Month: October 2023

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A Fall Bouquet & “Home”

Home

by Edgar Guest (1916)

It takes a heap o’ livin’ in a house t’ make it home,
A heap o’ sun an’ shadder, an’ ye sometimes have t’ roam
Afore ye really ’preciate the things ye lef’ behind,
An’ hunger fer ’em somehow, with ’em allus on yer mind.
It don’t make any differunce how rich ye get t’ be,
How much yer chairs an’ tables cost, how great yer luxury;
It ain’t home t’ ye, though it be the palace of a king,
Until somehow yer soul is sort o’ wrapped round everything.

Home ain’t a place that gold can buy or get up in a minute;
Afore it’s home there’s got t’ be a heap o’ livin’ in it;
Within the walls there’s got t’ be some babies born, and then
Right there ye’ve got t’ bring ‘em up t’ women good, an’ men;
And gradjerly, as time goes on, ye find ye wouldn’t part
With anything they ever used—they’ve grown into yer heart:
The old high chairs, the playthings, too, the little shoes they wore
Ye hoard; an’ if ye could ye’d keep the thumbmarks on the door.

Ye’ve got t’ weep t’ make it home, ye’ve got t’ sit an’ sigh
An’ watch beside a loved one’s bed, an’ know that Death is nigh;
An’ in the stillness o’ the night t’ see Death’s angel come,
An’ close the eyes o’ her that smiled, an’ leave her sweet voice dumb.
Fer these are scenes that grip the heart, an’ when yer tears are dried,
Ye find the home is dearer than it was, an’ sanctified;
An’ tuggin’ at ye always are the pleasant memories
O’ her that was an’ is no more—ye can’t escape from these.

Ye’ve got t’ sing an’ dance fer years, ye’ve got t’ romp an’ play,
An’ learn t’ love the things ye have by usin’ ’em each day;
Even the roses ’round the porch must blossom year by year
Afore they ’come a part o’ ye, suggestin’ someone dear
Who used t’ love ’em long ago, an’ trained ’em jes’ t’ run
The way they do, so’s they would get the early mornin’ sun;
Ye’ve got t’ love each brick an’ stone from cellar up t’ dome:
It takes a heap o’ livin’ in a house t’ make it home.

Edgar Albert Guest, born on August 20, 1881, in Birmingham, England, but raised in Detroit, was a poet known for his popular verse.
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A Credit Union’s Calling: Be “Stewards of Humanity”

Everything in life comes around, full circle, even in credit unions.

“In 1908, Monsignor Pierre Hevey, Pastor of Sainte-Marie’s parish in Manchester, New Hampshire, organized what was soon to be known as the first credit union. The goal was to help the primarily Franco-American mill workers save and borrow money.

“On November 24, 1908  in Manchester, New Hampshire  “La Caisse Populaire, Ste-Marie” (The People’s Bank)  became the first credit union in the nation.”  (from Our Story, St. Mary’s Bank)

Today the Bishops and priests of the Episcopal Diocese of New York are following in Monsignor Hevey’s footsteps.   And for many of the same reasons, as demonstrated in these founders’ statements:

“As a diocese, we are committed to making a meaningful impact on the lives of those who have traditionally been marginalized and underserved. That’s why the establishment and launch of our diocesan credit union is such a pivotal moment for us.

“It’s not just about providing financial services, it’s about creating an inclusive space where everyone, irrespective of their financial standing, can feel valued and supported. . .

“These initiatives are more than just programs or ideas, they are a call to action, a call to embody the love and grace of God in the world.”

A second organizer:

“As a member of the inaugural board of trustees and co-chair of the Diocese’s credit union task force, I am thrilled to see the New York Episcopal Federal Credit Union open its headquarters and first branch here in the Bronx. It’s a testament to our commitment to the local community and our mission to serve everyone in our field of membership, regardless of their financial circumstances.

The existing banking system often neglects the needs of those who are underserved and overlooked, and that’s why we’re excited to offer a financial institution that prioritizes the well-being of all its members. We look forward to empowering our neighbors in Fordham and throughout the Bronx, as well as the entire Diocese of New York, with the tools and resources they need to achieve financial stability and thrive.”

The biblical calling to be “stewards of humanity” was featured in this short recording by the Diocese announcing the credit union’s formation.

In the June 30, 2023 call report, the credit union reported $477,000 in total assets, all in investments, and a net worth of the same amount.

A Long Journey

Here are some details of the charter journey from an Episcopal  News Service May 23rd story:

“The journey towards establishing the NYEFCU began in 1990 when the Diocese of New York committed 10% of donations to its endowment funds to economic justice efforts and created a task force to recommend projects. Despite initial discussions and resolutions in 2003 and 2004, the credit union’s development was slow.

“It wasn’t until 2014 when the diocesan convention voted to “authorize the establishment of a task force to prepare a charter and solicit initial grants and deposits to establish the Episcopal Diocese of New York Credit Union.”

