“Life is not measured by the number of breaths we take, but by the moments that take our breath away.”
May you experience such moments during this holiday of thanks.
Great Third Quarter NCUSIF Report! (part 1 of 2)
I missed the November 21 NCUA board’s NCUSIF update so went back and listened to the 30 minute discussion via video. The report was incredibly positive. About both the financial performance of the fund and credit union industry trends.
There were several data “blanks” and areas that were not covered that I will discuss tomorrow.
The slides used to update the NCUSIF can be found here. YTD net is over $226 million which raised the Fund’s total retained earnings to $5.4 billion. This is .3033% of total insured shares ($1.767 trillion) at September 30, thus exceeding the .30% historical NOL cap.
Total insured losses for the year are negative, that is, recoveries of $2.0 million on prior losses have offset current writedowns of just $1.1 million. Nonetheless, NCUA has increased the loss allowance reserve to $232 million, or 1.3 basis points of insured shares in addition to the .3033 in retained earnings.
Since 2014 the NCUSIF has recorded actual net cash losses that exceeded 1 basis point of insured shares in only one year, 2018. That year the Fund wrote down the value of its portfolio of taxi medallion loans. In 2020 it sold this portfolio to a New York distressed asset fund manager (Marblegate) which benefitted from the full recovery in portfolio value as credit unions took all the write downs via the NCUSIF.
The CAMEL Trends
Even the CAMEL trends are positive. Kelly Lay Director of Examination and Supervision was at the table. The % of credit union assets classified as Code 4 & 5 declined from the June quarter. When asked about the change, Lay said it was because of improvements in specific credit union’s liquidity positions-a trend validated in Callahan’s third quarter TrendWatch analysis presented on November 12, 2024, nine days prior to the board meeting.
These two slides from that presentation show these changes in system liquidity:
She further stated that any large credit union that is downgraded in rating or with a 4/5 CAMEL ratings is examined at least annually. When pressed by a board member about potential exposure in commercial real estate loans, she replied that “there was nothing very concerning.”
External Third Quarter Data Analysis Positive
Several times board members referred to second quarter data, one citing an increase in delinquency and lower ROA at June 2024.
However both the macro-analysis in Callahan’s 3Q Trend Watch Video and the large, individual credit union performance comparisons by Jim DuPlessis of Credit Union Times all show marked improvement in the third quarter.
Two excellent data analysis by Jim DuPlessis include graphs that do not support this observation from older data:
Analysis of five most recent quarters through Q3 ’24 of industry loan production, published on November 4.
Top Ten Credit Union’s Earnings Still Improving on November 1, using the most recent five quarters through Q 3, 2024.
Two of TrendWatch slides:
And if the macro trends in credit unions was not convincing by itself, the final TrendWatch slide showed this perfpr,amce comparison with competitors thru June as later data is not yet released:
Stewards of the NCUSIF
In her opening statement board member Otsuka commented: Being stewards of the National Credit Union Share Insurance Fund is one of NCUA’s primary jobs—a critical component of our duty to protect members’ shares at credit unions. Thus, I continue to be encouraged by the strong performance of the Share Insurance Fund.
Tomorrow I will cover areas where the data was lacking compared to prior updates and the one primary performance topic that the board failed to address.
In future updates, the presentations could be improved if more timely data were used, so the board members have the benefit of the latest information when asking questions or making comments. Or even when testifying before Congressional committees.
Friday Thoughts
Two comments on yesterday’s blog NCUA’s transition in 1981:
- Ed Callahan was a leader who made you feel we were part of something big.
- from a George Will column: “Musk was ten years old in 1982 when Ronald Reagan appointed entrepreneur Peter Grace to purge government of waste and mismanagement. . .Grace’s commission produced 2,478 recommendations including this: Electricity produced by the Hoover Dam was being sold to parts of three Western states at Depression era rates that were one-fourth to one fourteenth of the rates paid by unsubsidized Americans. Congress responded to Grace’s proposal-stop this-by stampeding to extend for thirty more years this way below market price for a federal resource.”
- From Canada-an example of accountability:The Alberta government fired the entire board of its pension manager, saying the $116 billion Aimco increased compensation and staff, but not its returns. (an example for Coop Boards?)
- Why CEO’s who offer their credit union in merger to enhance their retirement benefits: “People love unjust gain because money is their highest trust.”
