Category: Cooperative Design

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Democratic Disruption at SECU’s 85th Annual Meeting

SECU’s October 11, 2022 annual meeting was a rare example of democratic cooperative governance.

Following the traditional annual meeting agenda, approval of minutes, the Chair’s report, election of directors, audit summary and President/CEO Jim Hayes’ update,  the Chair asked if there was any new business.

There was.

A member-owner presentation proposed two resolutions for the members to discuss and vote upon.

The first asked the Board to consult with staff and advisory board members to learn how six  changes he described would benefit the member-owners.  The dialogues should  be published for all members.

The second requested the board provide members SECU’s Strategic Plan at least 90 days prior to the 2023 Annual Meeting.

The chair asked  for comments.  One volunteer advisory board member said he had heard nothing about the topics raised.   A second member commented that he didn’t want the credit union “to become a Piedmont Airline.”  (merged out of business).  A current director spoke up supporting the second motion.

Both resolutions were approved by the approximately 1,000 members, with virtually no opposition.

The meeting was broadcast live on YouTube.  Here are the timing of key events: 29:50 Chair report; 54: Foundation update; 1:05 CEO Hayes report; 1:21 Call for new business with two resolutions at 1:48 with open discussion and member vote.

Should Credit Unions Care about SECU’s Debate of its future?

SECU at $51 billion is America’s second largest credit union. Its membership covers an estimated 25% of North Carolina’s population.

This event was covered in  a lengthy NC Business article and  in the North Carolina’s Banking Association’s weekly update.

SECU’s success and size extends far beyond its members or its home state.  It’s a model others study. It has an outsized influence in both state and national credit union organizations.

SECU’s leaders’ duties are more than managing a business.  The credit union has a position of influence and power beyond its balance sheet.  Its actions will be viewed by outsiders, the public and competitors, as an example of what a credit union is capable of becoming.

SECU’s reputation and widespread operating network means its choices are followed  by many in the cooperative movement as an example of credit union competence.

Blaming the Messenger

As events unfold, many observers will have opinions. Some, I believe,  will reflect  a capacity for missing the point. It will be framed as a conflict between a current and a former CEO as in the following LinkedIn comment:

As I read this article, I was saddened that a CEO who has retired and handed off the reins goes public when the new leadership makes strategic moves, and the retired CEO disagrees. This willingness to fight the new leadership’s right to make strategic decisions is wrong on too many levels.

This happened recently at SECU when Jim Blaine disrupted the annual meeting with a lengthy letter he read in totality because he was against the strategic direction the new leadership was taking the credit union. CEOs need to realize that when they step away, it is now someone else’s turn to lead forward. #ceo #leadership #retired

This is a position with which many CEO’s would sympathize. It absolves commenters from examining the issues raised.   But I believe this position is far too shallow.  Here’s why.

Very few member-owners would be capable of preparing the in-depth analysis of this presentation. But this was not a solo effort. In his opening Blaine comments there had been widespread concern from both employees and members about SECU’s apparent changes of direction and culture.

When individuals working in or interacting with an organization believe it to be going “off course” counsel will be sought from former leaders.   In the corporate world  this approach is shown by examples such as Disney, Starbucks and Apple where there were call outs to prior leaders.

When credit union members and employees are deeply concerned about  an event such as the mergers of Cornerstone FCU in Carlisle PA or Vermont State Employees, they reach out to former leaders. What do you think?  Will you help?

Former leaders are not one-person shows.  They understand the politics of leadership.  Any public role is carefully considered.

They become the messenger and therefore the face for larger issues.  Their previous roles give credibility to the concerns whereas an individual employee, member, director, vendor or credit union collaborator would not have the standing to raise.

Raising questions about  a strategic pivot in a “courteous and respectful manner” at the owners’ annual meeting is a vital process for cooperative governance.

An Example of Coop Democracy

This required annual meeting is a critical process for democratic cooperative governance.  It is the opportunity for the board (chair) and CEO to inform members where the credit union is heading, the reasons for change, and how it will affect them.

After outlining six new policy or business initiatives, Blaine closed with two summary questions: Who are we? Where are you leading us? 

Those are questions every CEO and board should be willing to answer for their member-owners.

Tomorrow I will summarize the issues raised, the credit union’s responses, and how SECU aligns with the nineteen other credit unions over $10 billion in assets.

 

 

 

 

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A Return of $250 for Each $1 Invested

I recently received the best return ever on an investment: $250 in value for each $1 sent.

Late last year I read about a 501 C3 nonprofit (RPI Medical Debt) that bought unpayable medical debt using  donations and then retiring all the acquired debt for consumers.  Several news articles gave details about churches and local governments using this method to help members of their communities.

A December 20, 2022 New York Times’ article Erasing Medical Debt described how the program had extended to major cities such as Chicago and Pittsburgh.  The story stated that 18% of Americans have medical debt turned over to a collection agency.

I decided to test the RPI Medical Debt’s concept.   Was the payoff “leverage” as great as claimed? The 100 to 1 debt abolishment standard sounded too good to be true.

I also wanted to learn how targeted the program could be as a potential initiative for credit unions. Credit unions are significant originators of consumer debt.  They know how past due delinquencies on a credit report can undermine anyone’s financial options.

Contacting RPI Medical Debt, I asked to purchase and cancel all debt from Jasper County IN, whose county seat is Rensselaer.   Our family lived there for over five years while I was in high school.  The town is primarily a farming community, neither wealthy nor poor, but one where the population today is the same as when we were there 60 years earlier.

