jurisdiction: US

text: b" NCUA 2009\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, 2009\n\n Audited Financial Statements Audit Report Number\n\nNCUA Operating Fund OIG-10-09\nNational Credit Union Share Insurance Fund OIG-10-10\nCentral Liquidity Facility OIG-10-11\nCommunity Development Revolving Loan Fund OIG-10-12\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 KPMG LLP to perform the financial\nstatement audits of the NCUA Operating Fund, the Share Insurance Fund, the\nCentral Liquidity Facility, and the Community Development Revolving Loan Fund\nfor the year ended December 31, 2009.\n\nThe purpose of the audits is to express an opinion on whether the financial\nstatements are fairly presented. The independent firm also reviewed the internal\ncontrol structure and evaluated compliance with laws and regulations, as part of\ntheir 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 KPMG LLP\nin June 2009 to perform the financial statement audits mentioned above. The\ncontract was for 2009, with options for 2010 and 2011. The Inspector General\nwas the contracting officer for this contract.\n\nAUDIT RESULTS KPMG LLP expressed unqualified opinions, stating that the\n financial statements present fairly, in all material respects,\nthe financial position of the NCUA Operating Fund, the Share Insurance Fund,\nthe Central Liquidity Facility, and the Community Development Revolving Loan\nFund at December 31, 2009, and the results of operations for the year then\nended.\n\nAlthough KPMG LLP did not express an overall opinion of the Funds\xe2\x80\x99 compliance\nwith laws and regulations, their testing of compliance did not disclose any\nsignificant deviations.\n\x0cNational Credit Union\nAdministration\nOperating Fund\nFinancial Statements as of and for the Years Ended\nDecember 31, 2009 and 2008, and Independent\nAuditors\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 REFORT ON FINANCIAL STATEMENTS 1\n\nFINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED\n DECEMBER 31, 2009 AND 2008:\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 Statement 5\xe2\x80\x9312\n\n\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON INTERNAL CONTROL\n OVER FINANCIAL REPORTING\n\n\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON COMPLIANCE AND OTHER MATTERS\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 Administration Operating\nFund (the Fund) as of December 31, 2009, and the related statements of revenues, expenses, and changes\nin fund balance, and cash flows for the year then ended (hereinafter referred to as \xe2\x80\x9cfinancial statements\xe2\x80\x9d).\nThese financial statements are the responsibility of the Fund\xe2\x80\x99s management. Our responsibility is to\nexpress an opinion on these financial statements based on our audit. The accompanying financial\nstatements of the Fund as of December 31, 2008, were audited by other auditors whose report thereon\ndated February 17, 2009, expressed an unqualified opinion on those statements.\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 Fund\xe2\x80\x99s internal\ncontrol 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 Administration Operating Fund as of December 31, 2009,\nand the results of its operations and its cash flows for the year then ended in conformity with U.S.\ngenerally accepted accounting principles.\n\nIn accordance with Government Auditing Standards, we have also issued our reports dated April 29, 2010,\non our consideration of the Fund\xe2\x80\x99s internal control over financial reporting and our tests of its compliance\nwith certain provisions of laws, regulations, contracts, and other matters. The purpose of those reports is to\ndescribe the scope of our testing of internal control over financial reporting and compliance and the results\nof that testing, and not to provide an opinion on the internal control over financial reporting or on\ncompliance. Those reports are an integral part of an audit performed in accordance with Government\nAuditing Standards and should be read in conjunction with this report in assessing the results of our audit.\n\n\n\n\nApril 29, 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\x0cNATIONAL CREDIT UNION ADMINISTRATION\nOPERATING FUND\n\nBALANCE SHEETS\nAS OF DECEMBER 31, 2009 AND 2008\n(Dollars in thousands)\n\n\n 2009 2008\nASSETS\n\nCASH AND CASH EQUIVALENTS (Note 4) $ 24,321 $ 21,592\n\nDUE FROM NATIONAL CREDIT UNION SHARE INSURANCE 2,258 169\n FUND (Note 6)\n\nEMPLOYEE ADVANCES 166 91\n\nOTHER ACCOUNTS RECEIVABLE (Note 6) 274 283\n\nPREPAID EXPENSES AND OTHER ASSETS 1,505 4,173\n\nFIXED AND INTANGIBLE ASSETS \xe2\x80\x94 Net of accumulated\n depreciation and amortization (Note 5) 37,503 33,399\n\nTOTAL $ 66,027 $ 59,707\n\n\nLIABILITIES AND FUND BALANCE\n\nLIABILITIES:\n Accounts payable $ 3,036 $ 4,063\n Obligations under capital leases (Note 7) 41 300\n Accrued wages and benefits 7,109 4,118\n Accrued annual leave 9,922 8,907\n Accrued employee travel 179 6\n Note payable to National Credit Union Share Insurance Fund (Note 6) 18,438 19,779\n\n Total liabilities 38,725 37,173\n\nCOMMITMENTS AND CONTINGENCIES (Notes 6, 7, 11 & 12)\n\nFUND BALANCE (Note 10) 27,302 22,534\n\nTOTAL $ 66,027 $ 59,707\n\n\nSee accompanying notes to financial statements.\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, 2009 AND 2008\n(Dollars in thousands)\n\n\n 2009 2008\n\nREVENUES:\n Operating fees $ 81,679 $ 72,423\n Interest 41 773\n Other 544 566\n\n Total revenues 82,264 73,762\n\nEXPENSES, NET (Note 6):\n Employee wages and benefits 58,469 56,030\n Travel 8,185 7,505\n Rent, communications, and utilities 1,935 1,908\n Contracted services 4,119 3,414\n Other 4,788 4,755\n\n Total expenses 77,496 73,612\n\nEXCESS OF REVENUES OVER EXPENSES 4,768 150\n\nFUND BALANCE \xe2\x80\x94 Beginning of year 22,534 22,384\n\nFUND BALANCE \xe2\x80\x94 End of year $ 27,302 $ 22,534\n\n\nSee accompanying notes to financial statements.\n\n\n\n\n -3-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nOPERATING FUND\n\nSTATEMENTS OF CASH FLOWS\nFOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008\n(Dollars in thousands)\n\n\n 2009 2008\n\nCASH FLOWS FROM OPERATING ACTIVITIES:\n Excess of revenues over expenses $ 4,768 $ 150\n Adjustments to reconcile excess of revenues over expenses to cash provided by operating activities:\n Depreciation and amortization 2,711 3,181\n Provision for loss on disposal of employee residences held for resale 330 283\n (Increase) decrease in assets:\n Due from National Credit Union Share Insurance Fund (2,089) 103\n Employee advances (75) 52\n Other accounts receivable 9 (114)\n Prepaid expenses and other assets 2,668 (2,857)\n (Decrease) increase in liabilities:\n Accounts payable (1,027) (153)\n Accrued wages and benefits 2,991 893\n Accrued annual leave 1,015 332\n Accrued employee travel 173 1\n\n Net cash provided by operating activities 11,474 1,871\n\nCASH FLOWS FROM INVESTING ACTIVITIES:\n Purchases of fixed assets (6,838) (2,367)\n Purchases of employee residences held for sale (1,258) (1,286)\n Proceeds from sale of employee residences held for resale 951 1,486\n\n Net cash used in investing activities (7,145) (2,167)\n\nCASH FLOWS FROM FINANCING ACTIVITIES:\n Repayments on note payable to National Credit Union Share Insurance Fund (1,341) (1,341)\n Principal payments under capital lease obligations (259) (946)\n\n Net cash used in financing activities (1,600) (2,287)\n\nNET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,729 (2,583)\n\nCASH AND CASH EQUIVALENTS \xe2\x80\x94 Beginning of year 21,592 24,175\n\nCASH AND CASH EQUIVALENTS \xe2\x80\x94 End of year $ 24,321 $ 21,592\n\n\nCASH PAYMENTS FOR INTEREST $ 509 $ 807\n\n\nSee accompanying notes to financial statements.\n\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, 2009 AND 2008\n\n\n1. 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\n2. SIGNIFICANT ACCOUNTING POLICIES\n\n Basis of Presentation \xe2\x80\x94 The Fund has historically prepared its financial statements in accordance with\n accounting principles generally accepted in the United States of America (GAAP), based on standards\n issued by the Financial Accounting Standards Board (FASB), the private sector standards setting body.\n In October 1999, the American Institute of Certified Public Accountants (AICPA) designated the\n Federal Accounting Standards Advisory Board (FASAB) as the standards setting body for the\n establishment of accounting principles generally accepted in the United States of America with respect\n to the financial statements of Federal government entities. The FASAB has indicated that financial\n statements prepared based upon standards promulgated by the FASB may also be regarded as in\n accordance with GAAP for those Federal entities that have issued financial statements based upon\n FASB standards in the past, which is the case for the Fund. Consistent with historical reporting, the\n Fund\xe2\x80\x99s financial statements are presented in accordance with accounting and financial reporting\n standards promulgated by the FASB.\n\n Basis of Accounting \xe2\x80\x94 The Fund maintains its accounting records in accordance with the accrual basis\n of accounting. As such, the Fund recognizes income when earned and expenses when incurred. In\n addition, the Fund records investment transactions when they are executed and recognizes interest on\n investments when it is earned.\n\n Related Parties \xe2\x80\x94 The Fund exists within the National Credit Union Administration and is one of five\n funds managed by the NCUA Board. The other funds managed by the Board, deemed related parties,\n are: a) the National Credit Union Share Insurance Fund (NCUSIF); b) the Temporary Corporate Credit\n Union Stabilization Fund (TCCUSF); c) Central Liquidity Facility (CLF); and d) the Community\n Development Revolving Loan Fund (CDRLF). The Fund supports related parties by proving office\n space, information technology services, and supplies as well as paying employees\xe2\x80\x99 salaries and benefits.\n Certain types of support are reimbursed to the Fund by NCUSIF and CLF based on allocation formulas,\n as described in Note 6.\n\n Cash Equivalents \xe2\x80\x94 Cash equivalents are highly liquid investments with original maturities of three\n months or less. The Federal Credit Union Act permits the Fund to invest in United States Government\n securities or securities guaranteed as to both principal and interest by the United States Government. All\n investments in 2009 and 2008 were cash equivalents and are stated at cost, which approximates fair\n value.\n\n Fixed and Intangible Assets \xe2\x80\x94 Buildings, furniture, equipment, computer software, and leasehold\n improvements are recorded at cost. Computer software includes the cost of labor incurred by both\n\n\n -5-\n\x0cexternal and internal programmers as well as other personnel in the development of the software. Capital\nleases are recorded at the present value of the future minimum lease payments. Depreciation and\namortization are computed by the straight-line method over the estimated useful lives of buildings,\nfurniture, equipment, and computer software, and the shorter of either the estimated useful life or lease\nterm for leasehold improvements and capital leases. Estimated useful lives are forty years for the\nbuilding and three to ten years for the furniture, equipment, computer software, and leasehold\nimprovements.\n\nLong-lived Assets \xe2\x80\x94 Fixed and intangible assets, subject to amortization, are reviewed for impairment\nwhenever events or changes in circumstances indicate that the carrying amount of an asset may not be\nrecoverable. If the carrying value of the long-lived asset or asset group is not recoverable, an impairment\nis recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through\nvarious valuation techniques including discounted cash flow models, quoted market values, and third\nparty independent appraisals, as considered necessary.\n\nAccounts Payable, Accrued Expenses, and Due from Related Parties \xe2\x80\x94 The Fund incurs\nadministrative expenses and liabilities for programs pertaining to related parties that are controlled by\nthe NCUA Board. Year-end balances of accounts payable and accrued expenses include amounts\nrelated to the NCUSIF and the CLF. Therefore, unreimbursed administrative expenses related to these\nentities are recognized as receivables in the accompanying financial statements.\n\nAccrued Benefits \xe2\x80\x94 The Fund incurs expenses for retirement plans, employment taxes, workers\ncompensation, transportation subsidies, and other benefits mandated by law. Corresponding liabilities\nrecorded contain both short-term and long-term liabilities, including liabilities under the Federal\nEmployees\xe2\x80\x99 Compensation Act (FECA). This act provides income and medical cost protection to\ncovered federal civilian employees injured on the job, employees who have incurred a work-related\noccupational disease, and beneficiaries of employees whose death is attributable to a job-related injury\nor occupational disease.\n\nOperating Fees \xe2\x80\x94 Each federally chartered credit union is assessed an annual fee based on their assets\nas of the preceding thirty-first day of December. The fee is designed to cover the costs of providing\nadministration and service to the Federal Credit Union System. The Fund recognizes this operating fee\nrevenue ratably over the year.\n\nIncome Taxes \xe2\x80\x94 The Fund is exempt from Federal income taxes under Section 501(c)(1) of the\nInternal Revenue Code.\n\nLeases \xe2\x80\x94 Operating leases are entered into for the acquisition of office space and equipment as part of\nadministering NCUA\xe2\x80\x99s program. The cost of operating leases is recognized on the straight-line method\nover the life of the lease and includes, if applicable, any reductions resulting from incentives such as rent\nholidays. The same method is used to recognize income from operating leases. Certain office space\nleases are subject to escalations in rent, as described in Note 7.