- On the challenge for informed public discourse: Reducing complex issues and any public policy into one sentence is not conducive to the civility, magnanimity, and intellectual processes needed for a free society to flourish. Doing so performs a double disservice, in that even while it redirects one from issues to personalities it also kills the search for truth by ignoring the need for real arguments, even ones made with magnanimity. The human mind was created to seek and know the truth. . . Democracy requires compromise, and compromise requires the two virtues lacking most in American society–prudence and humility.
- What hope is there, then, now that technology and social media have only deepened the virtue deficit? To paraphrase the great orator, Cicero, who lived at the time of the Roman Republic’s decline into instability, impiety, and autocracy, “silent prudence” is always better than “loquacious folly.”
- We may live in an age of succinct folly but the first part of Cicero’s dictum still applies.Silence involves listening, for one cannot argue without first listening to one’s opponent. As the writer of Ecclesiastes reminds us, “The words of the wise are heard in silence, more than the cry of a prince among fools.” Thankfully, Solomon has not yet called and asked for his wisdom back.
Learning from the Past: NCUA and Credit Unions During a Change in National Political Leadership
The 1980 election of Ronald Reagan brought a spirit of hope and joy for some. For others , deep concern about the future of the federal government’s role.
Recall Reagan’s policy priorities: Supply side economics-tax cuts, defense spending to counter the Soviet Union, tighter money supply, reducing the rate of government spending and deregulation. In August 1981, one of his first dramatic actions was firing 11,345 striking air traffic controllers and banning them from federal service for life after they refused to return to work following a contract dispute. Federal agencies and employees were worried about their future.
A specific initiative that has parallels with Trump’s appointment of the Musk-Ramasamy duo to reduce government spending was the Grace Commission. Here is a summary of its role:
The Private Sector Survey on Cost Control (PSSCC), commonly referred to as the Grace Commission, was an investigation requested by President Reagan authorized in Executive Order 12369 on June 30, 1982. In doing so President Reagan used the now famous phrase, “Drain the swamp“.[1] The focus was on eliminating waste and inefficiency in the United States federal government. The head of the commission, businessman J. Peter Grace,[2] asked the members of that commission to “Be bold and work like tireless bloodhounds, don’t leave any stone unturned in your search to root out inefficiency.”[3] (Wikipedia)
A year later when the Commission issued its report it called NCUA Board Chairman Edgar Callahan a “role model” for government agency executives. It noted that, “in one year, NCUA cut Agency staff 15% and its budget by 2.5% while maintaining their commitment to preserving the safety and soundness of the credit union industry.” (NCUA 1983 Annual Report page 3). What was this transformation like?
How NCUA and Credit Unions Fared During Reagan’s First Term
When Reagan took office, inflation for the prior year 1980 was 13.5%. The short-term Fed Funds rate was 13%. Federal Reserve President Volker’s goal was to drive inflation down by raising rates further if necessary.
The NCUA’s new Chairman was Edgar Callahan, whose immediate prior responsibility was over five years as Director of the Department of Financial Institutions in Illinois. DFI supervised over 1,000 state chartered credit unions. At the February 1982 GAC conference, the primary concern for the audience of national attendees was industry survival. Callahan said the response was to put responsibility for fundamental business decisions in the hands of credit union boards and managers, not the regulator. He called this multi-faceted change “deregulation.”
During the next three years NCUA became what the Grace commission described as a model for effective governmental performance.
The following are highlights of how NCUA changed from a November 15, 1984 agency press release titled: FCU Operating Fee Scale Slashed 24%; Third cut in Three Years
The excerpts from this two-page, detailed release describe how this unprecedented reduction was achieved.
The NCUA Board today slashed by 24% the operating fee scale for federal credit unions in 1985, bringing to 64% the fee scale cuts over the past three years.
The dramatic 24% cut will save federal credit unions more than $4.3 million in 1985 and has saved them $14 million since 1983, the first year in NCUA’s history that the fee scale was cut.
“For the third straight year, the efficient operation of the Agency has allowed us to put money into the pockets of federal credit unions, “ said NCUA Chairman Edgar Callahan. “It’s an impressive track record, one that the agency and entire credit union system can be proud of.”