The Diocese embraces a lively community of faith, fellowship, service and spiritual commitment across almost 200 congregations and 50,000 members.

“The task force submitted an application for a federal charter to the National Credit Union Administration in December 2020, and spent 2021 and 2022 addressing the federal agency’s requests for more information and revisions before finally receiving approval.

“The credit union was launched with an initial investment of $500,000, with $250,000 from the diocese and another $250,000 from Trinity Church Wall Street. An ongoing fundraising drive aims to secure an additional $300,000 to cover the first five years of operating expenses, including staffing, office supplies, and computer technology. After this period, NYEFCU aims to have enough members to sustain itself without further external funding.

“The first branch of the NYEFCU is located next to St. James, Fordham in a new mixed-use development (St. James Terrace) that will house 102 affordable apartments, half of which are allocated for formerly homeless individuals. In its inaugural year, the credit union aims to cater to the specific financial needs of its low- to moderate-income members by offering an array of services.”

Credit Unions’ Future as Credit Unions

No matter the size of America’s collective consumer wealth,  many still have limited access to fair financial options.  These are often the targets of for-profit financial offerings.

It’s no accident that people of faith have played a major role in the establishment of coops as a way to serve their congregations.   They remind all of the values animating credit union pioneers.  And the values that make cooperatives more than “nice banks.”

The fact that this charter application and processing will take from 2020 (when submitted) until the end of this year to raise sufficient capital,  shows the perseverance required overcoming government bureaucracy.

These spiritual founders are responding to the call to serve by creating a financial cooperative.

The major difference is that the Diocese had one hurdle that Monsignor Hevey did not have to deal with, the NCUA.  It just shows it helps to  have God on one’s side.

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An Interest Rate Observation

Most commentary on rates focuses on when will the Fed stop raising, pause and then lower rates.   And what will be the new normal?  Will the markets ever see another ZIRP, zero interest rate policy?   What ever happened to Modern Economic Theory that deficits don’t matter?

Here is a recent observation from Michael Higgins a consultant for banks and credit unions:

Since the inception of Fed Funds Rate in 1954, the average is 4.60% and median is 4.16%. Today it’s 5.33% (Source: St Louis FRED). The recent decade was a statistical outlier. If you entered the industry after iPhone was introduced, this is how things used to be. As one expert noted to me, it’s going to be “normal” for longer.
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Members Win at SECU Annual Election & One Observer’s Reaction

Following the formal board reports and the one hour Member Feedback Forum  (comments limited to two minutes each), the Chair read the results of the contested election.

The three member-nominated  candidates won all open seats by receiving the three highest vote totals of the six candidates.   Overall 13,335 votes were cast, based on the highest total from each group.   Incumbent directors received 47% and the candidates nominated via petition, 53% of all votes cast.

The new directors, left to right, are Michael Clements,  Barbara Perkins,  and Chuck Stone.

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Why the Members Won

Voting is the essence of democracy.   All members had the chance to choose who they wanted to lead this iconic credit union.  That is a choice that rarely occurs in credit unions today.  But now the precedent has been set.

Another fascinating aspect of the meeting was the open Forum.  I counted 32 members who spoke up.  Here are several brief snippets of their remarks, addressed to the full board and CEO.  There were no  responses  given to any of the concerns.

  • A retired 47 year SECU employee:  I’m scared to death with what I see at the credit union. . .Risk based lending (RBL) and card rewards are paid by those who overpay interest.  Open your eyes.
  • Member since ’75.  Got loan as college grad and no credit score. . . against RBL. . . I’ve attained financial security. We should be a community where we help each other.
  • I’m amazed after 85 years that we cannot exist without treating members equally.  RBL is race  based lending.
  • Why is the credit card rate increasing?  If a member wants rewards go to a bank.  If the board wants rewards, they should go to a bank.
  • Transparency is lacking, especially the bylaw changes.  We have been denied democracy.
  • I’ve no prepared comments,  Just hope the board will see that the people here do not support the mindset of this board.
  • Retired 41 year senior employee:  Employees need a service heart for the membership.  Last two years has not been for the benefit of the member.   What I’ve seen breaks my heart.
  • Congratulated new CEO Brady and asked: Please report these comments online.
  • 51 year member.  There’s no term limits for those on stage. Nominating committee selected all board members-an old boys club.  We’re making money, but the members aren’t getting any of it.
  • 39 year SECU employee retired in March ’22.  New leadership wanted to turn us into a bank.
  • 36 year SECU employee.  Rarely saw a credit report without blemishes.  All members equally important.  We made life changing differences for people.

And many more.  There was no dialogue and no responses from the stage even when members posed a question.

One speaker, a new member,  stated that she wished she had known about these comments before she voted as she knew nothing about the candidates or issues except the information in the ballot.

The cumulative effect of these spontaneous, brief observations was overwhelming.  Speakers cared strongly about the credit union and its change of direction.