\n\nFair Value of Financial Instruments \xe2\x80\x94 The following methods and assumptions were used in\nestimating the fair value disclosures for financial instruments:\n\nCash and cash equivalents, receivables from related parties, employee advances, other accounts\nreceivable, accounts and notes payable to NCUSIF, and other accounts payable are recorded at book\nvalues, which approximate their respective fair values.\n\n\n\n\n -6-\n\x0c 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\n liabilities at the date of the financial statements and the reported amounts of revenues and expenses\n incurred during the reporting period. Significant estimates include the determination of the FECA\n liability, certain computer software asset values, and if there is any determination of a long-lived asset\n impairment, the related measurement of the impairment charge.\n\n Reclassifications \xe2\x80\x94 Certain amounts in the prior year\xe2\x80\x99s financial statements have been reclassified to\n conform to the current year presentation.\n\n3. NEWLY IMPLEMENTED ACCOUNTING STANDARDS\n\n In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial\n Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy\n of Generally Accepted Accounting Principles. SFAS No. 168 established the FASB Accounting\n Standards Codification (ASC) as the source of authoritative accounting principles recognized by the\n FASB to be applied by entities in the preparation of financial statements in conformity with U.S. GAAP.\n\n Effective December 31, 2009, the Fund adopted FASB ASC 855, Subsequent Events (precodification\n FASB SFAS No. 165, Subsequent Events). FASB ASC 855 establishes general standards of accounting\n for and disclosure of events that occur after the balance sheet date but before financial statements are\n issued or are available to be issued. FASB ASC 855 defines the period after the balance sheet date\n during which management shall evaluate events or transactions that may occur for potential recognition\n or disclosure, which entails both the circumstances under which an organization shall recognize events\n occurring after the balance sheet date and the disclosures that an organization shall make about those\n events or transactions. FASB ASC 855 defines two types of subsequent events. The first type consists\n of events or transactions that provide additional evidence about conditions that existed at the date of the\n balance sheet, including the estimates inherent in the process of preparing financial statements (i.e., a\n nonrecognized event).\n\n4. CASH AND CASH EQUIVALENTS\n\n The Fund\xe2\x80\x99s cash and cash equivalents at December 31, 2009 and 2008 are as follows (in thousands):\n\n 2009 2008\n\n Deposit with U.S. Treasury $ 513 $ 1,249\n U.S. Treasury overnight investments 23,808 20,343\n\n Total $ 24,321 $ 21,592\n\n\n\n\n -7-\n\x0c5. FIXED AND INTANGIBLE ASSETS\n\n Fixed and intangible assets are comprised of the following at December 31, 2009 and 2008\n (in thousands):\n\n 2009 2008\n\n Office building and land $ 43,595 $ 43,358\n Furniture and equipment 15,676 13,501\n Equipment under capital leases 152 2,782\n Assets under construction 4,441 1,000\n\n Total 63,864 60,641\n\n Less accumulated depreciation and amortization (26,361) (27,242)\n\n Fixed and intangible assets \xe2\x80\x94 net $ 37,503 $ 33,399\n\n Furniture and equipment includes computer software acquired externally and developed internally. The\n carrying value and accumulated amortization of computer software as of December 31, 2009 and 2008\n were $4,401,000 and $1,972,000, and $2,285,000 and $1,312,000, respectively. Amortization expense\n for the years ended December 31, 2009 and 2008 totaled $660,000 and $401,000, respectively.\n\n Accumulated amortization balances for equipment under capital leases as of December 31, 2009 and\n 2008 were $111,000 and $2,523,000 respectively. Amortization expense for the years ended\n December 31, 2009 and 2008 totaled $230,000 and $870,000, respectively.\n\n Assets under construction primarily represents developmental costs incurred from the customization of\n software purchased from external vendors for internal use. This includes the federal financial\n accounting system that was implemented in January 2010.\n\n6. RELATED PARTY TRANSACTIONS\n\n (a) Transactions with the National Credit Union Share Insurance Fund (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\n a study of actual usage. The allocation factor was 53.8% to NCUSIF for 2009 and 52.0% for 2008.\n The cost of the services allocated to NCUSIF, which totaled approximately $90,244,000 and\n $79,385,000 for 2009 and 2008, respectively, is reflected as a reduction of the corresponding\n expenses in the accompanying financial statements. These transactions are settled monthly. At\n December 31, 2009 and 2008, amounts due from NCUSIF, under this allocation method, totaled\n $2,258,000 and $169,000, respectively.\n\n In 1992, the Fund entered into a commitment to borrow up to $41,975,000 in a thirty-year secured\n term note with NCUSIF. The monies were drawn as needed to fund the costs of constructing a\n building in 1993. Interest costs incurred were $509,000 and $807,000 for 2009 and 2008,\n respectively. The note payable balances at December 31, 2009 and 2008 were approximately\n $18,438,000 and $19,779,000, respectively.\n\n\n\n\n -8-\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 The above note requires principal repayments at December 31, 2009 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 11,733\n\n Total $ 18,438\n\n(b) Transactions with the Central Liquidity Facility (CLF)\n\n Certain administrative services are provided by the Fund to the CLF. The Fund pays CLF\xe2\x80\x99s employee\n salaries and related benefits as well as CLF\xe2\x80\x99s portion of building and operating costs. Reimburse-\n ments of these expenses are determined by applying a ratio of CLF full-time equivalent employees to\n the NCUA total, with settlement and payment occurring quarterly. All other CLF reimbursement\n expenses are paid annually. The costs of the services provided to the CLF were approximately\n $334,000 and $259,000 for 2009 and 2008, respectively, and are reflected as a reduction of the\n corresponding expenses in the accompanying financial statements.\n\n Other accounts receivable include approximately $145,000 and $110,000 of amounts due from the\n CLF as of December 31, 2009 and 2008, respectively.\n\n(c) Support of the Community Development Revolving Loan Fund (CDRLF)\n\n The Fund supports the administering of programs under the CDRLF by paying related personnel and\n other associated costs. This estimation of administrative costs include salaries, employee benefits,\n travel, training, telephone, supplies, printing, and postage.\n\n For the years ending December 31, 2009 and 2008, administrative support to CDRLF is estimated at\n (in thousands):\n\n 2009 2008\n\n Employee $ 242 $ 213\n Other 12 12\n\n Total $ 254 $ 225\n\n\n\n\n -9-\n\x0c (d) Federal Financial Institutions Examination Council (FFIEC)\n\n The NCUA is one of the five federal agencies that fund FFIEC operations. Under FFIEC\xe2\x80\x99s charter,\n NCUA\xe2\x80\x99s Chairman is appointed as a Member. The FFIEC was established on March 10, 1979 as a\n formal interagency body empowered to prescribe uniform principles, standards, and report forms for\n the federal examination of financial institutions by the National Credit Union Administration, the\n Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the\n Office of the Comptroller of the Currency, and the Office of Thrift Supervision, and to make\n recommendations to promote uniformity in the supervision of financial institutions. Additionally,\n FFIEC provides training to staff of member agencies, which are charged based on use. For the years\n ended December 31, 2009 and 2008, FFIEC assessments total $760,000 and $816,000, respectively.\n FFIEC\xe2\x80\x99s 2010 budgeted assessments for NCUA total $854,000.\n\n7. LEASE COMMITMENTS\n\n Description of Leasing Agreements \xe2\x80\x94 The Fund has entered into a number of lease agreements\n with vendors for the rental of office space as well as the leasing of office equipment that includes\n laptops, 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 $1,089,000 and $923,000, of which approximately\n $586,000 and $480,000 were reimbursed by NCUSIF for 2009 and 2008, respectively. In addition,\n the Fund leases laptop computers and other office equipment under operating leases with lease terms\n that expire through 2012.\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, 2009, before reimbursements, are as follows\n (in thousands):\n\n Years Ending Operating Capital\n December 31 Leases Leases\n\n 2010 $ 1,760 $ 17\n 2011 1,897 17\n 2012 1,128 7\n 2013 512\n 2014 125\n\n Total $ 5,422 $ 41\n\n\n Based on the allocation factor approved by the NCUA Board for 2009, NCUSIF is expected to\n reimburse the Fund for approximately 53.8% of the future operating lease payments.\n\n8. RETIREMENT PLANS\n\n Eligible employees of the Fund are covered by federal government retirement plans, either the Civil\n Service Retirement System (CSRC) or the Federal Employees Retirement System (FERS). Both plans\n are defined benefit retirement plans covering all of the employees of the Fund. FERS is comprised of a\n Social Security Benefits Plan, a Basic Benefits Plan, and a Savings Plan. Contributions to the plans are\n\n\n - 10 -\n\x0c based on a percentage of an employee\xe2\x80\x99s gross pay. Under the Savings Plan, employees may also elect\n additional contributions up to $16,500 in 2009, and the Fund will match up to 5% of the employee\xe2\x80\x99s\n gross pay. In 2009 and 2008, the Fund\xe2\x80\x99s contributions to the plans were approximately $14,021,000 and\n $12,768,000, respectively, of which approximately $7,543,000 and $6,639,000, respectively, were\n reimbursed by NCUSIF.\n\n These defined benefit plans are administered by the U.S. Office of Personnel Management (OPM),\n which determines the required employer contribution level. The Fund does not account for the assets\n pertaining to the above plans and does not have actuarial data with respect to accumulated plan benefits\n or the unfunded liability relative to eligible employees. These amounts are reported by the OPM and are\n not allocated to individual employers.\n\n9. 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 FASB ASC No. 825, Disclosures about Fair Value of Financial Instruments.\n The fair value of a financial instrument is the amount that would be received to sell an asset or paid to\n transfer a liability in an orderly transaction between market participants at the measurement date. The\n methods and assumptions used in estimating the fair value disclosures for financial instruments are as\n follows:\n\n Cash and cash equivalents \xe2\x80\x94 The carrying amounts for cash and cash equivalent financial instruments\n approximate fair values. Cash equivalents are U.S. Treasury overnight investments.\n\n Due from NCUSIF \xe2\x80\x94The carrying amount for the due from NCUSIF approximates fair value.\n\n Employee Advances \xe2\x80\x94The carrying amounts for receivables from employees approximate fair values.\n\n Obligation under capital lease \xe2\x80\x94The carrying amounts for the remaining obligations owed on capital\n leases approximate fair values.\n\n Note payable to NCUSIF \xe2\x80\x94 The carrying amount for the note payable to NCUSIF approximates fair\n value.\n\n The carrying amounts and the estimated fair values of the Fund\xe2\x80\x99s financial instruments are as follows (in\n thousands):\n\n December 31, 2009 December 31, 2008\n Carrying Fair Carrying Fair\n Amount Value Amount Value\n\n Cash and cash equivalents $ 24,321 $ 24,321 $ 21,592 $ 21,592\n Due from NCUSIF 2,258 2,258 169 169\n Employee advances 166 166 91 91\n Obligation under capital lease 41 41 300 300\n Note payable to NCUSIF 18,438 18,438 19,779 19,779\n\n\n\n\n - 11 -\n\x0c10. FUND BALANCE AND RETAINED EARNINGS APPROPRIATION\n\n In 2006, the NCUA Board established an appropriation of the fund balance in an effort to more\n transparently disclose and communicate to stakeholders earnings which were necessary for major\n projects that could not be accrued or would not warrant inclusion in the annual operating expense\n budget. The initial appropriation of $1,000,000 was for repairs and maintenance on NCUA\xe2\x80\x99s Alexandria\n headquarters building.\n\n For the years ending December 31, 2009 and 2008, retained earnings appropriation is estimated at (in\n thousands):\n\n 2009 2008\n\n Fund balance (excluding retained earnings appropriation) $ 26,302 $ 21,534\n Retained earnings appropriation 1,000 1,000\n\n Total fund balance $ 27,302 $ 22,534\n\n\n11. 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\n12. COLLECTIVE BARGAINING AGREEMENT\n\n The NCUA has a collective bargaining agreement with the National Treasury Employees Union (NTEU)\n that became effective on January 11, 2008. NTEU is the exclusive representative of approximately 80%\n of NCUA employees. This agreement shall remain in effect for a period of three years from its effective\n date and shall be automatically renewable for additional one year periods unless either party notifies the\n other party, in writing, at least 60 days, but not more than 120 days, prior to the expiration date of this\n agreement of its intention to renegotiate this agreement; the first notification period starts September 13,\n 2010 and ends November 12, 2010.