Category: Co-ops in Capitalism

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Doing the Right Thing

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

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

What It means to be a Credit Union

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

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

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

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

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

The Debate Over Loan Pricing

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

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

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

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

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

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

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

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

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

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

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

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

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

What is a Credit Union’s Purpose?

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

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

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

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

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

What’s Next

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

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

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

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

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

 

 

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When Will Interest Rates Fall?

On Friday’s market close, traders were talking about the 10-year Treasury yield reaching 5%. Right now, it’s at 4.49%.  Other short term rates were:

  • The one-month Treasury bill is at 5.55%.
  • The two-month T-bill is 5.60%.
  • The three-month T-bill is 5.55%.
  • The six-month T-bill is 5.53%.
  • The one-year T-bill is at 5.46%.
  • The two-year note is at 5.03%.

This inverted yield curve (10-year rates lower than short term yields) has been the situation for over a year.

When might rates stabilize or reverse is a topic for any CEO trying to manage  multiple ALM risks.   But must rates go back down?   Or are are markets developing a new normal, higher yield curve?

This week I will look at some industry data about how this rise over the past 12 months has affected credit union liquidity.

Many economic observers have been puzzled why the highest short term rates this century have not stalled the economy, caused a recession, or even undercut the positive stock market gains. GDP is still growing.

But one person thinks this not-too-hot, not-too-cold economy must  face a day of reckoning, unless interest rates come down soon.   This is certainly not the Fed’s latest policy intent from their September meeting.

Kelly Evans is a commentator on CNBC’s The Exchange.  For most of this year, she has been critical of the Fed’s increasing interest rate steps. She cites data from analysts which lead her to believe a recession is inevitable, unless the Fed pulls back quickly.

All of her columns last week examined the sources of interest rate pressures.  These include the changing line up of who is buying Treasury debt, the increased burden from rising federal budget deficits, and why the zero interest rate era of quantitative easing is possibly over.

She has been sounding Cassandra-like warnings  that the Fed’s rate rises are going to break something in the economy-a soft landing is not likely.

Here is  an unusual Saturday column listing all of her commentary from last week.  If you have time to skim only one, start with Friday’s because I believe it summarizes the forces she thinks are now  manifested in growing market jitters.

Her Edited Column

“This was an important week in global markets. Long-term government bond yields showed early signs of a “disorderly” climb, not so much because of any improvement in the economic outlook, but concerningly, as investors seem to be testing how high rates need to go in a high-debt, high-deficit landscape where the key buyer of government bonds last decade (central banks) has vanished from the scene.

Central banks altogether bought $23 trillion of assets (primarily government debt and U.S. mortgages) in the past 15 years, according to Bank of America’s Michael Hartnett. That “liquidity supernova” caused “big asset price inflation…and in recent years subsidized massive U.S., U.K., and European government spending,” he wrote yesterday.

Now, that excess is unwinding. . .

So how did we get here? Here’s a recap of the pieces that examined that issue this week.

Monday: The $2 trillion deficit. How did we get here?   A quick summary of growing government spending and flat revenue growth.

Tuesday: Will the deficit require the Fed to restart QE?  The difficulty in reducing government spending.

Wednesday: When will markets force Washington’s hand? Unless fiscal spending is reduced, there is no telling how high rates might go.

Thursday: If bond yields don’t start dropping… her conclusion: If yields don’t start falling sharply on weaker data–as we’re expected to get in the fourth quarter–investors will really start panicking and rates will rise.

Friday: The sovereign debt bubble is bursting. This is her strongest warning.  It starts by critiquing  Modern Monetary Theory which asserted government deficits don’t matter.  Here is an except:

“By the end of the 2010s, “austerity” talk was ancient history. Global bond yields simply weren’t rising, no matter how much debt governments were issuing. In 2019, almost a quarter of global government debt carried negative yields; it seemed markets were practically begging policy makers for more and more of it, with permission to juice their economies. The New York Times started carrying op-eds promoting the idea of “Modern Monetary Theory,” or near-limitless deficit spending; even mainstream economists like Robert Shiller seemed to half-endorse it.

“And if you really want to take a deeper dive, check out CBO’s writeup (from February) of the U.S. fiscal picture for the next ten years. You can see why markets are getting jittery.”

End

Tomorrow I will review the  liquidity trends in credit union balance sheets for the twelve months ending June 2023.

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People Helping People-A Major Government Agency’s Program

“People Helping People”

No, this is not  NCUA’S  motto.  It is the IRS’s. And it relies on volunteers.

“The Volunteer Income Tax Assistance Program offers free tax help to low- to moderate-income (generally, $60,000 and below) people who cannot prepare their own tax returns. Certified volunteers sponsored by various organizations receive training to help prepare basic tax returns in communities across the country.

“VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations(such as credit unions). Most locations also offer free electronic filing.”

Free Tax Return Preparation for You by Volunteers

“If you are an individual interested in becoming a volunteer, but need to find an organization in your area to link up with, please submit your contact information using the VITA/TCE Volunteer and Partner Sign Up. Your information will be forwarded to the appropriate local IRS office.

VITA Volunteer Testimonials

“One VITA Site Coordinator had this to say about her VITA site, “I feel comfortable saying all taxpayers using our services were extremely grateful for the patience, expertise and timeliness of volunteers preparing the tax return.

