Category: Cooperative Design

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A Suggested Virtual Annual Meeting on July 8

Last year I invested $100 and became a member-owner of Shared Capital Cooperative. Founded in 1978, it is a Community Development Financial Institution (CDFI) organized as a coop with both individual and cooperative members.

Its purpose is funding cooperative enterprises and housing.

Their annual meeting is July 8th and is open to the public.

Why attend? I believe this example of a financial firm may inspire ideas about how cooperative design can transcend current credit union models. Notice follows:

2020 Annual Member Meeting & Cooperative Forum: July 8, 2 – 3:30 pm CT

Click here to register now to join us virtually on July 8 at 2 pm CT

Shared Capital Cooperative is excited to share our impact over the past year and to feature cooperatives across the country that are innovating and inspiring in their response to COVID-19. The event will include: 

· A brief Business Meeting reporting on our activities and impact;

· Annual Cooperative Forum, featuring cooperatives’ resilience, innovation and inspiration in how they continue to serve their members and their communities during the pandemic. 
For more information please click here.

The event is free, and everyone is welcome to attend.. Click below to register: https://register.gotowebinar.com/register/3140026396343107343

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Disrupting Cooperative “Trade Associations”

One vital advantage of cooperatives is intra-industry collaboration. A long-standing expression of this capability is credit union trade associations. They range from local chapters (largely extinct) to leagues to the national groups such as CUNA, NAFCU, NASCUS, NACUSO as well as associations focused on specific interests, e.g. the Defense Credit Union Council.

But as the average credit union grows in size, total institutions continue to decline and credit unions develop more in-house capabilities, what is their future?

Defending the Status Quo

Their actions during the crisis are instructive. They rush to convey the latest regulatory announcements; monitor congressional decisions to protect credit union interests; seek parity with other government agencies; and maybe even inject a long-standing narrow fix into the legislative agenda.

Most importantly they protect the sacred tax exemption even as they seek a credit union portion of various federal rescue funds.

Apart from insider expertise, trade associations’ political persuasiveness relies upon tens of millions of member-owners, not just 5,000 institutions. One looks in vain for the stories of credit unions’ unique role with members. Or how the tax-exempt reserves and cooperative capital are being deployed.

There is no future agenda being pursued. Just more efforts to keep “eyes open.”

Instead of championing cooperative reforms, especially for well-documented deficiencies in NCUA’s role, the industry is flooded with updates about what is happening, might happen, or will never happen in DC.

The Challenge

The membership and financial pressures on trade associations will only grow more urgent as a result of current events. The challenges are many:

  • How will trades adjust to a shrinking credit union base?
  • What if credit unions see little value in political advocacy or value it so much it becomes an in-house capability?
  • What is their value as a showcase or gateway for vendors to credit union buyers?
  • Will trades have any meaningful role in the development of credit union-owned services or just continue as middleman aggregators?
  • Will league and other organizational consolidations erode the hard-earned loyalty of their constituents?

The Need for Vision

In a time of multiple crises and the ongoing disruption of traditional business tactics, innovation is required. There is no going back. Only forward. What is the vision for that effort?

Where do the authors of break through ideas go today in credit union land? Probably not to the trades where the dominant role is member retention, not leadership. So where will the influence once wielded by the trades move? Where will the phoenix rise from the ashes?

What will be the design of tomorrow’s “association” that attracts future credit union investment and loyalty? Will it combine CUSO business style efforts as well as industry advocacy? Will it be a source for new ideas and independent analysis? Will it form alliances and with whom?

Trade associations will not disappear. Rather, they will stay as vestigial organs celebrating past memories and arranging social gatherings. Meanwhile the designers of the future will have encamped elsewhere.

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Do Credit Unions have Enough Capital to Weather Loan Losses from the Current Crisis?

That was the first question the reporter asked. Others followed. Will some fail? Would secondary capital options help?

My Answer and the Data

Yes, the system has adequate capital. Credit unions have total reserves of almost $193 billion and an average net worth ratio over 11%.