A long time credit union advocate who watched the meeting sent me this reaction.

This is What Credit Union Democracy Looks Like

This afternoon, my daily routine was disrupted in a good way by the annual meeting of North Carolina’s State Employees Credit Union (SECU), the  $50-billion, 2.7 million member, 85-year old credit union that is the nation’s second largest.

I became a cooperative idealist in the 1970s, first as a food co-op organizer until I was introduced to credit unions when I was charged with organizing one for the farmworker nonprofit I worked for.. . . I was enthralled with credit unions as democratic, egalitarian institutions, created to empower individuals excluded from the for-profit banking system.

I was fortunate enough to be hired by the National Federation of Community Development Credit Unions (rebranded as Inclusiv after I left), becoming CEO in 1983 and serving for nearly 30 years. . .

Over the years , , , I went to my share of annual meetings of our member credit unions, usually not very well attended (except if there were refreshments). It was great to meet members, and it was my job, but truth be told, it was not the liveliest way to spend an evening or weekend afternoon.  

My Life’s Work

The 90-minutes I spent watching SECU’s annual meeting on YouTube reminded me why credit unions became my life work. One after another, SECU members debated recent changes instituted by the board,  most controversially, the introduction of risk-based pricing—the nearly universal practice of U.S. credit unions which  charge members different rates according to the credit score-informed tier they fell into.

Not SECU. For nearly its entire history, it offered the same price for the same loan product for all members.  It was a simple, time-honored, financially successful practice, that fueled SECU’s steady growth. . .

But for some members and the credit union’s recent leadership, that was not good enough. Several speakers argued that the credit union’s savings rates were not competitive; one spoke of his children leaving SECU for better rates at a bank. How would the credit union grow and—well, compete—if it didn’t raise savings rates to retain members? . . .

Speaker after speaker—members of 30 years, 40 years, 50 years—spoke passionately about what SECU had meant to them and others, a place to get the best possible rate even when they were starting out in life, were struggling financially, or had marred credit.

True, risk-based pricing was everywhere in credit unions today—but for those with long memories, it had not always been so. They fully understood that better returns on savings were available elsewhere. But they were staying.

One-tier pricing is radically egalitarian—providing those with fewer financial means the same rates enjoyed by those with immaculate credit scores and ample resources. Except it is hardly radical, and hardly new.

One speaker denounced the strategy as “socialist”: This was North Carolina, he argued, not Russia, China, or Cuba. But I heard no “woke” or progressive rhetoric, only the testimony of people who cared deeply about their fellow North Carolinians and wanted to help them better their lives. “People helping people”—not simply a brand slogan, but an expression of human solidarity.

I spent my career working with small, community-based institutions. As the credit union “movement” became the credit union “industry,” with assets and membership disproportionately concentrated in a minority of institutions, I reluctantly concluded that my ideals and passion were nothing more than a relic.

Today, I thank the members of SECU for the inspiration and hope they gave me.

© Clifford N. Rosenthal

 

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Once . . .

Yesterday the North Carolina Credit Union Commission met to discuss a member’s complaint that SECU’s recent bylaw change proscribed members’ rights.  I noted three outcomes.

  1. The chair recused under the ethics rules as he is an employee of SECU.
  2. SECU was approached about voluntarily deferring its bylaw changes until after today’s annual meeting, but declined.
  3. A Commission subcommittee was formed to review the process for bylaw changes and make recommendations as soon as practical.

The Commission’s role in this oversight has not ended. The bylaw issue will continue on its agenda.

Today at 1:00pm SECU’s Annual meeting will be held. A link for the virtual broadcast will be published on its website.  The voting outcome for directors will be announced.

This Annual Meeting will be a seminal event no matter the result. For once members have been brought into the process,  it will be hard to shut them out in the future.

Once . . .Is Today

Once to every man and nation
Comes the moment to decide,
In the strife of truth with falsehood,
For the good or evil side;
Some great cause, God’s new Messiah,
Offering each the bloom or blight,
And the choice goes by forever
Twixt that darkness and that light.

Then to side with truth is noble,
When we share her wretched crust,
Ere her cause bring fame and profit,
And ’tis prosperous to be just;
Then it is the brave man chooses
While the coward stands aside,
Till the multitude make virtue
Of the faith they had denied. . .

The Members’ Voice

Once empowered, the members’ voice is hard to still.   In a democracy people will act when they see their self interest in jeopardy.

Member rights have not been a priority across the credit union system.  Federal and state regulators have been absent and at times, negligent, when overseeing this aspect of their responsibility.

Democratic governance is a vital factor in the credit union model.  Legal equality in governance was deemed to be a precursor for economic equality.

Democratic voting is more than an organizational design.  The one-person-one-vote is a core value.   For decades credit unions have struggled to tie their cooperative moral laces.

Today as recited in James Russell Lowell’s poem above, may be a reawakening of that effort for SECU and the cooperative system.