We have many repeat ‘customers’ from year to year and – even during the down months – we are greeted throughout the community with a warm hello and ‘see you at tax time.’ This speaks highly for the good work these gifted volunteers perform.”

A VITA volunteer stated this about her volunteer experience, “VITA helped me acquire more knowledge on my tax benefits. I really love it because you are learning and helping the community at the same time. It’s the best feeling.”

An Example for the Cooperative Regulator

This is the IRS — a government agency which seeks and encourages volunteers to carry out its mission of tax filing and compliance.   The words come right out of the credit union playbook.   I wonder why this spirit is not part of NCUA’s game plan?

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The Extraordinary Advantage of Local

IN 1973 a critic of mainstream economic thought was published in  Small is Beautiful: A Study  of Economics As If People Mattered by E. F. Schumacher.

The author espoused a principle that small, appropriate technologies, policies, and polities were a superior alternative to the accepted ethos of “bigger is better”.

His thesis is the exact opposite of the forces driving market capitalism   In a competitive economy firms strive for market  dominance to achieve  monopolistic-like power to better control  the organization’s financial outcomes.

Schumacher advocated for a  “persons-first” or humanistic economics as opposed to contemporary theories which emphasized institutional financial success over human well-being–sometimes caricatured as trickle-down economics.

In the same decade of the 1970’s, active credit union charters reached a peak of nearly 22,000.   Some saw credit unions as an example of the book’s relevance.

While the author’s critique may have been on point, I believe his alternative approach was insufficient.  For the antidote to overpowering corporate influence is not small, but local.

What Local Enables-Growing Big by Staying Small

Local does not necessarily mean small.  One of the geniuses of the business model developed by the $50 billion asset State Employees Credit Union North Carolina (SECU) was the ability to grow to become the second largest credit union by staying local, that is acting small.

This “local” strategy required providing authority and responsibility for the credit union’s operations all the way down to each branch.  Loan decisions, collections and business priorities were set at the branch level.  Each branch’s connections to their communities were enabled through dozens of local advisory boards, member loan reviews,  and  engaged local community relationships.

Each branch operated as a “small” credit union  enabled by central funding and resources including back office transaction and delivery system support, and an ATM network and call center.   The result was 85 years of continuous growth creating an employee culture based on “doing the right thing” for the members.

This approach continues in other credit unions.  In an article on economic empowerment in a new area,  Golden 1 Credit Union’s  Erica  Taylor, VP for Community  Relations, summarized  their approach in  a disadvantaged community  as  hyper-local and multipronged:

If all goes well — and the concentrated, hyperlocal investment works in Del Paso Heights — Golden 1 hopes to partner with other communities to replicate the initiative throughout the state.

“One of the biggest lessons learned is there is no one-size-fits-all solution,” Taylor says. “Each neighborhood, state, or municipality is going to have unique needs. It’s important to start by asking what those needs are and listening.”

Branch Expansions Continue

I believe this advantage is also reflected in the continuing expansion of credit union branches.   As reported yesterday in a review  of midyear data: ” A CU Times analysis of NCUA data released Sept. 7 shows the nation’s 4,780 credit unions . . .had 21,835 locations as of June 30, having added 53 since March.”

Another number from the article: The average credit union branch in June served 6,370 members, up from 6,335 in March and 5,828 in December 2019.

Presence matters.   Branches are still the major investment for demonstrating a credit union’s relevance for members in a community.

The  Decline of Local institutions

It is often difficult for small organizations to survive alone, without the support of external expertise.  Especially in a community or section of a city that is economically stagnant.

When one looks at long serving organizations that continue to thrive locally such as the Boy/Girl Scouts, college sororities/fraternities, the PTA, national food franchises, the Catholic church and many other successful institutions, the formula is local leadership and centralized common support.

The following  excerpt is from an interim pastor whose responsibility was to close a local church which could no longer sustain itself.  In this summary event, he laments the loss of this “local” presence:

It is hard to imagine another place where this particular group of people would have gathered together for a common purpose. Eugene Peterson reminds us in his book Subversive Spirituality:

“The work of salvation is always local. Geography is as much a part of the gospel as theology. The creation of land and water, star and planet, tree and mountain, grass and flower provides ground and environment for the blessings of providence and the mysteries of salvation … nothing spiritual in our scripture is served up apart from material … this street, these trees, this humidity, these houses. Without reverence for the locale, obedience floats on the clouds of abstraction.”

Imagine being told you can no longer go to a place that you returned to every day for decades, a place you returned to not because you had to, but because it was where you wanted to be. But now it is going to be closed, sold, and, depending on the buyer, it might be torn down and turned into an apartment complex or a storage facility.

This is the same loss that occurs when a credit union merges. Leadership and focus move away from long standing community ties.   It is an  economic, emotional and existential loss for members and their community.

A current interpretation of Schumacher’s “humanistic economics” is George Hofheimer.   He worked for Filene and CUES for decades and is now an industry consultant.   He wrote Banking on a Human Scale to describe how credit unions build relationships, implementing the advantage of local solutions.

His thesis:  “In a world dominated by scale and technology, smaller community based  credit unions and banks have the chance to serve more people and serve them better by making banking more human.”