In 2019 the industry’s annualized loan losses were .63%. At March 31, 2020, 85% of all loans were secured and first mortgages backed 43% of the portfolio. Unsecured loans were under 10%. The allowance account was 150% of all delinquent loans.

In the Great Recession of 2009, the net loan charge off rate was 1.21%; and in 2010, 1.13%. The market value of homes securing mortgages was a major concern. That is not the case today.

In 2019, the industry’s net loan losses were $6.1 billion. However. credit unions added $6.5 billion to the allowance account and still reported $14.5 billion in net income. Credit unions could see their historical loss rate of .50-.60% grow by three of four times (double the 2009/10 experience) and still be very sound.

Two Capital Sources

Averages provide a macro context, but problems are micro, in individual credit unions. Might individual credit unions have higher than average losses?

A fact of the covid economic shutdown is that the impact on individual households is disparate. According to a Bipartisan Institute Survey, 42 % of households report negative effects on income from the dual crises. For Hispanic households, the result was 60% and for black homes, 54%. Over 59% of single parent households, regardless of race, saw income reduced or were forced to seek unemployment.

Individual credit unions will have differing proportions of members financially impaired. But that is why the cooperative system has two capital sources.

The primary reserves are each firm’s retained earnings. The second is the collective capital in the NCUSIF approaching $17 billion.

Cooperatives’ Collective Capital

Unlike the FDIC fund, the cooperative system’s insurance fund was redesigned in 1984 to be a ready source of capital assistance. This assistance is authorized by Section 208 of the Federal Credit Union Act.

When the FDIC is given a troubled charter by separate supervisory authority, its role is to close the institution by liquidation or sale. Providing FDIC assistance is considered inappropriate because of public policy concerns about the use of “public money” to restore private wealth.

Credit unions create common wealth. Their reserves are the collective savings of all the members. Members in turn send 1 cent of every share in a credit union to the NCUSIF to comply with the 1% deposit requirement.

These collective reserves, updated semi-annually, are always fully available to assist individual credit unions. In the premium model, funds must come from expenses charged to the insured banks.

NCUSIF assistance in the form of cash, subordinated debt or guarantees has been used since the fund’s founding in 1971. These actions not only minimize losses, but most importantly enable familiar service to members who may be caught in the same economic circumstances as their credit union.

Capital Is Not the Issue

The dollars of capital or the level of net worth is not the primary issue for the coop system. Important yes; but more critical is how the reserves are used by credit unions and NCUA. Is it just to expense away troubled credit unions, or to invest to restore sustainable operations?

Cooperative reserves, like all capital, can be underused or misused. In a competitive market system however, capital’s objective is to gain long term returns and create competitive advantage. Liquidation is always the costliest option, both in terms of immediate expense and the elimination of all future income.

Today credit unions are working with millions of members whose financial situation has been disrupted through no fault of their own. Standing alongside members’ transitions can result in years of fervent loyalty. Similarly, the welfare of the whole system is enhanced when credit unions suffering loses, can work to again be sound.

The National Effort to Save Jobs, Assist Consumers , and Support Businesses

Every covid emergency program passed by Congress including the CARES Act with its $600 unemployment weekly increase, $1,200 one-time payments to families earning less than $75,000, the PPP loan program with loan forgiveness, the Federal Reserve purchase of EFT’s with high risk bonds, and its Main Street loans to business are public expenditures intended to prevent corporate and individual financial failure. The goal is to restore the economy and consumers to full activity as quickly as possible.

However, some at NCUA may not have bought into this bipartisan, government-wide effort. Bound by a literal PCA mindset, the NCUSIF’s CFO announced a $60 million addition to loss reserves in the May Board meeting, even though every financial trend presented was in a positive direction.

In April the Inspector General in his semi-annual report to congress confidently predicted: “Given the economic impact of the COVID-19 pandemic, we anticipate an increase in required MLRs in the coming year.” A Material Loss Review is required in every circumstance where the cost of a problem resolution exceeds $25 million.

