Author: Chip Filson

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What Are Credit Unions to do When NCUA Messes Up?

Many NCUA management actions have limited direct impact on credit unions.  But when mistakes are made in a critical system component, the NCUSIF,  they can cost credit unions dearly.

The NCUSIF’s sole source of revenue is the earnings on its $20.5 billion investment portfolio of government securities.

The objectives of the NCUSIF’s current investment policy are clear:

The investment objectives of the NCUSIF are:

  1. To meet liquidity needs resulting from the operations of the Fund; and
  2. To invest, on a daily basis, any excess cash in authorized Treasury investments seeking to maximize yield.

The Investment Committee has fallen increasingly short of these objectives for at least the past 15 months. Results  have been contrary to these clearly stated goals.

The Numbers: $10 billion in New Investments in Two Years

At December 2019, the NCUSIF’s portfolio size was $16.02 billion of which $5 billion matured in two years or less.   At February 2022, the portfolio had increased to $20.5 billion.

Since  interest rates declined to historic lows in March 2020 at the start of the national economic shutdown, the NCUSIF has invested more than $10 billion ( 50% of its current portfolio) following a robotic 7-year ladder.

Today these $10 billion investments are worth less than par.  They cannot be sold without incurring market losses constraining the NCUSIF’s liquidity options as stated in objective 1.

At February 2022, the portfolio reports a total unrealized market loss of $343 million, a decline in value of over $ 800 million since December 2020.   The current unrealized loss will increase as rates  rise.  These declines since December 2020, easy to  see from the monthly market value disclosure. They also indicate that the portfolio’s yield is increasingly  falling behind market rates.

A $45 Million Dollar Mistake and Still Growing

The most recent investment of $650 million on February 15, 2022 for seven years at a fixed yield of 2.01% continues this mismanagement in the face of unanimous market indicators and Fed statements pointing to rising rates.

Today the seven year T-Note is near 3% yield.   Not only is this investment from just 60 days earlier worth less than par, the loss of income over the seven-year term is currently over $45 million. That is 1% (or higher yield pickup) times $650 million times seven years.

Credit unions and their members will pay the cost for these and other misjudgments that have resulted in at least half of the NCUSIF’s portfolio below market.  With a 3.5 year effective price duration, the portfolio will continue to decline in value by 3.5% for every 1% increase in the yield curve going forward.

The NCUSIF Investment Committee

The Board’s Policy delegates the implementation of the its two policy objectives to four of the agency’s most senior staff including:

Director of Office of Examination and Insurance, Chair

Chief Financial Officer

Director, Division of Capital and Credit Markets

Chief Economist

One would have hoped given the first quarter’s “Rout in the Bond Market” (WSJ headline), the continued inflation projections, the Federal Reserve’s frequent announcements of policy change, that someone would have called a timeout on this robotic investing ladder. The declines in market value are in plain sight; but more critical are  increasing constraints on future income possibilities, objective 2.

What Can Credit Unions Do?

The reason for monthly NCUSIF financial disclosures is so the fund’s owners who rely on NCUA management, can see the results and raise concerns with the board.

Credit union’s first responsibility is to speak up.  Directly communicate your views of this performance failure.  For your members will pay the cost of these misjudgments ($45 million and higher) potentially for years.

The reported results fall way short of policy.  What will the board do?   The committee seems unable to follow market trends, its own NEV data or internal IRR analysis (if any), or even to be aware of different portfolio options.

In public board meetings, staff is dismissive of change calling alternatives “market timing” when in fact the real issue is simply “investment management.” This is a responsibility every credit union is expected to perform in all phases of the interest rate cycle.

Assuming the board is incapable of monitoring and implementing its stated policy, then Congress is the next recourse.

The Damage to NCUA and the System’s Reputation

 

When NCUA and senior employees are oblivious to market trends, the situation raises questions about competency in many other areas of operational assessments and regulatory approvals.

Supervision requires judgments.  Policies nor rules can prescribe detailed actions. Ratio calculations can be written down but determining the correct numbers entails seasoned analysis.

The economy is in an inflationary period which some say has not been experienced for 40 years.  The Federal reserve’s balance sheet and its increase in money supply has never been larger.   Short term overnight rates are priced in forward markets as high as 3% in a year’s time.

There will be significant adjustments as credit unions transition their balance sheets to the new environment and as member’s see rising rate options.

There will be lots of hyperbolic forecasts and many forebodings in forthcoming months. After all, “preaching negativity makes you an expert” as one colleague used to say.