SECU turned the widely practiced financial growth model in financial services of a centralized, top-down command and control  on its head.  It grew by staying local in focus, execution and relevance.

It implemented the oldest rule of political success which is “all politics is local.”  This reality is how people see the impact of their representative’s decisions on their lives, jobs and communities.  Are they in touch or a remote elite?

Credit unions, as democratically designed, have this same political capacity which when enabled, no competitor can match.  Have you ever tried to oppose a Capital One branch closing for example?

The founder and current CEO of Nvidia, the fastest growing technology stock this year, has a philosophy described by one employee: “He is big on staying as small as possible while still doing big things. “

For credit unions I would insert the word “local” for small.   Member-owners can see how their money is being used and feel their participation matters.  SECU’s experience shows how powerful it is to be large and local at the same time.  Scale, branding and technology cannot defeat the entrenched advantages of community pride and loyalty.

 

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Transparency: A Test for the Cooperative System

“Democracy Dies in Darkness.”

That is the official slogan of The Washington Post, adopted in 2017. The slogan was introduced on the newspaper’s website on February 22, 2017.  The phrase was popularized by investigative journalist Bob Woodward, who used it in a 2007 piece criticizing government secrecy.

Yesterday long-time credit union supporter and reporter Frank Diekmann published an “editorial” on the CU Today web site, Why NCUA Should Require Credit Unions to Disclose What They’re Paying for Banks.

Based on years of covering bank purchases, he critiques the absence of meaningful data in many of these transitions.  No information is provided, such as the purchase price,  that would show how the members collective capital is being used to pay off owners of banks.  Here is some of his logic:

“Why the secrecy?

“It’s quite the hypocritical disconnect for a CU community that defends the federal tax exemption largely on the back of the “structure,” that is that credit unions are democratically run cooperatives where the members are the owners, to then turn around and say certain information belongs to some but not others (never a good sign in a democracy) and that some cooperators are more equal than others. . .

“There is another big, CU-principal-grounded reason for letting members know how much of their money is being spent and for what, and it’s a real ironic kicker: if the acquiring credit union were a publicly traded bank buying up another bank, it would be required to disclose the purchase price, and analysts/customers/the market would have the opportunity to put the ROI under the microscope. . .

“And then there is this other “let’s not go there” issue. But I say, let’s do. While this may not be the primary reason for buying a bank, it’s also not an innocent bystander: CEOs who have language in their contracts tying their compensation to asset size are getting raises out of these deals. Members have a right to know about that, especially since—again—it’s their money being used to goose the comp.

“It’s time to dispense with the rosy sounding but generic banality and to specifically document how members of the acquiring credit union benefit, and how the former customers are better off, with some real dollar figures around the savings on loans and fees and the increased rates on deposits. You know, how much more is going into people’s pockets?”

Transparency Is the Lifeblood of Democracy

Frank’s concern about credit union’s secrecy extends far beyond bank purchases.  Boards and CEO’s have grown used  to not disclosing or even explaining anything to members especially around their leadership roles and activities.

Credit unions want to retain their “private” character, but to act unfettered in the public market place.  CEO and board salaries are  not required to be disclosed by federal charters.  For states the information is supposed to be provided in the 990 filing, but it is often late, after the major participants have left and not reviewed by any authority for accuracy.  Many credit unions check the disclosure box on the report as provided only “on demand.”

While some merger disclosures were required from a 2018 rule, NCUA’s oversight of the rule is inconsistent and lacking in any meaningful effort to inform members about the transaction.  Merger actors have perfected the arts of circumventing required benefit disclosures.

The supposed democratic governance model of one person one vote in annual board elections never happens, because there are no elections.   The board controls the nominations to just equal the vacancies.

Even when the rare election takes place, the ability of members to learn about candidates’ position is not offered by the credit union-except for incumbents.  See the current SECU board contest as an example.

In almost all other institutions dealing with the public, the SEC mandates disclosures far beyond anything credit unions provide so that owners of companies can be informed about the basis for transactions.

NCUA has completely ignored any obligation to protect the rights of member-owners compromising the fundamental governance mechanism in a cooperative.

Transparency Is a Requirement for Democracy

It’s no accident that the Post’s motto was aimed at governmental secrecy. The one exception I would raise to Frank’s thesis is that he wants NCUA to require greater disclosure.  The regulators are part of the problem.

NCUA repeatedly draws its own curtains of secrecy over its actions and even “facts.”  Listen closely to today’s hearing on the NCUSIF for reference to undisclosed econometric models and staff actions not subject to public or even board scrutiny.

When the NCUA chair was asked recently about a well-publicized problem in a credit union, he commented that he couldn’t talk about such situations and pivoted to the need for more authority over vendors.   NCUA itself fails to put on the public record the details for its decisions leaving both members and the industry in the dark about its effectiveness or even awareness of key events.

The Transparency Advantage

Frank closes with another reason, beyond the owners right for relevant information to make informed decisions about the credit union’s activities.

It is a moral issue that can put cooperatives on the ethical high ground or cast them as just another form of  self-serving enterprise:

“Not only would documenting all that (about bank purchases) be the right and ethical thing to do, it would make for an effective response to critics. . . that claim credit unions are just “profit-seeking enterprises masquerading as tax-exempt non-profits.”

