for 35.0 percent of total assets.\n The states of California, Florida, Arizona, and Nevada present a credit concentration risk accounting\n for 22.0 percent of the total real estate loans outstanding and 31 percent of total delinquent loans.\n\n14. COMMITMENTS AND CONTINGENCIES\n\n The Fund is currently a party to a number of disputes that involve or may involve litigation. In the\n opinion of management, the ultimate liability with respect to any other disputes, if any, will not be\n material to the Fund\xe2\x80\x99s financial position.\n\n15. SUBSEQUENT EVENTS\n\n Subsequent events have been evaluated through June 10, 2010, which is the date the financial\n statements were available to be issued. There have been no activities that would materially affect\n financial statement balances as of December 31, 2009.\n\n\n\n\n - 21 -\n\x0c KPMG LLP\n 2001 M Street, NW\n Washington, DC 20036\n\n\n\n\n Independent Auditors\xe2\x80\x99 Report on Internal Control Over Financial Reporting\n\n\nInspector General, National Credit Union Administration and\nthe Board of Directors, National Credit Union Administration:\n\nWe have audited the balance sheet of the National Credit Union Share Insurance Fund (NCUSIF) as of\nDecember 31, 2009, and the related statements of operations, changes in fund balance, and cash flows for\nthe year then ended (hereinafter referred to as \xe2\x80\x9cfinancial statements\xe2\x80\x9d), and have issued our report thereon\ndated June 11, 2010.\n\nWe conducted our audit in accordance with auditing standards generally accepted in the United States of\nAmerica; the standards applicable to financial audits contained in Government Auditing Standards, issued\nby the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin\nNo. 07-04, Audit Requirements for Federal Financial Statements, as amended. Those standards and OMB\nBulletin No. 07-04 require that we plan and perform the audit to obtain reasonable assurance about whether\nthe financial statements are free of material misstatement.\n\nThe management of the NCUSIF is responsible for establishing and maintaining effective internal control.\nIn planning and performing our fiscal year 2009 audit, we considered the NCUSIF\xe2\x80\x99s internal control over\nfinancial reporting by obtaining an understanding of the NCUSIF\xe2\x80\x99s internal control, determining whether\ninternal controls had been placed in operation, assessing control risk, and performing tests of controls as a\nbasis for designing our auditing procedures for the purpose of expressing our opinion on the financial\nstatements. To achieve this purpose, we did not test all internal controls relevant to operating objectives as\nbroadly defined by the Federal Managers\xe2\x80\x99 Financial Integrity Act of 1982. The objective of our audit was\nnot to express an opinion on the effectiveness of the NCUSIF\xe2\x80\x99s internal control over financial reporting.\nAccordingly, we do not express an opinion on the effectiveness of the NCUSIF\xe2\x80\x99s internal control over\nfinancial reporting.\n\nOur consideration of internal control over financial reporting was for the limited purpose described in the\npreceding paragraph and was not designed to identify all deficiencies in the internal control over financial\nreporting that might be deficiencies, significant deficiencies, or material weaknesses.\n\nA deficiency in internal control exists when the design or operation of a control does not allow\nmanagement or employees, in the normal course of performing their assigned functions, to prevent, or\ndetect and correct misstatements on a timely basis. A significant deficiency is a deficiency, or a\ncombination of deficiencies, in internal control that is less severe than a material weakness, yet important\nenough to merit attention by those charged with governance. A material weakness is a deficiency, or\ncombination of deficiencies, in internal control, such that there is a reasonable possibility that a material\nmisstatement of the entity\xe2\x80\x99s financial statements will not be prevented, or detected and corrected on a\ntimely basis.\n\n\n\n\n KPMG LLP, a U.S. limited liability partnership, is the U.S.\n member firm of KPMG International, a Swiss cooperative.\n\x0cNational Credit Union Share Insurance Fund\nJune 11, 2010\nPage 2 of 2\n\n\nIn our fiscal year 2009 audit, we did not identify any deficiencies in internal control over financial\nreporting that we consider to be material weaknesses, as defined above. However, we identified a certain\ndeficiency in internal control over financial reporting that we consider to be a significant deficiency that is\ndescribed in Exhibit I. Exhibit III presents the status of the prior year material weakness.\n\nThe NCUSIF\xe2\x80\x99s responses to the finding identified in our audit are presented in Exhibit II. We did not audit\nthe NCUSIF\xe2\x80\x99s response and, accordingly, we express no opinion on it.\n\nWe noted certain additional matters that we have reported to management of the NCUSIF in a separate\nletter dated June 11, 2010.\n\nThis report is intended solely for the information and use of the addressees, NCUSIF\xe2\x80\x99s management, OMB,\nthe U.S. Government Accountability Office, and the U.S. Congress and is not intended to be and should\nnot be used by anyone other than these specified parties.\n\n\n\n\nJune 11, 2010\n\x0c Exhibit I\n\n\n NATIONAL CREDIT UNION \xe2\x80\x93 SHARE INSURANCE FUND\n\n SIGNIFICANT DEFICIENCY\n\n\n\nIntroduction\n\nThis exhibit describes the significant deficiency noted during our audit as of and for the year ended\nDecember 31, 2009, and our recommendations thereon. The National Credit Union Share Insurance Fund\n(the SIF) management\xe2\x80\x99s response to this finding is presented in Exhibit II.\n\nImprovements Needed in Financial Accounting and Reporting Process\n\nThe SIF does not have sufficient staff resources with the experience in technical accounting and reporting\nrequirements that the entity requires to consistently perform certain internal control activities, particularly\nthose related to the preparation and review of the financial statements. For example, we noted:\n\n1 A lack of documentation of control activities. The SIF does not have procedures in place that require\n review and approval of the journal entries and related supporting documentation because the journal\n entries that we tested did not have evidence that the journal entries were reviewed and approved by\n someone other than the preparer.\n\n2 Lack of formal policies and procedures that require periodic reassessment of the adequacy and\n propriety of required disclosure and that also would stipulate the review process and require\n secondary reviews and approvals of the financial statements and related supporting documentation.\n\n3 Supervisory reviews that were nonetheless performed were not entirely effective in identifying\n improper financial statement presentation and missing disclosures. In part, the individuals compiling\n the financial statements did not possess sufficient technical knowledge and/or institutional expertise\n that would enable effective performance of such preparation and reviews. For example, the draft\n financial statements prepared for the year ended December 31, 2009 did not properly identify and\n present comprehensive income and its related components in the statement of fund balance and\n comprehensive income. Additionally, such draft financial statements also improperly aggregated\n certain items on the statement of cash flows to comprise both non-cash reconciling items and actual\n cash disbursements. Additionally, there were several occurrences of inconsistencies, in similarly or\n identically described amounts, both between the basic financial statements and the amounts in the\n note disclosures and internally within the notes. As a result of our observations, management\n analyzed and adjusted the financial report.\n\nOffice of Management and Budget (OMB) Circular No. A-123, Management Accountability and Control,\ndefines management\xe2\x80\x99s responsibility and provides guidance to Federal managers on improving the\naccountability and effectiveness of Federal programs and operations by establishing, assessing,\ncorrecting, and reporting on internal control. Management controls are the organization policies and\nprocedures used to reasonably ensure that (i) programs achieve their intended results; (ii) resources are\nused consistent with agency mission; (iii) programs and resources are protected from waste, fraud, and\nmismanagement; (iv) laws and regulations are followed; and (v) reliable and timely information is\nobtained, maintained, reported and used for decision making. Further, OMB Circular No. A-123\nelaborate on both general attributes and specific controls that are essential for effective management\ncontrols. Management is responsible for developing control activities, which are the policies, procedures,\ntechniques, and mechanisms that enforce management\xe2\x80\x99s directives and help ensure actions address risks.\n I-1\xc2\xa0\n\n\xc2\xa0\n\x0c Exhibit I\n\n\nThe activities include reviews by management at the functional or activity level, proper execution of\ntransactions and events, accurate and timely recording of transactions and events, and appropriate\ndocumentation of transactions and internal control. Without such effective controls, there is an increased\nrisk of material misstatements to the financial statements and related disclosures.