The Debt Fulfillment Report

Based on my pledge commitment, RPI retired all the available outstanding delinquent medical debt for 423 residents of Jasper Country totaling $264,878.  They had no more access to debt available in the country right then, although more debt certainly exists.

However, with the funds remaining the non-;profit acquired debt from at least one resident in every Indiana county.   The total consumers helped were 2,291 with over $2.532 millions of their debt erased.

RPI had acquired the debt for less than a penny on the dollar.  The total accounts closed (not individuals served) was 4,396.  Of these 9.3% (409) were bought directly from hospitals.  The balance was from the secondary debt market.

Much of the debt (86%) was 5 to 10 years old– specifically 1,812 accounts with balances of $1.9 million.  Only 1.8% of the debt was less than five years;  1.2% of the debt had originated over 20 or more years earlier.

The average debt extinguished had a face value of $846. For me, an overwhelming proof of concept!  A financial “loaves and fishes” story.

The Consumer ‘s Experience

Consumers cannot apply to RPI for relief.  Rather the non-profit seeks to buy debt in the open market on behalf of funders who donate or make pledges to support their goal of abolishing medical debt for individuals and families burdened by the payments.

To qualify a “soft credit report” is run to determine each individual’s eligibility for relief.  Potential  portfolios are  prescreened by holders to identify those who qualify for  abolishment of debt.    A person must earn less than four times the local poverty level  (nationally an amount of  $111,000 for a family of four) or have debt that exceeds 5% of annual income determined by pulling a soft credit report.

With these qualifications, the debt is excluded from income and not subject to IRS taxation.  The transaction is considered an act of charity by donors who support RIP’s mission.

Each consumer is sent a letter announcing the relief.  The total debt abolished, number of accounts and  creditor are identified.

The “good news” letter says there are no strings attached and  encloses a  page of FAQs  to answer  questions.   Recipients may, but are not required, to share their story about what this relief means to their circumstances.

The RIP Organization: People helping People

This nonprofit was founded in 2014 with a threefold mission:

  • Initiate a high volume of debt relief to reduce financial and mental stress for individuals;
  • Offer health care providers a way to strengthen their communities;
  • Highlight the problems of medical debt to seek a more affordable and transparent health care system.

Since inception the firm has provided $8.5 billion of debt relief helping 5,493,000 individuals and families.

The Credit Union Opportunity

The immediate possibility is straight forward: strengthen members of their primary communities by offering to retire consumers medical debt. When fulfillment data are known, celebrate the relief impact.  Invite  consumers to learn more about another people-helping-people organization, the credit union.

Such an effort is a “win” on many levels:  for the consumer, the credit union, the community and even medical providers with outstanding debt.

If interested  contact RIP Medical Debt and make a pledge for a test project.    I would be glad to share my contact and the reports and information I received.  My project was completed in under 45 days from initial contact  to finish.

Credit Unions Ringside

As vital consumer lenders credit unions are at ringside knowing the debt burdens members carry.

Three days ago a Washington Post article reported the story of a 72year old still struggling to pay off his $5,000 student debt from the 1970’s.  This is just one area where a similar approach for  relief may be prudent and desirable.  An example from the article reported:

Years of administrative failures and poorly designed programs have denied many borrowers an off-ramp from a perpetual cycle of debt.

There are nearly 47,000 people like Hamilton who have been in repayment on their federal student loans for at least 40 years, according to data obtained from the Education Department. . . About 82 percent of them are in default on their loans, meaning they haven’t made a voluntary payment in at least 270 days. . . 

The Supreme Court will shortly hear a challenge to the Biden administration’s efforts to forgive up to $20,000 per borrower in federal student loans. The Court many not allow the initiative to proceed.

Why not design a program similar to RIP Medical Debt and approach the Department of Education about purchasing the loans with the intent of  extinguishing them?

Credit unions would  be helping resolve the financial and mental stress of longstanding student debt for eligible borrowers (to be defined).   Even at a penny or two on the dollar, the government would be receiving more versus 100% forgiveness.

The program could be targeted where relief is most needed.   It could happen fast.  A  “scholarship-in-reverse” plan  where college debt continues to burden individual’s lives.

Can the cooperative movement demonstrate their collaborative entrepreneurial capacity and address a critical public need?

Two final data points from the Post article on student debt:

From the time student loan borrowers’ first loans enter repayment, the median length of time it takes to pay in full is 15½ years. .  . Federal student loans are discharged upon death.  

Must individuals wait till death for common sense relief?

 

 

 

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Stories That Made Us

The stories we tell, define who we are.   They preserve those moments in life that we value.  For organizations they communicate the culture.  For a country, they express its collective national aspirations.

Two of the brief stories below are from CEO Tim Mislanky’s monthly staff update for Wright-Patt Credit Union.  They honor the credit union’s commitment to service, its foundational value.

The third is an account of a father’s efforts to respond to segregation  an ever present legacy in their community.

These accounts are not mere history.  Rather they give meaning to life today. As you read, ask what story might you tell about your efforts?

A Greyhound Bus Trip to the Credit Union

A WPCU member, who is also ex-military, took a Greyhound bus from Cleveland to Columbus for a close reopen account. She is advanced in years so she could not do it online. She arrived at Graceland at 5pm and we had appointments till close at 5:00 PM.  Stacy Davison was the only financial coach for the remaining workday. Stacie gladly stayed to be sure that our member was taken care of.