“NCUA is the only federal financial regulatory agency that is assessing its constituents less this year, than it did three years ago and I think that is a tremendous accomplishment,” said NCUA Board Vice Chair P.A. Mack.
Federal credit union operating fees, which are pegged to a sliding scale based on federal credit unions’ assets, are the primary source of funding for the Agency’s operating budget. The fee pays for the Agency’s annual examinations of each federal credit union as well as its chartering, supervisory and administrative activities. NCUA receives no tax dollars. Operating fees, the earnings on the investments of those fees, and insurance premiums are the sole sources of funding for the agency.
(The next six paragraphs show the specific dollar impact on credit unions of different asset sizes including Ft Shafter, Hawaii Federal and State Employees and Navy Federal Credit Unions.)
Continued cost cutting efforts at NCUA, coupled with a projection for robust federal credit union asset growth and increased earnings on NCUA investments are the key elements that made a third consecutive operating fee scale cut possible.
The NCUA board attributed the Agency’s success in keeping costs down to high productivity by NCUA staff, personnel reductions and the shifting of resources from the central offie to the field where they are needed most.
For example, NCUA for the second consecutive year has completed an annual examination of each federal credit union, and achievement not seen since the mid-1970’s. Although total agency employment has been reduced by 15%, the number of examiners has increased to an all-time high (369). Getting back to a once-per-year exam cycle exemplifies the Board’s desire to promote safety and soundness while leaving the management decisions in the hands of each credit union.
The resulting gains in efficiency enabled the Board to reduce the Agency’s fiscal 1984 budget by 4.9%-the biggest cut in the Agency’s history. It was the third straight year the Board approved a total agency budget that was below the previous year’s request.
Federal Credit unions in the six months ended June 30, 1984 had grown 12.5% from $55.5 billion to $61.3 billion.
Taken together, the budget cuts, investment income and credit union growth are expected to leave NCUA’s operating fund with substantially more than it needs to meet its expenses. By slashing 24% from its operating fee schedule, the board is effectively eliminating a $3.4 million surplus. “We believe in returning as much as possible to credit unions,” Chairman Callahan said.
This action is another in a series fiscal and operational improvements the NCUA Board has approved of in the past three years. . . most recently the adoption of rules to revitalize the National Credit Union Share Insurance Fund (NCUSIF) transforming it from the lowest reserved to the strongest of the three federal deposit insurance funds. (End quote)
Some of the Lessons
Chairman Callahan’s leadership at the agency was based on professional competence, experience and pragmatic solutions. Some of his colleagues had worked with him on credit union issues for over five years. Internally Callahan placed responsibility for problem solving with the six regional directors. The agency had become top heavy in D.C. where issues got bogged down between 16 separate offices. He streamlined this structure into two primary responsibilities: an office of administration and the office of programs.
Resources were moved to the field so that an annual exam became the minimum standard for performance. Competence, not seniority or appointment status, were the criteria for responsibility. Mike Riley went from head office to become RD of the largest and most problem challenged region as the youngest RD ever. Rosemary Hardiman was board secretary and Joan Pinkerton, and Sandy Beach led public information and congressional affairs—all were appointees chosen by the previous Chair Larry Connell.
Money was not the most critical resource; it was management talent and willingness to innovate to resolve problems with effective supervision. Staff was provided enhanced training that included Video Network recordings such as Rex Johnson of Lending Solutions, leading sessions with examiners to identify sound and unsound loan underwriting. Another video session was a case study of an actual credit union problem for the agency led by a business school professor.
These efforts were supported by disciplined research, constant dialogue with credit unions and open, frequent communications. New data analytical tools (financial performance reports) from the call report were provided for both examiners and credit unions. NCUA board meetings were taken on the road so credit unions could attend and speak directly with senior staff and board members.
NCUA and credit unions worked collaboratively to transform both the agency-the CLF, the NCUSIF and the exam program-and the credit union system to the new world of open market-based competition. These institutional changes have endured even when subsequent Chairman were chosen from individuals with no coop experience, and several who had just lost a recent election (Senator Jepsen and Congressman Norm D’Amours). The agency staff and administration were comfortable working with the industry even when board members had little or no relevant credit union, regulatory or leadership experience.