\xc2\xa0\n\nRecommendations\n\nWe recommend that the NCUA modify accounting policies, procedures and controls as follows:\n\n\xef\x82\xb7 Reassess on a comprehensive basis the staff capabilities and operational and reporting processes to\n determine the areas where new and/or revised controls are warranted. This is especially vital when\n viewed within the context of the migration to the new financial accounting system. Consider also the\n control environment to determine the necessary requirements to satisfy the criteria referenced above.\n\n\xef\x82\xb7 Match qualified personnel who are regularly trained and who possess the unique skills necessary to\n account for and report NCUA transactions consistent with the requirements of U.S. generally\n accepted accounting principles to the key NCUA process and control activities.\n\n\xef\x82\xb7 Improve the overall core competencies of key financial management and personnel through training\n that is sufficiently robust and focused on the areas of need.\n\n\xef\x82\xb7 Adopt formal methodology to regularly (at least annually) evaluate and update the Fund\xe2\x80\x99s policies and\n procedures to adapt to significant operational changes and adopt accounting pronouncement as such\n changes occur. Where transactions are similar across the NCUA, it may be advantageous to prepare\n combined accounting policies and pro forma disclosures.\xc2\xa0\n\n\n\n\n I-2\xc2\xa0\n\n\xc2\xa0\n\x0c National Credit Union Administration\n\n Exhibit II\n\n NATIONAL CREDIT UNION SHARE INSURANCE FUND\n MANAGEMENT RESPONSE TO AUDIT FINDINGS\n\n\nFindings: Improvements Needed in Financial Accounting and Reporting Process\n\nThe OCFO experienced a significant increased level of work during 2009, including\nimplementing a new financial management system, adding the Temporary Corporate\nCredit Union Stabilization Fund, assessing insured credit unions for the collection of a\npremium, and addressing a considerable increase in the level of complexity in accounting\ntransactions and reporting.\n\nThe financial statement audit, which resulted in an unqualified opinion, identified findings\nrelated to needed improvement in the National Credit Union Share Insurance Fund\xe2\x80\x99s\n(NCUSIF) financial accounting and reporting processes. NCUA agrees that they warrant\nmanagement\xe2\x80\x99s attention.\n\nWe believe the findings can best be categorized as:\n 1. Lack of documentary evidence of supervisory review, especially over journal entries;\n 2. Comprehensiveness of documentation with accounting policies and procedures; and\n 3. Weaknesses with conforming our annual financial statements into the form and\n content required by Generally Accepted Accounting Principles.\n\nWe will implement corrective action to address these findings taking into consideration the\nagency\xe2\x80\x99s resources and priorities.\n\n 1. Lack of documentary evidence of supervisory review, especially over journal entries:\n\n As a small agency with limited resources, NCUA is still required to assess its\n internal control structure with the goal of ensuring that risks are appropriately\n mitigated. As part of implementing our new financial management system, we will\n review controls around journal entries and consider establishing a threshold for\n documenting supervisory review of journal entries above a certain dollar threshold\n or unusual in nature.\n\n 2. Comprehensiveness of documentation with accounting policies and procedures:\n\n Audit findings highlighted the lack of comprehensiveness of our accounting policies\n and procedures as well as available documentation to evidence compliance. In\n response, NCUA will review controls where the availability of documentation\n appeared limited and strengthen processes accordingly. NCUA will also start\n building a repository of accounting and internal control policies and practices, which\n can be readily accessed by all NCUA staff.\n\n\n\n\n 1775 Duke Street - Alexandria, VA 22314-3428 - 703-518-6300\n\x0c3. Weaknesses with conforming our annual financial statements into the form and\n content required by generally accepted accounting principles:\n\n NCUA is a small Federal agency and must focus its resources on essential functions.\n Financial accounting and reporting is viewed by executive agency management as\n important and essential. Financial highlights of all funds are made available to all\n at public Board meetings and on the agency\xe2\x80\x99s web site. The findings cited by our\n auditors relate to our annual process of preparing the financial statements in the\n form and content required by generally accepted accounting principles. To\n strengthen our financial reporting, we will review and refine our internal control\n processes and evaluate training requirements. We will also hire additional staff\n with requisite skills.\n\n\n\n\n 2\n\x0c Exhibit III\n\n\n NATIONAL CREDIT UNION \xe2\x80\x93 SHARE INSURANCE FUND\n\n STATUS OF PRIOR YEAR MATERIAL WEAKNESS\n\n\nPrior Year Material Weakness\n\nDuring the fiscal year 2008 financial statement audit, the prior year auditors noted a material weakness\nregarding the National Credit Union Share Insurance Fund (NCUSIF) accounting and reporting for the\nconsolidation of certain variable interest entities.\n\nCurrent Year Status of the Prior Year Material Weakness\n\nDuring fiscal year 2009, management determined that due to the change in reporting entity, the NCUSIF\nno longer should consolidate the variable interest entities identified during the 2008 financial statement\naudit. Certain accounting and reporting deficiencies continued to be observed in 2009 as described in\nExhibit I.\n\n\n\n\n III-1\xc2\xa0\n\n\xc2\xa0\n\x0c KPMG LLP\n 2001 M Street, NW\n Washington, DC 20036\n\n\n\n\n Independent Auditors\xe2\x80\x99 Report on Compliance and Other Matters\n\n\nInspector General, National Credit Union Administration and\nthe Board of Directors, National Credit Union Administration:\n\nWe have audited the balance sheet of the National Credit Union Share Insurance Fund (NCUSIF) as of\nDecember 31, 2009, and the related statements of operations, changes in fund balance, and cash flows for\nthe year then ended (hereinafter referred to as \xe2\x80\x9cfinancial statements\xe2\x80\x9d), and have issued our report thereon\ndated June 11, 2010.\n\nWe conducted our audit in accordance with auditing standards generally accepted in the United States of\nAmerica; the standards applicable to financial audits contained in Government Auditing Standards, issued\nby the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin\nNo. 07-04, Audit Requirements for Federal Financial Statements, as amended. Those standards and OMB\nBulletin No. 07-04 require that we plan and perform the audit to obtain reasonable assurance about whether\nthe financial statements are free of material misstatement.\n\nThe management of the NCUSIF is responsible for complying with laws, regulations, and contracts\napplicable to the NCUSIF. As part of obtaining reasonable assurance about whether the NCUSIF\xe2\x80\x99s\nfinancial statements are free of material misstatement, we performed tests of the NCUSIF\xe2\x80\x99s compliance\nwith certain provisions of laws, regulations, and contracts, noncompliance with which could have a direct\nand material effect on the determination of the financial statement amounts, and certain provisions of other\nlaws and regulations specified in OMB Bulletin No. 07-04. We limited our tests of compliance to the\nprovisions described in the preceding sentence, and we did not test compliance with all laws, regulations,\nand contracts applicable to the NCUSIF. However, providing an opinion on compliance with those\nprovisions was not an objective of our audit, and accordingly, we do not express such an opinion.\n\nThe results of our tests of compliance discussed in the third paragraph of this report disclosed no instances\nof noncompliance or other matters that are required to be reported herein under Government Auditing\nStandards or OMB Bulletin No. 07-04.\n\nThis report is intended solely for the information and use of the addressees, NCUSIF\xe2\x80\x99s management, OMB,\nthe U.S. Government Accountability Office, and the U.S. Congress and is not intended to be and should\nnot be used by anyone other than these specified parties.\n\n\n\n\nJune 11, 2010\n\n\n\n\n KPMG LLP, a U.S. limited liability partnership, is the U.S.\n member firm of KPMG International, a Swiss cooperative.\n\x0cINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON INTERNAL CONTROL OVER\n FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER\n MATTERS BASED UPON THE AUDIT PERFORMED IN ACCORDANCE\n WITH GOVERNMENT AUDITING STANDARDS\n\n\nTo the Inspector General of\nNational Credit Union Administration:\n\nWe have audited the financial statements of the National Credit Union Share Insurance Fund (NCUSIF)\nas of and for the year ended December 31, 2008, and have issued our report thereon dated June 10 , 2010.\nWe conducted our audit in accordance with auditing standards generally accepted in the United States of\nAmerica and the standards applicable to financial audits contained in Government Auditing Standards,\nissued by the Comptroller General of the United States.\n\nInternal Control Over Financial Reporting\n\nIn planning and performing our audit, we considered NCUSIF\xe2\x80\x99s internal control over financial reporting\nas a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial\nstatements, but not for the purpose of expressing an opinion on the effectiveness of NCUSIF\xe2\x80\x99s internal\ncontrol over financial reporting. Accordingly, we do not express an opinion on the effectiveness of\nNCUSIF\xe2\x80\x99s internal control over financial reporting.