Through the close reopen process,  Stacie found out that our member came all the way from Cleveland via the bus and hoped to get a bus back to Cleveland that same night. Stacie got online to try and help our member find a bus schedule to Cleveland, but there were no buses available until the next day.

Our member was then going to take a public transportation to a homeless shelter to stay the night. She had brought her dinner and breakfast with her to be prepared if she had to stay overnight.

It was dark and unsafe for our member, so Stacie told the member she would take her to the shelter. Stacie looked online to see if the Holiday Inn had a room, so she could pay for our member to stay the night in comfort, they did not, and the member would not let her do that. Stacie offered to drive her back to Cleveland, but the member declined.

On the way to the shelter Stacie tried to buy her a hot dinner, but the member said “I will eat what I brought from home.” The member said the shelter served dinner, so she could eat there also.

Manager’s comment: This is an example of going above and beyond for our member and, a great example of a servant’s heart.

One Hot Dog Per Day

Heidi recently worked with a member who shared personal details with her about how she was having financial difficulties and surviving on eating one hot dog per day. The member was having extreme difficulty being able to afford food in her home. Heidi went into action and found information about area food banks that she shared with the member.

A week or two later, the member returned to the member center. She told Heidi (while crying) that Heidi gathering those resources and sharing them with her was “life changing.” The member said that she was able to contact two food banks, and that both were able to provide food to her. She also shared with Heidi that she has now also secured a temporary part time job.

Manager’s Note: Because of Heidi’s work, we are developing a guide about food banks and area resources that can be shared with members.

Picking Up the Minister’s Food Tray

A family story prompted by yesterday’s post about Springfield, Illinois and integration in the 1960’s.

My father, editor of the afternoon daily in a small city in the mid-Ohio Valley (population about 40,000), was about the same time fighting an uphill battle to change the status quo there. He spoke out a lot in his editorials and made himself unpopular with a certain type of citizen.

Sometimes the telephone would ring during dinner and my father would slip away and answer. “Who was it this time?” my mother would ask. “Oh, just another one of my sidewalk editors,” he’d say. But actually, some of them were calling to threaten him—and us. He didn’t stop promoting integration in schools and businesses and elsewhere. 

As a ruling elder in the First Presbyterian Church he was hastily summoned to the church narthex one hot and un-air-conditioned summer morning where he weighed in successfully in an off-the-cuff decision to let a neatly hatted and gloved black woman stay for the church service.  

A visitor from Texas, she had just come in and sat down in a pew causing a flurry of concern especially with another ruling elder who came to my father and said: “What shall we do?”  No black person was thought to have darkened the church door before. There were supposedly only about 50 black families in the city and they had their own churches. Thankfully, nothing happened to the visitor and she worshipped unbothered along with the rest of us. But that kind of acceptance only went so far. 

I remember well my father’s repeated consternation about a popular downtown cafeteria where the local Brotherhood Committee met regularly to plan interfaith events designed to promote tolerance and understanding.  The Rev. Preston Smith, a loved and respected pastor of one of the local black churches was the only person of color on this committee that included a representative of the tiny Jewish community and Father O’Reilly of St. Xavier’s downtown catholic church.

Everyone except Rev. Smith went through the line and got his food, but someone else had to fill a tray for him and take it to the back room where the meeting was held. My father finally challenged the cafeteria’s owner: “Bill, why won’t you serve Preston just like the rest of us?” 

 “I’d like to. I really would, but I just can’t. It would ruin my business; people wouldn’t come. I’d lose everything.”  

Some years later, the cafeteria closed for other reasons. I still have a brass plaque of the Brotherhood Award from 1968  engraved to my father for “Distinguished Service in Human Relations” presented by the local chapter of the National Council of Christians and Jews.

 

 

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Two Positive Updates & a Disheartening Decision

Callahan’s Trend Watch industry analysis on February 15 was a very informative event. It was timely and comprehensive.

Here is the industry summary slide:

The numbers I believe most important in the presentation are the 3.4% share growth, the 20% on balance sheet loan growth and the ROA of .89.

The full 66 slide deck with the opening economic assessment and credit union case study can be found here.

The Theme of Tighter Liquidity

A theme woven throughout the five-part financial analysis was tighter liquidity and the increased competition for savings.   Slides documented the rising loan-to-share ratio, the drawdown of investments and cash, the increase of FHLB borrowings, and the continuing high level of loan originations, but lower secondary market sales.

These are all valid points.   However liquidity constraints are rarely fatal.  It most often just means slower than normal balance sheet growth. That is the intent of the Federal Reserve’s policy of raising  rates.

Credit Unions’ Advantage

I think the most important response to this tightening liquidity is slide no. 24 which shows the share composition of the industry.  Core deposits of regular shares and share drafts are 58.3% of funding.  When money market savings are added the total is 80%.

This local, consumer-based funding strategy is credit unions’ most important strategic advantage versus larger institutions.  Those firms rely on wholesale funds, large commercial or municipal deposits and regularly  move between funding options to maintain net interest margins.  These firms are at the mercy of market rates because they lack local franchises.

In contrast, most credit unions have average core deposit lives from ALM modeling of over ten years. The rates paid on these relationship based deposits rise more slowly and shield institutions from the extreme impacts of rapid rate increases.   In fact the industry’s net interest margin rose in the final quarter to 2.86% (slide 56) and is now higher than the average operating expense ratio.

Rates are likely to continue to rise.  There will be competition at the margin for large balances especially as money market mutual funds are now paying 4.5% or more.  If credit unions take care of their core members, they will take care of the credit union.

