Epitaph for THE Cooperative Book of Discovery

This post is a eulogy.  For 36 years credit unions were provided a comprehensive report on their collective progress.   That publishing effort grew in scope, analysis and detail while keeping the same title: The Credit Union Directory.  It is no more.

The Credit Union System’s Essential Resource


In 1986 Callahan’s introduced the first complete Directory of all active credit unions for the industry’s and general public’s use.   It was a complete census by state of every credit union, a task never accomplished in the eight decades since the first charter.

One reason for this gap was there was no centralized source for information.  NCUA’s call report included only federally insured data. There were approximately 1,800 cooperatively insured credit unions in over 20 states that offered a choice of share insurance.

Prior directories were periodically attempted.  One listed the  4,000 largest credit unions by assets.  Some state leagues published listings, but they were not for public use.

A Calling Card

The Directory was Ed Callahan’s  idea.  At great expense, Callahans had established a database of all NCUA data, augmented with cooperatively insured information. We believed the industry and public would beat a path to our door for the latest, most complete data on credit unions.

The company had an outstanding invoice for over $100,000 with a local service bureau that managed the information.  No one came knocking.  Ed decided we needed a “calling card” to let people know about our analytic capability.  Hence the first Directory, with 1985 data listing every credit union, was released at the  February 1986  CUNA governmental affairs conference.

The initial product was a literal directory organized by state listings in credit union alphabetical order.  The single line of information with the credit union was the CEO’s name, contact information and summary financial data:  total assets, loans, members and capital.

As the Directory became an annual effort, the content expanded.  Advertising was added to support production costs.  The concept of  a one stop information resource  became widely valued.  At least three other competitors entered the market:  NCUA printed and gave away a  state listing of its insured; Thompson’s added a credit union volume to their bank and S&L publications; and CUNA attempted its own version.

All subsequently dropped their “directory”  efforts.  For Callahan’s, this calling card expanded with more analysis and industry listings.  It demonstrated the firm’s software capabilities that eventually led to the development of Peer to Peer as the premier industry analysis product.

Annual  Publications:  The 2006 Example

The listings remained central, but the annual analysis expanded in multiple ways.

New reference material was included to give added value and market reach.  For example, the top 100 Canadian credit unions were listed in the belief this might open up a northern market.  It didn’t.  World Council information was presented showing the US totals in a worldwide context.

An example of this ever expanding effort is the 2006 edition which totals 646 pages in four tabbed sections.

Each year, the Directory’s cover was redesigned. A theme summarizing the movement’s progress was introduced .  In 2006, the message was Communities United by the Cooperative Difference.

The first tab, State of the Industry, presented the industry’s consolidated balance sheet and income statement, key trends and auto  loan share by state; 30 “best in class” leader tables;  an analysis of the corporate network;  a listing of CUSO’s, credit union auditors, leading technology providers and a list of mergers.  Contact information for all state and federal regulators, leagues and trade associations and Canada’s largest 100 credit unions were provided in just the first 125 pages.

Tab two was  the traditional listings provided by state.  Each state was headed by a five year performance summary and a top 50 by assets table preceding the alphabetical list of all the credit unions.  Seven pages were devoted to comparing state by state performance on key ratios.

The third tab was a cross reference listing where a user could look up credit unions alphabetically by name,  by city, or by the manager’s last name.  For example, seven Carlsons and 65 Johnsons.  Buffalo, NY, reported 42 credit unions with home offices in the city; Carmel, IN, had just two.

If one wanted a quick summary of credit unions by employment, the reader could look up credit unions that had Post Office or Postal, IBM, State Farm as a first name.  Or, if looking for parish-based credit unions, one would find 185 credit unions whose name began with St. (Agnes, et al ).

The final section was a buyer’s guide which showed 115 vendors serving the credit union community.   And helped to underwrite the Directory’s printing costs.  The sponsor for 2006 was Charlie MAC.  For those not familiar with US Central, this was a secondary market initiative for credit unions to compete with the government sponsored GSE’s.

The Incalculable Resource

Each edition attempted to list the major system components and the businesses serving credit unions.  To address concerns about timeliness of the data (publication occurred about 4-5 months after the financial information), Callahans in 2006 created a “Directory Online” with 24/7 access.  This digital version was updated with the latest financial as well as contact changes.

By publishing annually, the industry had a comprehensive set of performance benchmarks in one volume.   Who had moved in or out of the top 200?  How many credit unions have home offices in DC?  Or,  what states have the fastest growing coop system?  While the information was at a point in time, it was a starting place for limitless stories and analysis, then or in years later.

Leaving the Scene

Callahans last annual printed Directory was volume 36, published in 2021 using December 2020 data.  This edition had 221 pages including a 29-page buyer’s guide.

There was industry analysis with ten-year trends, leader tables, and peer group comparisons.  There was still a state-of-the-state section in which all the individual credit unions were listed.  Contact information was also provided for CUSO’s, Corporates, regulators, and trade associations.

There was no introductory analysis or theme, undoubtedly hindered by the Covid lockdown and recovery during the production cycle.

In 2022, there was no printed edition.  The industry trends, top 50 or 100 listings, the corporate network and state summaries are available online.  If printed, the  information would  total 132 pages.  There is no advertising or buyer’s guide.

Does It matter that there is no longer a printed Directory?

There are certainly virtual substitutes for some of the data listings and contact information.  One can search on NCUA’s site for peer information and trends.  Pulling other categories of information (CUSO’s, trade associations) would require someone with a knowledge of relevant  resources.  If interested in a year’s key industry events such as large mergers, charter conversions, bank purchases, or even newer data sets such as subordinated debt or goodwill, one would have to find a credit union database resource such as Peer to Peer.