Transparency is a leadership requirement.  It creates trust and confidence even when things go wrong.  Doing the right thing should not require a rule or reg.   It is a character trait.  Cooperatives and transparency are naturally intertwined, until pulled apart.  As Frank points out, that separation undermines the special possibilities and accomplishments cooperatives were empowered to do.

 

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What to Listen For in Thursday’s NCUSIF Update at NCUA

Cooperative design is a unique competitive advantage in a capitalist society.  The success of for- profit firms is based on their ability to extract value from their customers to create maximum return for their owners.

In coops the owners are the customers.  This alignment creates a financial and a trust superiority versus competitors when the model is managed well.

In 1984 the NCUSIF was redesigned following coop practice. This change drew from the experiences of over a dozen successful state chartered insurance funds. The design’s core feature is the 1% deposit perpetual underwriting with explicit checks on the oversight and management of the fund by NCUA.

One of these oversight tools is the monthly posting of the full NCUSIF financials on NCUA’s website. This is the same regular reporting NCUA requires by credit unions to their member-owners.

Quarterly the NCUSIF Board is publicly briefed on staff’s management of the fund.   This provides the credit union owners insight into the Board’s oversight of credit union members’ funds.

The June 2023 financials have been posted.   There will be additional numbers  such  as CAMELS score distributions, projections and updates on investment management-the Fund’s largest asset in the meeting.

What should credit unions look for in the briefing?  How do board members query staff’s performance?

What NCUA Staff Manages: Retained Earnings

The primary indicator of the Fund’s performance is retained earnings.  The responsibility is to maintain a retained earnings ratio of  .20% to .30% (the traditional floor and cap) of insured savings.   This ratio can be tracked every quarter as the industry reports its insured share total in the 5300 call reports, and NCUA reports NCUSIF’s retained earnings for the same quarter end.

The history shows this ratio tends to be very stable with minimal change even when some factors, such as share growth, show wide fluctuations. Below are the actual results of this ratio over the past three and a half years:

Dec ‘20:  .3179%

Dec ’21:  .2942%

Dec ’22:  .2922%

Mar ’23; .2883%

Jun  ‘23:  .2908%

Adding the 1% of insured savings as of the same date shows that the normal operating level (NOL) has been very steady at the upper end of its traditional cap of 1.3%.

In the May 2023 NCUSIF board update as of March, staff projected an NOL of 1.25% at June, down from the December ’22 ratio of 1.3%. This hypothetical forecast suggested the retained earnings “cushion” would fall by half in just six months.  It was misleading and incorrect.

This 4 basis point error was due to two inaccurate projections in the presentation:  the retained earnings for June came in $31.3 million  higher and insured share growth $32.3 billion lower than the forecasted numbers.  This outcome should be a caution about future projections. This estimate was provided just  45 days before the June month end with  recent trends readily available.

Managing the Retained Earnings Outcome

One revenue and two expense items are management’s responsibility in achieving  retained earnings.

The first and most immediate is operating expenses.  Through June the NCUSIF expenses have grown 13.7% or $14 million more than expended through the first six months of 2022.  This is double the Fund’s long term rate of expense growth since 2008 of 6.9%.  Across all three credit union provided funds, the combined expenses grew 14% in the first six months of 2023, an indication of government’s ability to spend when checks and balances are lacking.

The second factor is the expense provision for insurance loss. To date  in 2023 the fund has added $20 million in additional provision expense versus  actual losses of just $1 million.  The June 2022 reserve was $169 million increased to $204 million one year later.

The reserve expense comes out of retained earnings.  Currently it equals 1.2 basis points of total insured risk.  Since the taxi medallion losses, the NCUSIF has not reported net cash losses for an entire year exceeding 1 basis point since 2013.   If there is a formula NCUA uses in preparing this reserving level, then that should be published so the assumptions can be validated with actual experience.

The Single Revenue Driver

The third factor and only revenue item other than an infrequent premium, is the earnings on the $22 billion par value investment portfolio.  By law, no premium can be charged if the NOL exceeds 1.3%.

Since December 2021 the NCUSIF’s portfolio market value has been below book.  The market loss was $1.7 billion at Dec ’22, $1.3 billion at March ’23 and then rising back up to $1.5 billion at June.

The year to date yield is 1.79% but is slowly rising and was 1.95% for June.  At the close of markets yesterday,  short term treasury rates up to one year were in the 5.5% range.   The seven year bond closed at 4.47%.  The inverted yield curve started in July 2022 when short term rates were higher than longer maturities.   NCUA announced a change in its short term liquidty target in November of 2022.

The NCUSIF’s investment strategy is to provide sufficient funds “to meet operating costs and liquidity needs without having to sell investments at a loss or use the agency’s borrowing authority.” 

The market loss at every investment bucket except overnights at June monthend, shows this objective has not been met.   If even half of the $22 billion investments were short term, the yield of over 5% would produce revenue of $550 million and result in more than sufficient income to meet the fund’s operating needs, sustain a 1.3% NOL and pay a significant dividend to the credit unions underwriting the fund.

The NCUSIF’s current weighted average yield is 2.85 years. Should market rates stay at this level, that is the approximate time it would take for the entire portfolio to return to par.   This would result in a market underperformance of five years or more from the time the first time the fund showed a combined value below market.