The February NCUA Board Meeting

The NCUA Board had three topics:  NCUSIF update, a proposed FOM rule change, and a new rule for reporting certain cyber incidents to NCUA within 72 hours of the event.  The NCUSIF’s status affects every credit union so I will focus on that briefing.

We learned the fund set a new goal of holding at least $4.0 billion in overnights which it is projected to reach by summer.  Currently that treasury account pays 4.6%.  With several more Fed increases on the way the earnings on this $4.0 billion amount alone (20% of total investments) would potentially cover almost all of the fund’s 2023 operating expenses.

Hopefully this change presages a different  approach to  managing NCUSIF.  Managing  investments using weighted average maturity (WAM, currently 3.25 years) to meet all revenue needs, versus a static ladder approach, means results are not dependent on the vagaries of the market.

At the moment the NCUSIF portfolio shows a decline from book value of $1.7 billion.  This will reduce future earnings versus current market rates until the fund’s investments mature, a process that could take over three years at current rate levels.

Other information that came out in the board’s dialogue with staff:

  • Nine of the past thirteen liquidations are due to fraud. Fraud is a factor in about 75% of failures;
  • More corporate AME recoveries are on the way. Credit unions have been individually notified. The total will be near $220 million;
  • If the NOL 1% deposit true up were aligned with the insured deposit total, yearend NOL would be about .003 of lower at 1.297% versus the reported 1.3%. Share declines in the second half of the year will result in net refunds of the 1% deposits of $63 million from the total held as of June;
  • Staff will present an analysis next month of how to better align the NOL ratio with actual events;
  • The E&I director presented multiple reasons for NCUSIF’s not relying on borrowings during a crisis, but instead keeping its funds liquid;
  • The E&I director also commented that the increase in CAMELS codes 3, 4, 5 was only partly due to liquidity; rather the downgrades reflected credit and broader risk management shortfalls;
  • NCUSIF’s 2022 $208 million in operating expenses were $18 million below authorized amounts;
  • The funds allowance account ($185 million) equals 1.1 basis points of insured shares. The actual insured loss for the past five years has been less the .4 of a basis point.

Both the Callahans Trend Watch industry report and NCUA’s  insured fund update with the latest CAMELS distributions suggest a very stable, sound and well performing cooperative system.

A Disappointing NCUA Response

Against this positive news, is a February 15  release from the Dakota Credit Union Association.   It stated NCUA had denied claims of 28 North Dakota credit unions for their $13.8 million of US Central recoveries from their corporate’s  PIC and MCA capital accounts.

These credit unions were the owners of Midwest  Corporate which placed these member funds in the US Central’s equity accounts, a legal requirement for membership.   The NCUA claimed that the owners of Midwest Corporate had no rightful claim, even though a claim certificate for these assets was provided by NCUA.

Nothing in this certificate says that the claim is no longer valid if a corporate voluntarily liquidates.

Under the corporate stabilization program corporate owners were forced to choose between recapitalizing after writing off millions in capital losses in 2009, merge with another corporate, or voluntarily liquidate.

Both the Iowa  and Dakota corporates chose to voluntarily liquidate versus facing the prospect of further corporate capital calls.

The NCUA oversaw the liquidation of both Corporates in 2011. The NCUA’s liquidating agent knew  that claim certificates were issued, that there was no wording that voluntary liquidation would negate future recoveries for the corporates’ owners and that NCUA’s legal obligation is to return recoveries to the credit union’s owners, whether in voluntary or involuntary liquidation.

The claim receipt specifically states: “No further action is required on your part to file or activate a liquidation claim.”  Yet that is just the opposite of what NCUA is now saying the credit unions must do.

For example NCUA continues to pay recoveries to the owners of the four corporates who were conserved and involuntarily liquidated by the agency.

According to Dakota League President Olson, NCUA has failed even to inform the league  in what accounts these funds are now held.  Are they being distributed to all other US Central owners? To the NCUSIF? Or held in escrow?

“This is a clear case of obstruction through bureaucratic hurdles and complicated language where the process is the punishment, and does not provide justice,” stated Olson.

These funds  ultimately belong to the member-owners of these credit unions  The NCUSIF is in good shape.  This is not a legal issue.  It is common sense.

NCUA controlled all the options for every corporate through through its stabilization plan. It took total responsibility for returning funds-no further action required. No one will critique returning members’ money.  But failure to do so undermines trust in the Board ‘s judgment, its leadership of staff, and its fiduciary responsibility for credit union member funds.

The NCUA board should do the “right thing” for these credit unions and their members.

 

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Credit Unions & Risk Based Capital (RBC): A Preliminary Analysis

From the June 30, 2022 call reports, NCUA reported:

  • 399 CUs opted into the Complex Credit Union Leverage Ratio (CCULR) framework with an average CCULR of 11.35%, or 26% higher than the 9% floor.
  • 304 CUs reported under the Risk-Based Capital (RBC) framework with an average RBC ratio of 15.39%, or 54% higher than the 10% minimum.

The 500 page, RBC rule and its almost 100 ratio calculations became effective January 1, 2022.  Just two weeks after NCUA board approval.

It was intended to provide greater insight about a credit union’s risk profile and capital adequacy. What can an analysis of the RBC adopters tell us from this initial implementation?

The Macro Totals

The 304 credit unions plus 4 ASI-insured who adopted RBC, manage $822.7 billion in assets.  But the risk weighted assets total only $479 billion.  That 58% ratio  is the NCUA’s discounting of total assets total by assigning relative risk weights.  For example some assets have zero “weight” (cash, treasuries) or negligible emphasis ( GSE’s 20%).