But credit union’s track record in the most extreme crises has been one of patient, experienced adjustments even when markets seemed to have lost all logic.

As NCUA’s enters this new cycle of interest rates, will its ability to make reasoned adjustments match credit union’s own track record?  This initial response in the comparatively simple management of a treasury portfolio, with just two clear policy goals, is not encouraging.

Can the agency learn from its own misjudgments?

 

 

 

 

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Chevron, NCUA’s Authority, and Democracy’s Vulnerability

NCUA is an independent agency–in many senses of that term.  The most important is that the only governance oversight is via the three board members who serve 6-year terms ( or longer) once confirmed by the Senate.

NCUA raises all of its own revenue by taxing credit unions. It sets its own internal policies, manages  four separate funds, passes rules and regs requiring only two board votes, and enforces its own supervisory findings including starting and ending credit union charters.

The agency prepares its own legislation (rules), interprets its own authority and executes its supervision. There is no separation of these distinct functions as in the national government.

In individual credit union actions, NCUA is the prosecuting attorney, judge, jury and sentence enforcer.  There is no independent appeals process.  Congress has no control except the spotlight of public hearings-but no standing authority to make change.

Even in situations as mundane as FOIA denials, the same legal office that made the initial determination rules on the appeal.

This unlimited executive, legislative, judicial and enforcement activity all within a single bureaucracy has been described as the “fourth branch” of government or the “Administrative State.”

The Chevron Ruling

A new book on this issue has just been released.  The Chevron Doctrine describes  bureaucratic “rule” and the role of this Supreme Court precedent.

I outlined this topic in a blog NCUA and the Supreme Court calling attention to the current case (American Hospital Association (AHA) v. Becerra ) which could substantially reinterpret how courts defer to agency’s exercise of their authority.

One reviewer of Merrill’s book comments:  The author says the business of delegation is settled. He has to say this because the Constitution says Congress does not have right to delegate its powers, which it does every time it creates a new agency.

Instead of making the rules as required, it charges the agency with making the rules for itself, because Congress is dysfunctional and couldn’t possibly do this. But it’s illegal. And these agency-made rules then act as enforceable laws, which only Congress can create, at least according to the Constitution. Instead, Americans are enduring a fourth branch — the Administrative Branch — unrecognized in the Constitution.

The ruling this week by a Florida judge that the Center for Disease Control’s (CDC) mask requirements for public transportation was illegal, is a rare example of a court overturning an agency’s requirements.

How This Affects Credit Unions

Credit unions have learned there is no recourse to NCUA’s actions or inactions. The agency’s directives from onerous exam DOR’s, financial interpretations imposing PCA ratios, and rules issued outside traditional statutory authority (e.g. the RBC/ CCULR capital regulation approved in December 2021) are the most obvious example of  NCUA’s unchecked authority.

However just as important as acts of commission are omissions, when NCUA fails to enforce its own fiduciary interpretations.  If a CEO and Chair of a credit union want to transfer $10 million of members’ capital to their own private firm upon merger, that’s OK with NCUA.

In merger after merger, members are misinformed, or not informed of the consequences of their vote. NCUA continues to approve rhetorical statements of good intentions in the required Member Notice with significant omissions of material facts, as a sufficient basis for member-owners to vote on their charter’s future.

One example: in  2021 members lost their voting rights for the board or approving  other corporate actions such as merger, when combing with a specific state charter and giving up their federal voting options.  There was no mention of this change in the merger material.

The Only Constraint

The only check and balance on NCUA’s actions or inactions is at the board level.   If individual board members do not raise the question of proper authority or about acts of omission, there is no accountability at the agency.

When Board member Mark McWatters, a lawyer, twice presented his legal analysis opposing  the agency’s risk based capital proposals as not authorized by statue, his reasoning was “overruled” twice by a simple board vote, 2 to 1.

Democracy is hard work.  The processes sustaining it are fragile.  Personal ambition and ideological views can override traditional norms of transparency, accountability and even term limits.

The motivations for the transition in 1977 of NCUA from a single Administrator to a three-person board was due to credit union concerns over the power of one person to determine the future of credit unions. Especially one who had a prior career as a Marine general.

The Supreme Court may limit the Chevron precedent and the unchecked administrative power of government agencies. In the interim this means the responsibility of individual board members is especially critical if some semblance of democratic accountability is to govern NCUA’s conduct.