\n\nOur consideration of internal control over financial reporting was for the limited purpose described in the\npreceding paragraph and was not designed to identify all deficiencies in internal control over financial\nreporting that might be significant deficiencies or material weaknesses and therefore, there can be no\nassurance that all deficiencies, significant deficiencies or material weaknesses have been identified.\nHowever, as described in the accompanying schedule of findings and responses, we identified a certain\ndeficiency in internal control over financial reporting that we consider to be a material weakness.\n\nA deficiency in internal control exists when the design or operation of a control does not allow\nmanagement or employees, in the normal course of performing their assigned function, to prevent, or\ndetect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination\nof deficiencies, in internal control such that there is a reasonable possibility that a material misstatement\nof the entity\xe2\x80\x99s financial statements will not be prevented, or detected and corrected on a timely basis. We\nconsider the deficiency described in the accompanying schedule of findings and responses to be a\nmaterial weakness. See finding 2008-01.\n\x0cCompliance and Other Matters\n\nAs part of obtaining reasonable assurance about whether NCUSIF\xe2\x80\x99s financial statements are free of\nmaterial misstatement, we performed tests of its compliance with certain provisions of laws, regulations,\ncontracts, and grant agreements, noncompliance with which could have a direct and material effect on the\ndetermination of financial statement amounts. However, providing an opinion on compliance with those\nprovisions was not an objective of our audit, and accordingly, we do not express such an opinion. The\nresults of our tests disclosed no instances of noncompliance that are required to be reported under\nGovernment Auditing Standards.\n\nThis report is intended solely for the information and use of the Inspector General, the Board of the\nNational Credit Union Administration, and the management of the National Credit Union Share Insurance\nFund and is not intended to be, and should not be, used by anyone other than these specified parties.\n\n\n\n\nJune 10, 2010\n\x0cNATIONAL CREDIT UNION SHARE INSURANCE FUND\n\nSCHEDULE OF FINDINGS AND RESPONSES\nAS OF AND FOR THE YEAR ENDED DECEMBER 31, 2008\n\n\nFINDING 2008-01\n\nCondition: National Credit Union Share Insurance Fund (NCUSIF) failed to properly identify the\nappropriate accounting treatment under Financial Accounting Standards Board (FASB) Accounting\nStandards Codification (ASC) 810, Consolidation (formerly, FASB Interpretation No. 46 (R),\nConsolidation of Variable Interest Entities with respect to its variable interests in certain corporate credit\nunions.\n\nCriteria: An entity is a variable interest entity (VIE) if it meets the criteria outlined in ASC 810, which\nare: (1) the entity has equity that is insufficient to permit the entity to finance its activities without\nadditional subordinated financial support from other parties, or (2) the entity has equity investors that\ncannot make significant decisions about the entity\xe2\x80\x99s operations or that do not absorb their proportionate\nshare of the expected losses or receive the expected returns of the entity. A VIE must be consolidated by\nthe reporting entity that is deemed to be the primary beneficiary of the VIE, which is the party involved\nwith the VIE that has the majority of the expected losses or a majority of the expected residual returns or\nboth. NCUSIF was deemed to be the primary beneficiary of certain VIE\xe2\x80\x99s at December 31, 2008.\n\nEffect: NCUSIF should have consolidated the VIE\xe2\x80\x99s in which it was the primary beneficiary as of\nDecember 31, 2008. However, effective June 18, 2009, NCUSIF legally transferred its obligations with\nrespect to the corporate credit unions to a newly formed entity, the Temporary Corporate Credit Union\nStabilization Fund (TCCUSF). As a result, effective with that date, NCUSIF was no longer required to\nconsolidate VIE\xe2\x80\x99s in accordance with ASC 810. Because NCUSIF and TCCUSF are under common\ncontrol, this has resulted in a change in reporting entity in accordance with FASB ASC 250, Accounting\nChanges and Error Corrections; accordingly, TCCUSF is now considered the primary beneficiary.\n\nCause: This condition results from a deficiency in the design of internal control as NCUSIF did not\ninitially identify the correct accounting treatment for its variable interests in certain corporate credit\nunions.\n\nMonetary Impact: There is no monetary impact associated with this finding due to the fact that\nsubsequent to December 31, 2008, NCUSIF legally transferred its obligations with respect to the\ncorporate credit unions to a newly formed entity.\n\nRecommendation: NCUSIF should consider all relevant accounting literature as it prepares its financial\nstatements to ensure accuracy in accounting and presentation.\n\nManagement Response: NCUA is a small Federal agency and must focus its resources on essential\nfunctions. Financial accounting and reporting is viewed by executive agency management as important\nand essential. Financial highlights of all funds are made available to all at public Board meetings and on\nthe agency\xe2\x80\x99s web site. The finding cited by our auditors relates to our annual process of preparing the\nfinancial statements in the form and content required by generally accepted accounting principles. To\nstrengthen our financial reporting, we will review and refine our internal control processes and evaluate\ntraining requirements. We will also hire additional staff with requisite skills.\n\x0cNational Credit Union\nAdministration Central\nLiquidity Facility\nFinancial Statements as of and for the\nYears Ended December 31, 2008 and 2007, and\nIndependent Auditors\xe2\x80\x99 Reports\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCENTRAL LIQUIDITY FACILITY\n\nTABLE OF CONTENTS\n\n\n Page\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT 1\n\nFINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED\n DECEMBER 31, 2008 AND 2007:\n\n Balance Sheets 2\n\n Statements of Operations 3\n\n Statements of Members\xe2\x80\x99 Equity (Deficit) 4\n\n Statements of Cash Flows 5\n\n Notes to Financial Statements 6\xe2\x80\x9311\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON INTERNAL CONTROL OVER FINANCIAL\n REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED UPON\n THE AUDIT PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING\n STANDARDS 12\xe2\x80\x9314\n\x0cINDEPENDENT AUDITORS\xe2\x80\x99 REPORT\n\n\nTo the Inspector General of\nNational Credit Union Administration:\n\nWe have audited the accompanying balance sheets of the National Credit Union Administration Central\nLiquidity Facility (CLF) as of December 31, 2008 and 2007, and the related statements of operations,\nmembers\xe2\x80\x99 equity (deficit), and cash flows for the years then ended. These financial statements are the\nresponsibility of CLF\xe2\x80\x99s management. Our responsibility is to express an opinion on these financial\nstatements based on our audits.\n\nWe conducted our audits in accordance with auditing standards generally accepted in the United States of\nAmerica and the standards applicable to financial audits contained in Government Auditing Standards,\nissued by the Comptroller General of the United States. Those standards require that we plan and perform\nthe audit to obtain reasonable assurance about whether the financial statements are free of material\nmisstatement. An audit includes consideration of internal control over financial reporting as a basis for\ndesigning audit procedures that are appropriate in the circumstances, but not for the purpose of expressing\nan opinion on the effectiveness of CLF\xe2\x80\x99s internal control over financial reporting. Accordingly, we\nexpress no such opinion. An audit also includes examining, on a test basis, evidence supporting the\namounts and disclosures in the financial statements, assessing the accounting principles used and\nsignificant estimates made by management, as well as evaluating the overall financial statement\npresentation. We believe that our audits provide a reasonable basis for our opinion.\n\nIn our opinion, such financial statements present fairly, in all material respects, the financial position of\nthe National Credit Union Administration Central Liquidity Facility as of December 31, 2008 and 2007,\nand the results of its operations and its cash flows for the years then ended in conformity with accounting\nprinciples generally accepted in the United States of America.\n\nAs discussed in Note 4 to the financial statements, effective December 31, 2008, CLF has changed the\npresentation of its funds on deposit with U. S. Central Federal Credit Union.\n\nIn accordance with Government Auditing Standards, we have also issued our report dated March 15,\n2010, on our consideration of CLF\xe2\x80\x99s internal control over financial reporting and our tests of its\ncompliance with certain provisions of laws, regulations, contracts and grant agreements and other matters.\nThe purpose of that report is to describe the scope of our testing of internal control over financial\nreporting and compliance and the results of that testing and not to provide an opinion on the internal\ncontrol over financial reporting or on compliance. That report is an integral part of an audit performed in\naccordance with Government Auditing Standards and should be read in conjunction with this report in\nconsidering the results of our audits.