Compared to the traditional well-capitalized 7% of assets standard, this group holds $20.5 billion in excess capital above this ratio.

Using the minimum RBC ratio of 10%, this same group holds $26 billion in excess of the minimum.  As shown above, their average RBC is 15.4%.

The bottom line is that this group of credit unions is well capitalized whether using the 7% traditional level or the new RBC 10%.

Other Initial Findings

One intriguing fact is that 149 of these credit unions, or almost half, have traditional net worth exceeding 9%.  That  suggests most could opt out of the RBC calculations as they exceed the CCULR 9% compliance minimum.

For example, one credit union with assets between five and ten billion dollars, reports standard net worth of 12.5% and an RBC ratio of 48.3%.   Why did they report RBC versus CCULR?

One way CEO’s can use RBC is to show that even with a low traditional net worth  they are still more than well-capitalized.  A CEO holding 7.5% net worth may want to allocate future earnings for greater member value and avoid the 2% tax on net income  to maintain the 9% CCULR minimum.  Showing a high RBC to your board and members is a powerful defense of the lower traditional net worth measure.

A Look at Ratio Methodologies

However as shown by the banking example below, RBC captures very few risk factors. Its focus is solely on potential credit and/or principal losses on loans and investments.

One example: 250 of these 308 credit unions reported unrealized declines in the market value of investments that exceeded 25% of net worth.   Four credit unions reported a decline greater than 50% of capital.  This was before the five additional Federal Reserve’s  rate increases through the end of the year.  This situation is not recognized in RBC.

To compare peers and their capital performance is very confusing.  RBC credit unions can choose four different ways of calculating the ratio’s denominator.   Seventy two credit unions opted for a ratio  that did not use June quarter ending assets.  They chose one of three other options that  results in a lower total asset amount, and therefore a higher RBC outcome.

RBC ratio comparisons are further complicated when 152 of the RBC credit unions had a combined risk weighting of less than 60% of total assets.  In one case the risk weighted assets were just 24% of the total balance sheet.

Another difficulty in  comparisons is that there are other options for capital creation than retained earnings.  Seventy-six credit unions report that less than 95% of their “capital” came from their own earnings.  Twenty-four reported subordinated debt as capital and the majority of the remaining group were from equity acquired in a merger.

As a result RBC net worth ratios  reflect different capital strategies.  There is a difference in operating capabilities between institutions who rely solely on retained earnings and those who purchase capital.

Performance Outliers

The RBC spread sheet easily identifies those near the 7% minimum requirement-one is below 7% and 12 between 7 and 7.5%.

Using the 10% minimum RBC net worth, eight credit unions fall below this ratio and 15 have 10.5% or lower, and are close to the minimum.

These screens would be one way of assigning exam priorities.

Initial Observations About RBC

From both the macro numbers and the micro analysis, RBC does very little to inform about safety and soundness.

  1. The calculation is a backward looking indicator of soundness. It is at a point in time and includes no dynamic ratios.
  2. Comparisons of peer capital adequacy using ratio analysis is virtually meaningless because of the range of calculations possible and distribution of risk weighted assets.
  3. No current, critical performance indicators are included. No delinquency, no expense ratios, no liquidity indicators, no IRR or ALM measures, and certainly no growth factors of any kind.

Ironically, is it possible that a very high RBC ratio indicates very poor value creation for members? The very opposite outcome for a credit union to sustain success?   Are the 33 credit unions with RBCs in the 20%, 30% and 40% ranges really serving members as their below average  loan/share ratios leads to higher reported RBC?

A Preliminary Look

The above analysis is as of June 30, 2022.  I will revisit the RBC reporting credit unions at December 2022  to see if the numbers have significantly changed.  For example, how many of  the 148 above 9% net worth opt for CCULR?  Credit unions will then have a full year’s and four quarters experience exploring the pros and cons of using RBC.

At this preliminary analysis, RBC looks like an exercise for credit unions to select their most favorable capital presentation. It may even create perverse regulatory incentives  that undercut initiatives for enhanced member value.

A Case Study of RBC and Bank Reporting

The following is an excerpt of RBC analysis of a bank serving the crypto industry and its reported capital adequacy.  This was written by Todd Baker, 1stSenior Fellow, Richman Center at Columbia University. (#capital #regulation)

Silvergate Bank has officially reported, and there is a big lesson there for regulators about the failure of risk-based capital standards to adequately address the risks of #banks serving the #cryptotrading gambling emulation of finance.

The wisdom of hard equity leverage capital requirements for banks is clearly demonstrated. They lost a billion dollars and their risk-based capital ratios increased! . .

Again, kudos to whomever managed the process of securities sales, reclassifications, borrowings, etc. at Silvergate. He/she did an amazing job bringing the plane onto the landing strip with one engine in flames and half the tail falling off while keeping the Tier 1 leverage ratio over the 5% “minimum” (which is actually way below the minimum in practice). . .But they still have the need to raise new capital, and fast, because their Tier 1 leverage ratio is way, way too low for the inherent risk from the business, as everyone now knows.

Despite losing a billion dollars (likely more than the company made cumulatively in it’s entire history) in the quarter, driving its holdco ratio of common equity to total assets down to 3.61%, from 8.84% at the end of 2021, and immolating half of the bank’s Tier 1 leverage capital, the bank’s risk-based capital ratios are actually higher (!) than they were at the end of the prior year.