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A Hearing Today on Member Rights in a Credit Union

The credit union democratic cooperative model  is simple. The legal equality of each member’s voting role is intended to facilitate economic equality.

The intent of the one-person-one-vote in governance is that when accessing common resources, each member is on the same footing.  If one person is better or worse off than another, that should not affect their ability to access credit.

In almost all other for-profit organizations, control is exercised by who holds the most shares, or through classes with special voting rights.

Member Rights

A credit unions’s bylaws is the primary document implementing member rights.  NCUA’s bylaw description runs 45 pages. “The FCU Bylaws address a broad range of matters concerning a credit union’s organization and governance, the relationship of the credit union to its members, and the procedures and rules a credit union follows.”

But who ensures that the bylaws are followed, both in letter and spirit?   Here is NCUA’s description of their role:

“The NCUA has discretion to take administrative actions when a credit union is not in compliance with its bylaws. If a potential violation is identified, the NCUA will carefully consider all of the facts and circumstances in deciding whether to take enforcement action. The NCUA will not generally take action against minor or technical violations, but emphasizes that it retains discretion to enforce the FCU Bylaws in appropriate cases, such as safety and soundness concerns or threats to fundamental, material credit union member rights.”  (emphasis added)

What happens when the bylaw procedures for nomination and election are administered so as to form without substance?  Or interpreted to enable incumbent directors to protect their positions and prerogatives?

A Live Case Study

Today, October 9,  an actual situation will be discussed.  The North Carolina Credit  Union  Commission will hold a special public meeting at 1:00 p.m. (dial in # (877)-402-9753, access code – 6601929.)

The primary purpose as published in the Notice:

“Discussion about concerns raised by a member of the public regarding recently approved changes to the State Employees’ Credit Union by-laws.”

This is how Jim Blaine sees the issue to be discussed in a recent post.

This will be another way the Annual Meeting and election of directors at SECU could have an impact far beyond this credit union’s circumstances.

The Annual meeting occurs tomorrow October 10th and will be lived stream.

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The Value of a Critic-Even a Dishonest One

Yesterday Politico published an article on credit unions written by a Brookings-based economist.

The title and subhead give his  message:

Credit Unions are Making Money off People Living Paycheck to Paycheck

The subhead:  There’s a new predator making money off overdraft fees: Credit unions.

The article was prompted by a new report required of all California state chartered banks and credit unions beginning with 2022 data.  The first report is 17 pages and lists in data tables the total overdraft and NSF fees collected by each firm the year.  The final column shows these dollar amounts as a percentage of net income and total revenue.

The author’s academic and /Congressional staff credentials suggest an objective study of an important topic: the  sources and importance of non interest income.

However as I read the article Mark Twain’s observation came to mind:  “Figures don’t lie, but liers do figure.”  But this shortcoming should not cause readers to overlook lessons from even a biased report.

In addition to the headline, the author’s target shows early on: And the first report of that data reveals that many California credit unions are taking millions from their most vulnerable customers and spending it on perks and bonuses for executives that resemble those of big banks more than nonprofits.

He uses one ratio from the study, total fees as a percentage of net income and then prepares a brief table listing the ratios for 12 credit unions (out of 114) with highest combined $ fees.

However this single ratio  can fluctuate dramatically depending on net income, independent of the numerator being studied-combined OD/NSF fees.   

To suggest  a credit union like FrontWave is abusing members because its ratio is 140% ignores the  study’s second ratio which is 12% of total income.  This ranking would give a very different listing.

FrontWave’s net income in 2022 declined by 33% from $8.4 to $5.6 million (.44 ROA) thus making the fee/net income ratio appear much higher than a “normal ROA” might present. 

Whereas Dow Great Western’s ratio was a negative -200% and only 1.32% of total income.  Was the credit union giving back more fees than they collected?  No, the credit union reported a negative net income.   Perhaps it should charge more fees?

Predetermined Conclusions

But the author has made up his mind, and now wants to condemn a practice without  examining other relevant details, such as the actual fee charged per transaction.  He downplays the other ratio of fees as a percentage of total revenue, which would show each firm’s  dependence on this one area of income.  These ratios range from 0% to 15%.

He makes no attempt to understand the data by calculating mean or the average fee-to-income ratio.  His conclusions  were formed before he knows what the data might mean:

Let’s be clear: Overdraft fees can be predatory. Every overdraft by definition turns money from someone who has run out of it into nearly pure profit for the bank or credit union that charged it because they get paid back immediately when the next deposit hits. Eighty percent of overdraft fees come from just 9 percent of account holders, highlighting that this product is targeted at people living paycheck to paycheck who run out of money from time to time.

Even given his limited analysis, the situation is dire:

The full picture among California’s 114 state-chartered credit unions is alarming.   And not just in California.  One suspects similar trends across the country. Several of Michigan’s largest credit unions have been sued for abusive overdraft practices and research from the Consumer Financial Protection Bureau shows credit unions averaging similar overdraft fees as banks.