\n\n13. SUBSEQUENT EVENTS\n\n Subsequent events have been evaluated through April 29, 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\n\n\n\n - 12 -\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 Administration Operating Fund (the Fund)\nas of December 31, 2009, and the related statements of revenues, expenses, and changes in fund balance,\nand cash flows for the year then ended (hereinafter referred to as \xe2\x80\x9cfinancial statements\xe2\x80\x9d), and have issued\nour report thereon dated April 29, 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 Fund is responsible for establishing and maintaining effective internal control. In\nplanning and performing our fiscal year 2009 audit, we considered the Fund\xe2\x80\x99s internal control over\nfinancial reporting by obtaining an understanding of the Fund\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 Fund\xe2\x80\x99s internal control over financial reporting.\nAccordingly, we do not express an opinion on the effectiveness of the Fund\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\nIn our fiscal year 2009 audit, we identified certain individual and collective deficiencies in internal control\nover financial reporting that we consider to be a material weakness, described in Exhibit I.\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 Administration Operating Fund\nApril 29, 2010\nPage 2 of 2\n\n\nThe Fund\xe2\x80\x99s response to the finding identified in our audit is presented in Exhibit II. We did not audit the\nFund\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 Fund in a separate letter\ndated April 29, 2010\n\nThis report is intended solely for the information and use of the addressees, Fund\xe2\x80\x99s management, OMB, the\nU.S. Government Accountability Office, and the U.S. Congress and is not intended to be and should not be\nused by anyone other than these specified parties.\n\n\n\n\nApril 29, 2010\n\x0c Exhibit I\n NATIONAL CREDIT UNION ADMINITRATION \xe2\x80\x93\n OPERATING FUND\n MATERIAL WEAKNESS\nIntroduction\nThis exhibit describes the material weakness noted during our audit as of and for the year ended\nDecember 31, 2009, and our recommendations thereon. The National Credit Union Administration\nOperating Fund (the Fund) management\xe2\x80\x99s response to this finding is presented in Exhibit II.\n\nImprovements Needed in Financial Accounting and Reporting Process\nThe Fund has historically followed several accounting policies and practices that are not in accordance\nwith U.S. generally accepted accounting principles (herein after referred to as non-GAAP policies). The\nFund\xe2\x80\x99s management had neither identified nor documented and evaluated non-GAAP policies to determine\ntheir financial statement impact in the current and future reporting periods. For example, the Fund recorded\nthe workers\xe2\x80\x99 compensation liability on a pay-as-you-go method. The pay-as-you-go method did not take\ninto consideration the probable and estimable future payments (i.e., the actuarial component contemplated\nby the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 712,\nDetermining the Timing and Method of Accruing Other Postemployment Benefits) and thus failed to\ncapture both the \xe2\x80\x9clife-of-claim costs\xe2\x80\x9d and an estimate of any amounts incurred-but-not-reported (IBNR).\nUpon further analysis, NCUA determined that its $112,000 workers\xe2\x80\x99 compensation liability determined\nusing the pay-as-you-go method was $2.1 million less than the $2.3 million actuarial liability estimated\nusing the Department of Labor calculation model for small Federal agencies. Other instances of non-\nGAAP polices that the Fund\xe2\x80\x99s management had not identified, included policies that had lower impact than\nthe workers\xe2\x80\x99 compensation liability, related to fixed and intangible assets and lease accounting. In addition\nto recording adjusting entries to properly reflect the workers\xe2\x80\x99 compensation liability, the Fund also\nacknowledged and recognized entries to reduce asset balances, adjust lease transactions, and modify certain\nother accounts. The largest quantified difference of these items was less than $400,000.\n\nFurther, the Fund does not have sufficiently comprehensive policies and procedures that document internal\ncontrol activities and monitoring functions that should be embedded and/or performed within the financial\naccounting and reporting process. Additionally, the Fund does not have sufficient staff resources with the\nexperience in technical accounting and reporting requirements that the entity requires to consistently\nperform certain internal control activities, particularly those related to financial reporting. For example, we\nnoted:\n\n (i) A lack of documentation of control activities. The Fund does not have procedures in place that\n require review and approval of the journal entries and related supporting documentation because\n the journal entries that we tested did not have evidence that the journal entries were reviewed and\n approved by someone other than the preparer. Several journal entries we tested, including cut-off\n and manual entries that required management judgment, were estimated without consideration of\n key pertinent and available data. We also noted a key person dependency, as almost all manual\n journal entries we tested were recorded by one individual.\n\n (ii) Difficulties encountered by management in providing support for key reported items in the\n financial statements. One specific example was account reconciliations that were not readily\n available, despite such reconciliations being noted as completed in management\xe2\x80\x99s Federal\n Management Financial Integrity Act (FMFIA) certifications.\n\n (iii) Ineffective comprehensive financial statement reviews. The reviews performed by the Fund\xe2\x80\x99s\n management were not performed at a level of detail that would reasonably detect or identify\n financial statement errors and missing disclosures and, in part, the individuals performing the\n\n I-1\n\x0c Exhibit I\n NATIONAL CREDIT UNION ADMINITRATION \xe2\x80\x93\n OPERATING FUND\n MATERIAL WEAKNESS\n review did not possess adequate training and/or institutional expertise that would enable effective\n performance of such reviews. One specific example was lack of appropriate identification of\n related parties and inadequate disclosure of related party relationships.\n\nWe believe that lack of comprehensive policies and procedures and monitoring functions contributed to the\naudit adjustments recognized during our audit, and if they persist, the situation could lead to inconsistent\napplication of processes and breakdown in internal control activities across the Fund that could lead to\nmaterial financial statement.\n\nThe FMFIA requires that agencies establish internal controls according to standards prescribed by the\nComptroller General and specified in the GAO Standards for Internal Control in the Federal Government\n(GAO Standards). These standards define internal control as an integral component of an organization\xe2\x80\x99s\nmanagement that provides reasonable assurance that the following objectives are being achieved:\neffectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable\nlaws and regulations. GAO Standards state that internal controls should generally be designed to assure\nthat on-going monitoring occurs in the course of normal operations. Management is responsible for\ndeveloping control activities, which are the policies, procedures, techniques, and mechanisms that enforce\nmanagement\xe2\x80\x99s directives and help ensure actions address risks. The activities include reviews by\nmanagement at the functional or activity level, proper execution of transactions and events, accurate and\ntimely recording of transactions and events, and appropriate documentation of transactions and internal\ncontrol.\n\nThis deficiency represents a material weakness.\n\nRecommendations\n\nWe recommend that the NCUA modify accounting policies, procedures and controls as follows:\n\n\xe2\x80\xa2 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 FMFIA criteria above.\n\n\xe2\x80\xa2 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 accepted\n accounting principles to the key NCUA process and control activities.\n\n\xe2\x80\xa2 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\xe2\x80\xa2 Adopt a formal process to regularly update the Fund\xe2\x80\x99s policies and procedures when significant\n operational and accounting pronouncement changes occur. Where transactions are similar across the\n NCUA, it may be advantageous to prepare combined accounting policies.\n\n\xe2\x80\xa2 Assess those areas of operations in which non-GAAP policies may be prevalent.\n\n i) Create a log or otherwise sufficiently document all existing and newly identified non-GAAP\n policies and practices.\n\n\n I-2\n\x0c Exhibit I\n NATIONAL CREDIT UNION ADMINITRATION \xe2\x80\x93\n OPERATING FUND\n MATERIAL WEAKNESS\n ii) Annually evaluate non-GAAP policies and practices to determine the impact of such policies in the\n current and future reporting periods.\n\n\xe2\x80\xa2 Update the NCUA Rules and Regulations or prepare a supplemental manual to ensure that internal\n controls are documented, implemented, and periodically evaluated and monitored to mitigate\n operational and financial accounting and reporting risks. In certain areas, similar processes may exist\n and function across multiple NCUA funds and offices. Thus, management could take maximum\n advantage of leveraging related controls across the various funds.\n\n\xe2\x80\xa2 Develop and implement policies and procedures to:\n i) Require review and approval of all journal entries by an appropriate individual other than the person\n generating the entry; and\n ii) Assign documented accountability for supervisory reviews either electronically through system\n access or manually through hard copy sign-off.\n\n\xe2\x80\xa2 Implement policies and procedures to appropriately estimate the financial statement impact of\n transactions that are accounted for on a preliminary or tentative basis or develop procedures to capture\n data that is not otherwise received on a current basis so that reasonable accruals are made.\n\n\xe2\x80\xa2 Establish formal policies and procedures regarding supervisory reviews of financial statements and\n related supporting documentation to ensure that all significant and relevant missing disclosures are\n identified and financial statement errors are identified and corrected in a timely manner.\n\n\n\n\n I-3\n\x0c National Credit Union Administration\n\n Exhibit II\n NATIONAL CREDIT UNION ADMINISTRATION\n OPERATING FUND\n\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 Operating Fund\xe2\x80\x99s financial accounting and reporting\nprocesses. While these findings represent a small segment of the Fund\xe2\x80\x99s activities, NCUA\nagrees that they warrant management\xe2\x80\x99s attention.\n\nWe believe the findings can best be categorized as:\n 1. Weaknesses with conforming our annual financial statements into the form and\n content required by Generally Accepted Accounting Principles;\n 2. Lack of documentary evidence of supervisory review, especially over journal entries\n where a single person dependency exists; and\n 3. Comprehensiveness of documentation with accounting policies and procedures.\n\nWe will implement corrective action to address these findings taking into consideration the\nagency\xe2\x80\x99s resources and priorities.\n\n 1. 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.\n\n 2. Lack of documentary evidence of supervisory review, especially over journal entries\n where a single person dependency exists:\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. The cited findings are primarily with non-payment related journal\n\n 1775 Duke Street - Alexandria, VA 22314-3428 - 703-518-6300\n\x0c entries (e.g., accruals) and have been previously assessed by management as a low\n risk. Large non-recurring and unusual entries are verbally discussed. Controls\n around payment related transactions are considered a higher risk and do include\n segregation of duties, multiple levels of supervisory reviews, and cash reconcilia-\n tions. 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\n3. 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.\n Although our policies and procedures are not unified, they include an online\n directives library of approximately 230 subject areas, written policies for key areas,\n staff desk procedures, a procurement manual, a travel manual, among other\n instructional documents. Additionally, we have evidenced our policy research on\n emerging items, such as accounting for the implementation of our new financial\n management system, the taxation of gifts, and guarantees. In response, NCUA will\n review controls where the availability of documentation appeared limited and\n strengthen processes accordingly. NCUA will also start building a repository of\n accounting and internal control policies and practices, which can be readily accessed\n by all NCUA staff.