\n\n\n\n\nMarch 15, 2010\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCENTRAL LIQUIDITY FACILITY\n\nBALANCE SHEETS\nAS OF DECEMBER 31, 2008 AND 2007\n(In thousands)\n\n\n 2008 2007\nASSETS\n\nASSETS:\n Cash $ 17 $ 12\n Funds on deposit with U.S. Central Federal Credit Union (Notes 4,\n 6, and 11) - 1,638,285\n Loans to members (Notes 5, 6 and 11) 1,585,478 -\n Accrued interest receivable 14,669 23,922\n\nTOTAL $ 1,600,164 $ 1,662,219\n\n\nLIABILITIES AND MEMBERS\xe2\x80\x99 EQUITY\n\nLIABILITIES:\n Accounts payable and other liabilities $ 2,287 $ 132\n Dividends payable (Note 8) 12,369 23,777\n Federal Financing bank notes payable 1,585,478 -\n Member deposits (Note 8) 486 642\n\n Total liabilities 1,600,620 24,551\n\nMEMBERS\xe2\x80\x99 EQUITY (DEFICIT):\n Capital stock \xe2\x80\x94 required (Note 3) 1,707,710 1,626,260\n Funds on deposit with U.S Central Federal Credit Union (Notes 4,\n 6, and 11) (1,719,574) -\n Retained earnings 11,408 11,408\n\n Total members\xe2\x80\x99 equity (deficit) (456) 1,637,668\n\nTOTAL $ 1,600,164 $ 1,662,219\n\n\nSee notes to financial statements.\n\n\n\n\n -2-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCENTRAL LIQUIDITY FACILITY\n\nSTATEMENTS OF OPERATIONS\nFOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n(In thousands)\n\n\n 2008 2007\n\nREVENUE :\n Investment income $ 57,580 $ 89,259\n Interest \xe2\x80\x94 loans to members (Note 5) 8,689 -\n\n Total revenue 66,269 89,259\n\nEXPENSES (Note 9):\n Personnel services 157 144\n Other services 49 48\n Rent, communications, and utilities 10 10\n Employee travel 1 -\n Group agent service fee 1 -\n Personnel benefits 35 33\n Supplies and materials 2 1\n Printing and reproduction 4 4\n\n Total operating expenses 259 240\n\n Interest \xe2\x80\x94 Federal Financing Bank loans (Note 7) 8,691 -\n Interest \xe2\x80\x94 liquidity reserve 32 53\n\n Total expenses 8,982 293\n\nEXCESS OF REVENUE OVER EXPENSES $ 57,287 $ 88,966\n\n\nSee notes to financial statements.\n\n\n\n\n -3-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCENTRAL LIQUIDITY FACILITY\n\nSTATEMENTS OF MEMBERS\xe2\x80\x99 EQUITY (DEFICIT)\nFOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n(In thousands)\n\n\n Capital Funds on Retained\n Stock Deposit Earnings Total\n\nBALANCE \xe2\x80\x94 January 1, 2007 $ 1,537,649 $ - $ 11,408 $ 1,549,057\n\n Issuance of required capital stock 89,709 - - 89,709\n\n Redemption of required capital stock (1,098) - - (1,098)\n\n Dividends - - (88,966) (88,966)\n\n Excess of revenue over expenses - - 88,966 88,966\n\nBALANCE \xe2\x80\x94 December 31, 2007 1,626,260 - 11,408 1,637,668\n\n Issuance of required capital stock 81,474 - - 81,474\n\n Redemption of required capital stock (24) - - (24)\n\n Reclassification (Notes 4 and 11) - (1,719,574) - (1,719,574)\n\n Dividends - - (57,287) (57,287)\n\n Excess of revenue over expenses - - 57,287 57,287\n\nBALANCE \xe2\x80\x94 December 31, 2008 $ 1,707,710 $ (1,719,574) $ 11,408 $ (456)\n\n\nSee notes to financial statements.\n\n\n\n\n -4-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCENTRAL LIQUIDITY FACILITY\n\nSTATEMENTS OF CASH FLOWS\nFOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n(In thousands)\n\n\n 2008 2007\n\nCASH FLOWS FROM OPERATING ACTIVITIES:\n Excess of revenue over expenses $ 57,287 $ 88,966\n Adjustments to reconcile excess of revenue over expenses to net cash\n provided by operating activities:\n Decrease in accrued interest receivable 9,253 (2,536)\n Increase in accounts payable and other liabilities 2,155 2\n\n Net cash provided by operating activities 68,695 86,432\n\nCASH FLOWS FROM INVESTING ACTIVITIES:\n Purchase of investments \xe2\x80\x94 net (81,289) (88,607)\n Repayment of loans from members 1,172,372 -\n Loans to members (2,757,850) -\n\n Net cash used in investing activities (1,666,767) (88,607)\n\nCASH FLOWS FROM FINANCING ACTIVITIES:\n Additions to member deposits 1,458 1,872\n Issuance of required capital stock 81,474 89,709\n Dividends (68,695) (86,456)\n Withdrawal of member deposits (1,614) (1,852)\n Redemption of required capital stock (24) (1,098)\n Repayment of note to the FFB (1,172,372) -\n Proceeds from issuing notes to the FFB 2,757,850 -\n\n Net cash provided by financing activities 1,598,077 2,175\n\nNET INCREASE IN CASH 5 -\n\nCASH \xe2\x80\x94 Beginning of year 12 12\n\nCASH \xe2\x80\x94 End of year $ 17 $ 12\n\nSUPPLEMENTAL DISCLOSURE OF CASH FLOW\n INFORMATION \xe2\x80\x94 Cash paid during the year for interest $ 6,570 $ 52\n\n\nSee notes to financial statements.\n\n\n\n\n -5-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCENTRAL LIQUIDITY FACILITY\n\nNOTES TO FINANCIAL STATEMENTS\nAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n\n\n1. ORGANIZATION AND PURPOSE\n\n The National Credit Union Administration Central Liquidity Facility (CLF) was created by the National\n Credit Union Central Liquidity Facility Act (the \xe2\x80\x9cAct\xe2\x80\x9d). CLF is designated as a mixed-ownership\n government corporation under the Government Corporation Control Act. CLF exists within the National\n Credit Union Administration (NCUA) and is managed by the National Credit Union Administration\n Board. CLF became operational on October 1, 1979.\n\n CLF was created to improve the general financial stability of credit unions by serving as a liquidity\n lender to credit unions experiencing unusual or unexpected liquidity shortfalls. CLF accomplishes its\n purpose by borrowing funds, subject to certain statutory limitations, when a liquidity need arises. CLF is\n a tax-exempt organization under Section 501(c)(1) of the Internal Revenue Code.\n\n CLF is subject to various Federal laws and regulations. CLF\xe2\x80\x99s operating budget requires Congressional\n approval, and the CLF is not permitted to approve applications for credit, the intent of which is to\n expand credit union portfolios. CLF\xe2\x80\x99s investments are restricted to obligations of the U.S. Government\n and its agencies, deposits in federally insured financial institutions, and shares and deposits in credit\n unions. Borrowing is limited by statute to 12 times the subscribed capital stock and surplus.\n\n2. SIGNIFICANT ACCOUNTING POLICIES\n\n Basis of Accounting \xe2\x80\x94 CLF maintains its accounting records on the accrual basis of accounting.\n\n Loans and Allowance for Loan Losses \xe2\x80\x94 Loans, when made to members, are on a short-term,\n seasonal or protracted need basis. For all liquidity-need loans, CLF secures each loan by a first priority\n security interest in assets of the member credit union. In determining the allowance for loan losses, when\n applicable, CLF evaluates the collectibility of its loans to members through examination of the financial\n condition of the individual borrowing credit unions and the credit union industry in general.\n\n Funds on Deposit With U.S. Central Federal Credit Union \xe2\x80\x94 CLF invests in redeposits and share\n accounts at U.S. Central Federal Credit Union (USC) (Notes 4, 6, and 11). These are nontransferable,\n nonnegotiable instruments that are acquired at face value and carried at cost.\n\n Fair Value of Financial Instruments \xe2\x80\x94 The following methods and assumptions were used in\n estimating the fair value disclosures for financial instruments:\n\n Cash \xe2\x80\x94 The carrying amounts for cash approximate fair value.\n\n Investments \xe2\x80\x94 Fair values of financial instruments with maturities over one year are computed using the\n market rate of interest at year-end. For financial instruments with maturities of one year or less, the\n carrying amounts approximate fair value.\n\n Loans \xe2\x80\x94 For loans advanced to member credit unions, the carrying amounts approximate fair value.\n\n\n\n -6-\n\x0c Member Deposits \xe2\x80\x94 Funds maintained with the CLF in excess of required capital amounts are recorded\n as member deposits. These deposits are due upon demand, and the carrying amounts approximate the\n fair value.\n\n FFB Notes Payable \xe2\x80\x94 For notes issued to the Federal Financing Bank (FFB), when applicable, the\n carrying amounts approximate fair value.\n\n Other \xe2\x80\x94 Accrued interest receivable, accounts payable, and other liabilities are recorded at book values,\n which approximate the respective fair values.\n\n Use of Estimates \xe2\x80\x94 The preparation of financial statements in conformity with accounting principles\n generally accepted in the United States of America requires management to make estimates and\n assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets\n and liabilities at the date of the financial statements and the reported amounts of revenues and expenses\n during the reporting period. Actual results could differ from management\xe2\x80\x99s estimates.\n\n3. CAPITAL STOCK\n\n Membership in CLF is voluntary and is open to all credit unions that subscribe to a required amount of\n capital stock or are members of an Agent member that has subscribed to the capital stock on their behalf.\n There are two types of membership, Regular (natural person credit unions) and Agent (a credit union or\n group of credit unions serving other natural person credit unions). Natural person credit unions may\n borrow from CLF directly as a regular member or indirectly through an Agent member.