A Political Lens

Near the end the author’s political bias comes out as he talks about democratic congressional members’ rhetoric against junk fees, and then this sentence:  Todd Harper, chair of the National Credit Union Administration (NCUA) has spoken out against abusive overdraft practices, but the NCUA Board has a Trump-appointed, Republican majority that is continuing to deregulate.

All three board members are Trump-appointed.   I’m not aware of any reg, rule or guidance letter that Harper has issued on this topic or that the other two board members opposed.  The singling out of Harper’s alleged views (no links) raises the question whether this is just a comrade in arms fronting for someone.

The Benefit of a Critic’s View

The author is a sceptic of credit union business practices:

California’s data shows that some credit unions are making a lot of money from overdraft fees. California’s largest state-chartered credit union, Golden 1, took $24 million in overdraft from their members, while spending $6 million a year for naming rights for an NBA stadium in Sacramento. North Island Credit Union bought naming rights for a famed music venue in Chula Vista and created an exclusive entrance, ticket discounts and other perks for some of its members while taking over $10 million last year in overdraft and non-sufficient funds charges from its members.

Do these business practices sound like those of nonprofits designed to provide basic banking services to people who share what the law calls a “common bond,” such as a workplace or other connection required for membership? Or are they what would expect from for-profit banks?

A Wakeup Call

The author asserts this not a single state issue:  California’s data is a wake-up call for the nation as a whole.

Even though he critiques mutiple credit union activities through his very limited NSF/OD lens, the article is a wake up call for those who believe credit unions are not banks in sheep’s clothing.

The article has all the indicators of a planned “hit piece” on credit unions.  But to try to kill the messenger or discount all the data is to miss the point.

Even when a public critic may be wrong, the better approach is to engage on the issue with facts and logic that show a grasp of the issue.  More rhetoric just makes the issue burn hotter but with no more light.

The need for fee transparency at the individual and macro levels is valid.  Credit unions, consumers and analysts/regulators can all better understand the role these fees have in a firm’s business model.

Comparisons between credit unions can be valuable, if all the data is known. How do some have very low fees and others relatively higher?

Members can more easily learn as they seek information on fees as they do now about loan and savings rates.

The author believes the only solution to his alarming “problem”  is more regulation.

But what kind of regulation would be relevant and consistent with one’s views on government’s role for coops and in markets? Should government regulate the fees somehow, mandate more disclosures, or control business practices as he hints by limiting fees to a percentage of net income.

More regulation will not stop credit unions tempted to put institutional priorities ahead of member-owner interests.

Regulators should ensure members have the tools to hold their repesentatives  to account-with the information and the ability to openly raise these topics in the traditional annual meeting and director election format.

What is missing is not regulation but the ability of members to play an effective governance role as owners in their credit union.   Enabling members to be more aware and active is critical to any credit union’s long term success.

No regulation, no matter how well intended, can replace members exercising their rights as owners.  That’s how markets are supposed to work.

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Are Credit Unions  Moving Beyond NCUA ?

In yesterday’s post on the recent borrowing trends in credit unions, every lender had stepped up to meet the 300%, $90  billion increase in external funding since June  of 2022.  Except one.

While the FHLB system and Fed  Reserve were the dominate providers, all sources from corporates (102%), to  sub debt (24%)  and even  other credit unions  (3,800%) increased their outstanding loans.

The only credit union provider that showed no borrowings was the credit union funded Central Liquidity Facility.   The last  CLF loan origination was in 2009.

CLF’s August 2023 Financial Condition

At August 31, 2023, the  CLF  Financial Statement reports  assets of $875million all invested in US Treasuries.  This was funded by $800 million from 390  credit unions’ capital stock purchases and another $17 million in deposits.  There were no corporate agent members. Retained earnings were $40.4 million.

Year-to-date operating expenses  are $1.3  million, up 86% from the prior year. Dividends on the credit union capital shares are paid quarterly.  The posted rates  would appear to trail the overnight Fed funds return by about 50 basis points.

The Facility’s borrowing authority-lending capacity was $19.7 billion.   And there were no loans.

Why Is There No CLF Lending?

The facility’s funding authority is large enough to  meet significant loan demand.   Its lending parameters mirror those of the Federal Reserve  which  had $30 billion outstanding to credit unions  at June 2023.   Moreover $20 billion of this total was advanced in the June quarter in the aftermath of  market uncertainty due to multiple banking failures.

How are all these other sources growing their portfolios  but the public-private  CLF partnership has no activity?

I have seen no effort by the CLF to promote its services to its own members.   It would be helpful to analyze how many of these 390 CLF shareholders had borrowings elsewhere.  However NCUA will not release the  members’ names so no one can check this possibility.