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A Person for the Ages

As long as there are credit unions,  persons of incredible talent, generosity and conviction will be drawn to leadership roles.  An example of this cooperative character is Marvel Eberhahn of Community Credit Union, New Rockford, North Dakota.

At her retirement celebration in December 2016 CU Today wrote a profile of her six-decade career as CEO.

Accompanying the story was an 8-minute video that shows the North Dakota setting and an extended interview with Eberhahn.   The video captures her personality formed by the prairie farmland which the credit union served.    The words demonstrate her spirit, practicality and love of community.

Her performance expectation for the credit union was straightforward:  “If we can’t be different, why are we here.”

Watch the video.  It provides  examples for how she implemented this belief, from saving a WW II veteran from a bank’s equipment foreclosure to keeping farmland in the family.

When she left her CEO role, the credit union was $!66 million in assets, a 9,000% growth from the $18,000 when she assumed her role.  Today Community is $192 million with three branches serving almost 5,000 members.

Here is the CU Today story, used with permission:

NEW ROCKFORD, N.D.–For the first time in 65 years, Community Credit Union here is preparing for a new CEO.

But before that happens, a new video shares Marvel Ebenhahn’s extraordinary history in credit unions, of days when the “credit union” was a filing cabinet, of difficult times trying to hold the family farm together, of tough times in a tough place, and through it all, of becoming an indispensable part of a community and overseeing 9,000% growth.

Ebenhahn will be retiring effective Jan. 1, 2017, after more than six decades on the job. Barb Messner, who is currently the CU’s operations manager, will take over as the second president in the credit union’s history.

Ebenhahn, however, is not fully retiring, and will be staying on at the credit union in an advisory capacity while also working as a loan officer with a less demanding schedule, which will allow her to spend more time at her retirement home in Arizona, according to the Credit Union Association of the Dakotas.

Few people in credit unions have ever overseen the kind of asset growth that Ebenhahn has seen during her career. When Ebenhahn joined the credit union, which serves rural Eddy County, N.D., it had $18,000 in assets and 250 members. Today it has $165 million in assets and nearly 6,000 members.

Founded in 1942, what was once operated out of a filing cabinet in the corner of a farm cooperative store now has three branches. Ebenhahn joined the CU in 1952 when it was known as Eddy County FCU.

“Marvel has been a mentor and inspiration for many credit union leaders throughout the decades here in North Dakota,” stated Jeff Olson, president/CEO of the Credit Union Association of the Dakotas (CUAD), in a statement.  “Not only does she embody the cooperative spirit of putting members first, she really epitomizes our wonderful, traditional ‘small town’ rural values of faith, family, community, and hard work,” he continued.

Unique & Inspiring

To illustrate what it is calling a “unique and inspiring story,” the Credit Union Association of the Dakotas has created a short documentary video that records in Ebenhahn’s own voice, the evolution of the credit union and the community.

“I think’s a safe bet that there aren’t very many credit union CEOs anywhere today that can boast a 9,000% increase in assets or a 2,000% increase in membership in their career,” remarked Olson, who’s voice provided the narration on the video.  “Nor can many match a span of 65 years of helping so many people in a small rural community.”

Marvel’s father was one of the original founders of the credit union, and she grew up with first-hand knowledge of the cooperative principals, the CUAD noted. Established in 1942, from its humble beginnings serving members of the Farmers Union Co-Op, the credit union evolved to a community charter so it could serve anyone who lived within a 50-mile radius of the town of New Rockford.  In 1962, 10 years after Ebenhahn joined the CU, it had grown to the point of needing its own building.

“The credit union soon gained a reputation for helping people that the banks had refused,” said the CUAD. “‘Go see Marvel’ became a common phrase in the community.”

Serving a rural farming community can mean tough times, and as the video makes clear the credit union has also had to make tough decisions, especially during the 1980s when agricultural markets hit hard economic times.

In the video Ebenhahn shares that it’s “not fun” to take away a farmer’s land. She said the CU’s policy has always been in cases where it had to foreclose to attempt to find someone else in the farmer’s family who might be able to take it over in order to “keep the family farm together.”

But in all cases the credit union’s interests had to be protected she said. “You can’t just charge off a loan because you like a guy,” Ebenhahn says in the video.

Olson, a 10-year veteran employee and president of CUAD, said he has had the opportunity to visit with Ebenhahn on many occasions.