Celebrating Success
The high point of this collaborative approach was the largest ever regulator-credit union conference held in December 1984 in Las Vegas, organized by NCUA. All state regulators and examiners and NCUA staff met with over 2,500 credit union attendees to hear from experts and debate the future. I will write more about this seminal event that has never been repeated.
The conference demonstrated the power of cooperatives to share and learn from each other. This was a summit that ushered in over three decades of credit union expansion and resilience as the S&L industry failed and the banking system and FDIC went through multiple bailouts.
The bottom line: as shown by this 1981 transition, new faces can be opportunities for creative leadership and strategic change. The 1981 selection of Ed Callahan as chair enabled NCUA and credit unions to become financial pacesetters for their members and the country. It is the quality of the appointee, not the party, that matters.
One should advocate for a similar considered appointment and proven leadership in this coming transition.
The Strategic Advantage of Being Local
The Institute for Local Self Reliance (ILSR) has turned 50 years old. Its mission is to build local power and fight large corporate control through research, advocacy, and community assistance to advance vibrant, sustainable, and equitable cities and towns.
This 11-minute video below provides its history from founding in 1974 in D.C. to its present multi-faceted efforts. The organization became national in the early 1980’s when it opened its head office in Minneapolis.
(https://www.youtube.com/watch?v=Wp_DNUXVDt8&t=108s)
In the 90’s It was an outlier in the world of “bigger is better” and the pull of the global economy on large corporate growth ambitions. However, its focus on local self-reliance regained momentum and focus as the power of monopolies became increasingly questioned, especially its impact on local economic communities.
The Institute’s approach is decentralization emphasizing local control and resisting corporate displacement of independent options. The goal is enhancing freedom and democracy with self-reliant economic projects and political control. Today it has four areas of focus: community broadband efforts, composting, energy democracy and promoting independent locally owned businesses.
While the advocacy and research efforts would seem to make the ILSR a natural ally of credit unions, there appears to be no overt participation in this cooperative financial sector.
Why Local Matters
In an era in which many tout scale as the most important competitive necessity, the real sustainable advantage for most credit unions is their “local” character, identity and related service advantages.
At September 2024, the industry’s call report data suggests that over 87% of credit unions offer some form of on online transaction access. The Internet advantage, no matter how sophisticated, is rarely a sustainable or unique delivery channel or even special user experience. However, being local is.
An Example of a Large, Local Advantage
Recently Jim Blaine has posted several articles on the founding of the country’s second largest credit union, State Employees of North Carolina (SECU). The post below details the founding character and common bond of the credit union.
Almost every state in the country had at least one or multiple credit unions with state employees as their core FOM. But only SECU made the breakout to record this growth achievement versus many states with much larger potential in their employee base.
How was this breakout accomplished? As the credit union’s operations expanded to locations and counties throughout the state, the critical advantage was keeping local input, oversight and responsibility at the branch level. Loans were made and collected by each branch; local advisory boards and committees were formed; employees were local; and the various aspects of community involvement were locally determined. Out of this local self-reliance, the second largest credit union in America was constructed.
Here is SECU’s brief founding story from a post on November 19, 2024 SECU Credit Unions as An Employee Benefit:
“No one questions that credit unions were created in the U.S. to provide access to credit for working men and women – particularly those of “modest means”. Why? Because “back then” many payroll offices were confronted with regular, recurring employee requests for “a short-term advance” prior to payday. Money is always in short supply for most folks – both “back then” and now.
“Not helping an excellent employee in a time of need was “bad for business” and employee relations. Sending them to a loan shark was worse. “Payday lending” at rates usually exceeding 100+% – both “back then” and now – creates a death spiral of financial dependency for a consumer. Shackles not made of iron, but shackles just the same.
.
. …” I owe my soul”... that can be a problem, … beware.
“Employers embraced “company credit unions” as an added benefit which could be used to assist and retain employees. Employers liked having an independent, employee-owned and led lender making the decisions on which employees qualified for loans – choices the employer did not want to make. Employers didn’t want to be in the lending business, nor have to “advance” company funds. To help out, employers frequently provided back office support, payroll deduction, office space and assisted employee-member volunteer leadership of the credit union.
“SECU, although a separate, independent organization, was “the company credit union” for North Carolina state government and the North Carolina school systems. The idea of a credit union as an important employee benefit caught on!