CLF the Missing  Player

The primary reference to the CLF by the three NCUA board members has been to urge congress to reinstate the special lending/agent membership options passed during the pandemic which expired at the end of 2022.

However today, the CLF lacks neither financial resources nor authority to offer loans that could meet member needs now–as all other lending institutions are  doing.   That is how these firms, public or private survive.

One might  speculate about why there is no CLF effort.   Does it have the operational capability and professional  skills to make loans?   For example, can credit unions even preposition collateral?

In prior lending activity the CLF  partnered with the corporate network which did the underwriting  and disbursements but drew on CLF funding. This operational  capability was lost when the NCUA ended this option by closing U. S. Central.

The  last CLF loans were $5 million each to the conserved WesCorp  and US Central in 2009.

Those two loans were an extension of the NCUSIF’s support.    No other corporates were offered CLF loans even though several had similar exposures to  underwater securities.

In  short, the  CLF  loans were just an extension of NCUA’s supervisory actions, not a liquidity lifeline .

My Thought on Why the  CLF is no Longer Relevant

In addition to its operational incapacity,  I believe credit unions have realized that, unlike other options, the CLF is not an actual  public-private partnership.   Its lending response  is at the whim of NCUA supervisory priorities, not credit union need.

Credit unions do not view the CLF as a reliable partner in times of balance sheet stress.

Therefore, they have moved beyond the CLF for the more proven reliabilities from the multiple options now available–both debt and subdebt.

In short,  credit unions  no longer need the CLF.  They have plenty of tested alternatives.  Ones that don’t impose supervisory judgments on top of collateral values.

For credit unions the CLF is a vestigial  organ, still within the body but not serving any system purpose.   It  continues tp accumulate  retained earnings but has no balance sheet risk.   The income  pays an increasing expense load (up 86% so far in 2023) even with no operational activity.   The regular members shares are subsidizing the  facility  which pays  a  below market quarterly dividend.

The challenges are not a lack  of institutional or member need— just look at the expanding FHLB lending programs.   Rather the challenge is leadership.

This  is  not a situation requiring  a congressional legislative fix.   What’s missing is NCUA’s ability to partner with the members who fund the CLF and develop collaborative solutions to  benefit the cooperative system and their members.

It’s  been done before.   It is being done now by multiple organizations and firms (see examples below).   Credit unions have seen these more reliable options and have decided to move on from an impotent NCUA-CLF.

This situation also raises  a broader issue than the future of the CLF. When might this liquidity experience cause some credit unions  to consider moving even further away from the coop system  altogether.

NOTE: Examples of Proactive Efforts to Serve Credit Union’s Current Liquidity Needs

The following are  examples of  lenders and institutions with outreach to credit unions in this critical liquidity period in 2023.

First,  is the announcement of the  Federal Reserves’ new Bank Term Funding Program (BTFP) on March 12, 2023 for which credit unions were eligible.

The following is from from a  promotion highlighting CD  options:

Inclusiv/Capital and Primary Financial will host a webinar to discuss deposit strategies and resources to support your credit union’s impact lending and liquidity management strategies.

Primary Financial is a credit union service organization (CUSO) owned jointly by 10 corporate credit unions nationwide. This unique ownership structure gives Primary Financial potential relationships  with credit unions across America.

Examples of FHLB special programs and assistance are in numerous press stories:

Ken Bauer, EVP & CLO, OneAZ Credit Union:

“Particularly in Arizona, more of a person’s monthly wages are going to housing than ever before,” Bauer says. “We asked ourselves how we could help members navigate this market and bridge that gap to homeownership.”

To provide members with down payment assistance, the credit union is working with two grant programs offered through the Federal Home Loan Bank (FHLB).

In  Wisconsin:

Summit Credit Union of Madison, Wis. ($6.6 billion in assets, 248,245 members as of June 30) announced Thursday that it was able to help 70 borrowers through the $700,000 in grants it was provided this year by the Federal Home Loan Bank of Chicago. Buyers must earn no more than 80% of the area’s median income.

The grants reduce down payments, closing costs or pre-paid expenses by $10,000 for each of the 70 borrowers who benefitted from January to August 2023.

This is  Ryan  Donovan President and Chief Executive Officer, Council of Federal Home Loan Bank promoting the system’s “private-public” partnerships:

The Federal Home Loan Bank system is a terrific example of a private-public partnership that works, providing tremendous benefit to #homebuyers. Through our members and their activity, we help save homebuyers more than $13 billion each year in interest payments; we facilitate an additional 16% of #mortgage originations; we help make the 30-year fixed rate mortgage an opportunity for many homebuyers; we support community financial institutions across the country; and, we’re one of the largest private-sector contributors to affordable housing efforts.

One can also list numerous financial consultants, ALM  advisory firms,  and brokers seeking to assist credit union liquidity needs, for a fee.  But there is no CLF outreach.