Chairman Hood has issued policies to give credit unions greater flexibility and time to work through financial downturns. The question is whether these policies will be just press releases or will they change staff behavior

For that to happen, the Chair will need to ensure operational performance. That oversight accountability, not the amount of capital, is the real test for the Agency’s leaders.

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The Choice of Words

The headline seemed newsworthy: Bank Credit Union Merger News

The problem: it was not accurate. Credit unions and banks cannot and do not merge. The brief story did state that a credit union had completed its acquisition of a bank. But then the story continued the fiction by stating “this is the seventh merger of a bank into a credit union this year.”

Why the Misstatement?

Writers have a point of view. In this case the post was to promote the idea that banks and credit unions are much alike. So much so that bank/credit union mergers are not that different from the several hundred merger transactions occurring between credit unions annually.

However, these transactions are purchases in which credit unions pay cash to the owners of the bank in order to acquire the selling bank’s assets and liabilities. They are whole bank acquisitions. These sales are negotiated, often with the help of brokers, accountants, lawyers and other third-party experts to navigate both the business details and the regulatory approvals.

The documentation is very distinct from credit union mergers. The agreements will include representations, warranties, covenants and possibly non-compete and/or employment clauses on top of the detailed financial commitments. By contrast, the NCUA approves real mergers with a template, two paragraph, half-page general statement about transference of assets and liabilities to the surviving credit union.

Normalizing the Abnormal

The effort to portray credit union acquisitions of banks as just another kind of “merger” is supported by a host of intermediaries who benefit financially from the transaction It also provides a thin veneer of “normality” to those credit union leaders who use the accumulated reserves of members to buy out competitors or to enhance institutional size.

These are not, as one NCUA board member characterized them, just market-based transactions. For there is no market accountability before or after the event as there would be in a publicly traded stock. The deals are negotiated in secret, not in an open process. The members have no say; rarely would the transaction provide them any direct benefit. And if the deal does not work out, the owners of the credit union, unlike a bank’s shareholders, have no course of action.

Avoiding the Real Issues

An event may not be illegal, but that does not mean it is wise. Credit unions’ whole bank purchases raise important questions about the role of tax-exempt cooperatives. Should their tax-free accumulation of reserves enable them to buy tax paying banks? How do such transactions promote the unique role of cooperatives in financial services? What are the benefits to existing members? How transparent should the transactions be to members and the public to ensure accountability?

Banks are chartered to make money for their owners. The owners sell when they see it in their personal interests to cash out and reinvest elsewhere or spend their funds for individual purpose. Credit unions are founded on the principle of paying forward the wealth created by generations of members to be used for future members. It is common wealth, not private.

By blurring the lines by using terms like “bank credit union mergers,” the interests of a host of vendors is enhanced and the public perception of credit unions as no different from banks is promoted.

It also enables lazy strategy on the part of credit union CEOs. Organic growth requires innovation, constant focus on enhancing member value and an understanding of the competitive advantages of cooperative design. Buying out competitors may work in the open markets; that is not why cooperatives were formed.

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Crossing Red Lines

“We crossed a lot of red lines.” That is how Federal Reserve Chairman Jerome Powell described the host of actions by the central bank responding to the COVID economic shutdown.

Actions included lowering interest rates to near zero, conducting unlimited bond purchases, implementing emergency lending programs to business, state and large city governments.

There are more steps planned, novel in scope and speed. These include the main street credit program to make at-risk loans to medium-sized businesses, buying corporate bonds and the debt of states and large cities.

The purchase of non-investment grade debt held by Exchange Traded funds was perhaps the most controversial. Included in the initial $1.3 billion purchases were bonds issued by Hertz, J.C. Penny, Neiman Marcus and Whiting Petroleum all of which have filed for bankruptcy. The US Treasury has been allocated up to $75 billion to cover potential losses on these non-bank, lending initiatives.

