Life is about discovering the right questions more than having the right answers.
Virginia’s Fall Colors
NCUA’s 9.6% Increase in the Proposed 2023 Budget Shows the Need for A Better Way for Spending Oversight
NCUA’s 2023 Staff Proposed Draft budget is 84 pages. It adds 25 new positions and an 80% increase in spending on the Merit technology system.
CUNA and NAFCU provided 8 and 9-page detailed suggestions for changes. Credit unions pay all NCUA’s expenses. The two trade associations critiques are an excellent starting point for readers who want to see the critical issues.
A Longer Term Spending Perspective
Two weeks ago I posted a blog called NCUA’s budget hearing and inflation that included a chart from the Bureau of Labor Statistics showing the 22 year cumulative price increases for many sectors of the economy. The largest was the 240% gain in hospital services followed by college tuition and fees at 180%.
Average hourly wages had increased 100% and overall inflation was 74.4% in this time frame.
In this 22 years the US population has grown by 50 million. Each of these economic sectors are serving many more customers with more products and more facilities than was the situation in 2020.
NCUA’s proposed 2023 budget would result in a 283% increase for this same period, higher than any other economic sector. Meanwhile number of NCUA insured credit unions has fallen from 10,316 to 4,853.
NCUA’s budget process is one sided. It details all spending request but provides no cost control or expenses reductions. An example is this excerpt from CUNA’s analysis of administrative costs: Specifically, the budgets for contracted services, administrative expenses, and rent, communications, and utilities are proposed to increase by 30.3%, 10.8% and 21.8%, respectively.
Without external oversight, the budget process becomes a PR exercise with scripted answers and no independent review. Board members readily give in to the inflation rationale.
NCUA’s budget grows inexorably faster than every other sector because there is no check and balance. The agency is answerable only to itself. Or as one board member frequently observes, “NCUA is a monopoly.”
Chairman Ed Callahan’s Last Congressional Hearing
For there to be accountability over NCUA’s spending, the process should be changed. The example of former NCUA Chairman Ed Callahan’s final Congressional testimony suggests a possible solution.
On April 24, 1985 Ed appeared before Chairman Boland’s subcommittee of the House’s powerful Committee on Appropriations. He presented the CLF’s 1986 appropriation request.
The following are excerpts from Chairman Callahan’s opening statement:
For fiscal year 1986 we are requesting a $600 million in new loans, the same number as the previous five years. The expense limitation $850,000 is the number as the current fiscal year and has been unchanged for the past four years. . .
We believe the lending limit is adequate to meet the needs of over 18,000 credit unions. . . Our agents, the 42 corporates, have reported minimal increases in loans even though loans outstanding at their member credit unions have increased 44% the past two years. . .
The CLF’s loan balances of $288.5 million represent a very slight increase since our fiscal year end. . .
Mr. Chairman, today the (CLF) system provides services to more credit unions at a lower cost and with fewer employees than at any other time in its history. Credit unions and we are proud of its success.
At the time of this hearing, NCUA insured 18,000 credit unions with six regional offices and a DC headquarters. Total employment was 600. The CLF’s bottom line of no increases in operating expenses for four consecutive years was the same outcome for both the NCUSIF and agency’s operating budgets.
In contrast, NCUA’s total spending has grown over 200% more than the economy’s total inflation for the past 22 years. The solution to NCUA’s open-ended spending is to make the entire NCUA budget subject to Congressional oversight and approval.
A Better Way: Put NCUA Spending “On Budget” for Congressional Review
All CLF spending was subject to Congressional oversight until the 2008/2009 crisis changed this annual approval process. Congress no longer reviews CLF lending or expenses. The CLF’s coverage has never been as comprehensive or meaningful since.
Currently the NCUA is seeking to extend the CARE Act provisions enlarging the CLF’s capabilities. This legislative request is an ideal opportunity to put the CLF back on budget along with the remainder of the Agency’s spending.
In the real economy, constraining costs is the first responsibility of leaders when facing unprecedented inflation and the prospect of an economic downturn. Personnel and other resources must be redirected to immediate priorities, rather than just adding staff for new initiatives.