“Other N.C. companies also formed credit unions – R.J. Reynolds, AT&T, IBM, Champion Paper for their employees – as did many municipalities, local post offices, our military, and churches. At its peak, there were 360+ different credit unions in North Carolina, today just 60 remain.
“Is SECU still “the company credit union” for North Carolina state workers? What has changed? In order to know where you’re going, it often helps to know where you have been.”
(End Quote)
SECU’s Relevance for Today
Some of the companies and many of the 360 credit unions referenced in Jim’s blog no longer exist. However, the local communities and their residents are still present—even if now in separate lines of work. Local does not go away.
Local does not mean an effort must remain small. No, local wins because it is built on the ultimate credit union advantage of relationships and self-reliance.
A billion dollar credit union’s car loan, savings account or even mortgage are often a commodity, no different from similar products offered by a ten million dollar institution. The difference is personal, being able to talk with a real person who is familiar with your community and circumstance.
The ILSR has continued to present the power of local solutions and control in its newsletter. A recent article was on grocery prices: High prices are a problem. Here’s how to solve it. Perhaps its opportune for credit unions to align and participate with the work of the ILSR. For it appears to capture the ultimate advantage of a member-owned cooperative-its local identity. control and focus.
The Connection Beetween Politics and Co-op Democratic Governance
Trump’s election victory has reawakened concerns about whether the checks and balance essential to America’s democratic institutions will hold.
I believe that credit union’s unique design for member-onwer governance offers a helpful example of the fragility of democratic oversight.
As the chasm between credit union’s original destiny and today’s performance and compliance shortcomings grows, purpose and practice may appear further and further apart in the public’s eyes.
Nowhere is this chasm greater than the failure to encourage member-owner participation in the formal annual meeting elections. Additionally, in daily communications rare are appeals to the special role of being owners versus messages common in all financial customer appeals.
Here are two recent observations on the delicate nature of democratic processes. And why credit union’s example might influence our perception of how political democracy functions.
America-An Experiment
A personal story. When I was in grammar school, our history book was titled, “The United States of America, An Experiment in Democracy.”
I froze. I got goose bumps. I was 8 years old. An experiment? I knew enough that some experiments worked, and others didn’t.
It felt like the bottom fell out. All sense of permanence left.
That day was life-changing. I have never seen this country the same since. (source: unknown)
The Transfer of Power
“The genius of democracy is its self-correcting nature. But the problem, of course, is if the person (or persons) being elected into office is (are) the kind of threat that intends to disrupt this happy self-correcting logic of democracy.” ( Daniel Ziblatt, co-author of How Democracies Die)
How do these observations about national political concerns apply to credit union’s democratic model?
Richard Rohr comments: We quickly and humbly learn this lesson in contemplation: How we do anything is probably how we do everything.
What Impact Might the Trump Administration Have on Credit Union Oversight
Writing about the future is easy. Rarely do readers look back when events have unfolded. Moreover such forecasts often reflect, not insight or wisdom, but rather one’s own efforts to protect vested interests.
However there are some reference points which can help us think about what a credit union might do going forward into a possible disrupted regulatory future.
Today I will review what Project 2025 says about federal regulation. I could find no direct reference to credit unions although I did not review all 900 pages.
Published in 2023, President-elect Trump has denied association with the ideas presented in the document. More than 100 conservative organizations were involved in its creation. I found the brief section I cite below had over four pages of extensive reference notes.
IMPROVED FINANCIAL REGULATION
From page 705: One of the priorities of the incoming Administration should be to restructure the outdated and cumbersome financial regulatory system in order to promote financial innovation, improve regulator efficiency, reduce regulatory costs, close regulatory gaps, eliminate regulatory arbitrage, provide clear statutory authority, consolidate regulatory agencies or reduce the size of government, and increase transparency.
Merging Functions. The new Administration should establish a more streamlined bank and supervision by supporting legislation to merge the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Federal Reserve’s non-monetary supervisory and regulatory functions.
U.S. banking law remains stuck in the 1930s regarding which functions financial companies should perform. It was never a good idea either to restrict banks to taking deposits and making loans or to prevent investment banks from taking deposits. Doing so makes markets less stable. All financial intermediaries function by pooling the financial resources of those who want to save and funneling them to others that are willing and able to pay for additional funds. This underlying principle should guide U.S. financial laws.