The Opportunity of a Crisis

But THE red line crossed that preceded all of these central bank actions was changing the internal mind set of the Federal bureaucracy. “We don’t do this. Where is the authority? We’ve never done this before. How will it work? What if we fail?”

With over one in four workers laid off, unemployment is expected to exceed 20% for May. Powell justified his innovative approach partly by the fact that the burdens of job loss are falling on those least able to afford it. They are lower paid service workers whose ranks are disproportionately women and minorities.

But changing long standing, institutional economic realities is hard. All governmental leaders find bureaucracies reluctant to move in innovative ways or at the pace of events. The easiest thing is keep doing what you have always done. The result, no real change occurs. The status quo remains.

The opportunities for transformational change can be fleeting. Public moods move quickly. Political and vested interests rise up. New approaches can be lost if not seized “in the moment” as Chairman Powell did.

He courageously decided to “cross all the institutional red lines.” Without taking that risk, the whole recovery momentum would be much more difficult.

NCUA’s Withdrawal from the Cooperative System

This crisis is an opportunity for NCUA to reverse the past decade’s pattern of unilateral, isolated and often self-serving regulatory responses in its relationships with credit unions.

Among all financial institutions, the cooperative model uniquely depends on collaboration. It is not just the basis for initial chartering, but also a singular operational advantage.

All elements of the system have a mutual responsibility for safety and soundness. Since the NCUA’s 2009 takeover of the corporate network followed by liquidation of four of the five largest corporates, it has failed to seek solutions cooperatively with credit unions and in members’ best interests.

The disruptions to financial performance by the crisis should be a turning point in this relationship. No regulatory rule or waiver, or congressional legislation, can “de-risk” the consequences of the financial toxicity caused by the pandemic and national economic shutdown.

The regulatory impulse to get rid of problems through mergers and selling member-owners to someone else when the going gets tough is a slow-moving death spiral for the industry.

Cooperative workouts are not presumed to be fast, especially when relying on retained earnings. They take time – sometimes years. They are messy. Each is unique, personal in the details. They require sweat equity and occasionally, 208/NCUSIF assistance.

The purpose of the 1% NCUSIF redesign was to keep credit unions and the system whole. Since the 2009 crisis NCUA has used the resources of this unique cooperative fund to broker problems away and avoid leadership accountability.

Crossing Red Lines to Avoid Red Ink

Jerome Powell has acted fast to help troubled industries, individual business, states and cities work their way through catastrophic revenue shortfalls and unknowable future trends. To keep the cooperative system whole while transitioning this crisis, NCUA must do the same.

The Board should establish an expectation that no credit union charter should be lost because of the current pandemic. Credit unions who work with their member-owners in this transition should expect no less than 100% support from their regulator.

This is not a legal, but a commonsense judgment. Similar to the Fed, the full range of credit union resources should be available whether this be 208 waivers and/or direct NCUSIF capital contributions.

This is a moment for NCUA to highlight the cooperative model in all its member focused uniqueness. It will require NCUA staff to grasp the opportunity for innovation by working with credit union leaders in the trenches. If that bureaucratic “red line” or mindset can be crossed, then the outcome should be a lot less red ink when this is over.

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Merger Math in Credit Unions: A Deeply Flawed Process   

Many credit unions profess a growth strategy based on merging other credit unions. Simple math shows this is a dubious strategy.

Simple Merger Math:

1 credit union + 1 credit union = 1 credit union

The facts are straight forward.

A merger of two sound, well-run credit unions does not grow anything. It changes no market share, initiates no new community relationships and invariably results in new costs and lost members.

Most importantly, real choice for members is lost. Frequently the merging members were eligible to join the surviving credit union. If the surviving firm was indeed a better deal it should be winning over these members. But an unspoken reality is mergers are initiated to eliminate unbeatable competitors.

By cancelling charters of long serving, independent institutions, generations of member goodwill and community relationships are ended. Career opportunities for employees are compromised. Leadership within the communities served and in the industry by the board and senior management is, if not totally eliminated, shifted to senior staff already engaged. Rarely does the surviving leadership team have the local connections of the merged credit union.