 

Why? Most of Silvergate’s assets were and are still government securities that are treated as riskless (0% risk weighting) or GSE securites that carry a 20% risk-weighting. Riskless, that is, until you have to sell them in a rising rate environment…

Compare these two disclosures, from year-end 2022 and 2021:

“At December 31, 2022, the Bank had a tier 1 leverage ratio of 5.12%, common equity tier 1 capital ratio of 53.89%, tier 1 risk-based capital ratio of 53.89% and total risk-based capital ratio of 54.07%. These capital ratios each exceeded the “well capitalized” standards defined by federal banking regulations of 5.00% for tier 1 leverage ratio, 6.5% for common equity tier 1 capital ratio, 8.00% for tier 1 risk-based capital ratio and 10.00% for total risk-based capital ratio.” Versus,

“At December 31, 2021, the Bank had a tier 1 leverage ratio of 10.49%, common equity tier 1 capital ratio of 52.49%, tier 1 risk-based capital ratio of 52.49% and total risk-based capital ratio of 52.75%.”

 

 

 

 

 

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NCUA Board’s January Review of the 18% Usury Celling-A Shakespearian Event

Open board meetings are the public’s opportunity to see members officially at work.  Current practice is that all statements, questions, and staff answers are fully scripted in advance.

Even so these presentations demonstrate members’ grasp of issues, their knowledge of credit union operations and their view of cooperative’s role.

The one January topic with immediate effect was reviewing the 18% usury cap on  all FCU loan rates-except for PALS short term advances.

The Missing ALM Context

Setting loan and savings rates is an everyday event for credit unions.

The most important aspect of loan pricing is its ALM context.  The goal is to manage the net interest margin, the key factor in bottom line net income. That’s how credit unions “make their living.”

That fundamental ALM context was never introduced by either staff or board members.

As of September 30, the net interest margin for all credit unions was 2.79% up 20 basis points from the year earlier.   The average cost of funds to assets was 42 basis points.   As an approximation, a loan priced at 18% would have a spread of 17% over the average cost of funds.  Subtracting an average operating expense of 3%, would leave a net margin of 14%.

Loans are the fastest growing component of the credit unions’ collective balance sheet.  The year over year increase was 19% as of September 2022–the highest rate in decades.

There is scant evidence that the 18% is limiting credit union lending options or earnings.

The Board’s Discussion

Chairman Harper reported all three members had different positions on the ceiling.  He supported the 18%. The agency had obtained a letter from Treasury which concluded: As a result, we believe that presently there are not compelling reasons to change the current 18 percent loan rate ceiling for federal credit unions. 

This was the first time Treasury had ever commented on the topic.  Even more concerning was their offer to an “independent” agency:  Treasury is available to consult on any future consideration of the interest rate ceiling.  

Harper said he was willing to review the topic again in April along with the possibility of a floating rate cap.

The other two board members made no reference to the ALM context or operating margins.  Their intent seemed to find a way to give credit unions more leeway.

Both advanced an interesting economic theory: charging more for loans will actually increase demand.  To better serve members who pay high loan rates elsewhere, credit unions must charge higher rates themselves.  The cure for high member loan rates, is higher rates!

This view certainly supports the market’s practice that those who have the least or know the least, pay the most for financial services.

In the words of Vice Chair Hauptman:  Low-income and CDFI credit unions depend upon the ‘head room,’ the ceiling provides above the statutory rate of 15 percent. . . to serve their neediest members.

He then showed a bizarre slide of a personal example of the late fee assessed by a governmental authority when a required payment was not made on time. His apparent point was governmental authorities charge different late penalties which he equated to usury ceilings on loans.  He asked for further research and review of the issue in April.

Hood acknowledged: when you talk about the interest rate ceiling, we really need to think about how this impacts members. He gave several anecdotes such as:

One credit union told me that their concern is that if the NCUA maintains the interest ceiling at 18 percent, as rates continue to rise, they would have to deny potential credit card applications unless the credit union member had an excellent credit score.

NCUA staff seemed to embrace this view that higher rates are the only antidote for higher risk.

The reversion to a 15 percent interest rate ceiling would constrain an FCU’s ability to apply risk-based pricing to higher risk credits and reduce net interest margins in the current rising rate environment. In particular, a reduction in the interest rate ceiling would adversely affect a relatively large number of low-income designated FCUs (LIFCUs) and their members’ access to credit.

Much Ado About Nothing

Since 1987 the board has reviewed and approved the 18% cap twenty-four consecutive times.  All three board members voted for the 18% ceiling extension to September 2024.

This meeting displayed each board member’s understanding and approach to this hither to fore routine event. I can’t wait to see the sequel in April’s meeting.

 

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The Most Significant Omission in NCUA’s Performance Plan

At the January NCUA board meeting staff presented the Agency’s 2023 Annual Performance Plan.  It is 43 pages.  With many  outcomes.  As stated in the Chairman Harper’s introduction:  We have identified three strategic goals supported by ten strategic objectives and 19 performance goals. To meet these goals and objectives, the NCUA has also identified 45 indicators to measure performance.

Even with these many details,  the document has a significant omission.  The oversight  was not  mentioned by any board member. The absence may explain why the agency has been so ineffective in overseeing the most vital component of cooperative design.

The Missing Concept:  “Member-owner”

The term member-owner is used once, in the Mission Statement:  Protecting the system of cooperative credit and its member-owners through effective chartering, supervision, regulation, and insurance.

The term is never referred to again.  Where one might expect to see the concept, instead the words “consumer “and “individual” are inserted.  The word member does not even appear in the two highest strategic goals:

Goal 1: Ensure a safe, sound, and viable system of cooperative credit that protects consumers.