Both efficiency and effectiveness concerns were raised in NAFCU and CUNA’s detailed budget responses. However, these comments come with no formal authority. NCUA routinely restates its positions, such as the need for consumer examiners or more specialists. Board members, with rare exceptions, just support each other’s spending priorities.
Putting the NCUA on-budget would open up the process to independent monitoring and public commentary. Congress would review and approve the spending as well as the underlying “themes” or policy justifications. As the NCUA’s taxpayers, credit unions would then have a meaningful way to comment on NCUA’s budgets and operating performance.
It worked for the CLF. It would be a better way for insuring accountability for NCUA’s performance today.
A New Class Act?
Risk based lending (RBL) was introduced to credit unions in the mid 1990’s. Many credit unions now use this approach in some or all of their lending offerings.
The debate continues as to whether this is consistent with coop principles. Here is one CEO’s view.
(from Jim Blaine)
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| Balanced lending… |
Many, many credit unions have successfully implemented risk-based lending to the benefit of each and every member. More and more members are calling out and demanding increased risk-based lending by credit unions. Never has one concept been so uniformly and enthusiastically accepted by the masses. RBL is the top requested service on every member survey – right?.
One CEO told me that RBL was an easy sale to the Board after one Board member got back from an RBL seminar cruise. Evidently, in the bar, the Board member was chastised by an RBL advocate with the arguments: “You mean you charge the same loan rate to an admiral as you do to an E-4? You mean your school superintendent pays the same rate as the first year teacher? The blue collars get the same deal?! Do your maid and gardener get the same rate you do? That’s not fair! You’ve got to start running that credit union like a business these days!”
It’s an especially easy sale, when you lace the poison with a few high heat words like unfairness, subsidy, unprofitable, freeloading – free riders. Fairness, of course, is something every credit union person supports. Every effort should be made to assure fairness is a fundamental, core value of the credit union philosophy.
Evidently for the first seventy or eighty years of the credit union movement, boards and members didn’t care much about fairness in lending. Unfairness existed in all credit unions since none used risk-based lending….
Evidently for the first seventy or eighty years of the credit union movement, boards and members didn’t care much about fairness in lending. Unfairness existed in all credit unions since none used risk-based lending….
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| Secret formula… |
Critics try to make an issue out of the “unfairness” in RBL. They always want to claim that while RBL may achieve consistency in credit union lending decisions, RBL was never designed to achieve fairness. With RBL, members are divided into risk “classes” (A,B,C,D,E, etc.) based on a secret formula of risk criteria.
Although the secret formula for risk criteria isn’t advanced enough to tell us which exact member will default, it is explicitly accurate in knowing which “class” to which you and I should belong. There are no shades of gray in an empirical, statistical model. Don’t tell me about the divorce, the flood, the death in the family, or the reporting error. Your statistical record speaks for itself. The secret formula knows who you really are in your heart of hearts. Cut the whining, pay the rate; fair is fair!
Complainers also don’t seem to appreciate the need to eliminate the subsidies within a credit union to “low class” borrowers. The financial stability of the wealthy few is being imperiled by the working class majority. If the poor can’t pay their loans, logically they should be charged a higher rate.
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| A New Class Act? |
But we haven’t even begun to fully exploit the benefits of risk-based pricing for the membership. Hope we can use the secret formula to help make some of the other operations of the credit union fairer. We’re already getting behind on the innovations being implemented by our guiding lights over in the banking industry.
Some local banks have used secret formulas to determine even more precisely which customers are profitable and which are unprofitable. Who wants an unprofitable customer? And there certainly isn’t any difference between an unprofitable customer and an unprofitable member, is there? Hey, credit unions aren’t welfare states, are we?
Those creative banks have started coding customers into green, yellow, and red “classes” at the call centers. Regardless of how long you’ve been waiting, green goes to the head of the queue. Greens have separate, fast teller lines and receive special services. Bright, bright greens can even receive “private banking” services so they never have to rub elbows with “the riffraff”. Don’t we want to serve our “best” members, too?
Whose credit union is it anyway?
Serving the members based on the distinction of “class” will go a long way toward increasing a sense of fairness and building unity within the credit union. We certainly haven’t been “a class act” in the past but surely everyone agrees that – in a cooperative – some members are more equal than others.
Can Credit Unions Be Uniquely Cooperative?