\n\n\n\n\n 2\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 Administration Operating Fund (the Fund)\nas of December 31, 2009, and the related statements of revenues, expenses, and changes in fund balance,\nand cash flows for the year then ended (hereinafter referred to as \xe2\x80\x9cfinancial statements\xe2\x80\x9d), and have issued\nour report thereon dated April 29, 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 Fund is responsible for complying with laws, regulations, and contracts applicable\nto the Fund. As part of obtaining reasonable assurance about whether the Fund\xe2\x80\x99s financial statements are\nfree of material misstatement, we performed tests of the Fund\xe2\x80\x99s compliance with certain provisions of\nlaws, regulations and contracts, noncompliance with which could have a direct and material effect on the\ndetermination of the financial statement amounts, and certain provisions of other laws and regulations\nspecified in OMB Bulletin No. 07-04. We limited our tests of compliance to the provisions described in the\npreceding sentence, and we did not test compliance with all laws, regulations, and contracts applicable to\nthe Fund. However, providing an opinion on compliance with those provisions was not an objective of our\naudit, 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, the Fund\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\nApril 29, 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\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 Statement as of and for the\nYear Ended December 31, 2009\n\nAnd Independent Auditors\xe2\x80\x99 Reports\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n As of and for the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n\n\n\nTABLE OF CONTENTS\n\n Page\n\n\n\nIndependent Auditors\xe2\x80\x99 Report on Financial Statements 3\n\nFinancial Statement As Of December 31, 2009:\n\n Balance Sheet 4\n\n Statement of Operations 5\n\n Statement of Members\xe2\x80\x99 Equity 6\n\n Statement of Cash Flows 7\n\n Notes to Financial Statement 8\xe2\x80\x9314\n\n Independent Auditors\xe2\x80\x99 Report on Internal Control over\n Financial Reporting\n\n Independent Auditors\xe2\x80\x99 Report on Compliance and Other Matters\n\n\n\n\n -2-\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 Administration Central\nLiquidity Facility (CLF) as of December 31, 2009, and the related statements of operations, members\xe2\x80\x99\nequity, and cash flows for the year then ended (hereinafter referred to as \xe2\x80\x9cfinancial statements\xe2\x80\x9d). These\nfinancial statements are the responsibility of the CLF\xe2\x80\x99s management. Our responsibility is to express an\nopinion 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; 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 CLF\xe2\x80\x99s internal\ncontrol 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 Administration Central Liquidity Facility as of\nDecember 31, 2009, and the results of its operations and its cash flows for the year then ended in\nconformity with U.S. generally accepted accounting principles.\n\nIn accordance with Government Auditing Standards, we have also issued our reports dated April 28, 2010,\non our consideration of the CLF\xe2\x80\x99s internal control over financial reporting and our tests of its compliance\nwith certain provisions of laws, regulations, contracts and other matters. The purpose of those reports is to\ndescribe the scope of our testing of internal control over financial reporting and compliance and the results\nof that testing, and not to provide an opinion on the internal control over financial reporting or on\ncompliance. Those reports are an integral part of an audit performed in accordance with Government\nAuditing Standards and should be read in conjunction with this report in assessing the results of our audit.\n\n\n\n\nApril 28, 2010\n\n\n -3-\n KPMG LLP, a U.S. limited liability partnership, is the U.S.\n member firm of KPMG International, a Swiss cooperative.\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n As of December 31, 2009\n (Dollars in thousands, except share data)\n\n\n\n\nBALANCE SHEET\n\n\n 2009\nASSETS\n\nCash and cash equivalents (notes 4 and 6) $ 5,900\nInvestments held to maturity\n (Net of $2,169 amortized discount,\n fair value of $1,832,955) (notes 5 and 6) 1,828,831\nLoans to members (notes 6 and 7) 8,312,751\nLoan to related party (notes 6 and 12) 10,000,000\nAccrued interest receivable 23,591\n\nTOTAL $ 20,171,073\n\n\nLIABILITIES AND MEMBERS\xe2\x80\x99 EQUITY\n\nLIABILITIES:\n Accounts payable and other liabilities $ 171\n Dividends payable 1,375\n Federal Financing Bank notes payable (notes 6 18,312,751\n and 11)\n Accrued interest payable 23,561\n Member deposits (notes 6 and 9) 363\n\n Total liabilities 18,338,221\n\nMEMBERS\xe2\x80\x99 EQUITY\n Capital stock \xe2\x80\x93 required ($50 par value;\n authorized: 72,749,116 shares; issued and\n outstanding: 36,374,558 shares) (note 8) 1,818,728\n Retained earnings 14,124\n\n Total members\xe2\x80\x99 equity 1,832,852\n\nTOTAL $ 20,171,073\n\n\nSee accompanying notes to financial statements.\n\n\n\n\n -4-\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n For the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n\nSTATEMENT OF OPERATIONS\n\n\n 2009\n\nREVENUE:\n Investment income $ 21,468\n Interest on loans 85,649\n Gain on sale of investments 43\n\n Total revenue: 107,160\n\nEXPENSES: (note 12)\n Personnel services 205\n Personnel benefits 48\n Other general and administrative expenses 81\n\n Total operating expenses 334\n\n Interest \xe2\x80\x93 Federal Financing Bank notes payable (note 11) 85,649\n Interest \xe2\x80\x93 liquidity reserve 7\n\n Total expenses 85,990\n\nNET INCOME $ 21,170\n\n\nSee accompanying notes to financial statements.\n\n\n\n\n -5-\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n For the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n\n\n\nSTATEMENT OF MEMBERS\xe2\x80\x99 EQUITY\n\n\n\n Capital Stock\n Shareholder Retained\n Shares Amount Total\n Loan Earnings\n\nBALANCE \xe2\x80\x93 December 31, 2008 34,154,171 $ 1,707,710 (1,719,574) 11,408 $ (456)\n\n Issuance of required capital stock 2,221,840 111,092 111,092\n\n Redemption of required capital stock (1,453) (74) (74)\n\n Repayment of shareholder loan (note 8) 1,719,574 1,719,574\n\n Dividends declared ($0.51/share) (notes\n 8 and 9) (18,454) (18,454)\n\n Net income 21,170 21,170\n\n\nBALANCE \xe2\x80\x93 December 31, 2009 36,374,558 $1,818,728 - 14,124 $1,832,852\n\n\n\n\nSee accompanying notes to financial statements.\n\n\n\n\n -6-\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n For the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n\nSTATEMENT OF CASH FLOWS\n\n\n 2009\n\nCASH FLOWS FROM OPERATING ACTIVITIES:\n Net income $ 21, 170\n Adjustments to reconcile net income\n to net cash provided by operating activities:\n Increase in accrued interest receivable (8,922)\n Increase in accounts payable and other liabilities 21,445\n\n Net cash provided by operating activities 33,693\n\nCASH FLOWS FROM INVESTING ACTIVITIES:\n Purchase of investments ( 1,828,831)\n Loan principal disbursements - net (16,727,273)\n\n Net cash used in investing activities (18,556,104)\n\nCASH FLOWS FROM FINANCING ACTIVITIES:\n Issuance of required capital stock 111,092\n Dividends paid (notes 8 and 9) (29,448)\n Redemption of required capital stock (74)\n Withdrawal of member deposits (719)\n Repayment of shareholder loan 1,719,574\n Additions to member deposits 596\n Proceeds from FFB borrowings - net 16,727,273\n\n Net cash provided by financing activities 18,528,294\n\nNET INCREASE IN CASH AND CASH EQUIVALENTS 5,883\n\nCASH AND CASH EQUIVALENTS\xe2\x80\x93 Beginning of year 17\n\nCASH AND CASH EQUIVALENTS \xe2\x80\x93 End of year 5,900\n\nSUPPLEMENTAL DISCLOSURE OF CASH FLOW\n INFORMATION \xe2\x80\x93 Cash paid during the year for interest $ 64,250\n\n\n\n\nSee accompanying notes to financial statements.\n\n\n\n\n -7-\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n Notes to Financial Statement\n As of and for the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n\n\n1. ORGANIZATION AND PURPOSE\n\n The National Credit Union Administration Central Liquidity Facility (CLF) was created by the National Credit\n Union Central Liquidity Facility Act (the \xe2\x80\x9cAct\xe2\x80\x9d). CLF is designated as a mixed-ownership government corporation\n under the Government Corporation Control Act. CLF exists within the National Credit Union Administration\n (NCUA) and is managed by the National Credit Union Administration Board. CLF became operational on\n October 1, 1979.\n\n CLF was created to improve the general financial stability of credit unions by serving as a liquidity lender to credit\n unions experiencing unusual or unexpected liquidity shortfalls. CLF accomplishes its purpose by borrowing funds,\n subject to certain statutory limitations, when a liquidity need arises.\n\n CLF is subject to various Federal laws and regulations. CLF\xe2\x80\x99s operating budget requires Congressional approval,\n and CLF may not make loans to members for the purpose of expanding credit union loan portfolios. CLF\xe2\x80\x99s\n investments are restricted to obligations of the U.S. Government and its agencies, deposits in federally insured\n financial institutions, and shares and deposits in credit unions. Borrowing is limited by statute to 12 times the\n subscribed capital stock and surplus.\n\n2. SIGNIFICANT ACCOUNTING POLICIES\n\n (a) Basis of Presentation \xe2\x80\x94 CLF has historically prepared its financial statements in accordance with accounting\n principles generally accepted in the United States of America (GAAP), based on standards issued by the\n Financial Accounting Standards Board (FASB), the private-sector standards-setting body. In October 1999, the\n American Institute of Certified Public Accountants (AICPA) designated the Federal Accounting Standards\n Advisory Board (FASAB) as the standards-setting body for the establishment of accounting principles\n generally accepted in the United States of America with respect to the financial statements of Federal\n government entities. The FASAB has indicated that financial statements prepared based upon standards\n promulgated by the FASB may also be regarded as in accordance with GAAP for those Federal entities, such\n as the CLF, that have issued financial statements based upon FASB standards in the past. Accordingly,\n consistent with historical reporting, the CLF\xe2\x80\x99s financial statements are presented in accordance with\n accounting and financial reporting standards promulgated by the FASB.\n\n (b) Basis of Accounting \xe2\x80\x94 CLF maintains its accounting records on the accrual basis of accounting. CLF\n recognizes loans when they are issued and related repayments when they are received. CLF records investment\n transactions when they are made. CLF recognizes borrowings when they are received and repayments when\n they are made. In addition, CLF recognizes interest on loans and interest on investments when they are earned\n and recognizes interest on borrowings when it is incurred. CLF recognizes expenses when incurred. CLF\n accrues and records dividends on capital stock monthly and pays dividends quarterly.\n\n (c) Use of Estimates \xe2\x80\x94 The preparation of financial statements in conformity with GAAP requires management\n to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of\n contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues\n and expenses during the reporting period. Actual results could differ from management\xe2\x80\x99s estimates.\n\n (d) Cash and Cash Equivalents \xe2\x80\x94 CLF considers all highly liquid investments with a maturity of three months\n or less when purchased to be cash equivalents.\n\n\n\n\n -8-\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n Notes to Financial Statement\n As of and for the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n\n\n(e) Investments \xe2\x80\x94 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. All\n investments are classified as held-to-maturity under FASB ASC 320-10-25-1, Classification of Investment\n Securities, as CLF has the intent and ability to hold these investments until maturity. Accordingly, CLF reports\n investments at amortized cost. Amortized cost is the face value of the securities, plus the unamortized premium\n or less the unamortized discount.\n\n Premiums and discounts are amortized or accreted over the life of the related held-to-maturity investment as an\n adjustment to yield using the effective interest method. Such amortization and accretion is included in the\n \xe2\x80\x9cInvestment income\xe2\x80\x9d line item in the statements of operations.\n\n(f) Loans and Allowance for Loan Losses \xe2\x80\x94 Loans, when made to members, are on a short-term or long-term\n basis. Loans are recorded at the amount disbursed and bear interest at the higher of: (1) the Federal Financing\n Bank advance rate, or (2) the Federal Reserve Bank discount window Primary Credit rate. By regulation,\n member liquidity needs loans are made on a fully secured basis. CLF obtains a security interest in the assets of\n the borrower equal to at least 110 percent of all amounts due. For member loans issued under the Credit Union\n System Investment Program (CU SIP) and Credit Union Homeowners Affordability Relief Program (CU\n HARP), CLF obtains a security interest in the assets of the borrower equal to 200 percent of the amount due\n under the program. CLF does not currently charge fees associated with its lending activities. In determining the\n allowance for loan losses, when applicable, CLF evaluates the collectability of its loans to members through\n examination of the financial condition of the individual borrowing credit unions and the credit union industry\n in general.\n\n CLF management reviews the allowance for loan losses annually. A loan is considered impaired if it is\n probable that CLF will not collect all principal and interest actually due. The impairment is measured based\n on the present value of expected future cash flows discounted at the loan\xe2\x80\x99s effective interest rate. CLF does\n not accrue interest when a loan is considered impaired. When ultimate collectability of the principal balance\n of the impaired loan is in doubt, all cash receipts on the impaired loan are applied to reduce the principal of\n such loan until the principal has been recovered and are recognized as interest income thereafter. Impairment\n losses are charged against the allowance and increases in the allowance are charged to bad debt expense.\n Loans are written off against the allowance when all possible means of collection have been exhausted and the\n potential for recovery is considered remote. There was no allowance and no past due loans at December 31,\n 2009, and there were no write offs for fiscal year 2009. CLF management considers write offs remote because\n all member loans must be collateralized with a minimum of 110 percent of the outstanding amount.