Tomorrow’s meeting will be a critical time to see how staff has evaluated this extended period of below market performance. What changes do they anticipate going forward to better align performance with the two policy goals?  What interest rate risk monitoring enhancement is needed to avoid this situation in the future?

What about Share Growth?

The only other factor affecting the retained earnings-NOL ratio is credit union share growth.  To maintain a stable .2 to  .3 ratio, the net income must grow at the same rate as insured savings.

But NCUA staff do not control share growth, only the three factors above. In the second half of 2022, insured savings had a negative growth of $5.0 million.  That could be the outcome again in 2023.  For example the second largest credit union, SECU NC, had a negative share growth of 8% for the 12 months ending this June.

Fortunately it is very easy to model all four variables in a dynamic spread sheet through the end of the year.   For example if one assumes fund expenses of $220 million, insurance provision of .5 basis point of insured shares, 2% annual share growth, a 1.85% portfolio return, then the current retained earnings ratio would increase from the June level to .2969 or just short of the .30 historical cap triggering a dividend.

Here is the model anyone can use.  Any of the four variables can be changed, even the yearend  retained earnings currently at .30%.  The latest actual data can be input daily if necessary.

One option is to run what ifs and breakeven analysis. For example if the fund’s investment yield had been 2%  higher for this year (3.85%), and all else the same, the yearend outcome would be an retained earnings ratio of .3225 or $387 million above the .3% traditional cap resulting in  a dividend for credit unions.

The 1% True up Calculation

At the current time, NCUA uses a bifurcated ratio calculation for the yearend NOL.   It uses the most recent retained earnings and insured shares.  However staff,  instead of recognizing the 1% statutory liability from credit unions, includes a six month old figure  from June in the denominator.

The currrent NOL number is an inaccurate and misleading presentation of the fund’s real financial position.

For example using the current June 1% capital deposit number omits entirely the obligation of 49% of credit unions with assets less than $50 million.  These are not required to submit a June 1% trueup.

In the past, the use of a six month old total 1% deposit amount has led to an understatement of the actual NOL calculation at yearend.   This underreporting keeps credit unions from a potential dividend which was the commitment made for their open-ended perpetual 1% underwriting.

If that same method is used at 2023 year end and there is a major runoff in insured savings in the second half, then using the six month old 1% deposit  will overstate the NOL and potentially trigger a dividend from a ratio six months out of date.  If the 8% decline in SECU’s 12 month share growth were to occur across the industry, a dividend would be likely even with the 1.33% NOL.

This 1% late trueup recognition has been raised in Board meetings for almost 2 years.   Staff has promised to provide options from an outside CPA firm’s review.   Board members have referred to recommendations in the study that provide ways to better present the actual ratio.  It’s time the NCUSIF bring this ratio into a better presentation of the fund’s stability and strength.

The NCUSIF is a Cooperative Advantage

When well managed the NCUSIF is a competitive advantage for credit unions versus FDIC insured institutions.   The FDIC ratio of fund balance to insured savings was 1.10% at June 2023.  Banks are facing increasing insurance premiums far into the future to bring the ratio back to the immediate goal of 1.35%.   For cooperatives, the 1% deposit ensures the NCUSIF size is always relatively constant to the insured shares risk.

Since the 2008/9 financial crisis and the Federal Reserve’s quantitative easing to sustain the economy, short term rates have fallen to historic lows.  Folling the Covid shutdown this resulted in ZIRP, or zero interest rate policy, leading to the subsequent inflation.

The Fed has made clear its intent to return to a 2% inflation level with real interest rates in excess of that goal.   During this time of near zero rates, the NCUSIF, like many credit unions, went long hoping to pick up yield.  In doing so it fell short of its two primary objectives of liquidity (without resorting to borrowing) and easily covering operating expenses.

This Thursday’s board meeting is an opportunity to see how Board members and staff react to the changing rate environment and their role overseeing the fund’s performance.  Tune in.

 

 

 

 

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A Moment of Impact for a Member

From Tim Mislansky, CEO, Wright-Patt Credit Union in Dayton, Ohio:

Kim Luke works as a Financial Coach at Area A. We have a member, David, who was declined twice for a home equity recently because he was applying for a fixed loan when his credit score would only allow for a line of credit.

Kim came across this declined application and knew this was not right and there was something we could do for him. Kim reached out to him, explained the situation, and David decided to proceed with doing the loan application.

After gathering all the information needed from David, Kim learned he was working multiple jobs and struggling with his credit. He had eighteen open lines and a mortgage on his report, all with different due dates. He was getting behind on payments due and struggling to keep up and was just generally having a tough time.

He has had some rocky payment history with us in the past because of this, but underwriters saw exactly what Kim did – the potential to drastically improve someone’s life and the loan request was approved.

With this consolidation, we paid off every debt and even had some room for home improvements he has been putting off for a while. He has gone from nineteen due dates and payments to just two. His mortgage and now this home equity. But here is the best part:

This consolidating is going to save David over $3,100 a month. This is going to completely change his life. He is going to be able to go back to working just one job again.

This loan had the ability to not only change someone’s life but also show him exactly what Wright-Patt stands for and what we can do for our members. It really put into perspective just how rewarding and fulfilling our job can be!

Thanks, Kim, for looking past what we cannot do, to what we can do, to make a big impact on David.