“I would love to drop in on her credit union just so I could listen to some of her many stories of how the credit union was able to help so many people over the years,” he said in a statement.  “What is even more amazing is that she is making loans and doing business with grandchildren and great grandchildren of the people that first started the credit union. That’s why I thought it was important that we (CUAD) record Marvel so we could share her amazing story with today’s credit union leaders.”

The Ultimate Compliment

The CUAD reported several of its member credit unions have recently incorporated the video into their employee training programs – the ultimate compliment to Ebenhahn and her legacy.

“It’s amazing what people can do when they work together,” Ebenhahn says in the video. “I think I’ve been pretty lucky to have this job. To tell you the truth, I don’t think I’d want to do anything else. I’ve been blessed.”

 

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When Will Easter Come to Ukraine?

The dark night of the soul.

HOPE:  From a world-wide community of faith that believes in their witness.

(https://www.youtube.com/watch?v=G_x-HM7lroA)

Hope from 3,000 years ago. Isaiah chapter 65:

New Heavens and a New Earth

17 “See, I will create
    new heavens and a new earth.
The former things will not be remembered,
    nor will they come to mind.
18 But be glad and rejoice forever
    in what I will create,
for I will create Jerusalem to be a delight
    and its people a joy.
19 I will rejoice over Jerusalem
    and take delight in my people;
the sound of weeping and of crying
    will be heard in it no more.

20 “Never again will there be in it
    an infant who lives but a few days,
    or an old man who does not live out his years;
the one who dies at a hundred
    will be thought a mere child;
the one who fails to reach[a] a hundred
    will be considered accursed.
21 They will build houses and dwell in them;
    they will plant vineyards and eat their fruit.
22 No longer will they build houses and others live in them,
    or plant and others eat.
For as the days of a tree,
    so will be the days of my people;
my chosen ones will long enjoy
    the work of their hands.
23 They will not labor in vain,
    nor will they bear children doomed to misfortune;
for they will be a people blessed by the Lord,
    they and their descendants with them.
24 Before they call I will answer;
    while they are still speaking I will hear.
25 The wolf and the lamb will feed together,
    and the lion will eat straw like the ox,
    and dust will be the serpent’s food.
They will neither harm nor destroy
    on all my holy mountain,”
says the Lord.

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Precious Good Fridays

Everyone will experience Good Fridays in their lives.   Sometimes it is only temporary–moments of doubt, distrust or feeling alone.

The Good Friday Christian story is much harsher.  It  includes betrayal, denial, false witnesses, suffering and ultimately a cruel death.

How we react or interpret these moments defines what we believe.   Some will call upon faith; some fate; others just accept these trials as the ups and downs of the human condition.

Our society has grown skeptical of public testimonies of faith.  The words often seem mismatched with the deeds or the personality of the speaker.

Until you see an example that rings so true, it erases any doubt about the power of belief.  Especially in public life.  When everything is at stake for you.  And for all those around you.

For example, the picture of a Ukrainian solo cellist playing Bach in a vacant city square asserting his artistic humanity in war.

A Profession and a Calling

The brief recording below was posted on March 5, 2022 by the Kyiv Symphony Orchestra and Chorus (KSOC).   That is ten days after the Russia’s invasion when the battle for Ukraine’s capital was much in doubt.

All religious music—including the great oratorios such as Handel’s Messiah—were banned under Communist rule.

These compositions based on Scripture,  declare God’s glory to the nations. The musicians of the KSOC see music as both a profession and a calling. Their members are graduates of the world-renowned Tchaikovsky National Music Academy and regularly perform in Ukraine and tour the U.S. and Canada.

Their response to weapons of war are words of faith.  When a prayer is sung,  God hears it twice.  In this case, first in Ukrainian, and then in English. The members of the KSOC are a witness to their country of the power of faith.  And to the rest of us when we enter Good Friday moments of deep doubt and hurt.

 

(https://www.youtube.com/watch?v=2qrryKC9vYY)

That same week the BYU singers offered this musical prayer hymn in Ukrainian.  The spirit can be uplifting and contagious.

(https://www.youtube.com/watch?v=I9IVx6bM5ck)

 

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Money Changers and Temples

In his first inaugural address  March 4, 1933, Franklin Roosevelt called out financiers.  Here are some of his remarks about that segment of society.

“This is a day of national consecration. . .

“This is preeminently the time to speak the truth, the whole truth, frankly and boldly. . .our distress comes from no failure of substance. . . Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. . .

“Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. . .

“Faced by failure of credit, they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They only know the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.