\n\n(g) Borrowings \xe2\x80\x94 CLF\xe2\x80\x99s borrowings are recorded when received and do not have premiums or discounts.\n\n(h) Tax-Exempt Status \xe2\x80\x94 CLF is exempt from tax in accordance with section 312 of the Federal Credit Union\n Act (FCU) - 12 U.S.C. \xc2\xa71795k.\n\n(i) Related Parties \xe2\x80\x94 CLF exists within the National Credit Union Administration (NCUA) and is managed by\n the NCUA Board. The NCUA\xe2\x80\x99s Operating Fund (OF) provides CLF with information technology and other\n services and supplies. In addition, the NCUA\xe2\x80\x99s OF pays CLF\xe2\x80\x99s employees\xe2\x80\x99 salaries and benefits as well as\n CLF\xe2\x80\x99s portion of monthly building operating costs. The allocation formula to calculate these expenses is\n based on the number of full-time employees of the respective entities and the estimated amount of time CLF\n employees spend performing CLF functions.\n\n The National Credit Union Share Insurance Fund (NCUSIF) is also a related party. CLF has the statutory\n authority to advance funds to the NCUSIF and advances were made in 2009 (note 12).\n\n\n\n -9-\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n Notes to Financial Statement\n As of and for the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n3. RECENTLY ISSUED ACCOUNTING STANDARDS\n\n Effective December 31, 2009 CLF adopted FASB issued Statement of Financial Accounting Standards (SFAS) No.\n 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.\n SFAS No. 168 established the FASB Accounting Standards Codification (ASC) as the sole source of authoritative\n accounting principles recognized by the FASB to be applied by nonpublic entities in the preparation of financial\n statements in conformity with GAAP (the GAAP hierarchy).\n\n Effective December 31, 2009, CLF adopted FASB ASC 855, Subsequent Events (precodification FASB SFAS No.\n 165, Subsequent Events). FASB ASC 855 establishes general standards of accounting for and disclosure of events\n that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB\n ASC 855 defines the period after the balance sheet date during which management shall evaluate events or\n transactions that may occur for potential recognition or disclosure, the circumstances under which an organization\n shall recognize events occurring after the balance sheet date and the disclosures that an organization shall make\n about those events or transactions. FASB ASC 855 defines two types of subsequent events. The first type consists\n of events or transactions that provide additional evidence about conditions that existed at the date of the balance\n sheet, including the estimates inherent in the process of preparing financial statements (i.e., nonrecognized event).\n\n4. CASH AND CASH EQUIVALENTS\n\n CLF\xe2\x80\x99s cash and cash equivalents at December 31, 2009 are as follows:\n\n 2009\n\n U.S. Treasury Securities $ 5,261\n USC Daily Transaction Share Account 622\n PNC Bank 17\n\n Total $ 5,900\n\n\n The U.S. Central Federal Credit Union (USC) Daily Transaction Share Account is a variable rate share account,\n used primarily for CLF clearing transactions. The account is available only to CLF. U.S. Treasury securities had an\n initial term of less than three months when purchased.\n\n5. INVESTMENTS\n\n The carrying amount, gross unrealized holding gains, gross unrealized losses and the fair value of held-to-maturity\n debt securities at December 31, 2009 were as follows:\n\n Gross\n Gross\n Carrying Unrealized\n Unrealized Fair Value\n Amount Holding\n Holding Gains\n Losses\n U.S. Treasury Securities: $1,828,831 4,335 (211) 1,832,955\n\n Total $1,828,831 4,335 (211) 1,832,955\n\n Maturities of debt securities classified as held-to-maturity were as follows at December 31, 2009:\n\n\n\n\n - 10 -\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n Notes to Financial Statement\n As of and for the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n Carrying Amount Fair Value\n Due in one year or less $ 993,122 $ 994,036\n Due after one year through five years 832,721 836,083\n Due after five years through ten years 2,988 2,836\n Total $ 1,828,831 $ 1,832,955\n\n\n6. FAIR VALUE MEASUREMENTS \xe2\x80\x94 FASB ASC 825, Financial Instruments, defines fair value as the price that\n would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants\n at the measurement date. The following methods and assumptions were used in estimating the fair value disclosures\n for financial instruments:\n\n Cash and cash equivalents \xe2\x80\x94 The carrying amounts for cash and cash equivalents approximate fair value.\n\n Investments held to maturity \xe2\x80\x94 The fair value for investments is determined using the quoted market prices at the\n reporting date (observable inputs).\n\n Loans \xe2\x80\x94 For loans advanced to member credit unions and the loan to related party, the carrying amounts\n approximate fair value because all loans have a maturity of one year or less.\n\n Federal Financing Bank Notes Payable \xe2\x80\x94 For notes issued to the Federal Financing Bank (FFB), when applicable,\n the carrying amounts approximate fair value because all borrowings have a maturity of one year or less.\n\n Member Deposits \xe2\x80\x94 Funds maintained with the CLF in excess of required capital amounts are recorded as member\n deposits. These deposits are due upon demand, and therefore carrying amounts approximate the fair value.\n\n Other \xe2\x80\x94 Accrued interest receivable, accounts payable and other liabilities, dividends payable, and accrued interest\n payable are recorded at book values, which approximate the respective fair values.\n\n\n Carrying\n Fair Value\n Financial Instruments Value\n\n Cash and cash equivalents $ 5,900 $ 5,900\n Investments held to maturity 1,828,831 1,832,955\n Loans to members 8,312,751 8,312,751\n Loan to related party 10,000,000 10,000,000\n Accrued interest receivable 23,591 23,591\n Accounts payable and other liabilities 171 171\n Dividends payable 1,375 1,375\n Federal Financing Bank notes payable 18,312,751 18,312,751\n Accrued interest payable 23,561 23,561\n Member Deposits 363 363\n\n\n7. LOANS TO MEMBERS\n\n CLF has in place form documents that reflect the repayment, security, and credit reporting terms applicable to all\n CLF loans. CLF makes loan disbursements through the corporate credit union network and relies on members of the\n corporate network to service loans it has made. CLF relies on USC as its agent, as master servicer for all loans;\n\n\n - 11 -\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n Notes to Financial Statement\n As of and for the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n USC relies on the appropriate corporate credit union as its agent to service loans owed by its natural person credit\n union members. CLF requires each corporate credit union acting as loan servicer to subordinate any claims it might\n have in the collateral owned by natural person credit unions that may have been pledged to secure an advance from\n the corporate.\n\n In January 2009, the NCUA Board changed the methodology by which CLF funded natural person credit union\n loans by modifying the agreement between CLF and USC and creating a new assignment agreement between CLF\n and USC. This change was effective for all CLF loans made after January 20, 2009. Prior to the changes, loan\n proceeds were passed through USC to the corporate credit union and ultimately to the natural person credit union.\n Loan documents were signed at each level such that the natural person credit union borrower was indebted to its\n corporate credit union which, in turn was indebted to USC, which in turn was obligated to repay the advance to the\n CLF. The NCUA Board approved streamlining this relationship so that the indebtedness of the natural person credit\n union to the CLF is direct.\n\n During 2009, the NCUA Board obtained concurrence from the Secretary of the Treasury and the Board of\n Governors of the Federal Reserve System on its determination that extensions of credit to members of CLF for\n purposes other than the statutorily defined liquidity needs are in the national economic interest with the\n understanding that extensions of credit will not be made or used for a purpose that conflicts with the FCU Act. CLF\n began making other than liquidity needs (OTLN) based loans in January 2009.\n\n The two initiatives for other than liquidity needs (OTLN) lending are the Credit Union System Investment Program\n (CU SIP), and the Credit Union Homeowners Affordability Relief Program (CU HARP). There were 3 offering\n periods for CU SIP and one offering period for CU HARP. Funds for both programs come from the FFB\n borrowings. The loan amounts, maturity dates, and interest rates are presented following.\n\n Amount Maturity Date Interest Rate\n\n CU SIP 1 $ 4,801,984 1/8/2010 0.5650%\n CU SIP 2 2,915,062 2/12/2010 0.7060%\n CU SIP 3 500,000 3/12/2010 0.8290%\n CU HARP 95,705 12/31/2010 0.5740%\n Total $ 8,312,751\n\n\n As of December 31, 2009, $4,897,689 in loans to members was due from USC for the first CU SIP offering (CU\n SIP 1) and the CU HARP and $3,415,062 was due from natural person credit unions.\n\n8. CAPITAL STOCK\n\n Membership in CLF is voluntary and is open to all credit unions that purchase a prescribed amount of capital stock.\n CLF capital stock is non-voting and shares have a par value of $50. There are two types of membership, regular\n (natural person credit unions) and agent (corporate credit unions). Natural person credit unions may borrow from\n CLF directly as a regular member or indirectly through an agent member.\n\n The capital stock account represents subscriptions remitted to CLF by member credit unions. Regular members\xe2\x80\x99\n required subscription amounts equal one-half of one percent of their paid-in and unimpaired capital and surplus,\n one-half of which is required to be remitted to CLF. Agent members\xe2\x80\x99 required subscription amounts equal one-half\n of one percent of the paid-in and unimpaired capital and surplus of all of the credit unions served by the agent\n member, one-half of which is required to be remitted to CLF. In both cases, member credit unions are required to\n hold the remaining one-half in liquid assets subject to call by the NCUA Board. These unremitted subscriptions are\n not reflected in CLF\xe2\x80\x99s financial statements. Subscriptions are adjusted annually to reflect changes in the member\n\n\n\n - 12 -\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n Notes to Financial Statement\n As of and for the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n credit unions\xe2\x80\x99 paid-in and unimpaired capital and surplus. Dividends are non-cumulative and declared and paid on\n only required capital stock.\n\n During fiscal year 1984, CLF accepted a membership request from USC on behalf of its corporate credit union\n members. At December 31, 2009 $1,750,551 of CLF capital stock was purchased by USC on behalf of its member\n corporate credit union members. USC has 26 corporate credit union members as of December 31, 2009.\n\n A member of CLF whose capital stock account constitutes less than five percent of the total capital stock\n outstanding may withdraw from membership in CLF six months after notifying the NCUA Board of its intention to\n do so. A member whose capital stock account constitutes five percent or more of the total capital stock outstanding\n may withdraw from membership in CLF twenty-four months after notifying the NCUA Board of its intention. At\n December 31, 2009, CLF had one member withdrawal request of $128 pending.\n\n The required capital stock is redeemable upon demand by the members. The redemption is not mandatory, as\n defined in FASB ASC 480-10-25-7, Mandatorily Redeemable Financial Instruments; therefore capital stock is\n classified in permanent equity.\n\n CLF\xe2\x80\x99s capital stock accounts are composed of the following at December 31, 2009:\n\n Shares Amount\n\n Regular members 1,363,531 $ 68,177\n Agent members 35,011,027 1,750,551\n\n Total 36,374,558 $ 1,818,728\n\n\n Dividends on capital stock are declared based on available earnings and the dividend policy set by the NCUA Board.\n Dividends are accrued monthly based on prior quarter-end balances and paid on the first business day after the\n quarter-end. The dividend rates paid on capital stock for both regular and agent members change quarterly.\n\n During 2009, USC paid in full an outstanding shareholder loan.\n\n9. MEMBER DEPOSITS\n\n Member deposits represent amounts remitted by members over and above the amount required for membership.\n Interest is paid on member deposits at a rate equivalent to the dividend rate paid on required capital stock.\n\n10. CONCENTRATION OF CREDIT RISK\n\n At December 31, 2009, CLF had a concentration of credit risk for its loans to USC of approximately $4,897,689.\n\n In January 2009, the NCUA Board announced two additional actions which provided immediate enhancement to the\n corporate credit union system\xe2\x80\x99s liquidity and capital positions. One of these actions was a temporary NCUSIF\n guarantee of member shares in corporate credit unions. The guarantee covers all shares through December 31, 2010\n and included CLF\xe2\x80\x99s deposit in the USC Daily Transaction Share Account.