 

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The Borrowing-Liquidity Trends in Credit unions

From a September 2023 CEO’s team memo update:

Liquidity

“We remain laser focused on managing liquidity risk in this environment of aggregate decreasing money supply.  

“We finally sold our $18 million pool of auto loans that we’ve been marketing  for two months.  As with all other loan sales, we will service the pool in order to maintain and grow member relationships.  The transaction generated cash of just over $15.3 million.  

“We expect to end the month at a loan to deposit ratio in the 102% neighborhood, down from a high of 106.41% in July.  Our goal remains to reduce this ratio to no more than 100% by year end.  

The best way to accomplish this is through acquisition of core deposits from our friends and neighbors in our primary market.  We’re also marketing another pool of loans so that we don’t have to slow our lending origination machine any further.”

This not an isolated event.  Yesterday’s Credit Union Times summarized  auto loan  securitizations by credit unions since 2019, with two totaling $501 million in this past week.

Economic Forces Drying Up Liquidity

Two factors have disrupted normal  credit union ALM liquidity management over for the year ending June 2023.

The first is the 18 month long increase in interest rates by the Federal Reserve to reduce inflation.  The process began on March 17, 2022. The Fed raised its overnight  Fed Funds target from effectively zero to today’s range of 5.25-5.50%.

The Fed’s intent is to slow the economy, lower demand for financing and lower inflation to 2%.

The second was the sudden bank crisis in March of this year.  Here is the cascading sequence of events from one summary report:

In the lead-up period to the crisis, many banks within the United States had invested their reserves in U.S. Treasury securities, which had been paying low interest rates for several years. As the Federal Reserve began raising interest rates in 2022,  bond prices declined, decreasing the market value of bank capital reserves, causing some banks to incur unrealized losses. To maintain liquidity, Silicon Valley Bank sold its bonds and realized steep losses.

The first bank to fail, cryptocurrency-focused Silvergate Bank, announced it would wind down on March 8, 2023 due to losses suffered in its loan portfolio. Two days later, upon announcement of an attempt to raise capital, a bank run occurred at Silicon Valley Bank, causing it to collapse and be seized by regulators that day. Signature Bank, a bank that frequently did business with cryptocurrency firms, was closed by regulators two days later on March 12, with regulators citing systemic risks. . .

The collapses of First Republic Bank, Silicon Valley Bank and Signature Bank were the second-, third- and fourth-largest bank failures in the history of the United States.

The Fed created a new lending option to cope with the uncertainties resulting from these failures. To calm rattled financial markets and support banks, the Bank Term Funding Program (BTFP) began on March 13, offering maturity dates of up to one year.

The BTFP’s role was focused on  firms that had large unrealized losses on their government bonds and potentially at risk of large-scale deposit withdrawals.  The intent was to prevent losses from forced sales of underwater securities to fund deposit outflows.

The new program charges a higher rate than the discount window.  One other important difference  is that while the BTFP requires banks to offer collateral, it values the collateral at par, rather than on a mark-to-market basis.

The Credit Union System’s  Borrowings at June 2023

Credit unions did not have the lending or deposit concentrations of the failed banks. But like all financial institutions, their term investments have declined in value.

Members were seeing very competitive savings rates in money market  funds and CD specials.  Share growth for the year ended June 2023  was just 1.4%.  At June 2022, the 12-month growth was 8.1%.

Loans however are still increasing at double digit rates (12.8%). Short term liquid funds are declining.

One response to tightening liquidity was increased borrowings. The table below shows the five most recent quarter-ending  borrowing totals and their  source for the credit union system.

Total Credit Union System Borrowings    (June ’22 to June ’23)

Source:  NCUA call reports

The trends from the data show:

  • Total number of credit union borrowers grew 50% from 838 to 1,260 in one year.
  • Outstanding loans increased by $90.1 billion or 300%.
  • The Fed Reserve Bank (FRB) became a significant new source growing from 1.6% to funding 25.5% ($30.8 billion) of credit union borrowings.
  • The largest lender was the FHLB system increasing from $26.1 billion (86%) to $84 billion (69.7%) of total loans.

Total borrowings of $120.4 billion are 5.4% of total industry assets (compared to 1.4% at June 2022) and 55% of June 2023 capital.

System liquidity is tightening. The second observation is that in the market uncertainty following the banking failures and continuing liquidity demand, the credit union funded facility, the NCUA-managed CLF still has zero borrowings.

The last CLF loans were paid off in  2010.  There has not been a single borrowing in the thirteen years since.

The Federal Reserve loan window stepped up quickly and creatively to respond to events.  The FHLB system expanded its traditional lending role.  The CLF has the borrowing capacity and legal authority to match the needs being served by these two primary lenders. But it is “missing in action.”

Tomorrow I will evaluate what the CLF’s absence means for NCUA and the credit union system.

 

 

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Doing the Right Thing

Yesterday a long investigative report on the contested SECU board director election was published in The Assembly.  This digital investigative journal’s role is to publish “deep reporting on power and place in North Carolina.”   Carli Brosseau has written a lengthy description of the circumstances around this election.