\n\n The required capital stock account represents the portion of capital stock subscriptions remitted to CLF\n by member credit unions. Regular members\xe2\x80\x99 required subscription amounts equal one-half of one\n percent of their paid-in and unimpaired capital and surplus. One-half of this amount is required to be\n remitted to CLF. Agent members\xe2\x80\x99 required subscription amounts equal one-half of one percent of the\n paid-in and unimpaired capital and surplus of all of the credit unions served by the Agent member that\n are not Regular members. One-half of that amount is required to be remitted to CLF. In both cases, the\n remainder may be held by the member on call of the CLF Board. The unremitted subscription amounts\n are not reflected in CLF\xe2\x80\x99s financial statements. Subscriptions are adjusted annually to reflect changes in\n the member credit unions\xe2\x80\x99 paid-in and unimpaired capital and surplus. Dividends are declared and paid\n on required capital stock as determined by the Board.\n\n A member of CLF whose capital stock account constitutes less than five per cent of the total capital\n stock outstanding may withdraw from membership in CLF six months after notifying the NCUA Board\n of its intention to do so. A member whose capital stock account constitutes five per cent or more of the\n total capital stock outstanding may withdraw from membership in CLF 24 months after notifying the\n NCUA Board of its intention.\n\n The required capital stock is redeemable upon demand by the members. The redemption is not\n mandatory, as defined in FASB Statement No. 150, Accounting for Certain Financial Instruments with\n Characteristics of both Liabilities and Equity; therefore classification in permanent equity is appropriate.\n\n\n\n\n -7-\n\x0c CLF\xe2\x80\x99s capital stock accounts are composed of the following:\n 2008 2007\n\n Regular members $ 64,363 $ 60,613\n Agent member 1,643,347 1,565,647\n\n Total $ 1,707,710 $ 1,626,260\n\n The agent member capital stock account balance at December 31, 2008 and 2007, is represented by one\n member, U. S. Central Federal Credit Union (USC), that serves as the Agent Group Representative for\n all other corporate credit unions (Notes 4, 6, and 11).\n4. FUNDS ON DEPOSIT WITH U.S. CENTRAL FEDERAL CREDIT UNION\n During fiscal year 1984, CLF accepted a membership request from USC to be an Agent Group\n Representative on behalf of its corporate credit union members. At December 31, 2008 and 2007,\n $1,643,347,000 and $1,565,647,000, respectively, of the required (paid-in) portion of subscribed capital\n stock was purchased from CLF by USC on behalf of its corporate credit union members. USC has\n 26 corporate credit union members as of both December 31, 2008 and 2007.\n As permitted by statute, CLF investments are restricted to obligations of the U. S. Government and its\n agencies, deposits in federally insured financial institutions, and shares and deposits in credit unions.\n CLF had elected to deposit all of its agent member share capital in USC at market rates of interest. At\n December 31, 2008 and 2007, approximately $1,719,574 and $1,638,285,000, respectively, was held on\n deposit in USC accounts at a yield of 2.86% and 5.77%, respectively, as follows (in thousands):\n 2008 2007\n\n U.S. Central Federal Credit Union Share Account $ 1,712,574 $ 1,632,285\n U.S. Central Federal Credit Union Share Certificates 7,000 6,000\n\n $ 1,719,574 $ 1,638,285\n\n As a result of the deterioration of USC\xe2\x80\x99s financial condition and the potential uncertainty surrounding\n USC\xe2\x80\x99s ability to immediately repay the funds held on deposit, CLF determined that the economic\n substance of CLF\xe2\x80\x99s funds on deposit with USC had changed. Accordingly, effective December 31, 2008,\n CLF changed its accounting treatment of its funds on deposit with USC and reclassified the funds on\n deposit with USC to a contra-equity presentation (Note 11). CLF has followed the guidance in\n EITF 85-1, Classifying Notes Receivable for Capital Stock, as a basis for presenting its funds on deposit\n with USC as contra-equity. The amounts on deposit represent USC\xe2\x80\x99s capital stock balance with CLF;\n USC, as of December 31, 2008, does not have the intent or ability to repay these funds to CLF within a\n relatively short period of time. As discussed in Note 11, effective August 3, 2009, CLF transferred its\n funds from USC to direct deposit with the U. S. Treasury.\n A Memorandum of Understanding (MOU), effective July 1, 2005, sets forth the understanding of CLF\n and the USC concerning the investments by CLF in USC Share Account and Certificates.\n As provided in the MOU, all investments by CLF in shares of USC will be in either the Share Account\n or Share Certificates. The Share Account is a three-month, fixed rate account that provides for automatic\n re-investment at maturity and funds are available without penalty upon seven days notice. The Share\n Account is only available to CLF. In the event of a liquidation of USC, shares in the account will be\n redeemable in full, prior to the redemption of any other shares of USC.\n\n\n\n -8-\n\x0c The Share Certificates are fixed rate, with a maturity fixed upon issuance (three or five years under the\n current MOU). Redemption prior to maturity is permitted, in whole or in part, if the CLF requests early\n redemption and if the USC and the CLF agree on an early redemption value. The Share Certificates are\n neither negotiable nor assignable.\n\n5. LOANS TO MEMBERS\n\n The balance of outstanding loans as of December 31, 2008, was $1,585,478,115. Interest rates of these\n loans range from .50 % to 2.25%, and their maturities extend through October 2009. CLF can provide\n members with extensions on their loans. Of the total amount of loans outstanding, $1,510,000,000 was\n due from USC (Note 6). There were no outstanding loans or loan commitments at December 31, 2007.\n\n6. CONCENTRATION OF CREDIT RISK\n\n At December 31, 2008, CLF has a concentration of credit risk for its shareholder loan with USC of\n approximately $1,719,574, 000 (Notes 4 and 11). At December 31, 2007, CLF has a concentration of\n credit risk for its funds on deposit with USC of approximately $1,638,285,000 (Note 4), and at\n December 31, 2008 and 2007, for its loans to USC of approximately $1,510,000,000 and $0,\n respectively (Note 5).\n\n7. BORROWING AUTHORITY\n\n CLF is authorized by statute to borrow, from any source, an amount not to exceed 12 times its\n subscribed capital stock and surplus. Congress, through the appropriations process, placed a limit on\n gross obligations for 2008 and 2007 at $1.5 billion. However, effective October 1, 2008, under Public\n Law 110-329, Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009,\n Congress took action to remove the annual borrowing limitation of $1.5 billion to enable CLF to borrow\n up to its full statutory authority of approximately $41 billion.\n\n CLF borrows exclusively from the Federal Financing Bank (FFB). The National Credit Union\n Administration maintains a note purchase agreement with the FFB on behalf of CLF. Under the terms of\n its agreement, CLF borrows from the FFB as needed. Under terms prescribed by the master note\n agreement, CLF executes promissory notes in amounts as necessary and renews them annually. During\n 2008, CLF borrowed amounts totaling $2,757,849,774 from FFB under fifty-six separate loan\n agreements, which it, in turn, loaned to member credit unions. The amounts owed to the FFB at\n December 31, 2008 totaled $1,585,478,000.\n\n At December 31, 2008 and 2007, CLF was in compliance with its borrowing authority.\n\n8. MEMBER DEPOSITS\n\n Member deposits represent amounts remitted by members over and above the amount required for\n membership. Interest is paid on member deposits at a rate equivalent to the dividend rate paid on\n required capital stock.\n\n Dividends payable represents dividends declared in 2008 and 2007 to be paid in 2009 and 2008,\n respectively.\n\n\n\n\n -9-\n\x0c9. SERVICES PROVIDED BY THE NATIONAL CREDIT UNION ADMINISTRATION\n\n NCUA provides CLF with information technology and other services and supplies. In addition, NCUA\n pays CLF\xe2\x80\x99s employees\xe2\x80\x99 salaries and benefits as well as CLF\xe2\x80\x99s portion of monthly building operating\n costs. CLF reimburses NCUA on a monthly basis for these items. The total amounts charged by NCUA\n were approximately $259,000 and $240,000 for the years ended December 31, 2008 and 2007,\n respectively. As of December 31, 2008 and 2007, accounts payable and other liabilities include\n approximately $110,000 and $103,000, respectively, due to the NCUA Operating Fund for services\n provided.\n\n10. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS\n\n The carrying amount and the estimated fair value of CLF\xe2\x80\x99s financial instruments at December 31, 2008\n and 2007 are as follows (in thousands):\n\n 2008 2007\n Carrying Fair Carrying Fair\n Amount Value Amount Value\n\n Cash $ 17 $ 17 $ 12 $ 12\n Funds on deposit with U.S.\n Central Federal Credit Union - - 1,638,285 1,638,473\n Loans to members 1,585,478 1,585,478 - -\n Accrued interest receivable 14,669 14,669 23,922 23,922\n Accounts payable and other\n liabilities 2,287 2,287 132 132\n Dividends payable 12,369 12,369 23,777 23,777\n Federal Financing bank notes\n payable 1,585,478 1,585,478 - -\n Member deposits 486 486 642 642\n\n11. U. S. CENTRAL FEDERAL CREDIT UNION AND RELATED SUBSEQUENT EVENTS\n\n As described in Note 4, funds on deposit with U.S. Central Federal Credit Union in 2007 were presented\n as an asset in the accompanying balance sheets. Beginning in 2008, CLF began accounting for its agent\n member share capital invested in USC accounts as a shareholder loan at a market rate yielding 2.86%.