\n\n11. BORROWING AUTHORITY\n\n CLF is authorized by statute to borrow, from any source, an amount not to exceed 12 times its subscribed capital\n stock and surplus. Until October 1, 2008, Congress, through the appropriations process, placed a limit on gross\n\n\n - 13 -\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n CENTRAL LIQUIDITY FACILITY\n Notes to Financial Statement\n As of and for the Year Ended December 31, 2009\n (Dollars in thousands, except share data)\n\n obligations at $1.5 billion. However, effective October 1, 2008, under Public Law 110-329, Consolidated Security,\n Disaster Assistance, and Continuing Appropriations Act, 2009, Congress took action to remove the annual\n borrowing limitation of $1.5 billion to enable CLF to borrow up to its full statutory authority. As of December 31,\n 2009, CLF\xe2\x80\x99s statutory borrowing authority was $43,818,955.\n\n CLF borrows exclusively from the FFB. The National Credit Union Administration maintains a note purchase\n agreement with the FFB on behalf of CLF. Under the terms of its agreement, CLF borrows from the FFB as needed.\n Under terms prescribed by the master note agreement, CLF executes promissory notes in amounts as necessary and\n renews them annually. Advances made under the current promissory note cannot exceed $25,000,000 and cannot\n mature later than March 31, 2011. During 2009, CLF borrowed amounts totaling $18,537,962 from FFB under\n twenty-five separate loan agreements, which it, in turn, loaned to member credit unions. The amounts owed to the\n FFB at December 31, 2009 totaled $18,312,751. At December 31, 2009, CLF had $6,687,249 available capacity to\n borrow under its current promissory note and such funds are available through March 31, 2010.\n\n At December 31, 2009 CLF was in compliance with its borrowing authority.\n\n12. RELATED PARTY TRANSACTIONS\n\n NCUA\xe2\x80\x99s OF pays CLF\xe2\x80\x99s employees\xe2\x80\x99 salaries and benefits as well as CLF\xe2\x80\x99s portion of monthly building and\n operating costs. Expenses are allocated by applying the ratio of CLF full-time equivalent employees to the NCUA\n total. These expenses are reimbursed to NCUA quarterly. All other CLF reimbursement expenses are paid\n annually. The total amount charged by the NCUA was approximately $334 for the year ended December 31, 2009.\n As of December 31, 2009, accounts payable and other liabilities include approximately $145 due to the NCUA\xe2\x80\x99s OF\n for services provided.\n\n On March 19, 2009, the NCUA Board took steps to stabilize the corporate credit union system when it placed USC\n and Western Corporate Federal Credit Union (WesCorp) into conservatorship. CLF entered into a Funding\n Commitment and Agreement and a Short-Term Revolving Promissory Note on March 20, 2009, to fund\n $20,000,000 with a final maturity date of any advance at December 31, 2010. There was $10,000,000 remaining on\n this commitment as of December 31, 2009. CLF approved an advance of $10,000,000 to NCUSIF in order for\n NCUSIF to make $5,000,000 in liquidity stabilization loans to both USC and WesCorp. This advance was made on\n March 23, 2009, for a period of 91 days, maturing on June 22, 2009 and on June 22, 2009, the advance was renewed\n for an additional 182 days maturing on December 21, 2009. On December 21, 2009, the advance was renewed\n again for an additional 365 days maturing on December 21, 2010. The advance bears interest at a rate of 0.5280%\n per annum.\n\n13. SUBSEQUENT EVENTS\n\n Management evaluated all events and transactions that occurred after December 31, 2009 through April 28, 2010,\n the date CLF issued these financial statements. In March 2010, CLF renewed its promissory note with the FFB.\n The available capacity under the renewed promissory note is $25,000,000 and the funds are available through March\n 31, 2011.\n\n\n\n\n - 14 -\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 Administration Central Liquidity Facility\n(CLF) as of December 31, 2009, and the related statements of operations, members\xe2\x80\x99 equity, and cash flows\nfor the year then ended (hereinafter referred to as \xe2\x80\x9cfinancial statements\xe2\x80\x9d), and have issued our report\nthereon dated April 28, 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 CLF is responsible for establishing and maintaining effective internal control. In\nplanning and performing our fiscal year 2009 audit, we considered the CLF\xe2\x80\x99s internal control over\nfinancial reporting by obtaining an understanding of the CLF\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 CLF\xe2\x80\x99s internal control over financial reporting.\nAccordingly, we do not express an opinion on the effectiveness of the CLF\xe2\x80\x99s internal control over financial\nreporting.\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 Administration Central Liquidity Facility\nApril 28, 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 CLF\xe2\x80\x99s response to the finding identified in our audit is presented in Exhibit II. We did not audit the\nCLF\xe2\x80\x99s response and, accordingly, we express no opinion on it.\n\nThis report is intended solely for the information and use of the addressees, the CLF\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\nApril 28, 2010\n\x0c Exhibit I\n NATIONAL CREDIT UNION ADMINITRATION \xe2\x80\x93\n CENTRAL LIQUIDITY FACILITY\n SIGNIFICANT DEFICIENCY\n\n\n\n\nIntroduction\nThis exhibit describes the significant deficiency noted during our audit as of and for the year ended\nDecember 31, 2009, and our recommendation thereon. The Central Liquidity Facility (CLF) management\xe2\x80\x99s\nresponse to this finding is presented in Exhibit II. Exhibit III presents the status of the prior year material\nweakness.\n\nCLF Should Improve and Formalize Processes and Controls Over the Preparation of the Financial Statements,\nEspecially with Respect to the Statement of Cash Flows and the Statement of Members\xe2\x80\x99 Equity\nDuring our review of the CLF\xe2\x80\x99s draft financial statements for the year ended December 31, 2009, we noted that\nthe statement of cash flows and statement of members\xe2\x80\x99 equity presented in the financial statements contained\nomissions and misclassifications, as follows:\n\n\xef\x82\xb7 The statement of cash flows did not include approximately $5.9 million in movement related to cash\n equivalents.\n\n\xef\x82\xb7 The statement of cash flows did not separately disclose the cash collection of a shareholder loan in the\n amount of $1.7 billion (a financing activity), but instead showed this transaction netted against the purchase\n of U.S. Treasury securities in the amount of $1.8 billion (an investing activity with a different counterparty).\n\n\xef\x82\xb7 The supplemental disclosure of cash flow information \xe2\x80\x93 cash paid during the year for interest did not include\n interest paid to the Federal Financing Bank (FFB) in the amount of approximately $64 million.\n\n\xef\x82\xb7 The statement of members\xe2\x80\x99 equity and notes to the financial statements did not disclose the members\xe2\x80\x99 capital\n stock account shares and changes thereof as required by the authoritative guidance.\n\nBased on discussions with CLF management, the statement of cash flows and statement of members\xe2\x80\x99 equity\npresented in the draft financial statements for the year ended December 31, 2009 were prepared following the\nprocesses established in prior years. CLF has historically not presented share information on the balance sheet,\nstatement of members\xe2\x80\x99 equity, or the related note disclosures.\n\nIn fiscal year 2009 CLF changed a significant part of its business activity. From inception to August 2009, the\nCLF invested its cash balances with its majority shareholder, the U.S. Central Federal Credit Union (USC).\nHistorically, these transactions were accounted for as investments in the balance sheet and investing activities in\nthe statement of cash flows. However, in August 2009, CLF redeemed its USC investments and invested the\nproceeds with the U.S. Treasury. This change in business activity, coupled with the presentation of investments\nwith USC on the December 31, 2008 balance sheet as a shareholder loan (i.e., a contra equity account), caused\nthe transaction to be misclassified in the 2009 statement of cash flows.\nFinancial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) sets forth the\npresentation requirements for the statement of cash flows. FASB ASC 230-10-45 states, in part, the following:\n\n 45-4 A statement of cash flows shall explain the change during the period in cash and cash equivalents\xe2\x80\xa6\n The total amounts of cash and cash equivalents at the beginning and end of the period shown in the\n\n I-1\n\x0c Exhibit I\n NATIONAL CREDIT UNION ADMINITRATION \xe2\x80\x93\n CENTRAL LIQUIDITY FACILITY\n SIGNIFICANT DEFICIENCY\n\n\n\n\n statement of cash flows shall be the same amounts as similarly titled line items or subtotals shown in the\n statements of financial position as of those dates.\n\n 45-26 \xe2\x80\xa6[B]oth investing cash inflows and outflows and financing cash inflows and outflows shall be\n reported separately in a statement of cash flows\xe2\x80\x94for example, outlays for acquisitions of property, plant,\n and equipment shall be reported separately from proceeds from sales of property, plant, and equipment;\n proceeds of borrowings shall be reported separately from repayments of debt; and proceeds from issuing\n stock shall be reported separately from outlays to reacquire the entity's stock.\nAdditionally, FASB ASC 505-10-50-2, Equity Disclosures, states the following:\n\n 50-2 If both financial position and results of operations are presented, disclosure of changes in the\n separate accounts comprising shareholders' equity (in addition to retained earnings) and of the changes in\n the number of shares of equity securities during at least the most recent annual fiscal period\xe2\x80\xa6presented\n is required to make the financial statements sufficiently informative. Disclosure of such changes may\n take the form of separate statements or may be made in the basic financial statements or notes thereto.\n\nThe omissions and misclassifications noted above were in contravention of the aforementioned U.S. generally\naccepted accounting principles (GAAP). Management made the appropriate corrections to the draft statement of\ncash flows and the statement of members\xe2\x80\x99 equity to present them in accordance with such GAAP in the issued\nversion of the financial statements.\nThis deficiency represents a significant deficiency.\nRecommendations\n\nWe recommend that the CLF management enhance the process used to prepare the statement of cash flows to\nensure that the FASB ASC 230-10-45 guidance is followed. This would include adding steps for management to\nevaluate any new types of transactions and changes in operations to assure such items are properly considered\nand presented in accordance with GAAP.\n\nWe also recommend that management enhance the process used to prepare the statement of members\xe2\x80\x99 equity to\nensure that the FASB ASC 505-10-50 guidance is followed.\n\n\n\n\n I-2\n\x0c\x0c Exhibit III\n NATIONAL CREDIT UNION ADMINITRATION \xe2\x80\x93\n CENTRAL LIQUIDITY FACILITY\n STATUS OF PRIOR YEAR MATERIAL WEAKNESS\n\n\n\n\nPrior Year Material Weakness\n\nDuring the fiscal year 2008 financial statement audit, the prior year auditors noted a material weakness regarding\nthe National Credit Union Administration\xe2\x80\x99s Central Liquidity Facility (CLF) accounting of its funds on deposit at\nU.S. Central Federal Credit Union (USC).\n\nCurrent Year Status of the Prior Year Material Weakness\n\nDuring fiscal year 2009, CLF replaced its funds on deposit at USC with U.S. Treasury securities. Certain related\ndeficiencies continued to be observed in 2009 as described in Exhibit I.\n\n\n\n\n III-1\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 Administration Central Liquidity Facility\n(CLF) as of December 31, 2009, and the related statements of operations, members\xe2\x80\x99 equity, and cash flows\nfor the year then ended (hereinafter referred to as \xe2\x80\x9cfinancial statements\xe2\x80\x9d), and have issued our report\nthereon dated April 28, 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 CLF is responsible for complying with laws, regulations, and contracts applicable\nto the CLF. As part of obtaining reasonable assurance about whether the CLF\xe2\x80\x99s financial statements are\nfree of material misstatement, we performed tests of the CLF\xe2\x80\x99s compliance with certain provisions of laws,\nregulations and contracts, noncompliance with which could have a direct and material effect on the\ndetermination of the financial statement amounts, and certain provisions of other laws and regulations\nspecified in OMB Bulletin No. 07-04. We limited our tests of compliance to the provisions described in the\npreceding sentence, and we did not test compliance with all laws, regulations, and contracts applicable to\nthe CLF. However, providing an opinion on compliance with those provisions was not an objective of our\naudit, 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, the CLF\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\nApril 28, 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\x0cNational Credit Union Administration\nCommunity Development\nRevolving Loan Fund\nFinancial Statements as of and for the\nYears Ended December 31, 2009 and 2008, 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 ON FINANCIAL STATEMENTS 1\n\nFINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED\n DECEMBER 31, 2009 AND 2008:\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 6-10\n\n\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON INTERNAL CONTROL OVER\n FINANCIAL REPORTING\n\n\n\nINDEPENDENT AUDITORS\xe2\x80\x99 REPORT ON COMPLIANCE AND OTHER MATTERS\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 Administration Community\nDevelopment Revolving Loan Fund (CDRLF) as of December 31, 2009, and the related statements of\noperations, changes in fund balance, and cash flows for the year then ended (hereinafter referred to as\n\xe2\x80\x9cfinancial statements\xe2\x80\x9d). These financial statements are the responsibility of the CDRLF\xe2\x80\x99s management.