The article is well- researched, provides multiple points of view, and important context.   She contacted me as part of her reporting.   I referred to my blogs on SECU for why this event was significant for the entire credit union system.

What It means to be a Credit Union

Carli provides a straight forward description of their unique design for her readers: “Credit unions are set up as not-for-profit cooperatives where every member, no matter their account balance, is an equal part- owner.  That ownership share is the reason members get a say in who’s on the board. It’s also part of what makes them different from banks, which are for-profit and owned by investors. “

Her story provides two themes about how this coop democratic design is at the core of this election.

The first is the multiple ways the incumbent leadership has tried to thwart the members’ role in elections.  The nominating committee refused  three member petitions to be on the ballot.  The “self nomination” process was changed to limit to ten days the time to gather the required 500 signatures once the “official’ candidates were announced.  The annual meeting process has been modified to prevent traditional new and old business from being brought to the floor.  This was how the initial member concerns had been raised.

This recounting of board incumbent’s trying to protect their position and to discourage or ignore member views is not new.  In almost all cases thwarting these attempts  is successful.  The result is no democratic coop governance.  Incumbency perpetuates itself. Boards crystallize into a ruling elite.

This SECU example is important because it shows that even in a very large coop, the members can make their voice heard-albeit with much perseverance.

The Debate Over Loan Pricing

The second element of democratic design at issue is how should the loan and saving products offered members be priced.   Should members using the same service such as an auto loan or a CD be given the same pricing?  Or, should those who are better off receive more favorable terms than those who have lesser funds?

SECU’s adoption of risk-based lending is the other theme in the story that is relevant for credit unions role as an alternative to for-profit banks.

Most financial firms and credit unions use risk-based pricing today.   SECU is an outlier. Its 85-year history shows a single pricing model can succeed. Carli’s story clearly presents these contrasting views of its role in SECU.

CEO Brady’s logic and initial results are reported as follows:

“SECU opted for a more compressed pricing structure than most other lenders use, said Leigh Brady,

“SECU launched risk-based lending for car loans in March, with a 4.5 percent spread between what a borrower in the lowest credit tier pays compared to a borrower in the top tier, Brady said. And the credit union’s core members—state employees and retirees—get a 0.5 percent discount.

“From Brady’s perspective, the policy is working. More members are opting for car loans from SECU, and a greater share of those borrowers have credit scores in the top tier—18 percent in March 2022, and 28 percent a year later, according to data Brady provided.

“SECU is still willing to lend to people with low credit scores, she said. “There are lenders that just absolutely will not lend to anyone below a 660 credit score,” said Brady. “We do. We lend below 540.”

“She thinks the new loan policy is actually fairer than the old one.

“Brady said she came to recognize the “harsh reality” that SECU had been overcharging its members with the best credit.

“Another factor, director Wooten said, was persistent questioning by regulators about the diversity of the loan portfolio. “We had regulators that were always concerned that we had all of our lending in one bucket,” he said. “We had all of these mortgage loans, and they were in this bucket where most of the folk were in, you know, this middle tier or lower.”

The contrasting view is presented by one member-nominated candidate’s letter sent to SECU’s chair following the risk based pricing discussion at the 2022 annual meeting:

“Clements laid out his credentials—he had been a member for 45 years, currently serves on the local advisory board, and was previously on the SECU Foundation board and a loan review committee—and said he was appalled by the board’s adoption of risk-based lending. “This policy clearly signifies that all our members are NOT equal.”

What is a Credit Union’s Purpose?

The debate is joined.  How should a democratic, member-owned  coop behave after the votes are  counted.   Does this democratic foundation end at the ballot box, or is it intended to carry over in the business practices of the credit union?  Should a member with more resources get a better deal than one with less?

Or even more direct, should those with a lesser financial status be charged more on loans so that the well-to-do pay less?

Both models can and do work.  Is coop design intended to perpetuate the financial inequalities that members bring to their relationships or to give everyone  an equal place on the financial starting line?

The distribution of wealth in America is increasing year after year.  Those that have the least or know the least, pay the most. If the coop model does not address these growing disparities in financial outcomes, how can democratic economic opportunity be realized?

The article presents clearly the credit union challenge of democratic governance and opportunity in a capitalist economy where accomplishment and status is often equated with personal wealth.

What’s Next

After interviewing many of the principals, the author concludes with this outlook:

“It’s unclear which vision will win members’ approval in the board election, or how many people will seize the chance to have a say.”

Now it is up to the members to decide.  This is how the democracy is supposed to function. This is the first-year online voting is  an option.

One person, one vote is an important aspect of coop uniqueness.  Letting the members vote is Doing the Right Thing.

On October 10th, the livestream link of SECU’s annual meeting will be available from the SECU website www.ncsecu.org at 1:00 p.m.  Tune in.