\n Transactions with equity owners need to be evaluated to determine their substance and the appropriate\n reporting in the financial statements based on the terms of the transaction, including interest rates,\n payment terms and maturities, evidence of ability and intent of repayment, nature and sufficiency of\n collateral.\n\n CLF took into account the complex interrelationship between its stock ownership arrangement and its\n lending activities during the final months of 2008 and subsequent actions taken in 2009 as detailed\n below. The existing interrelationships include USC\xe2\x80\x99s majority ownership stake in CLF, the\n conservatorship of USC by NCUA, the corresponding National Credit Union Share Insurance Fund\n (NCUSIF) assistance extended to USC, and the CLF liquidity advance made to the NCUSIF which then\n advanced the funds to USC. These factors raise reasonable doubt as to the ability and intent of USC to\n repay CLF\xe2\x80\x99s invested funds upon demand as of December 31, 2008. This in turn led to a determination\n that the amount of the investment (funds held on deposit) should instead be reported within the equity\n section of the balance sheets as a receivable from shareholder.\n\n\n\n\n - 10 -\n\x0cIn November 2008, the NCUA Board determined that extensions of credit by CLF for other than\nliquidity needs (OTLN) are in the national economic interest, and requested concurrence of the Board of\nGovernors of the Federal Reserve System and of the Secretary of the Treasury for OTLN lending\nauthority through December 31, 2009. Concurrences were received and CLF began making\nOTLN-based loans in January 2009 as described in the next paragraph.\n\nThe NCUA Board announced two new initiatives for CLF extensions of credit to credit unions for\nsystem liquidity needs under the OTLN authority. The two initiatives are the Credit Union System\nInvestment Program (CU SIP), and the Credit Union Homeowners Affordability Relief Program\n(CU HARP). Funds for both would come from the Federal Financing Bank (FFB).\n\nCLF made loans and loan commitments through a one-time offering of CU HARP of $164,016,217 and\nthrough the CU SIP of $4,801,984,000 in January 2009. CLF made further loans and loan commitments\nthrough the CU SIP of $2,915,062,000 and $500,000,000 in February 2009 and March 2009,\nrespectively.\n\nIn January 2009, the NCUA Board announced two additional actions which provided immediate\nenhancement to the corporate credit union system\xe2\x80\x99s liquidity and capital positions. One of these actions\nwas a temporary National Credit Union Share Insurance Fund (NCUSIF) guarantee of member shares in\ncorporate credit unions, which included CLF\xe2\x80\x99s share accounts on deposit with USC. The guarantee\ncovers all shares through December 31, 2010.\n\nOn March 19, 2009, the NCUA Board took additional steps to stabilize the corporate credit union\nsystem when it placed USC and Western Corporate (WesCorp) Federal Credit Union into\nconservatorship.\n\nThe CLF approved an advance of $10 billion to NCUSIF in order for NCUSIF to make $5 billion in\nliquidity stabilization loans to both USC and WesCorp. These advances were made on March 23, 2009,\nfor a period of 91 days and maturing on June 22, 2009. Subsequently, on June 22, 2009, the advances\nwere renewed for an additional 182 days maturing on December 21, 2009.\n\nEffective August 3, 2009, CLF transferred its funds from USC to a direct deposit account with the\nU.S. Treasury and invested them in a laddered portfolio of short-term U.S. Treasury securities.\n\n ******\n\n\n\n\n - 11 -\n\x0cINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON INTERNAL CONTROL OVER\n FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER\n MATTERS BASED UPON THE AUDIT PERFORMED IN ACCORDANCE\n WITH GOVERNMENT AUDITING STANDARDS\n\n\nTo the Inspector General of\nNational Credit Union Administration:\nWe have audited the financial statements of the National Credit Union Administration Central Liquidity\nFacility (CLF) as of and for the year ended December 31, 2008, and have issued our report thereon dated\nMarch 15, 2010. We conducted our audit in accordance with auditing standards generally accepted in the\nUnited States of America and the standards applicable to financial audits contained in Government\nAuditing Standards, issued by the Comptroller General of the United States.\nInternal Control Over Financial Reporting\nIn planning and performing our audit, we considered CLF\xe2\x80\x99s internal control over financial reporting as a\nbasis for designing our auditing procedures for the purpose of expressing our opinion on the financial\nstatements, but not for the purpose of expressing an opinion on the effectiveness of CLF\xe2\x80\x99s internal control\nover financial reporting. Accordingly, we do not express an opinion on the effectiveness of CLF\xe2\x80\x99s internal\ncontrol over financial reporting.\nOur consideration of internal control over financial reporting was for the limited purpose described in the\npreceding paragraph and was not designed to identify all deficiencies in internal control over financial\nreporting that might be significant deficiencies or material weaknesses and therefore, there can be no\nassurance that all deficiencies, significant deficiencies or material weaknesses have been identified.\nHowever, as described in the accompanying schedule of findings and responses, we identified a certain\ndeficiency in internal control over financial reporting that we consider to be a material weakness.\nA deficiency in internal control exists when the design or operation of a control does not allow\nmanagement or employees, in the normal course of performing their assigned function, to prevent, or\ndetect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination\nof deficiencies, in internal control such that there is a reasonable possibility that a material misstatement\nof the entity\xe2\x80\x99s financial statements will not be prevented, or detected and corrected on a timely basis. We\nconsider the deficiency described in the accompanying schedule of findings and responses to be a\nmaterial weakness. See finding 2008-01.\nCompliance and Other Matters\nAs part of obtaining reasonable assurance about whether CLF\xe2\x80\x99s financial statements are free of material\nmisstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts,\nand grant agreements, noncompliance with which could have a direct and material effect on the\ndetermination of financial statement amounts. However, providing an opinion on compliance with those\nprovisions was not an objective of our audit, and accordingly, we do not express such an opinion. The\nresults of our tests disclosed no instances of noncompliance that are required to be reported under\nGovernment Auditing Standards.\n\x0cThis report is intended solely for the information and use of the Inspector General, the Board of the\nNational Credit Union Administration, and the management of the National Credit Union Administration\nCentral Liquidity Facility and is not intended to be, and should not be, used by anyone other than these\nspecified parties.\n\n\n\n\nMarch 15, 2010\n\n\n\n\n - 13 -\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCENTRAL LIQUIDITY FACILITY\n\nSCHEDULE OF FINDINGS AND RESPONSES\nAS OF AND FOR THE YEAR ENDED DECEMBER 31, 2008\n\n\nFINDING 2008-01\n\nCondition \xe2\x80\x94 Effective December 31, 2008, CLF changed its accounting treatment of its funds on deposit\nwith USC and reclassified the funds on deposit with USC to a contra-equity presentation.\n\nCriteria \xe2\x80\x94 CLF has followed the guidance in EITF 85-1, Classifying Notes Receivable for Capital Stock,\nas a basis for presenting its funds on deposit with USC as contra-equity. The amounts on deposit\nrepresent USC\xe2\x80\x99s capital stock balance with CLF; USC, as of December 31, 2008, does not have the intent\nor ability to repay these funds to CLF within a relatively short period of time.\n\nEffect \xe2\x80\x94 This condition results from a deficiency in the design of internal control as CLF did not initially\nidentify the correct treatment of its funds held on deposit with USC.\n\nCause \xe2\x80\x94 As a result of the deterioration of USC\xe2\x80\x99s financial condition and the potential uncertainty\nsurrounding USC\xe2\x80\x99s ability to immediately repay the funds held on deposit, CLF determined that the\neconomic substance of CLF\xe2\x80\x99s funds on deposit with USC had changed.\n\nMonetary Impact \xe2\x80\x94 There is no monetary impact associated with this finding.\n\nRecommendation \xe2\x80\x94 CLF should review its financial statements for accuracy to ensure the proper\npresentation of its funds on deposit.