\nOur responsibility is to express an opinion on these financial statements based on our audit. The\naccompanying financial statements of the CDRLF as of December 31, 2008, were audited by other auditors\nwhose report thereon dated February 17, 2009, expressed an unqualified opinion on those statements.\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 CDRLF\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 Administration Community Development Revolving Loan\nFund as of December 31, 2009, and the results of its operations and its cash flows for the year then ended\nin conformity with U.S. generally accepted accounting principles.\n\nIn accordance with Government Auditing Standards, we have also issued our reports dated February 17,\n2010, on our consideration of the 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 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\nFebruary 17, 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\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCOMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n\nBALANCE SHEETS\nAS OF DECEMBER 31, 2009 AND 2008\n\n\n 2009 2008\n\nASSETS\n\nCash and cash equivalents (Note 4) $8,949,290 5,610,194\n\nLoans receivable (Notes 6, 7, and 8) 8,818,487 10,553,512\n\nInterest receivable (Note 8) 19,193 25,620\n\nTotal $17,786,970 16,189,326\n\n\nLIABILITIES AND FUND BALANCE\n\nLIABILITIES \xe2\x80\x94 Accrued technical assistance (Notes 8 and 11) $1,604,064 1,267,377\n\n Commitments and contingencies (Note 11)\n\nFUND BALANCE:\n\n Fund capital 14,637,777 13,435,642\n Accumulated earnings 1,545,129 1,486,307\n\n Total fund balance (Note 5) 16,182,906 14,921,949\n\nTotal $17,786,970 16,189,326\n\nSee accompanying notes to the 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, 2009 AND 2008\n\n\n 2009 2008\n\nSUPPORT AND REVENUES:\n Interest on cash and cash equivalents (Notes 4 and 8) $4,066 35,186\n Interest on loans (Note 8) 102,584 123,329\n Appropriation revenue (Note 5) 1,000,000 975,000\n Total support and revenues 1,106,650 1,133,515\n\nEXPENSES:\n Technical assistance 1,049,778 1,157,041\n Provision for loan losses (1,950) 31\n Total expenses 1,047,828 1,157,072\n\nNET INCOME (LOSS) $58,822 (23,557)\n\n\n\n\nSee accompanying notes to financial statements.\n\n\n\n\n -3-\n\x0c NATIONAL CREDIT UNION ADMINISTRATION\n COMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n\n STATEMENTS OF CHANGES IN FUND BALANCE\n FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008\n Fund Capital\n For Technical Total Fund Accumulated Total Fund\n For Loans Assistance Capital Earnings Balance\n\nDecember 31, 2007 $13,387,777 47,865 13,435,642 1,509,864 14,945,506\n\n Appropriations received (Note 5) - 975,000 975,000 - 975,000\n Appropriations expended - (975,000) (975,000) - (975,000)\n Net loss - - - (23,557) (23,557)\n\nDecember 31, 2008 $13,387,777 47,865 13,435,642 1,486,307 14,921,949\n\n Appropriations received (Note 5) - 2,250,000 2,250,000 - 2,250,000\n Appropriations expended - (1,000,000) (1,000,000) - (1,000,000)\n Appropriations expired - (47,865) (47,865) - (47,865)\n Net income - - - 58,822 58,822\n\nDecember 31, 2009 $13,387,777 1,250,000 14,637,777 1,545,129 16,182,906\n\n\n See accompanying 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, 2009 and 2008\n\n\n 2009 2008\n\nCASH FLOWS FROM OPERATING ACTIVITIES:\n\nNet Income (Loss) $58,822 (23,557)\nAdjustments to reconcile net income (loss) to net cash\nused in operating activities:\n Approriation revenue recognized (1,000,000) (975,000)\n Changes in assets and liabilities:\n Decrease in interest receivable 6,427 4,534\n Increase (Decrease) in accrued technical assistance 336,687 (40,758)\n\n Net cash used in operating activities (598,064) (1,034,781)\n\nCASH FLOWS FROM INVESTING ACTIVITIES:\n Loan principal repayments 4,323,025 3,088,553\n Loan disbursements (2,588,000) (350,000)\n\n Net cash provided by investing activities 1,735,025 2,738,553\n\nCASH FLOWS FROM FINANCING ACTIVITIES:\n Appropriations received 2008/2009 - 975,000\n Appropriations received 2009/2010 1,000,000 -\n Appropriations received 2010/2011 1,250,000 -\n Appropriations expired (47,865) -\n Net cash provided by financing activities 2,202,135 975,000\n\nNET INCREASE IN CASH AND CASH EQUIVALENTS 3,339,096 2,678,772\n\nCASH AND CASH EQUIVALENTS \xe2\x80\x94 Beginning of year 5,610,194 2,931,422\n\nCASH AND CASH EQUIVALENTS \xe2\x80\x94 End of year $8,949,290 5,610,194\n\nSee accompanying notes to financial statements\n\n\n\n\n -5-\n\x0cNATIONAL CREDIT UNION ADMINISTRATION\nCOMMUNITY DEVELOPMENT REVOLVING LOAN FUND\nNOTES TO FINANCIAL STATEMENTS\nAS OF AND FOR THE YEAR ENDED DECEMBER 31, 2009\n\n\n 1. NATURE OF ORGANIZATION\n\n The Community Development Revolving Loan Fund for Credit Unions (CDRLF) was established\n by an act of Congress (Public Law 96-123, November 20, 1979) to stimulate economic development\n in low-income communities. The National Credit Union Administration (NCUA) and the\n Community Services Association (CSA) jointly adopted Part 705 of NCUA Rules and Regulations,\n governing administration of the CDRLF, on February 28, 1980.\n\n Upon the dissolution of CSA in 1983, administration of CDRLF was transferred to the Department\n of Health and Human Services (HHS). From 1983 through 1990, the Fund was dormant.\n\n The Community Development Credit Union Transfer Act (Public Law 99-609, November 6, 1986)\n transferred CDRLF administration back to NCUA. The NCUA Board adopted amendments to\n Part 705 of NCUA Rules and Regulations on September 16, 1987, and began making loans and\n deposits to participating credit unions in 1990.\n\n The purpose of CDRLF is to stimulate economic activities in the communities served by\n low-income credit unions, which is expected to result in increased income, ownership, and\n employment opportunities for low-wealth residents, and other economic growth. The policy of\n NCUA is to revolve the loans to qualifying credit unions as often as practical in order to gain\n maximum impact on as many participating credit unions as possible.\n\n 2. 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 in conformity with accounting principles generally accepted in the United States of America.\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 2009 and 2008 were cash equivalents and\n are stated at cost, which approximates fair value. Cash equivalents are highly liquid investments\n with original maturities of three months or less.\n\n Allowance for Loan Losses \xe2\x80\x94 CDRLF records a provision for estimated loan losses based on\n historical loss experience. A provision for loans considered to be uncollectible is charged to the\n income statement when such losses are probable and reasonably estimable. Provisions for significant\n uncollectible amounts are credited to an allowance for loan losses, while de minimis amounts are\n directly charged-off or recovered. Management continually evaluates the adequacy of the allowance\n for loan losses based upon prevailing circumstances and an assessment of collectability risk of the\n total loan portfolio. On the basis of this analysis, no allowance for loan losses was necessary at\n December 31, 2009 and 2008. Accrual of interest is discontinued on non-performing loans when\n management believes collectability is doubtful.\n\n\n\n -6-\n\x0c Overhead Expenses \xe2\x80\x94 NCUA provides certain general and administrative support to the CDRLF,\n including office space, salaries, and certain supplies. The value of these contributed services is not\n charged to CDRLF.\n\n 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\n expenses because not all technical assistance is funded by appropriations. Interest income on cash\n equivalents and on loans is recognized when earned.\n\n Expense Recognition \xe2\x80\x93 Technical assistance expense is recognized when the CDRLF makes a\n formal commitment to the recipient credit union for technical assistance.\n\n Use of Estimates \xe2\x80\x94 The preparation of financial statements in conformity with accounting\n principles generally accepted in the United States of America requires management to make\n estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of\n contingent assets and liabilities at the date of the financial statements and the reported amounts of\n revenues and expenses during the reporting period. Actual results could differ from management\xe2\x80\x99s\n estimates.\n\n Income Taxes \xe2\x80\x93 The CDRLF, as a government entity, is not subject to federal, state or local income\n taxes, and accordingly, no provision for income taxes is provided.\n\n3. NEWLY IMPLEMENTED ACCOUNTING STANDARDS\n\n Effective December 31, 2009 CDRLF adopted the Financial Accounting Standards Board (FASB)\n Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards\n Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168\n established the FASB Accounting Standards Codification (ASC) as a sole source of authoritative\n accounting principles recognized by the FASB to be applied by nonpublic entities in the preparation\n of financial statements in conformity with GAAP (the GAAP hierarchy).\n\n4. CASH AND CASH EQUIVALENTS\n\n CDRLF\xe2\x80\x99s cash and cash equivalents at December 31, 2009 and 2008 are as follows:\n\n 2009 2008\n Deposit with U.S. Treasury $ 3,949,290 1,410,194\n U.S. Treasury Overnight\n Investments 5,000,000 4,200,000\n Total Investments $ 8,949,290 5,610,194\n\n\n5. 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 $16,182,906 appropriated to date for\n CDRLF, which includes accumulated earnings. Federally chartered or state-chartered credit unions\n with a low-income designation are eligible to participate in CDRLF\xe2\x80\x99s loan and technical assistance\n program.\n\n\n\n\n -7-\n\x0c During the year ended December 31, 2009, CDRLF received appropriations for technical assistance\n in the amount of $2,250,000: $1,000,000 for the Federal Government\xe2\x80\x99s fiscal years 2009\xe2\x80\x932010,\n with no rescission; and, $1,250,000 for the Federal Government\xe2\x80\x99s fiscal years 2010-2011 with no\n rescission.\n\n During the year ended December 31, 2008, CDRLF received appropriations for technical assistance\n in the amount of $975,000 for the Federal Government\xe2\x80\x99s fiscal years 2008\xe2\x80\x932009, with no rescission.\n\n These amounts were designated to be used for technical assistance and no amounts were designated\n to be used as revolving fund capital.\n\n Appropriations in the amount of $47,865 from fiscal years 2003 and 2004 were remitted to the U.S.\n Treasury in 2009 upon expiration.\n\n For the appropriations received for technical assistance for the Federal Government\xe2\x80\x99s fiscal year\n 2009-2010, $1,000,000 expires on September 30, 2010, and $1,250,000 expires on September 30,\n 2011.\n\n\n6. LOANS RECEIVABLE\n\n Loans outstanding at December 31, 2009 and 2008, are scheduled to be repaid during the following\n subsequent years:\n\n 2009 2008\n\n 2009 $ - 2,964,967\n 2010 2,743,464 2,825,455\n 2011 2,752,384 2,577,106\n 2012 2,354,916 2,115,984\n 2013 513,800 70,000\n 2014 453,923 -\n Loans outstanding 8,818,487 10,553,512\n Allowance for loan losses - -\n Total loans receivable $8,818,487 10,553,512\n\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 a nonmember deposit. As a nonmember deposit, an amount not\n to exceed $250,000 per credit union is insured by the National Credit Union Share Insurance Fund\n (NCUSIF). The aggregate amount of uninsured loans totaled $293,910 at December 31, 2009, and\n $247,161 at December 31, 2008.\n\n Loans are limited to a maximum amount of $300,000 per credit union. Per NCUA policy, loans\n issued after January 1, 2002, carry a fixed rate of 1%. Interest and principal are to be repaid on a\n semiannual basis beginning six months and one year, respectively, after the initial distribution of the\n loan. The maximum term of each loan is five years.\n\n CDRLF has the intent and ability to hold its loans to maturity. CDRLF anticipates realizing the\n carrying amount in full.\n\n\n\n -8-\n\x0c7. CONCENTRATION OF CREDIT RISK\n\n At December 31, 2009 and 2008, there are no significant geographic or individual counterparty\n concentrations of credit risk in the loan portfolio. As discussed in note 1, CDRLF provides loans to\n credit unions that serve predominantly low-income communities.\n\n8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS\n\n The following disclosures of the estimated fair value of financial instruments are made in\n accordance with the requirements of FASB ASC No. 825, Disclosures about Fair Value of\n Financial Instruments. The fair value of a financial instrument is the amount that would be received\n to sell an asset or paid to transfer a liability in an orderly transaction between market participants at\n the measurement date. The methods and assumptions used in estimating the fair value disclosures\n 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 receivable \xe2\x80\x94 The fair value is estimated by discounting projected future cash flows based on\n benchmark interest rates. For purposes of this calculation, the discount rate used was the U.S.\n Treasury constant maturity rate for similar maturities plus a two percent risk premium: 3.64% at\n December 31, 2009 and 3.04% at December 31, 2008.\n\n The carrying amount and the estimated fair value of the CDRLF\xe2\x80\x99s financial instruments are as\n follows:\n\n\n Carrying Estimated\n Amount Fair Value\n Assets:\n Cash and cash equivalents $ 8,949,290 $ 8,949,290\n\n Loans receivable $ 8,818,487 $ 8,310,773\n\n Interest receivable $ 19,193 $ 19,193\n\n Liabilities \xe2\x80\x94 accrued technical\n assistance $1,604,064 $ 1,604,064\n\n\n\n9. OVERHEAD EXPENSES\n\n NCUA, in supporting the activities of the CDRLF, provides for the administration of the CDRLF.