Policymakers should create new charters for financial firms that eliminate activity restrictions and reduce regulations in return for straightforward higher equity or risk-retention standards. Ultimately, these charters would replace government regulation with competition and market discipline, thereby lowering the risk of future financial crises and improving the ability of individuals to create wealth.
From page 706: Direct government ownership has worsened the risks that government-sponsored enterprises (GSEs) pose to the mortgage market, and stock sales and other reforms should be pursued. Treasury should take the lead in the next President’s legislative vision guided by the following principles:
- Fannie Mae and Freddie Mac (both GSEs) must he wound down in an orderly manner.
- The Common Securitization Platform57 should be privatized and broadly available.
- Barriers to private investment must be removed to pave the way for a robust private market.
- The missions of the Federal Housing Administration and the Government National Mortgage Association (“Ginnie Mae“) must he right-sized to serve a defined mission.
(End Quote)
The text also states that Congress should repeal titles of the Dodd-Frank Act that created the Financial Stability Oversight Council (FSOC), a federal government organization which identifies risks, promotes market discipline and responds to emerging threats. Project 2025 defines the FSOC as a “super-regulator tasked with identifying so-called systemically important financial institutions and singling them out for especially stringent regulation.”
A Learning Event: The S&L Dissolution
In the late 1970’s the S&L industry held the largest deposit market share in California, much larger than banking competitors. This was before deregulation. Most depository firms were limited to operating in a single state or in some cases, a single location (Illinois).
Today S&L’s no longer exist as a separate industry even though 555 savings institutions with $1.2 trillion in assets still operated at June 2024. All deposits are FDIC insured. Of the total institutions, 241 are supervised by the OCC, 276 by the FDIC and 37 by the Federal Reserve. While state and federal chartered institutions still function, the system is under federal direction.
While there are many reasons for the loss of the S&L’s as a separate, independent financial segment, the dominant factor was that many of the causes were self-inflicted. These included a loss of special purpose, rapid multistate expansion through acquisitions, and balance sheets weighed down with fixed rate mortgages in a deregulated deposit funding environment after 1981.
After the mid 1990’s, there was no separate FSLIC insurance fund, no Federal Home Loan Bank Board to oversee the industry, and the FHLB liquidity system survived by serving all real estate lenders including credit unions. In most states the mutual charter exists as an anachronism, with no new charters being issued. At the state level supervision is provided by a single banking/financial institutions department.
While external financial events did contribute to the industry’s collapse, competitors did survive and thrive, especially credit unions. At the February 1982 GAC in D.C., CUNA President Jim Williams told new NCUA Chairman Callahan there was only one topic on credit union’s minds: survival.
Together credit unions and NCUA embraced deregulation and the changes in structure and oversight the new environment would require. Hunkering down , protecting existing ways and asking for more funding to address problems was not the approach.
Whether the new administration will be as disruptive of federal regulators as indicated in campaign rhetoric, remains to be seen. The lessons from an earlier era can be helpful: remember who you are and build on what brought success to this point in time.
Many of the factors in the S&L demise were self-initiated with leadership failures. Cooperative success in navigating external changes was accomplished though enhanced collaborative efforts between credit unions and their regulators. not each trying to go their own separate ways.
Gettng Back to Work: A Member with a 536 FICO Score
Every day credit unions cause miracles to happen for members. You and I may not always see it from the recipient’s point of view. It may seem like just another transaction. But these events are miracles for persons often in extended circumstances and feeling without options or hope.
Following is a miracle story. It may seem small in the overall scheme of things, but it is everything to this member’s family.
Being Treated “Like a Human”
(Used with permission)
This story is about Corey who was assisted by our Financial Coach Ashley, who works at the Wilmington Member Center. While working the lobby on a busy Monday, Ashley met with Corey who had come into to talk about a car loan.
When they started talking about the loan details, Corey told Ashley that he was not even sure if this would be possible. He stated they had some life altering changes a while back and their credit took a major turn for the worse. He was not in desperate need of a new vehicle, but he wanted to try. Corey had been working on their family’s credit for a while and wanted to see where they stood.
Ashley encouraged the member, and after pulling his credit report she took a deep dive. The report showed his credit score of 536. (Note: this is a “below average” credit rating; the average American consumer has a 714 score.)