“Yes, the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of that restoration lies in the extent to which we apply social values more noble than mere monetary profit.

“Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy, the moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days, my friends, will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves, to our fellow men.

“Recognition of that falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing.”

One initiative to bring more options was passage of the Federal Credit Union Act in 1934.

FDR’s Biblical Reference: A Holy Week Sonnet

Cleansing the Temple   by Malcolm Guite

Come to your Temple here with liberation

And overturn these tables of exchange

Restore in me my lost imagination

Begin in me for good, the pure change.

Come as you came, an infant with your mother,

That innocence may cleanse and claim this ground

Come as you came, a boy who sought his father

With questions asked and certain answers found,

Come as you came this day, a man in anger

Unleash the lash that drives a pathway through

Face down for me the fear the shame the danger

Teach me again to whom my love is due.

Break down in me the barricades of death

And tear the veil in two with your last breath.

The Question:   Where are credit unions today with this ever lasting challenge to cleanse the temples of finance?

 

 

 

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A Critical CEO Change

Today American Share Insurance (ASI) announced that Theresa Mason will be the new President and CEO.  She succeeds the retiring Dennis Adams who has served in that capacity for over three decades.

According to the release:

“Theresa is a highly accomplished Executive within the Insurance industry, having spent the past 16 years in the Columbus Market with Grange Insurance and the Kansas City Life Insurance Company where she served as President of Grange Life Insurance and directed highly effective finance, operations, sales andIT teams.

A Certified Public Accountant that began her career with Ernst & Young in Cleveland, Theresa also carries her CGMA (Chartered Global Management Accountant) and holds affiliations with theAmerican Institute of Certified Public Accountants (AICPA) and the Ohio Society of CPA’s.”

Why This Matters

In ten states ASI is the share insurance option for state chartered credit unions instead of NCUSIF.

Today state charters hold approximately 50% of all credit union assets. The choice of share insurance is critical to a viable dual chartering system.  It allows state chartering authority to be the primary regulator.   Credit unions are closer to the legislatures and policy makers who create the laws governing their actions.

As a result, state charters have traditionally been the incubators of change for the entire credit union system.

In his final Annual Report message outgoing CEO Adams stated:

Without the option of private share insurance, I can attest that there are credit unions in America that would not be operating today. ASI has never been simply another vendor. To the contrary, we have always promoted our core value proposition as a true business partner to all of our member/owner credit unions, and our commitment to that has worked, and worked successfully, and that will never change. 

ASI’s board of directors is composed of credit unions and outside professionals elected by the credit union members.

ASI’s annual report shows the total primary insured shares of $20.4 billion with the program available in ten states.  It has received an outside audit by Deloitte and Touche and unqualified opinion following GAAP accounting standards.

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HEADLINES

April 7, 2020, Wall Street Journal, (pg. B 12)  Fed Could Set Off a Lengthy Tantrum

Sub head: This time with quantitative tightening, the central bank may not give in so easily to market protests

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May 18, 2020, Wall Street Journal (pg. B 1) Virus Deals Credit Unions a Losing Hand

“Almost a third of the nation’s 5,200-plus credit unions are tied to a single employer, industry or other association. . .” The two credit unions chosen to illustrate the story’s theme were WestStar Credit Union in Las Vegas, Nevada and Endurance FCU in Duncan, Oklahoma.  The entire credit union system and these two all are doing well two years later.

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October 6, 2021, Washington Post, Fear Sells.  It’s our Job not to give in to it.  by David von Drehle

“A healthy society is not a society without problems, because no society has ever been without problems. A healthy society is one that faces problems without fear because its people have courage–and their courage raises courageous leaders.”

Enough said.

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An Observer on Freedom, Democracy and Credit Unions

“Alexis de Tocqueville shows that the capacity to choose the right thing is best understood in communal and political terms.

“Praising the New England townships of early Puritan America, he points out that the citizens made their decisions in common, framing laws, electing those who would govern them, setting taxes, providing for the poor, and in all things looking only to themselves and their own responsibility. These physically unimpressive settlements in the New World enacted self-government in ways that monarchical old Europe could hardly imagine in the 17th century. . .

“Tocqueville consistently reserves the word “freedom” for active engagement in public life and a concern for the common good that counters isolated self-interest. Citizens are free when they see and respect their dependence on each other. They can best continue to do what they know to be the right thing if they are committed to political self-rule.”

Source:  Glenn Arbery, A Taste of Freedom,