Finally, from a cooperative system standpoint, as resources are concentrated in fewer and fewer organizations there is less diversity in risk management. Fewer organizations remain to innovate and develop business strategies.

A Flawed Democratic Process For Members

These issues were again raised in a Facebook post this month about a recently announced merger.

From a member’s point of view, this long-time credit union executive posed vital questions about the explanation  for combining two long serving, multi-billion, very sound charters. His concerns included:

  • Weak, “boiler plate” business justifications;
  • Failure to fully disclose all costs incurred by the transaction;
  • The loss of distinctive institutional cultures and professional career opportunities
  • The destruction of an organization’s unique heritage and its hard-earned legacy of generational relationships with members;
  • The absence of specific, quantifiable and immediate member benefits;
  • The elimination of member choice when the options from a well-run credit union are eliminated.

The post asked if the generalized assertions of potential future institutional gains were sufficient to offset the added costs and real losses incurred by the members of the cancelled charter. His conclusion was the transparency of this transaction is woefully insufficient.

Properly Informing Members

To my knowledge, members have never voted against a proposed credit union merger. A few announced mergers have been withdrawn before reaching the member vote.

While information presented in merger proposals today may be legally compliant, it does not provide the facts for members to make an informed choice.

Rather these votes succeed because they are predicated on trusting relationships even as that confidence is used to ask members to give up their unique institution.

Unintended Consequences

Mergers completed without member benefit as the foremost criteria are a suspect foundation for a cooperative. It presumes that success depends on the accumulation of greater institutional resources, not the relationship with the member-owners. Seeking greater market power is a classic recipe of for-profit firms. That is not why cooperatives were created.

If these deeply flawed, problematic merger processes continue then the future math of credit union mergers may be simply:

1 credit union – 1 credit union = 0. No member-owned coops are left.

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Presenting the Right Message About Credit Unions in Today’s Crisis

The doomsayers are already at work. Commentators use the March 31 data to prove their theory that an economic Armageddon is just around the corner. The end of everything we value. Unless of course we adopt their solution: more government, reopen faster, etc.

This pandemic is a health and an economic crisis. However, the greatest danger may be a loss of confidence in the spirit of who we are. Anyone who understands what made America today and why credit unions were created, knows that we will persevere and sustain.

Avoiding Self-Fulling Prophecy

But we must be careful not to project ourselves into a self-fulfilling prophecy of demise. That occurs when short term numbers or the peak of a problem is assumed in models and presented as the “new normal.”

Persons with an agenda will use these scenarios to enhance their position, resources or reputations. This happened in the 2008-2009 crisis and we need to learn that lesson in this new one.

These kinds of forecasts are impossible to make with accuracy. For they ignore the capacity of leaders and organizations to change and create “new normals;” that is, their innovative capacity to change the core assumptions models employ.

The First Quarter Numbers: A Case in Point

The first quarter numbers for most credit unions will show declines in the traditional measures of financial performance. ROAs will fall or even be negative, loan loss reserves will go up. Growth may slow. Delinquencies will increase, but certainly not by as much as will be the case for the June 30 numbers.

So what do the numbers mean? The most important point is that credit unions are sharing the financial pain and uncertainty of their member owners. This is the basic fact that is creating these numbers.

Credit unions are stopping fees, lowering rates, offering skips pays, and many other efforts to help members transition the unanticipated immediate economic shutdown required to stop the COVID virus.

Unemployment will reach heights not seen since the Great Depression. On average over 16% of the labor force (over 30 million) lost work in just one month. Rent, auto and credit card payments will be slowed or missed.

The members don’t know what their future will be; neither does their credit union. The credit union goal is not to hit an ROA goal, but rather sustain member relationships.

A Transition in Thinking and in Financial Trends

Traditional financial performance can be a very imperfect measure for how credit unions are serving members. At this time the numbers that may be the most unusual could be those that show everything is OK using traditional measures. More relevant performance analysis should focus on how many members are being helped and in what ways. For the ultimate strength of any credit union is its members.