\n The administrative costs paid by the NCUA\xe2\x80\x99s Operating Fund are directly related to the percentage\n of employees\xe2\x80\x99 time spent on the CDRLF. The administrative cost calculation takes into account the\n employees\xe2\x80\x99 salary, benefits, travel, training, and certain \xe2\x80\x9cother\xe2\x80\x9d costs (telephone, supplies, printing,\n and postage).\n\n\n\n\n -9-\n\x0c For the years ending December 31, 2009 and 2008, the NCUA through the Operating Fund, paid the\n following overhead expenses on behalf of the CDRLF:\n\n 2009 2008\n Employee $ 242,223 212,934\n Other 12,303 12,070\n $ 254,526 225,004\n\n\n10. SUBSEQUENT EVENTS (FAS 165, ASC 855)\n\nSubsequent events have been evaluated through February 17, 2010, which is the date the financial\nstatements were available to be issued.\n\nThere have been no activities that would materially affect financial statement balances as of December\n31, 2009.\n\n11. COMMITMENTS AND CONTINGENCIES\n\n As of December 31, 2009, the CDRLF has the following outstanding commitments:\n\n Loans approved but not yet disbursed: $ -\n\n Technical assistance approved but not yet disbursed: $ 1,604,064\n\n In accordance with the terms of such agreements, and as a condition for eventual disbursement, the\n borrower or technical assistance recipient may be required to satisfy specified contractual criteria.\n Loan commitments are not recognized until the loan agreement has been signed.\n\n\n\n\n - 10 -\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 Administration Community Development\nRevolving Loan Fund (CDRLF) as of December 31, 2009, and the related statements of operations,\nchanges in fund balance, and cash flows for the year then ended (hereinafter referred to as \xe2\x80\x9cfinancial\nstatements\xe2\x80\x9d), and have issued our report thereon dated February 17, 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 CDRLF is responsible for establishing and maintaining effective internal control.\nIn planning and performing our fiscal year 2009 audit, we considered the CDRLF\xe2\x80\x99s internal control over\nfinancial reporting by obtaining an understanding of the CDRLF\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 CDRLF\xe2\x80\x99s internal control over financial reporting.\nAccordingly, we do not express an opinion on the effectiveness of the CDRLF\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\nIn our fiscal year 2009 audit, we identified a certain deficiency in internal control over financial reporting\nthat we consider to be a material weakness, described in Exhibit I, and another deficiency that we consider\nto be a significant deficiency, described in Exhibit II.\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 Administration Community Development Revolving Loan Fund\nFebruary 17, 2010\nPage 2 of 2\n\n\n\n\nThe CDRLF\xe2\x80\x99s responses to the findings identified in our audit are presented in Exhibit III. We did not audit\nthe CDRLF\xe2\x80\x99s response and, accordingly, we express no opinion on it.\n\nWe noted a certain additional matter that we have reported to CDRLF management in a separate letter\ndated February 17, 2010.\n\nThis report is intended solely for the information and use of the addressees, CDRLF\xe2\x80\x99s management, OMB,\nthe U.S. Government Accountability Office, and the U.S. Congress and is not intended to be and should not\nbe used by anyone other than these specified parties.\n\n\n\n\nFebruary 17, 2010\n\x0c Exhibit I\n NATIONAL CREDIT UNION ADMINITRATION \xe2\x80\x93\n COMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n MATERIAL WEAKNESS\nIntroduction\nThis exhibit describes the material weakness noted during our audit as of and for the year ended\nDecember 31, 2009, and our recommendations thereon. The Community Development Revolving Loan\nFund (CDRLF) management\xe2\x80\x99s response to this finding is presented in Exhibit III.\n\nImprovements Needed in Management\xe2\x80\x99s Review Procedures Over the Cash Handling and\nReconciliation Process\n\nCDRLF records cash disbursements when the request for funds is submitted to the U.S. Department of the\nTreasury (U.S. Treasury), as opposed to when the funds are transferred to the recipients (i.e., custody of\ncash is relinquished), which is not in accordance with the Financial Accounting Standards Board (FASB)\nAccounting Standards Codification (ASC) financial assets de-recognition standard. CDRLF management\nindicated that they recorded disbursements at the time checks were requested from the U.S. Treasury in\norder to track the use of funds. As a result, the cash and accounts payable balances were understated by\napproximately $55,000 at December 31, 2009. Management recorded an adjusting entry to properly reflect\nthe cash and accrued technical assistance liability account balances in the financial statements.\n\nIn addition, CDRLF did not record the Congressional appropriation for the federal fiscal year 2010/2011,\nwhich was received on December 30, 2009. The National Credit Union Administration Office of the Chief\nFinancial Officer (OCFO) prepared the agency wide reporting to and reconciliation of transactions and\nbalances with the U.S. Treasury (the reconciliation) and provided the reconciliation to the fund supervisor\nto reconcile with the fund general ledger. The CDRLF supervisor did not utilize the section of the\nreconciliation that documented the U.S. Treasury balance for CDRLF and therefore did not realize that\nCDRLF had not recorded the Congressional appropriation for the federal fiscal year 2010/2011. As a\nresult, the cash and fund balance (i.e., operating appropriations received) were understated by $1,250,000\nat December 31, 2009. Management recorded an adjusting entry to properly reflect the cash and fund\nbalance in the financial statements.\n\nThis deficiency represents a material weakness.\nRecommendations\n\nWe recommend that the CDRLF modify accounting policies, procedures and controls as follows:\n\n\xef\x82\xb7 Record cash disbursements when the funds are mailed to the recipients (i.e., when custody of cash is\n relinquished and other de-recognition criteria are satisfied).\n\xef\x82\xb7 Record cash receipts when appropriations are received.\n\xef\x82\xb7 Perform appropriate account reconciliation procedures.\n\xef\x82\xb7 Make source documents available to the fund supervisor to ensure that out-of-balance errors are\n detected and corrected.\n\n\n\n\n I-1\n\x0c Exhibit II\n NATIONAL CREDIT UNION ADMINITRATION \xe2\x80\x93\n COMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n SIGNIFICANT DEFICIENCY\n\n\nIntroduction\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 Community Development Revolving Loan\nFund (CDRLF) management\xe2\x80\x99s response to this finding is presented in Exhibit III.\nImprovements Needed in Management\xe2\x80\x99s Review Procedures Over the Financial Accounting and\nReporting Process\nCDRLF does not have formal policies and procedures that require secondary reviews and approvals of the\nfinancial statements and related supporting documentation. The supervisory reviews performed were not\neffective in identifying missing disclosures and financial statement errors. For example, the draft financial\nstatements prepared for the year ended December 31, 2009 did not disclose the new accounting standard\nthat should have been implemented in fiscal year 2009, the Statement of Financial Accounting Standards\n(SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted\nAccounting Principles, (FASB ASC) and the FASB ASC references for the standards applicable to\nCDRLF. Further, the amount disclosed in the fair value note for cash and cash equivalents did not agree\nwith the corresponding amount on the balance sheet.\n\nIn addition, CDRLF does not have procedures in place that require review and approval of the journal\nentries and related supporting documentation because the journal entries that we tested did not have\nevidence that the journal entries were reviewed and approved by someone other than the preparer.\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, correcting,\nand reporting on internal control. Management controls are the organization policies and procedures used\nto reasonably ensure that (i) programs achieve their intended results; (ii) resources are used consistent with\nagency mission; (iii) programs and resources are protected from waste, fraud, and mismanagement; (iv)\nlaws and regulations are followed; and (v) reliable and timely information is obtained, maintained, reported\nand used for decision making. OMB Circular No. A-123 states the following:\n\n Policies and Procedures - Developing a written strategy for internal agency use may help ensure\n that appropriate action is taken throughout the year to meet the objectives of the Federal Managers\xe2\x80\x99\n Financial Integrity Act (FMFIA) of 1982 as codified in 31 U.S.C. 3512.\n\n Separation of Duties and Supervision \xe2\x80\x93 Key duties and responsibilities in authorizing, processing,\n recording, and reviewing official agency transactions should be separated among individuals.\n Managers should exercise appropriate oversight to ensure individuals do not exceed or abuse their\n assigned authorities.\n\n Recording and Documentation \xe2\x80\x93 Transactions should be promptly recorded, properly classified and\n accounted for in order to prepare timely accounts and reliable financial and other reports. The\n documentation for transactions, management controls, and other significant events must be clear\n and readily available for examination.\n\nWithout effective policies and procedures in place, there is an increased risk of material misstatements to\nthe financial statements and related disclosures.\n\n II-1\n\x0c Exhibit II\n NATIONAL CREDIT UNION ADMINITRATION \xe2\x80\x93\n COMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n SIGNIFICANT DEFICIENCY\n\n\nRecommendations\n\nWe recommend that CDRLF modify accounting policies, procedures and controls as follows:\n\n\xef\x82\xb7 Establish formal policies and procedures requiring supervisory review of financial statements and\n related supporting documentation to ensure that all significant and relevant missing disclosures are\n identified and financial statement errors are identified and corrected in a timely manner.\n\n\xef\x82\xb7 Develop and implement policies and procedures to:\n\n i) Require review and approval of all journal entries by an appropriate individual other than the\n person generating the entry (we acknowledge that the limited number of staff may pose challenges\n and that a broad solution may ultimately be necessary); and\n\n ii) Assign documented accountability for supervisory reviews either electronically through system\n access or manually through hard copy sign-off.\n\n\n\n\n II-2\n\x0c National Credit Union Administration\n\n\n Exhibit III\n\n\n NATIONAL CREDIT UNION ADMINISTRATION\n COMMUNITY DEVELOPMENT REVOLVING LOAN FUND\n\n MANAGEMENT RESPONSE TO AUDIT FINDINGS\n\n\n\n\nCDRLF Finding 09-01: Cash and Cash Equivalents\n\nCDRLF Management generally agrees with the auditors\xe2\x80\x99 findings. Management has\nimplemented policy and procedure changes and has taken corrective action to include the\nfollowing:\n\nEffective with the February 2010 statement, the CDRLF business process was amended so\nthat cash receipts and disbursements are recorded in accordance with Generally Accepted\nAccounting Principles. The business process was also amended effective January 1, 2010,\nwith the implementation of the Delphi-Oracle accounting system: the CDRLF will be\nresponsible for separately producing and reconciling its treasury cash reports.\n\n\n\nCDRLF Finding 09-03: Management\xe2\x80\x99s Review Procedures Over the Financial Accounting\n\nCDRLF Management generally agrees with the auditors\xe2\x80\x99 findings. Management has\nimplemented policy and procedure changes and has taken corrective action to include the\nfollowing:\n\nThe CDRLF will establish procedures which require Supervisory review and approval of\nfinancial statements, journal entries, and supporting documentation.\nFurther, effective with the conversion of the agency\xe2\x80\x99s accounting system to Delphi-Oracle,\nsecondary review requirements are programmed into the online accounting system, thus\nrequired.\n\n\n\n\n 1775 Duke Street - Alexandria, VA 22314-3428 - 703-518-6300\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 Administration Community Development\nRevolving Loan Fund (CDRLF) as of December 31, 2009, and the related statements of operations,\nchanges in fund balance, and cash flows for the year then ended (hereinafter referred to as \xe2\x80\x9cfinancial\nstatements\xe2\x80\x9d), and have issued our report thereon dated February 17, 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 CDRLF is responsible for complying with laws, regulations, contracts, and grant\nagreements applicable to the CDRLF. As part of obtaining reasonable assurance about whether the\nCDRLF\xe2\x80\x99s financial statements are free of material misstatement, we performed tests of the CDRLF\xe2\x80\x99s\ncompliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance\nwith which could have a direct and material effect on the determination of the financial statement amounts,\nand certain provisions of other laws and regulations specified in OMB Bulletin No. 07-04. We limited our\ntests of compliance to the provisions described in the preceding sentence, and we did not test compliance\nwith all laws, regulations, contracts, and grant agreements applicable to the CDRLF. However, providing\nan opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do\nnot 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, CDRLF\xe2\x80\x99s management, OMB,\nthe U.S. Government Accountability Office, and the U.S. Congress and is not intended to be and should not\nbe used by anyone other than these specified parties.\n\n\n\n\nFebruary 17, 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\x0c"