Goal 2: Improve the financial well-being of individuals and communities through access to affordable and equitable financial products and services.

Standard Plan Descriptions

The agency self description affirms that “the NCUA is an independent federal agency that insures deposits at federally insured credit unions, protects the members who own credit unions. . .   But the protection throughout is interpreted only as consumer compliance. Nowhere is there reference to member-owner rights, interests, responsibilities or even education.

Here are examples of how the agency describes its responsibilities in various sections of the plan:

The NCUA protects consumers through effective supervision and enforcement of federal consumer financial protection laws, regulations, and requirements.

Throughout the year, the NCUA will continue to adjust its examination program and operations to maintain safety and soundness, protect consumers, and ensure compliance with anti-money laundering laws.

Provide timely guidance to the credit union system and examiners related to changes in regulations established to protect consumers.

Monitor consumer complaints and fair lending examination and offsite supervision contact results to guide consumer compliance program development.

Continue to provide a responsive and efficient consumer complaint handling process in the Consumer Assistance Center.

The NCUA will enhance consumer access to affordable, fair, and federally insured financial products and services through the following strategies and initiatives:

Performance Goal 2.1.2 Empower consumers with financial education information.

No Ownership Role or Protection

Those who originally organized the coop and their heirs who today own the institution, at least in design, are now nothing more than consumers.

Owners’ rights are not part of  NCUA’s oversight.  The agency  protects “consumers” not owners, and safeguards “individual” not owners’ assets.  The agency is nothing more than  a cooperative CFPB with a safety and soundness function.

The Most Critical Function of Owners

In NCUA’s plan, member-owners have no standing, no rights and most of all, no regulatory attention.  This significant regulatory omission is why some credit unions feel empowered to push all of the boundaries of self-interest and business enterprise with actions disconnected from owners’ well-being and value.

Democratic coop design was intended to be a check and balance, the all important governance process that every organization requires to remain accountable, safe and sound.

Even NCUA asserts it has a governance process:  To ensure sound corporate governance, the NCUA will use the following strategies and initiatives: pg 29

The Consequences of No Member Ownership Role

Because of this regulatory omission, intended or otherwise, few credit unions  today  have any meaningful ownership participation.  The organization’s aspirations are only those of the  CEOs’ and boards’ ambitions. That often means business enterprise priorities over member welfare.

Credit unions are not subject to their peer’s competitive reviews as would be the case with a publicly traded bank stock. The institutional practices of mergers, sales and buyouts are not subject to any competitive process. Instead these executive transactions are private deals devoid of member input, meaningful public disclosures, no objective benefit and often lacking any economic rationality.

Just as NCUA has eliminated the ownership role of the member from its purview, so have many credit unions.  Without owners, just consumers, there is no accountability for institutional performance in theory or practice.

A Dangerous Design

That is a dangerous model.  Credit unions increasingly control billions in member funds and their collective savings (equity) in the hundreds of millions of dollars.  They increasingly commit to long term projects such as  subdebt borrowings, 20-year leases, and long term commercial real estate loans. The final outcomes of these decades’ length transactions may not be known until long past the tenure of the CEO who made the decisions.

Today most credit unions provide little to no transparency of their plans, priorities or projects to members.   There are plenty of product and service marketing messages.   But rarely are members informed about management’s goals.

The election of directors at the required annual meeting is fixed.  There is neither a choice for directors nor director statements of their reasons for serving.  Voting is by acclamation.

Without governance and a recognition of the owners’ role, the moral hazard of management decisions using the credit union’s resources increases.   Upside risks all benefit the incumbents; but the downside possibility of failure from a bank purchase, national expansion or fintech investment, means the members or NCUSIF will pay the price.

If one believes CEO/Board self restraint is sufficient to ensure members’ best interests, then they have not paid attention to practices such as; the $1.0 million dollar bonus to the manager of a merging credit union; the $10 million transfer of equity to a private foundation; or the change-of-control payments inserted in senior management contracts.

The list of self-serving actions grows daily.  Where money management for others is required, greed always lurks.

As just “consumers” or “individuals” member-owners no longer benefit from the most important reason for joining a financial cooperative.

Unless or until there is a meaningful acknowledgment  of member ownership and management’s obligations thereto,  the credit union system’s uniqueness, not to mention its soundness, will increasingly be at risk.

 

 

 

 

 

 

 

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An Incredible Chartering Story

The headline tells it all:  This Black Barber Opened The First Credit Union In Arkansas Since 1996.

It is the story of Arlo Washington’s journey to create People Trust Community FCU chartered in  September 2022.   The article in Next City describes Arlo’s journey after his mother died in 1995.  He followed a mentor’s model and became a barber.  His business instincts led him to open multiple shops and organize a barber college.

At the barber college he set aside $1,000 per month from profits to make small loans to the community.  This micro lending service grew until  the lending program was converted into a CDFI.  People Trust Community Loan Fund, the government recognized non-profit, then became the basis for his credit union charter application.

The Story within the Story

The author, Oscar Abello,  also weaves in another, longer tale, of the decline in new credit union charters.  Several of his observations follow:

It’s never been very easy to start a credit union, but it used to be easier and much more frequent than it has been in recent years. Prior to 1970, it was common to see 500 or 600 new credit unions chartered every year across the entire country.

People Trust was one of four new credit unions chartered in 2022; just 25 new credit unions have been chartered over the past 10 years. . .