Today, leading credit unions are reimagining how their resources can be used for members whose financial circumstances changed outside their control. This requires patience, creativity and new ways to structure member relationships.

This crisis is more than pivoting to virtual distribution, remote delivery and zoom interviews; the most critical innovation may be in the way credit is conceived. Loan terms may be extended, rates reduced, or payments based on whatever income is available. Outstanding credit may be restructured into A and B payment “tranches” in which the subordinate B tranche is the write-down needed to keep the member in the home or auto. It is the tranche that could be forgiven if the member cannot find work at previous income levels.

Monitor, Not Forecasting

Periodic reporting of the facts is important to ensure the industry’s collective resources are sent to the areas of highest need. Some credit unions will be more threatened than others because of the circumstances of their member base or community. The NCUSIF was constructed so that capital could be used to help these firms recover.

The greatest danger is not from the crisis itself, but how we respond. In both credit unions and government, competence, expertise and leadership ability is crucial. There is no prior road map to a new normal. Those in positions of authority must act with intelligence, recognizing lessons from the past. Credit unions have never lacked resources in a crisis, What is more important is wise stewardship of these mutual resources.

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Directing Traffic For Essential Service

Access to cash is members’ top financial worry in a crisis. Some are fortunate to have savings, steady income or retirement to draw upon. Others, living paycheck to paycheck, must rely on credit. These two options are illustrated from actual events. In person lobbies are closed. The CEO directs members to one of two “drive-throughs” serving everyone, regardless of circumstance.

Born in a Crisis

In 1932 during the national depression, workers at Wright Field in Dayton, Ohio decided to chip in 25¢ a week to help an ailing co-worker and his struggling family. Recognizing a great idea, they later took a quarter each payday to create a fund for fellow workers who might one day also need help. It was called “The Sunshine Fund.”

That shoebox of money became Wright-Patt Credit Union, Ohio’s largest, with over $5 billion in assets.

Those seeds planted 90 years ago now serve 400,000 members in central and southwestern Ohio during an economic shut down some are comparing to the Great Depression.

Managing a crisis like COVID-19, without any playbook or past experiences to draw from is challenging. The issues that come up are things most wouldn’t have imagined a few short months ago. For CEO Doug Fecher, there are only two rules: “Try to do the right thing as best you see it; and, do those things the very best you can. If we do those two things, we’ll be okay.”

The following excerpts from Fecher’s April 15 board crisis update documents the intensity of added activities undertaken in this “essential service.”

From CEO Fecher’s WPCU Weekly Board Update (with permission)

The big news this week is the government’s release of stimulus funds.

  • WPCU today received and posted about 81,000 ACH deposits for $147MM of government stimulus funds

Lending

  • We’ve processed 10,700 skip-a-pays for about $3.6 million in payment relief.
  • We’ve made 211 disaster relief loans totaling $260K.
  • First mortgage activity, especially refinancings due to lower rates, continues brisk with 240 closed mortgages so far this month.
  • We release full government payment proceeds to members even when members may have a balancing owing or negative deposit account balance with WPCU.
  • As of Friday, April 10th, we’ve processed 128 forbearances on 1st mortgage loans in the WPCU portfolio.

Commercial Lending

  • We have obtained SBA approval on 180 PPP applications for a total of $37MM in funding.
  • The PPP loans approved so far support nearly 4,600 jobs. Loan amounts range from approximately $300K to $2.8MM.
  • An additional fifty PPP applications are in process raising our total to $40MM.
  • About 300 commercial applications are in queue as of April 14th.

Partner Update

  • We have no employees confirmed with COVID-19.
  • Thirteen employees are in physician-directed self-quarantine.
  • We pay COVID-19 medical expenses for employees and family members on the WPCU health plan.
  • Absenteeism has decreased as more Partners have been moved to work from home. For example, member help center absenteeism fell to 1% this week, from 14% on March 30th.