Apples and Oranges
(from Jim Blaine)
Comparing a b#!k to a credit union is as silly as comparing an apple to an…
Credit unions are uniquely different!!!
If you’re one of those cynics who think “nothing is unique”,
then name one word in the English language which rhymes with orange…
Don’t rush I’ll wait….
Alright, alright if you’ve had a couple of craft beers, I will accept “door hinge“..
The Halloween Spirit
The Listeners (1912) by Walter de la Mare conjures the spirit of Halloween. A seemingly empty house, night time, silent souls, the rider’s horse eating grass, and the Traveller, all alone, knocking loudly for a response.
The poem presents a mystery-I kept my word and the one left awake.
It ,might be interpreted as a literal event, “does anybody care“; or metaphysical, spiritual metaphor- is there anybody there who will answer?
The haunting atmosphere evokes Halloween, the night of All Souls.
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The Power of the Credit Union Press
Many challenges confront credit union focused news reporting. Publishing daily via social media is hard. Staff is limited. Original stories take time to develop. Amplifying press releases is often an easy solution when faced with daily deadlines.
Credit Union Times and CUToday have developed important reporting niches however. If readers follow these original stories, they can provide insight into events that have consequences for the future of the cooperative system.
Following Court Documents
Peter Strozniak of Credit Union Times follows court cases about credit unions. On October 4, he reported on the embezzlement at the $3.2 Prairie View FCU: Former CEO Pleads Not Guilty to Embezzlement Charges. Some of the details in his coverage included:
- The CEO’s scheme lasted from 2010 until August 2020;
- She embezzled over $211,000 from 34 elderly members accounts;
- Created fraudulent loans for over $791,000;
- Formed 58 nominee loans by creating fake share loans in the names of relatives and friends
In eight of this ten-year fraud time frame, the credit union reported annual operating losses on its call reports. The credit union was merged in the first quarter of 2022 due to “its poor financial condition.”
The question that jumps out is how could NCUA examiners have continually missed this illegal activity for ten years?
Peter did not go there with this story, but the details certainly raise a core question about NCUA’s supervision of the FCU. It was small, with few employees and only 600 members. The call reports showed losses for most years. What does this case imply about the efficacy of NCUA’s annual examinations?
CU Today Goes to the Public Record
For most of this year, CU Today has summarized the merger activity posted from NCUA’s web site, Comments on Proposed Mergers.
Their latest reviews showed “CUs seeking to merge in multiple other CUs at once, combo’s in which the merging and acquiring CUs are both losing money, and several examples of credit unions reaching across state lines and even across country for merger partners.”
This reporting which includes the latest data and quotes from the member notices, takes a lot of work. Some examples.
One summary is for AIM Credit Union in Dubuque, IA. It is merging two Keokuk credit unions. Members of both merged credit unions were given identical Notice statements. They will be voting on the same day at the same location, First Christian Church. The two towns are 150 miles or about three hours apart. Was a local merger of the two credit unions considered?
In the merger of two Michigan credit unions, Community Alliance Credit Union ($108 million) with People Driven Credit Union ($355 million), the top three executives can receive a total of $542,000 in severance.
Community reported midyear capital of 8.39% and a loss of $73,000. The members were offered nothing of the over $8 million in capital being transferred. Is this an example of taking the money and running away?
The three-year old Maine Harvest FCU with 56% capital is merging so that “its mission of lending to farms and food producers will be better preserved with a larger credit union that embraces that mission.” Was this option researched at the start? Why not create a partnership, versus merger, with a larger credit union if more services are needed?
The $210 million Emory Alliance Credit Union in Decatur GA is merging with Credit Union 1 whose main office is listed as Rantoul, Il. One wonders why? Were no local options available? Did Emory do any due diligence on behalf of their members, especially of Credit Union 1’s recent initiatives before recommending this out of state takeover?
Finally, the $226 million Parsons FCU in Pasadena, CA is merging with the $1.1 billion Skyla FCU in Charlotte, NC. Parsons has almost 11% capital. Merging with a credit union across the country, especially with very strong instate options, would appear contrary to every common sense notion of member service and value. What is the reason for this “merger” almost 3,000 miles away.