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THE Strategic Question for the Credit Union System-and Congress

Lots of topics about credit union’s priorities last week here in DC.   The NAFCU caucus put their lobbying agenda on the table as they promoted the end of their independent efforts by merging with CUNA.

The continuing announcements of bank purchases, mergers and even member voting continue. Virginia Credit Union is asking members to approve management’s effort to convert to a federal vs state charter to “simplify” its regulatory oversight.

In these events and other well covered forums and leadership updates, one topic is missing from the discussions:  Is the credit union cooperative model still relevant?

Some credit unions still embrace their member-centered purpose.   The focus on member control follows.  But the actions of others suggest it is time to shelve that model.   The goal is to move on to some other understanding of the functions of a tax-exempt financial firm in a market economy.   As more credit unions embrace the tactics of their institutional competitors focusing on expansion and corporate success, does the coop’s role need to be rethought?

If one looks across the economy the needs of folk of modest means has not diminished.   It has actually grown.  The allocation of financial resources between the haves and have nots continues ever wider.

Cooperative design facilitates multiple business models, asset sizes, community roles and creative initiatives.   When an institution’s priorities become the center of effort versus the member-owners well-being, then is the model being disconnected from its primary purpose?

If we don’t discuss this situation openly, others will raise it for us.   Last week’s WSJ article Credit Unions Stray Far from Their Mission, was a well written hit job.  It included two supposedly academic articles to prove their point.

I would hope the concern is how can credit unions become better cooperatives for serving members, not debating competitors.   That member-focused discussion is one we would all tune in for.

 

 

 

 

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The Contested Board Election at America’s Second Largest Credit Union

(Case study 3 of 3 on cooperative democracy)

What could be the most significant board election in the history of the credit union system is now underway.

State Employees Credit Union (SECU) North Carolina is in the middle of a two month qualification and member voting period for three open seats on its eleven person board.   There are six candidates on the ballot.  Three were board nominated-all sitting directors.  Three are the result of their garnering a minimum of 500 member signatures supporting their candidacy.

Absentee voting began September 1 and in-person voting ends with the Annual Meeting on October 10, 2023.

SECU’s website contains  documents  describing the Annual meeting, critical dates and voting steps.   The current board members are listed.   There is a “Statement of Background” on each of the six candidates.

There is no other election  information I could find on the website, such as statements from the candidates about why members should support them.

This Vote’s Impact the Credit Union System

SECU is huge.  At June 30 it reported  $49.6 billion in total assets, almost 8,000 employees serving  2.8 million members in 275 branches.

The first lesson from this vote is that one of the largest credit unions with members distributed throughout the state can successfully conduct a contested election for open board seats.  Most large credit unions’ annual director “elections” are via “acclamation.” The number of candidates equals the open seats, so no ballot.

SECU shows the feasibility of both an absentee ballot and in-person voting culminating in the Annual Meeting.

Secondly member-owner voting matters.  The outcome of this ballot will confirm or potentially reset the credit union’s business priorities with members.  Given the circumstances preceding this vote, the members’ choice will make a difference. This is the owners’ role, but one rarely consulted.

How This Contest Developed

At the October 2022 Annual Meeting former CEO Jim Blaine read a statement  asking how six “initiatives” were in the members’ best interests.   These included a potential merger, FOM expansion, risk based pricing and other service changes.   The  two resolutions were deeply informed and adopted without opposition.

Jim had been completely absent from the credit union for over  6 years.  His role at the 2022 Annual Meeting  was in response to concerns that many current members and senior staff of both SECU and LGFCU had asked be  raised on their behalf.

These employees and members were deeply apprehensive in the about face of SECU policies and practices.  Few however were in a position to knowledgeably question the changes.

Blaine and prior board’s leadership was based on a different cooperative vision of SECU than the new CEO, Jim Hayes and his team, were implementing.   Their business priority is to modify  SECU’s efforts to more closely mirror how other large credit unions were growing.

The cooperative model that Blaine and his successor Mike Lord had implemented was based on “a democracy of opportunity.”  Every member received the same rate for the same loan type and the same return on savings regardless of balances.

The focus was on serving those who might have the least, or know the least, but have traditionally been charged the most for financial services at other firms.

These two  CEO’s had invested decades creating a culture with SECU branches in every county, on-site decision making and execution, all informed by local advisory boards.   There was no upselling or employee bonuses.  Promotion from within was preferred.  Advertising was word of mouth or press  releases about SECU’s foundation grants.

To many an outsider and professional peers, this approach seemed “old school’, out of touch with current options and overlooking major markets of opportunity.

After waiting for a productive dialogue and response with the leadership, in February 2023 Jim launched a blog SECU-Just Asking ! to take the issues public.  The new CEO Hayes left in June and the board appointed 35-year SECU employee Leigh Brady as CEO.

Risk based pricing on consumer loan products continued.   Blaine’s blog became a center for critical commentary.  It is now engaged in the board election to support the three “outsider” candidates.

This contested election will give the member-owners the chance to express their views on the credit union’s direction-that is the one member, one vote coop design.

The Campaign Underway

The evidence of public campaigning for member support is limited.   SECU is putting its best food forward offering rate specials:

The web site has short  videos of Who We Are with emphasis on SECU’s North Carolina roots.  There are brief statements by board members on LinkedIn and reports of CEO Brady and board member visits to branches.