She recognized that Corey was hesitant to even talk about the credit score and that it was weighing on his mind.
She explained that if we have a reason “Why” behind what happened, that can give us the full picture. We are aware that “life happens.” She asked him to clarify what life changing circumstance occurred. Let us just say the member and their spouse were put though something we hope no one will ever have to go through.
While typing up her notes, Corey asked if she was putting the details of what happened in the loan file. Ashley realized that Corey had just re-lived a traumatic event in his life.
When they were finished with the application, Corey got up, shook Ashley’s hand and said thank you. Ashley replied, “No problem, it is what we are here for.” The member responded with, “No, thank you for treating me like a HUMAN.” Corey stated he had been to several banks and was just given a hard no. Without asking questions, without seeming like they care, they just saw a terrible credit score and not a person and valued member.
The next step was for Ashely to review the details and give the full picture of the situation to the underwriter. The next day Ashley learned the loan was approved. She was so excited to call Corey and share the great news. When Corey came into the member center for the loan closing, he gave Ashley a big hug and thanked her repeatedly. Ashley is now working on a share secured credit card to help him improve his credit even more!!
To quote Ashley, “This is one of the most genuine interactions I have ever had with a member. I will most definitely be their person at the credit union going forward!! Even when we learned a tough “why” as to what happened, we were able to serve with the best possible solution. “
This story represents the hope we provide through our caring financial partner-employees. I love that Ashley recognized bad things happen to good people. Congrats and thank you Ashley for demonstrating why we exist!
Some Financial Context
This midwestern credit union serves a market that largely lives paycheck to paycheck. In other parts of the CEO’s staff update, he reported on the increase in charge-offs this year:
For the year, we have expensed $52.3MM for credit losses which is $16.6MM more than we budgeted for the year and $26.8MM more than in the same period of 2023. Credit loss expense remains one of our primary concerns for the short and longer term. It is the #1 reason we are missing our net income target in 2024.
Even with this drag on financial results, the credit union reported loan growth of 8.3% and share growth of 8.8% or almost three times the national average at September 2024. ROA is .80% and networth 10.9%.
Most importantly, this increase in defaults did not stop employees from doing the right thing for members, especially those in financial difficulty.
Taking care of members, even those on the financial margins, is good business. And that’s how cooperatives make real miracles happen in people’s lives every day.
Post Election Back to Work: The Change in Employment Patterns in Communities
As consumer focused financial providers, changes in local employment patterns can have a profound impact on members’ and their credit union’s financial outlook.
Credit unions have always walked toward members and communities in difficulty, not away. The importance of a local credit union option is especially critical for those living in areas of slower growth and/or lower paying job opportunities. Now a study has tried to identify those cities whose economies trail national averages.
In the FDIC’s Second Quarter report, there is an article U.S. Industrial Transition and Its Effect on Metro Areas and Community Banks (pgs 45-74).
The study covers fifty years from 1970-2019 in the shifting employment patterns from higher paying industrial occupations, such as manufacturing, to an economy based on service industry and technology.
The study uses Metropolitan Statistical areas (MSA’s) and developed a “transition score” for ranking the areas showing those most impacted by the decline in higher-paying to lower-paying employment.
Of the country’s 387 MSA’s (cities over 50,000) those with higher transition scores had slower economic growth, were mostly smaller in population, and located in the Northeast and Upper Midwest. The two study tables below show the MSA’s with the highest employment transition scores along with the change in total employment over the past fifty years.
Of the 54 MSA’s in states with the highest number transition scores, Pennsylvania led the states with ten.
(note: for highlighted MSA’s above the study presents analysis of each showing why they reported high population growth)
Additional tables and graphs illustrate both the distribution of the highest scores and the lower impact scores among the largest MSA’s which tend to have a more diversified industrial employment base (table 3 page 55).
As one would surmise, MSA’s with high employment transition scores had slower income growth than the nation as a whole. (chart 4, pg 57)
In the four metro areas with the highest scores above, there were a number of other negative economic factors in addition to the erosion of manufacturing. These included total employment and population declines, slower per capital and GDP growth versus national averages, natural disasters and a lack of amenities such as universities and favorable weather.
Impact on Community Bank Performance
The report’s final pages analyze the performance of banks whose headquarters were in one of the 54 MSA’s with the highest transition scores, that is communities impacted by the greatest change in employment patterns. Following are some of their conclusions.