Presenting the Facts for the Public
CU Today and Credit Union Times are serving a vital public, cooperative service developing this fact-based reporting.
Both media raise important questions about motivations and fiduciary duty of persons responsible for these events.
This original reporting raises critical questions about the directions of credit unions, the regulator’s oversight and how members’ best interests appear to be so cavalierly and repeatedly disregarded.
Sooner or later the stories behind these events will come out. The political and repetitional consequences will impact every credit union even when excesses may be the work of only a few.
A diligent, informed and questioning press is critical in holding those in positions of responsibility to account. CU Today and Credit Union Times are doing the job of the 4th estate. Are credit union leaders getting the message?
An Old Tale, Updated for Credit Unions
Down On The Farm…?
(by Jim Blaine)
George Orwell masterfully described the erosion of values and the rise of exploitation in his classic novel Animal Farm. The book written in 1945 is a satire of the decline in the Russian Revolution from idealism to the overlord State of Stalinism. To Orwell, what the Revolution had become in post-WWII Russia bore little resemblance to the high hopes of 1917.
In case you’ve forgotten the plot; in Animal Farm the slothful, tyrannical human proprietor of Manor Farm is overthrown by his much abused and neglected farm animals. The revolutionary animals quickly come to realize that when united in cooperative effort, they are quite capable of sensibly managing the farm and their own affairs.
Each animal, by nature and design, has different capabilities and unique qualities. Separately they are weak. But, cooperatively, working together; the united effort becomes far greater than the sum of the individual parts. Each animal contributes in full measure, in its own special way, to the overall success of the enterprise.
The cows and chickens provide milk and eggs for food. The sheep provide wool for cloth; the dogs provide protection; and the horses provide strength for plowing. The pigs, who seem to be the brightest, provide direction and management (surprise, surprise!).
Every civilized society, every social movement, every cooperative effort needs and creates a set of guiding principles – a social compact, a credo, a charter which explains shared beliefs and values. The animals of Animal Farm were no different. They carefully crafted rules for their new social order and painted them on the side of a barn for all to see.
ORIGINAL PRINCIPLES:
1. Whatever goes upon two legs is an enemy.
2. Whatever goes upon four legs, or has wings, is a friend.
3. No animal shall wear clothes.
4. No animal shall sleep in a bed.
5. No animal shall drink alcohol.
6. No animal shall kill any other animal.
7. All animals are equal.
Over time, several incidents occurred which seemed to be out of keeping with those original purposes. The pigs were found sleeping in the former owner’s bed; alcohol reappeared at social gatherings of the pigs; an animal who complained about the changing values was killed; and the pigs seemed to be working less and consuming more than their fair share.
When the animals returned to the barn to review their original principles; they found, much to their surprise, that those principles somehow had evolved into something a bit different!
“EVOLVING” PRINCIPLES:
1. Whatever goes upon two legs is an enemy.
2. Whatever goes upon four legs, or has wings, is a friend.
3. No animal shall wear clothes.
4. No animal shall sleep in a bed with sheets.
5. No animal shall drink alcohol to excess.
6. No animal shall kill any other animal without cause.
7. All animals are equal, but some animals are more equal than others.
The pigs, however, were always there to explain away questions, concerns and objections. Bad became worse at Animal Farm! Eventually, when the animals returned to the barn, they found a whitewashed wall with just one remaining principle.
“CURRENT” PRINCIPLES?
“All members are equal, but some members are more equal than others.”
“Isn’t that what we originally revolted against?,” some quietly asked.
So, what’s the point? In the beginning, there were several essential ideas which formed the core values of the credit union movement: one member, one vote; cooperative; non-profit; equal service to each member; consumer advocacy; volunteer leadership; unstandard answers; shared concerns; us not me.
Have you checked the barn lately?
When did we abandon the average man and woman – the working class; change our focus to the primacy of the bottom line; lower ourselves to worshipping before the false altar of market share; begin acting in the best interest of “the credit union” – not the members !?!; and start offering excuses rather than solutions?
Hey really, what happened…
Who let the pigs in?
A CEO’s Outlook at mid-October
On a recent trip I talked with a CEO to find out how the credit union was responding to four events: Covid, interest rate hikes, liquidity and the regulatory environment. Here are my notes.