Blaine continues his daily analysis of current leadership and trends on Just Asking!.  For example he calls out the fact that  over the past 12 months members have withdrawn over $4 billion in savings.  He urges support for the three member nominated candidates and contrasts their views with the incumbent directors’ recent decisions.

I sent an email to all six candidates.  It stated I was  writing a blog on coop democratic governance and wanted to present their efforts as candidates.

I suggested three questions:  How are you campaigning? What is the value of an election for members?  Your top priorities if elected?

Two candidates responded, both member-nominated. Excerpts of their replies are below.  I believe that their words convey the issues more clearly than any professionally produced campaign statements or videos.

Michael Clements whose qualifications are on the website sent  the following:

How Campaigning: I have asked for support from our local advisory board (I am a member). . . asked them to share my information with their individual networks for support. . .  I am not on social media (but a member of several other boards) so for my friends and colleagues I have asked them to share with their social media contacts. 

Value of an election:   The value of any election is to bring in new people who may provide new ideas and alternate ways of doing business.  Historically, we were given the opportunity at the annual meeting to get nominations from the floor which, to me, represented an openness to potentially obtaining and recruiting new board members and maybe new energy and ideas. 

The present practice of the nominating committee to interview those members who want to serve and then rejecting them for the status quo seems disingenuous.  Then to ask that if you want to self-nominate that you will need to obtain 500 actual signatures in 10 days! appears as an attempt to discourage rather than encourage an openness to be inclusive for our members.  I have served on four boards/committee with SECU. 

Top priorities:  I could work to strengthen the foundation that has allowed SECU to become an incredible organization and the second largest credit union in the US.  MEMBERS FIRST!  When you look at our logo, State Employees Credit Union, it has the image of North Carolina and then states “There is a difference!” 

This difference is that in our credit union, every member is equal and can avail themselves of all of the services which they qualify for.  No member is better than another and will thereby receive preferential treatment.  This difference is that we will NOT treat our members as if we are a traditional bank. . .

The second replyis from Barbara Perkins whose background is on the website.

How campaigning:  I feel it is important to mention that the first members to whom I appealed were those serving on the Board of Directors. . . After striking out, I started creating awareness through my personal Facebook page and emails to family, friends, former coworkers, former NC SECU employees, Loan Review Committee volunteers (25+ years of service), and Advisory Board volunteers (8 years of service). . . Once I qualified to run for the board, many of my friends/family/coworkers volunteered to help me obtain the required 500 signatures in the given 10 days. . .  currently I have a post on my FB page leading them to the www.SECUjustasking.com blog so my FB friends and their friends can research the history of the current board, the changes to policies and examples of judgments that have been detrimental, in many people’s opinions, to the NC SECU. 

Value of an election:  We have had ‘contested elections’ in the past.  Any member could do what was truly a ‘self-nomination’.  They expressed their desire to run, their biography (which they were allowed to write) was distributed at the annual meeting, they were allowed to speak to the membership before the voting and we voted.  If you review the (new)  ‘rules of behavior’ for the Annual Meeting, this has changed. . .  ‘contested elections’ inspire transparency and communication which should be provided voluntarily by the board.  Public relations firms can provide fancy words but actions are the proof of intention. 

Top Priorities: Each topic included 3-5 specific actions, omitted for brevity.

  1. a) Return unity of purpose to the membership, the employees and the management by getting back to the basics
  2. b)  Prioritize member needs with Credit Union operating funds (
  3. c)  Return to programs that benefit the membership
  4. d)  Stay in our lane

The three member candidates were also profiled on Just Asking!

Member Commentary

Beyond the SECU website I could not find any other organized public coverage of the campaign. Some members following events are posting on the Just Asking! blog.  An example of their involvement are the 42 comments after the September 11, 2023 post which profiles an incumbent candidate, Garland, who would become the new Chair if elected.  Two of the many remarks:

Most people live in darkness with no clue what’s going on around them.. You don’t need to have 10 degrees to know that SECU losing 4 billion dollars under this leadership is not a good thing.  or,  

Let’s have the nerve to tell the members about this. They can see what is happening in the drop in quality, bad rates. We need to tell them who is doing it to them.

SECU’s  Example

In many credit union CEO’s  view, the cooperative model developed by Blaine/Lord is seen as an anachronism, behind the times.   The fact that it had become the second largest credit union in the country by far, and had recorded 85 years of steady growth was discounted as an anomaly to current strategic thinking.  SECU’s many innovations in both product and service strategies and the employee culture were largely overlooked.

However the most important result of this coop’s model is not financial asset size or stability. It is that members believe in and support their credit union.  That trust has been and still is the foundation to sustained success for every firm.

Democratic voting is the water that keeps a cooperative’s grass roots healthy.    In this case it may be the means  to bring it back to life.

Members have become engaged as owners.  They are using their voting to assert their views about the future direction of SECU.  This is what democratic governance offers.

This example is an event that could bring new life to other large credit unions, now groping with technology fixes, merger solicitations and even bank purchases to maintain their market relevance.