Operating Updates

  • Transaction volume is much higher this week across the board. We received 7,376 calls into the member help center on April 14th, compared to 5,780 calls as of March 30th.
  • Member center and member help center activity jumped this week with the release of government stimulus checks. This is resulting in longer than usual lines in drive-thru lanes and on telephones.
  • We are seeing increased attempts at fraud.
  • Marketing communicates on everything from encouraging use of remote services, to fraud avoidance, to helping members with their government stimulus checks.

Liquidity as of April 13th

Our liquidity coverage ratio is 3.46.

This means we have almost three-and-a-half times the maximum cash draw down in the last thirty days in available liquidity.

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CLF: The One Thing Necessary

As of December 2019, approximately 1,468 credit unions with total assets of $1.4 trillion reported membership in the Federal Home Loan Bank (FHLB) system. These totals represent 27% of credit unions by number, and 88% of total assets.

By comparison, there were 278 credit unions that were Central Liquidity Facility (CLF) members holding $115 billion or about 7.2% of assets.

While numbers for Federal Reserve membership are not readily available, since NCUA requires by rule that all credit unions over $250 million be members of either the CLF or Federal Reserve, one can presume the overwhelming majority have opted for Fed membership.

Why this choice? If the Fed and CLF are both “lenders of last resort” why is the CLF deemed so unappealing? How is the FHLB system so much more relevant for credit unions then their own liquidity backstop?

NCUA’s Appeal for Credit Unions to Join the CLF

In its April 2020 meeting, the NCUA board approved final rules to make the CLF more attractive to join. Some changes were the result of the CARES legislation. They included opening membership to Corporates directly while changing their agent roles, expanding lending purpose, and increasing the borrowing multiple based on contributed capital from 12 to 16 times.

Rule changes eliminated the six-month waiting period after joining to borrow, the ability to withdraw membership upon demand versus the current 6-24 months delay, easing collateral requirements, and allowing corporates to borrow for their balance sheet. Staff also outlined improved loan processing capabilities.

The three Board members made individual appeals urging credit unions to join up now. They explained that the CLF, as now capitalized, could be inadequate to the crisis even at a multiple of 32 times member shares. NCUA could need liquidity for the NCUSIF and the Federal Financing Bank is the most reliable source for funding in a crisis.

The One Missing Element

The CLF is a “mixed-ownership government corporation” managed by the NCUA. The credit unions supply all the capital upon which total borrowing capacity is determined. Funding is direct from the government’s financing bank, unlike the FHLB system which raises its borrowings in the open market.

If the CLF is to be relevant in the future, the “mix” of the credit union and NCUA roles needs to be reassessed.

The historic agreement in 1983 for the corporate system to fully fund the CLF’s capital requirements for all credit unions  was ended by NCUA in 2012.  The NCUA failed to provide a design for the CLF to become an integral partner with its credit union members-owners.

In contrast today the FHLB system is credit union’s preferred lender because they are member-centric in their operations. Members buy capital stock to borrow in good times and bad; they elect the board, and individual banks proactively develop products and services to serve their various members’ needs.

The CLF has been used solely as a regulatory tool by NCUA. In the Great Recession, the primary borrower was the NCUSIF which forwarded $10 billion to the balance sheets of WesCorp and US Central. An effort designed by leading credit unions to create a “protracted adjustment credit” program for credit unions to refinance members’ mortgage loans became stillborn when NCUA staff took over the initiative.

Non Routine Borrowings to Resolve Problems

Credit unions seeking liquidity assistance will almost always be under some form of financial stress. This can be due to market dislocations making  assets difficult to value, unplanned share outflows, or earnings pressures from increased delinquency or  sound loan growth options.

By “normal” operating criteria, credit unions needing liquidity will be under financial strain and often under examiner constraints. Recent NCUA practice is not to provide workouts with problem credit unions via NCUSIF 208 and CLF assistance. Rather NCUA prefers to direct the credit union to downsize to fit its reduced capital ratio.  For contrast, this was not the policy when the CLF was used to alleviate the stress from the non-earning receivers’ certificates issued by the FDIC after the Penn Square failure in 1982.