On Covid
CU still on hybrid work model. Employer sponsor went all remote, but is now back in person, with little remote. The community around the head office, especially retail shops, became a ghost town. Kept all branches open, but back office staff is still mostly remote.
Expect hybrid work to continue. Commute for head office is a minimum of 30-60 minutes. Labor market extremely tight especially for retail.
Have re-evaluated every customer facing position including salaries, variable incentives, paid lunches and increased job tiers.
Interest Rates
The 30-year fixed rate mortgage is now at 7.5%. Member interest has evaporated and don’t see it coming back until late 2023. Increase in second mortgage demand.
Member spending is still strong and credit card volume has surpassed pre-pandemic levels. Will recession hurt consumer spending? Labor market great for employee, but creates inequities with current staff.
Biggest concern is inflation’s impact on costs and operating expense structure. Large increases in vendor contracts which have the ability to pass through costs based on a CPI index. In some cases this will be 8.5% to as high as 15%. Fortunately, we have caps in our contracts but many credit unions do not.
We are a unionized shop with approximately 70% of employees covered under a labor contract. Sponsor negotiates contract and we will have to see what happens to those costs.
Liquidity
Have difficulty selling to secondary market. Rates are extremely volatile day to day. Our mortgage pipeline is down 60%. Refinancing has all but stopped.
In ’20 and ’21 had share growth of 20% and 13%. Money stayed with us. This year members feel it’s time to spend. Grown only 2% in shares so far, but may end up flat at the end of the year.
Even though originations are lower, loans are staying on the balance sheet because there is no refinancing.
Paying up for CD’s: 11 month at 3.25% and 15 month at 3.5% with a minimum of $5,000.
Actively monitoring our wholesale funding sources. FHLB is about 100 basis points more expensive than CD’s. Also have brokered CD’s with SimpliCD.
So far this year ROA is at 80 basis points down from 92 bps in 2021. But for our 28 state peers over $500 million, the average is closer to 50 basis points.
Our top operational priority will be managing expenses.
Regulatory Environment
State chartered. All exams remote. The beginning of the year I was really concerned about the NEV test that would put us in the extreme risk category. But they have backed off with just a “high” rating.
Definitely a different level of NEV risk now and more pressure on liquidity.
Looking past current events there are two items. Should we move beyond our sponsor’s brand and FOM to open up markets for further growth? We have several special loan programs, credit card and provide financial literacy events. Sponsor brand is ours as well. So not a simple issue.
Secondly, we have always been a state charter; would a federal charter be an option for the future?
However our biggest challenge going forward is to control operating costs.
NEXT CITY-A Site Worth a Visit
One of the traditional advantages of credit unions is their local knowledge. This includes members’ circumstances, critical business trends in the area and continuing reinvestment to improve collective and individual opportunity.
As credit unions expand their market aspirations and growth ambitions, knowledge of and commitments to local communities can wane. The local knowledge and the resulting advantage of loyalty and member trust can be forfeited.
Next City is a nonprofit news organization that believes journalists have the power to amplify solutions and spread workable ideas from one city locale to the next.
It features actual projects. Case studies are the core of its reporting. It publishes an almost daily blog.
Here is a portion of the October 19 email update featuring mutual financial firms. It asks a critical strategic question about credit unions.
| While reporting a few years ago, I came across this startling fact: In 1986, the number of community banks across the country peaked at 15,717, but today there are fewer than 4,500.
Now I can’t remember the last time I went a whole day without thinking about it. I vaguely recall, as I’m sure many others do, the wave of bank mergers that really took the country by storm in the 1990s. Maybe some of those mergers made sense, given changes in technology and the world. But the rising tide of mergers went along with a drought in the formation of new banks and credit unions. I still don’t think we’ve fully processed what this shift in the banking system has meant for our cities and communities. Even today I don’t think we have a full picture of what was once possible, why it’s no longer possible, and maybe why we should make it possible again. I hope today’s story helps make that picture more complete, if not more clear. |
Banks With No Shareholders? The Curious Case Of Mutual BanksPonce Bank, founded in 1960 in the Bronx and currently New York’s only Latino community bank, shows the possibilities of lending as a mutual bank.
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Shouldn’t credit unions be in this reporting?