SECU shows the business process is much simpler.  Just give  members a voice and keep in touch with their priorities.   Members will transform into  owners willing to invest more than their money, but even more critically,  their energy and commitment when their credit union’s future is at stake.   Those are the fans whose loyalty any leadership team should crave.

 

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The NAFCU-CUNA Merger and Cooperative Democracy

(Case study 2 of 3 on cooperative democracy)

There may be no more critical decision this year for credit unions than the voting now underway to merge NAFCU into CUNA.

Voting is the moment when the cooperative democratic process is most potent. One member, one vote regardless of asset size or other claims to influence.

While both trade organization’s members will vote, the choice that  really matters is what NAFCU  voters decide.  Their approval requires a two-thirds majority to dissolve the trade group.

What NAFCU members choose will affect every credit union.  Perhaps far into the future.

With NAFCU CEO Berger announcing his retirement, directors from both firms already working on transition plans, staffs  briefed on their future and joint leadership meetings to promote a single outcome, is this decision already a done deal?  Does voting matter?  If NAFCU members do not approve, is there a plan B for their organization?

Credit Union Trades Evolve with the Cooperative System

From the initial state leagues and Filene/Bergengren’s Credit Union Extension Bureau, collaborative trade support has evolved.  CUNA and NAFCU’s priorities have closely aligned with the dual chartering system.  CUNA focused on state leagues and regulations from its Madison WI headquarters and NAFCU the federal charter track from it’s sole DC office.  (See NAFCU’s 1967 founding statement at the end of this post.)

CUNA moved its primary leadership to DC in the 1990’s when it selected Dan Mica, a former congressman as its CEO. Has the time come when these different histories and organizational focus should combine?

This short summary by Berger presents the core merger rationale:  We’ve heard from many of you over the years about the need to better align our advocacy, reduce redundancies in the events and trainings we offer, and work together to strengthen the industry.

The (new) organization will be able to dedicate more resources to the areas that matter most to you. It will be the best of both CUNA and NAFCU – strategic, decisive, cost and value conscious, and responsive.

The Diverse Cooperative Model

Credit unions are not a monolithic system.  The genius of cooperative design is that it supports many different business models.   The  $ 15.5 billion Alliant Credit Union’s digital only model is the antithesis of the $5 million Sixth Avenue Baptist FCU (founded in 1963 in Birmingham AL) as described in this CUES article.

Navy FCU with over $155 billion in assets may have the same member-focused mission as the CDFI Holy Rosary Credit Union in Kansas City.  But their national representation needs are very different.

The two trades have addressed differing priorities when representing their members.  NAFCU has been more critical of NCUA spending, the TCCUSF merger and defending the unique 1% NCUSIF cooperative funding model.  CUNA and the leagues have defended the state insurance alternative, more open FOM approaches and even the purchase of banks, the vast majority completed by state charters.

Because NAFCU is smaller with a single organizational presence it has had to “try harder” at times.   When I asked the CEO of a state charter why the credit union belonged to both organizations, he replied: “The NAFCU team is very responsive and discounted our dues. They also have some great training programs and better conferences.”

At the NAFCU Congressional Caucus in DC this week, CEO Nussel described CUNA’s advantage as its “industrial strength” and NAFCU’s as being “more intimate.”

A key question is whether the credit union system is better off with a monopoly of national representation, or whether choice can be more effective for the system’s diverse business priorities?  Is it better to have a single unified voice or the option of a more accessible DC relationship?

Without  alternatives, the diverse needs of credit unions represented by  one organization could quickly follow the path of least resistance.   Instead of promoting more opportunities  for member solutions, lobbying protects the status quo: defeating tax threats, stopping Durbin reforms, limiting CFPB jurisdiction, responding to bank criticisms and challenging regulatory actions that enhance member transparency.

There Is No Easy Answer

This democratic merger vote matters.   The outcome will affect the future of advocacy in Washington for all credit unions.

A merger may resolve the future of NAFCU, but it could also create a new set of challenges.  Without alternatives large credit unions may decide to undertake their own DC representation, which several have done in the past.

Here is just one of many courses that help organizations navigate their DC interests: Decoding D.C.: Policy, Power, and People.

If the decision is indeed still open for your credit union,  consider critical questions before voting.   These could include:

  1. What do I rely on my trade organization participation and investment to yield?
  2. What does my community need from our cooperatives empowered by this combined structure and from the people attracted to these careers?
  3. Credit unions as cooperative organizations are most often local, personal, and vested in action – will this merger dilute or add to these capabilities?

And, does NAFCU have a Plan B?

Editor’s Note: NAFCU’s founding description from its website

In 1967, a group of hard-charging credit union CEOs pushed the envelope. They had to grow, and they needed an association that would help. So they created NAFCU–an aggressive association forged with equal parts expertise, political savvy and boldness.

Since its founding, our small, but agile association has been a highly effective advocate for credit unions at the federal level. We were the first credit union trade association to set up shop in the Washington D.C. area, and we’ve crossed many milestones since our first major victory in 1970, when the National Credit Union Share Insurance Fund (NCUSIF) was enacted.

We were the sole (and successful) defender of the NCUSIF in the early 1990s when regulators and the White House were advocating for major change to it, and we were the only trade association to oppose the CFPB’s authority over credit unions when the agency was formed (a stance we keep to this day as we fight to reduce the agency’s burdensome impact on credit unions).