\n\n\n\n\n - 14 -\n\x0cNational Credit Union\nAdministration Community\nDevelopment Revolving Loan Fund\nFinancial Statements as of and for the\nYears Ended December 31, 2008 and 2007, and\nIndependent Auditors\xe2\x80\x99 Reports\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCOMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n\nTABLE OF CONTENTS\n\n\n Page\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT 1\n\nFINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED\n DECEMBER 31, 2008 AND 2007:\n\n Balance Sheets 2\n\n Statements of Operations 3\n\n Statements of Changes in Fund Balance 4\n\n Statements of Cash Flows 5\n\n Notes to Financial Statements 6\xe2\x80\x939\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON INTERNAL CONTROL OVER\n FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS\n BASED UPON THE AUDIT PERFORMED IN ACCORDANCE WITH\n GOVERNMENT AUDITING STANDARDS 10\xe2\x80\x9311\n\x0cINDEPENDENT AUDITORS\xe2\x80\x99 REPORT\n\n\nTo the Inspector General of\nNational Credit Union Administration:\n\nWe have audited the accompanying balance sheets of National Credit Union Administration Community\nDevelopment Revolving Loan Fund (CDRLF) as of December 31, 2008 and 2007, and the related\nstatements of operations, changes in fund balance, and cash flows for the years then ended. These\nfinancial statements are the responsibility of the management of CDRLF. Our responsibility is to express\nan opinion on these financial statements based on our audits.\n\nWe conducted our audits in accordance with auditing standards generally accepted in the United States of\nAmerica and the standards applicable to financial audits contained in Government Auditing Standards,\nissued by the Comptroller General of the United States. Those standards require that we plan and perform\nthe audit to obtain reasonable assurance about whether the financial statements are free of material\nmisstatement. An audit includes consideration of internal control over financial reporting as a basis for\ndesigning audit procedures that are appropriate in the circumstances, but not for the purpose of expressing\nan opinion on the effectiveness of CDRLF\xe2\x80\x99s internal control over financial reporting. Accordingly, we\nexpress no such opinion. An audit also includes examining, on a test basis, evidence supporting the\namounts and disclosures in the financial statements, assessing the accounting principles used and\nsignificant estimates made by management, as well as evaluating the overall financial statement\npresentation. We believe that our audits provide a reasonable basis for our opinion.\n\nIn our opinion, such financial statements present fairly, in all material respects, the financial position of\nNational Credit Union Administration Community Development Revolving Loan Fund as of\nDecember 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended\nin conformity with accounting principles generally accepted in the United States of America.\n\nIn accordance with Government Auditing Standards, we have also issued our report dated February 17,\n2009, on our consideration of CDRLF\xe2\x80\x99s internal control over financial reporting and our tests of its\ncompliance with certain provisions of laws, regulations, contracts, and grant agreements and other\nmatters. The purpose of that report is to describe the scope of our testing of internal control over financial\nreporting and compliance and the results of that testing, and not to provide an opinion on the internal\ncontrol over financial reporting or on compliance. That report is an integral part of an audit performed in\naccordance with Government Auditing Standards and should be considered in assessing the results of our\naudits.\n\n\n\n\nFebruary 17, 2009\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCOMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n\nBALANCE SHEETS\nAS OF DECEMBER 31, 2008 AND 2007\n\n\n 2008 2007\n\nASSETS\n\nCASH AND CASH EQUIVALENTS $ 5,610,194 $ 2,931,422\n\nLOANS (Note 4) 10,553,512 13,292,065\n\nINTEREST RECEIVABLE 25,620 30,154\n\nTOTAL $ 16,189,326 $ 16,253,641\n\n\nLIABILITIES AND FUND BALANCE\n\nLIABILITIES \xe2\x80\x94 Accrued technical assistance $ 1,267,377 $ 1,308,135\n\nFUND BALANCE:\n Revolving fund capital (Note 3) 13,435,642 13,435,642\n Accumulated earnings 1,486,307 1,509,864\n\n Total fund balance 14,921,949 14,945,506\n\nTOTAL $ 16,189,326 $ 16,253,641\n\n\nSee notes to financial statements.\n\n\n\n\n -2-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCOMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n\nSTATEMENTS OF OPERATIONS\nFOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n\n\n 2008 2007\n\nSUPPORT AND REVENUES:\n Interest on cash equivalents $ 35,186 $ 264,661\n Interest on loans 123,329 98,113\n Appropriation revenue 975,000 940,500\n\n Total support and revenues 1,133,515 1,303,274\n\nEXPENSES:\n Technical assistance 1,157,041 1,436,889\n Loan losses (recoveries) 31 (96,992)\n\n Total expenses 1,157,072 1,339,897\n\nEXCESS OF EXPENSES OVER SUPPORT AND REVENUES $ (23,557) $ (36,623)\n\n\nSee notes to financial statements.\n\n\n\n\n -3-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCOMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n\nSTATEMENTS OF CHANGES IN FUND BALANCE\nFOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n\n\n 2008 2007\n\nFUND BALANCE \xe2\x80\x94 Beginning of year $ 14,945,506 $ 14,982,129\n\n Change in unexpended appropriations:\n Operating appropriations received (Note 3) 975,000 940,500\n Appropriation revenue recognized (Note 3) (975,000) (940,500)\n\n Excess of expenses over support and revenues (23,557) (36,623)\n\nFUND BALANCE \xe2\x80\x94 End of year $ 14,921,949 $ 14,945,506\n\n\nSee notes to financial statements.\n\n\n\n\n -4-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCOMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n\nSTATEMENTS OF CASH FLOWS\nFOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n\n\n 2008 2007\n\nCASH FLOWS FROM OPERATING ACTIVITIES:\n\n Excess of expenses over support and revenues $ (23,557) $ (36,623)\n Adjustments to reconcile the excess of (expenses over support\n and revenues) support and revenues over expenses to net cash\n used in operating activities:\n Change in unexpended appropriations (975,000) (940,500)\n Changes in assets and liabilities:\n Decrease (increase) in interest receivable 4,534 (12,451)\n (Decrease) increase in accrued technical assistance (40,758) 216,717\n\n Net cash used in operating activities (1,034,781) (772,857)\n\nCASH FLOWS FROM INVESTING ACTIVITIES:\n Loan principal repayments 3,088,553 1,853,386\n Loan disbursements (350,000) (7,758,587)\n\n Net cash provided by (used in) investing activities 2,738,553 (5,905,201)\n\nCASH FLOWS FROM FINANCING ACTIVITIES:\n Appropriations received 975,000 940,500\n\n Net cash provided by financing activities 975,000 940,500\n\nNET INCREASE (DECREASE) IN CASH\n AND CASH EQUIVALENTS 2,678,772 (5,737,558)\n\nCASH AND CASH EQUIVALENTS \xe2\x80\x94 Beginning of year 2,931,422 8,668,980\n\nCASH AND CASH EQUIVALENTS \xe2\x80\x94 End of year $ 5,610,194 $ 2,931,422\n\n\nSee notes to financial statements.\n\n\n\n\n -5-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCOMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n\nNOTES TO FINANCIAL STATEMENTS\nAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007\n\n\n1. NATURE OF ORGANIZATION\n\n The Community Development Revolving Loan Fund for Credit Unions (CDRLF) was established by an\n act of Congress (Public Law 96-123, November 20, 1979) to stimulate economic development in\n low-income communities. The National Credit Union Administration (NCUA) and the Community\n Services Association (CSA) jointly adopted Part 705 of NCUA Rules and Regulations, governing\n administration of the Fund, on February 28, 1980.\n\n Upon the dissolution of CSA in 1983, administration of CDRLF was transferred to the Department of\n Health and Human Services (HHS). Because HHS never promulgated final regulations governing the\n administration of CDRLF, the Fund was dormant.\n\n The Community Development Credit Union Transfer Act (Public Law 99-604, November 6, 1986)\n transferred CDRLF administration back to NCUA. The NCUA Board adopted amendments to Part 705\n of NCUA Rules and Regulations on September 16, 1987, and began making loans/deposits to\n participating credit unions in 1990.\n\n The purpose of CDRLF is to stimulate economic activities in the communities served by low-income\n credit unions which will result in increased income, ownership, and employment opportunities for\n low-wealth residents, and other economic growth. The policy of NCUA is to revolve the loans to\n qualifying credit unions as often as practical in order to gain maximum impact on as many participating\n credit unions as possible.\n\n2. SIGNIFICANT ACCOUNTING AND OPERATIONAL POLICIES\n\n Basis of Accounting \xe2\x80\x94 CDRLF reports its financial statements on the accrual basis of accounting.\n\n Cash Equivalents \xe2\x80\x94 The Federal Credit Union Act permits CDRLF to make investments in United\n States Government Treasury securities. All investments in 2008 and 2007 were cash equivalents and are\n stated at cost which approximates fair value. Cash equivalents are highly liquid investments with\n original maturities of three months or less.\n\n Allowance for Loan Losses \xe2\x80\x94 CDRLF records a provision for estimated loan losses. Loans considered\n to be uncollectible are charged to the allowance for loan losses. Management continually evaluates the\n adequacy of the allowance for loan losses based upon prevailing circumstances and an assessment of\n collectibility risk of the total loan portfolio. Accrual of interest is discontinued on non-performing loans\n when management believes collectibility is doubtful. At December 31, 2008 and 2007, management\n determined that no allowance for loan losses was necessary.\n\n Salary and Operating Expenses \xe2\x80\x94 NCUA provides certain general and administrative support to the\n CDRLF, including office space, salaries, and certain supplies. The value of these contributed services is\n not charged to CDRLF.