There are almost always more interested groups looking to establish new credit unions, says Monica Copeland, MDI network director at Inclusiv, a trade group for credit unions focused on low-to-moderate income communities, “but it’s hard to track until they actually get through the process. It takes organizing groups years.”. . .

Or take Everest Federal Credit Union, which is based in Queens, New York and serving Nepali immigrants across the country. Its organizers started their work in 2015 and only recently opened for business. Part of their challenge was the startup capital they had to raise, from donations they ultimately gathered over the past seven years from hundreds of donors across the country.

Each of these efforts has had to go through the National Credit Union Administration – the federal agency that charters, regulates and insures deposits held at U.S. credit unions.  . .

There are multiple reasons for the dramatic falloff in new credit unions since 1970. Now a credit union consultant, Brian Gately worked as a credit union examiner at the NCUA in the ‘70s and ‘80s. According to Gately, the agency gradually lost touch with its purpose over the course of his tenure.

He started out winning awards for helping new credit unions get chartered to serve vulnerable communities in Puerto Rico and the U.S. Virgin Islands, but eventually left after refusing orders from higher-ups to shut down a new credit union serving a largely Puerto Rican migrant community on Manhattan’s Lower East Side.”

The article presents further examples of the chartering hurdles.  These challenges help a reader understand the miracle that any new credit union charter represents today.

Missing the Next Generation of Entrepreneurs

According to the Commerce Institute over 5.0 million new small businesses were started in 2022.  Only 4 new credit union charters were issued last year.  During the year credit unions announced or completed four to five times that number of whole bank purchases.

Credit unions are not tapping into  America’s inherent entrepreneurial market-based culture.  A system that fails to attract new entrants will slowly mature, consolidate and lose relevance. Other startups will arise  intent on  taking away a declining industry’s  current and future customers.

The article is an engaging description of one person’s efforts to pursue the possibilities of a credit union charter.   It also documents how difficult that process is, especially as it depicts NCUA’s role.

If a reporter who does not follow credit unions as a regular beat can so thoroughly document the new charter failings of the movement, why can’t credit unions see this challenge?

It raises the question as well of how many interested charter groups give up in frustration and look elsewhere for financial services?

 

 

 

 

 

 

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Losing the Cooperative Spirit?

This slide is from a November 2021 speech on credit union history at the Credit UnionLeadership Institute.  Facilitator:  Gary Regoli, CEO Achieva Credit Union.

It is a statement of the existential choice every credit union makes, often on a daily basis.

“Credit unions continue to lose ground with consumers, according to the American Customer Satisfaction Index’s most recent finance study. Credit unions’ score has dropped by one point to 75—falling behind banks for the fourth consecutive year.

Banks now surpass credit unions in nearly every service category as rated by U.S. consumers, according to this year’s survey. On the ACSI’s 100-point scale, credit unions now trail banks by three percentage points. Banks’ overall score (78) has remained relatively unchanged over the last four ACSI reports.

“The 2021-2022 study, which was based on more than 13,500 customer interviews, covers banks, credit unions, financial advisers and online investment. According to researchers, rapid membership growth fueled by the pandemic and ongoing industry consolidation could be affecting credit union customers, though the credit union industry’s traditional area of strength in the annual survey—in-person service—has remained consistent.

“Credit unions continue a long, slow decline in member satisfaction that is now in its fifth consecutive year,” said Forrest Morgeson, assistant professor of marketing at Michigan State University and director of research emeritus at ACSI.”

Source: ABA Banking Journal, November 16, 2022

 

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Resume and Eulogy Virtues

Last week I quoted New York Times columnist David Brooks’ philosophy in which he distinguished resume virtues from eulogy ones.

Résumé virtues are what people bring to the marketplace: Are they clever, devoted, and ambitious employees? Eulogy virtues are what they bring to relationships not governed by the market: Are they kind, honest, and faithful partners and friends?

This past weekend I received a copy of a funeral message from a friend I have known since college. His wife of 28 years had died in January.  She had been chronically ill their entire marriage–some of the times were good, but others in and out of hospital.

He celebrated her spirit with these words:

She was the most selfless person I have ever known. I really believe she hung onto life all these years for us, and I hope the rest of my life will be worthy of her sacrifice, because it was not easy for her to stay with us. She gave her life for her friends and family.

Organizations Do Not Have Souls

In the life witness of Jan Karski which I described last week, I quoted his observation that “Governments do not have souls. Only people do.”  I believe his words are applicable to any organization not just “governments” which was the focus of Karski’s anti-Nazi Polish underground activities.

Doing the right thing is sometimes very hard.   Especially when one’s views set them apart from the prevailing practice or beliefs of the organizations in which they work or are members.

Puritan John Winthrop in this lecture (A Model of Christian Charity) prior to sailing for the new world, warned his fellow Puritans that their new community would be “as a city upon a hill, the eyes of all people are upon us”, meaning, if the Puritans failed to uphold their covenant with God, then their sins and errors would be exposed for all the world to see.

That biblical reference of “a city upon a hill” has been later used by four Presidents to describe their vision for America.

Cooperatives were endowed with the hope of being  “a city on the hill” in a country where individuals were often taken advantage of by the prevailing economic system. That system still exists today.

What the above examples suggest is that credit union design is not what makes the difference.  Rather it is the quality of leaders chosen to continue a firm’s legacy.

Being in the minority, such as living at the boundary between health and illness in the circumstance referred to in the funeral, is never easy.  But examples of resolution and spirit should remind us of the aspirations of our own better selves.