NCUA has not sought credit union input for changes to better fulfill CLF’s legislative purpose to ”encourage savings, support consumer and mortgage lending, and provide basic financial resources to all segments of the economy.”

If credit unions are to be asked to fund the CLF more fully, they must be included in the conversation about the CLF’s future.

Reversing an Historic Catastrophe

At year-end 2011 and until October 25, 2012, the CLF was fully funded and covered all credit unions for membership. At the 2011 annual CLF audit, it had an estimated draw of $49.8 billion from the Federal Financing Bank. Total credit union assets at that time were $974 billion.

NCUA described events following the audit in 2012 in the annual report: “Neither USC bridge nor NCUA were able to secure the transition of USC’s products and services to a successor entity, thereby leading the Board’s decision to wind-down and liquidate USC Bridge’s operations as of October 29, 2012.

Accordingly, USC Bridge discontinued its role as the agent group representative for CLF and CLF redeemed USC Bridge’s capital stock on October 25, 2012. The result of the liquidation of the agent group representative is that as of December 31, 2012, CLF membership comprised solely regular members and no agent membership is in place.”

NCUA controlled both the USC Bridge and the CLF. NCUA unilaterally shut down the CLF’s thirty-year record of covering every credit union in the cooperative system.  

US Central was never insolvent when liquidated by NCUA.  US Central’s asset management estate (AME) today reports a positive balance of over $1.7 billion.

The Challenge at This Time

Two of the three current board members were involved in these prior events. Rodney Hood was on the NCUA board that conserved US Central in April 2009, even though solvent and fully reserved for losses. From February 2011 Todd Harper was NCUA’s Director of Public Affairs and senior policy advisor to Chairman Matz when the CLF’s comprehensive industry role was terminated in October 2012.

If the Board can learn from these previous events to again develop a partnership with credit unions about the role of the CLF, they will rectify one of the most unfortunate actions ever taken by NCUA.

Credit unions’ strength is their ability to collaborate, work for shared purpose and exercise patience when resolving problems. If the Board reaches out and listens, real change can be made in the next covid congressional package that will be coming down the congressional pike.

Such a re-design could make the CLF central to the future of the cooperative system and enhance the role laid out for it by Congress. That would be a tremendous opportunity in the current crisis to reverse a mistake from the prior one. Is the Board up to the challenge this time?

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Ending Autopilot Decision Making in Credit Union Mergers

No credit union merger proposal has ever been turned down by a vote of the members. In over 5,000 voluntary mergers over the last two decades, most were by credit unions that were financially sound.

So why has the voting process been so perfunctory, to the point of meaninglessness?

Why has this fundamental member-owner responsibility become so routine?

This is especially critical when much evidence exists in for-profit sector and financial services, that many mergers destroy value.

One reason why this exercise in cooperative democracy appears pointless is that the voting decisions is presented in such a way that members believe there is no real choice in the matter.

Members are given no economic facts or alternatives, and often given a nudge in the form of a special dividend to follow the course recommend by the Board and management to give up their charter.

In an article exploring why consumers may act contrary to their economic self-interest,  the authors provide the following observation from behavioral economics:

“While it may not sound like a lot of fun to think about the opportunity costs of every financial decision, we need to be careful and not get too caught up in an “autopilot” mode of decision making. Thinking about everything we could do with our money is hard. At the time you make a purchase, remember that you can spend the money only once. More costs exist, so you may miss future opportunities such as a more significant purchase, interest earned on savings, bill payments, or other possibilities. The difficulty of considering several options leads us to revert to mental shortcuts during our decision making.”

Surrendering control over an organization and legacy assets produced by the efforts of generations is hardly a routine decision. Might it be time to ask whether the so called voting process be re-evaluated based on cooperative values and fiduciary responsivity?