\n\n\n\n\n -6-\n\x0c Revenue Recognition \xe2\x80\x94 Appropriation revenue is recognized as the related technical assistance\n expense is recognized. Total appropriation revenues will differ from total technical assistance expenses\n because not all technical assistance is funded by appropriations.\n\n Use of Estimates \xe2\x80\x94 The preparation of financial statements in conformity with accounting principles\n generally accepted in the United States of America requires management to make estimates and\n assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets\n and liabilities at the date of the financial statements and the reported amounts of revenues and expenses\n during the reporting period. Actual results could differ from management\xe2\x80\x99s estimates.\n\n3. GOVERNMENT REGULATIONS\n\n CDRLF is subject to various Federal laws and regulations. Assistance, which includes lending and\n technical assistance, is limited by Congress to a total of the $20,515,835 appropriated for CDRLF, plus\n accumulated earnings. Federally chartered and state-chartered credit unions may participate in CDRLF\xe2\x80\x99s\n Community Loan Fund. Loans may only be made to low-income credit unions as defined by NCUA.\n\n NCUA Rules and Regulations Section 705.7 permit the classification of the loan in the participating\n credit union\xe2\x80\x99s accounting records as either a note payable or a nonmember deposit. As a nonmember\n deposit, an amount not to exceed $250,000 per credit union is insured by the National Credit Union\n Share Insurance Fund (NCUSIF). The covered amount of loans recorded as nonmember deposits by\n participating credit unions insured by the NCUSIF totaled approximately $10,306,351 and $5,790,000 at\n December 31, 2008 and 2007, respectively. Under the CDRLF Loan Program, loans recorded in the\n credit union\xe2\x80\x99s accounting records as notes payable may be collateralized.\n\n Loans are limited to a maximum amount of $300,000 per credit union. Loans issued after January 1,\n 2002, carry a fixed rate of 1%. Interest and principal are repaid on a semiannual basis beginning six\n months and one year, respectively, after the initial distribution of the loan. The maximum term of each\n loan is five years.\n\n During the years ended December 31, 2008 and 2007, appropriations for technical assistance in the\n amounts of $975,000 and $940,500, were received for the Federal Government\xe2\x80\x99s fiscal years 2008\xe2\x80\x932009\n and 2007-2008, respectively. The amounts were designated to be used as operating appropriations for\n technical assistance and no amounts were designated to be used as revolving fund capital.\n\n For the appropriations received for technical assistance for the Federal Government\xe2\x80\x99s fiscal year\n 2008-2009, $975,000 expires on September 30, 2009. Appropriations of $975,000 for technical\n assistance grants are proposed for fiscal 2009\xe2\x80\x932010.\n\n 2008 2007\n\n Unexpended appropriations:\n Balance \xe2\x80\x94 beginning of the year $ 1,141,442 $ 1,141,442\n Operational appropriations received (rescinded) 975,000 940,500\n Appropriation revenue recognized (975,000) (940,500)\n\n Balance of unexpended appropriations \xe2\x80\x94 end of year $ 1,141,442 $ 1,141,442\n\n Revolving fund capital $ 13,435,642 $ 13,435,642\n\n\n\n\n -7-\n\x0c4. LOANS\n\n Loans outstanding at December 31, 2008 and 2007, are scheduled to be repaid during the following\n subsequent years:\n\n 2008 2007\n\n 2008 $ - $ 2,738,295\n 2009 2,964,967 3,075,324\n 2010 2,825,455 2,775,356\n 2011 2,577,106 2,657,106\n 2012 2,115,984 2,045,984\n 2013 70,000 -\n\n Loans $ 10,553,512 $ 13,292,065\n\n5. CONCENTRATION OF CREDIT RISK\n\n At December 31, 2008 and 2007, there are no significant concentrations of credit risk in the loan\n portfolio. As discussed in Note 1, CDRLF provides loans to credit unions that serve predominantly\n low-income communities.\n\n6. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS\n\n The following disclosures of the estimated fair value of financial instruments are made in accordance\n with the requirements of Financial Accounting Standards Board Statement No. 107, Disclosures about\n Fair Value of Financial Instruments. The methods and assumptions used in estimating the fair value\n disclosures for financial instruments are as follows:\n\n Cash and Cash Equivalents \xe2\x80\x94 The carrying amounts for cash and cash equivalents approximate fair\n values.\n\n Interest Receivable and Accrued Technical Assistance \xe2\x80\x94 Such items are recorded at book values,\n which approximate the respective fair values.\n\n Loans \xe2\x80\x94 The fair value is estimated by discounting projected future cash flows using current market\n interest rates. For purposes of this calculation, the discount rate used was the Treasury Constant Maturity\n Rate plus two percent (3.04% and 5.26% at December 31, 2008 and 2007, respectively).\n\n\n\n\n -8-\n\x0cThe carrying amount and the estimated fair value of the CDRLF\xe2\x80\x99s financial instruments are as follows:\n\n 2008 2007\n Carrying Estimated Carrying Estimated\n Amount Fair Value Amount Fair Value\n\n\n Assets:\n Cash and cash equivalents $ 5,610,194 $ 5,610,194 $ 2,931,422 $ 2,931,422\n\n Loans \xe2\x80\x94 net $ 10,553,512 $ 10,046,414 $ 13,292,065 $ 11,817,193\n\n Interest receivable $ 25,620 $ 25,620 $ 30,154 $ 30,154\n\n Liabilities \xe2\x80\x94 accrued technical\n assistance $ 1,267,377 $ 1,267,377 $ 1,308,135 $ 1,308,135\n\n\nIt is the intent of CDRLF to hold its loans to maturity. CDRLF anticipates realizing the carrying amount\nin full. Fair value is less than the carrying amount because loans are made at less than market interest\nrates.\n\n ******\n\n\n\n\n -9-\n\x0cINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON INTERNAL CONTROL OVER\n FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER\n MATTERS BASED UPON THE AUDIT PERFORMED IN ACCORDANCE\n WITH GOVERNMENT AUDITING STANDARDS\n\n\nTo the Inspector General of\nNational Credit Union Administration:\n\nWe have audited the financial statements of the National Credit Union Administration Community\nDevelopment Revolving Loan Fund (CDRLF) as of and for the year ended December 31, 2008, and have\nissued our report thereon dated February 17, 2009. We conducted our audit in accordance with auditing\nstandards generally accepted in the United States of America and the standards applicable to financial\naudits contained in Government Auditing Standards, issued by the Comptroller General of the United\nStates.\n\nInternal Control Over Financial Reporting\n\nIn planning and performing our audit, we considered CDRLF\xe2\x80\x99s internal control over financial reporting as\na basis for designing our auditing procedures for the purpose of expressing our opinion on the financial\nstatements, but not for the purpose of expressing an opinion on the effectiveness of CDRLF\xe2\x80\x99s internal\ncontrol over financial reporting. Accordingly, we do not express an opinion on the effectiveness of\nCDRLF\xe2\x80\x99s internal control over financial reporting.\n\nA control deficiency exists when the design or operation of a control does not allow management or\nemployees, in the normal course of performing their assigned functions, to prevent or detect\nmisstatements on a timely basis. A significant deficiency is a control deficiency, or combination of\ncontrol deficiencies, that adversely affects the entity\xe2\x80\x99s ability to initiate, authorize, record, process, or\nreport financial data reliably in accordance with generally accepted accounting principles such that there\nis more than a remote likelihood that a misstatement of the entity\xe2\x80\x99s financial statements that is more than\ninconsequential will not be prevented or detected by the entity\xe2\x80\x99s internal control.\n\nA material weakness is a significant deficiency, or combination of significant deficiencies, that results in\nmore than a remote likelihood that a material misstatement of the financial statements will not be\nprevented or detected by the entity\xe2\x80\x99s internal control.\n\nOur consideration of internal control over financial reporting was for the limited purpose described in the\nfirst paragraph of this section and would not necessarily identify all deficiencies in internal control that\nmight be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal\ncontrol over financial reporting that we consider to be material weaknesses, as defined above.\n\x0cCompliance and Other Matters\n\nAs part of obtaining reasonable assurance about whether CDRLF\xe2\x80\x99s financial statements are free of\nmaterial misstatement, we performed tests of its compliance with certain provisions of laws, regulations,\ncontracts, and grant agreements, noncompliance with which could have a direct and material effect on the\ndetermination of financial statement amounts. However, providing an opinion on compliance with those\nprovisions was not an objective of our audit and, accordingly, we do not express such an opinion. The\nresults of our tests disclosed no instances of noncompliance or other matters that are required to be\nreported under Government Auditing Standards.\n\nWe noted certain matters that we reported to management of CDRLF in a separate letter dated\nFebruary 17, 2009.\n\nThis report is intended solely for the information and use of the Inspector General, the Board of the\nNational Credit Union Administration, and the management of the National Credit Union Administration\nCommunity Development Revolving Loan Fund and is not intended to be and should not be used by\nanyone other than these specified parties.\n\n\n\n\nFebruary 17, 2009\n\n\n\n\n - 11 -\n\x0c'