While overall performance is generally lower, these banks performed better than other community institutions in periods of high economic stress. In terms of structure, consolidation occurred as in the industry at large, such that only 31% of high transition communities were left with a local institution by 2019. New charters were less frequent in these MSA’s. But bank failure rates were lower.
In the highest transition scored MSA’s, banks had weaker branch and deposit growth, slower overall financial activity including pretax ROA.
The reason for these banks better performance during the two periods of economic crisis, was that their balance sheets contained more single family residential loans and lower exposure to commercial and industrial loans than institutions located in a less impacted MSA’s.
The Takeaways for Credit Unions
Credit unions are no strangers to changing employment patterns in their market areas. Many were originally chartered with employer based FOM’s. The deregulation of the early 1980’s allowed both state and federal charters to diversify their member base and seek other growth options.
The banks that were most resilient during these employment transitions focused more on first mortgage lending and less on commercial. Credit unions are almost exclusively consumer and real estate focused lenders. Even when an industry or local employer closes, the members tend to stay local. And need their credit union more than ever.
The study shows the external context matters in overall performance. It shows the obvious–that slower economic growth tends to correlate with lower financial performance. It also reinforces the critical and crucial role locally-focused financial firms have in these community transitions.
There is a cyclical pattern in much economic change. A high growth area becomes crowded, expensive, and loses appeal versus communities with lower home prices and more stable institutions. The role of credit unions as local economic actors is vital in both communities.
Many commentators suggest the latest election outcomes were driven by voters’ dissatisfaction with their economic situation, especially inflation.
Credit unions have the chance to take the lead in giving these members a hand up.
As other firms may rush to the high growth market attractions, the study shows that sustainability in times of deep transition is not only possible, but critical to the bringing the time closer when good fortunes return.
Getting Back to Work: The State of the Credit Union System at September 30, 2024
As the new administration’s post election appointments and policy directions are implemented, the credit union system is on a stable foundation.
There are still latent issues of vital importance, most of which the NCUA board has adeptly avoided. But the macro-financials reported in Callahan’s 3rd Quarter Trend Watch overview yesterday are strong and heading in the right direction. This is the link to the 72 slide deck. The full recording is available here.
Some observations I noted:
Improving liquidity: In Alloya Corporate’s economic summary they presented their balance sheet trends to show the industry’s improving liquidity position as demonstrated by the growth in members’ deposit balances.
For all natural person credit unions, total borrowings have fallen and are now only 5.2% of assets, loan and share growth are in even balance, and the market value in underwater investments has recovered another $9 billion in value. Liquidity is coming back.
Slow Growth
The overall theme for this quarterly update was balance sheet growth much less than the industry’s CAGR over the past 20 years. The September 2024, 12-month share increase was 3.2% versus 6.3% over the past two decades. For loans, the latest 2.59% growth is less than half the 20 year average of 7%.
An interesting statistic about the 2.5% in additional members is analysis showing credit unions with organic growth grew faster than those institutions relying on third party loan originations, a common means of adding members.
The upside of this modest growth was that the various measures of total capital and net worth(10.8%) have all increased versus one year earlier.
Takeaways In a Changing Administration
The credit union system was financially strong before the election. Nothing has altered this fact. A change in regulatory leadership is coming. Questions credit unions might consider as this political turnover occurs might be:
How will this change affect your members’ lives? Will the direct governmental assistance of the COVD era and programs such as student loan forgiveness end?
How will reliance on market outcomes affect lending opportunities such as climate related projects or electronic vehicle sales?
Will the new normal in the Fed’s overnight rate settle in an expected range of 2.5-3.0%–or will fiscal policy drive a higher or lower level?
With a more market-oriented administration, will the unique role of credit unions be sustained, or will the industry just be seen as another option in an ever expanding lineup of fintech, bitcoin and other financial providers.
In a future blog I will explore issues of regulatory policy and present a case study of a prior time of major change in administration.
The Good News
The good news for credit unions at this moment of national policy changeover is that they are in a sound position to deliver for members on all of their traditional service options.
They can continue to help members who feel vulnerable or overlooked. And maybe they can bring to those struggling with inflation or even bigger goals such as buying a home, even more responsive financial solutions in the four years ahead.