The Directory’s function expanded assembling  performance and individual credit union data to serve as a starting point for insight and analysis.  At a macro level, the Directory was the only source for  ten-year financial trends and a two-year balance sheet and income statement that includes all credit unions, not just NCUSIF insured.

But the Directory was more than a useful compilation for quick reference.  It presented the industry’s multiple connections and comprehensive participants.  Each volume was a census of all key movement participants (by name and organization) and  an almanac of the  year’s trends.

Each edition presented the collective industry’s performance, information missing from all other yearend reports.  For example, NCUA’s Annual Report records its activities and financial audits, not credit unions’ role in the economy.  Trade groups report  their advocacy, education and  information services.  Individual credit unions promote their own success and accomplishments.

What is lost is the sense of cooperative identity, a shared destiny and a system with special purpose that serves over 100 million member-owners.   If one were to understand the history of the credit union system, especially the post deregulation era, the Directory would be the major resource.

This bridge connecting the past to the present no longer exists.  Each future writer or researcher will have to find their own way to the history.

The Directory memorialized multiple national, state and local  milestones for a movement whose future should be more consequential than its past.

Without this collective benchmarking, can there be a shared purpose? If one fails to celebrate birthdays, anniversaries or other key events, life goes on.  So will credit unions but with less of a sense of who they are and where they have come from.

A movement without a collective memory can slowly disintegrate into individual contemporary stories.   The shared destiny is lost as firms follow their own independent journey. A Community United by the Cooperative Difference no longer has a record of who they are.




Searching For Credit Union History

Three weeks ago I received a unique document.  It was John Tippet’s 2001 speech to Navy FCU’s board at their annual planning conference. John Tippets was then CEO of American Airlines FCU, now retired.

The presentation was typed in full along with the slides used.   John presented his credit union’s strategy and how he believed this implemented credit union’s unique design.

Ten years later (2011) Navy’s planning COO requested a copy. Now twelve years further on, I will share some of his thoughts. I believe they are an important example of a leader’s vision and provide important perspective today.

History Matters

The American historian David McCulloch wrote over a dozen books and countless speeches on transformative events (1776) and the people who played important roles.  His accounts are lively and compelling.  He drew upon stories from his subject’s diaries, letters, speeches as well as second hand press accounts recreating these past scenes.

As an author, he believed history was larger than life.   A country’s stories, he believed,  are its most critical  resource.  When well presented, often from original records, they enlarge the spirit and shape our understanding of who we are.  And what we aspire to become.

If one reads the Congressional Record transcript of Ed Callahan’s last testimony as NCUA chairman on April 24, 1985, there can be no question of his impact.  His eloquence, factual knowledge and even humor with the committee shows their respect of his leadership of NCUA during this very vital time for financial services.  The words recreate the event and provide, still today, insight into a leader’s talent.

Or read the July 16, 1982 hearing transcript of NCUA General Counsel Bucky Sebastian’s testimony before Chairman Rosenthal’s House Committee on Government Operations.  The Committee was investigating the failure of Penn Square Bank and its impact on credit unions. It had occurred just two weeks earlier. The back and forth between Sebastian and the Committee chair jumps off the page.  It shows clearly two very different understandings of the event and the role of government.   Bucky’s powerful argumentative style is on full display!

The Absence of Credit Union Records and Original Documents

The years 1981-1985 were pivotal in credit union evolution.  Their response to the economic crisis and the deregulation of America’s financial system was critically important for their members’ future.

These major events unfolded just as NCUA was still organizing itself as an independent agency with a three-person board appointed by the president.   Prior to this federal credit union oversight had been by a single Administrator housed within HEW.

In response to these changes, a separate credit union press of weekly or monthly newsletters was begun. These included CUIS (credit union information service), NCUA Watch, Report on Credit Unions and smaller commentaries. The trades wrote current stories in their weekly updates mailed to members.

These critical original documents from this period are hard to find.   I have contacted CUNA Mutual, CUNA, the Credit Union Museum and even the Library of Congress.  No copies of any of these written sources seem to be available.

Even more vital would be recorded speeches.  In this era all major credit union conferences would make cassette recordings of the keynote speakers and sell them to attendees to take home to boards and staff unable to attend.

A major event was CUNA’s Governmental Affairs Conference held every February at the Hilton Hotel. The NCUA chair’s speech would be a highlight.  I found a copy of Callahan’s 1983 and 1984 presentations.  But the most pivotal ones from 1982 and 1985 are missing.

State leagues and other conference organizers routinely recorded presentations by NCUA personnel as well.  Finding copies of these tapes is very difficult. The firms organizing the events have long ago moved on.  These live recordings are often seen as yesterday’s news when found in office records.

In this pre-internet period, NCUA communicated with its staff in six regional offices and the credit union community with a new media, VCR.   NCUA’s Video Network issued 21 productions over three years.  No copies can be found for many episodes. Neither NCUA nor the National Archives have the tapes of these critical updates.

Telling the Credit Union Story

Contemporary leaders are focused on creating their story rather than learning about the past.  Many of the participants from this critical 1981-1985 era have retired years ago.  Memories fade.  When their boxes of credit union experiences and keepsakes are opened by children or grandchildren, they rarely have any personal meaning for the family.  So out they go.

The founders of these earlier newsletters and conferences leave no legacy of their vital role of credit union events now forgotten.

But somewhere in a closet, garage, or basement storage area I believe some of these original records (newsletters, recordings, VCR’s) exist kept by those as memories of an important part of their lives—but even more consequential, I believe, as original sources of credit union history.

Can reader’s provide suggestions where some of this trove of credit union history exists?

I will be glad to digitize any records that a person wishes to keep.  The years of 1981-1985 are a turning point.

Parts of John Tippet’s 2001 statements on his credit union’s strategy will spark controversy.  It did then and it will today.   Some of the same challenges remain.  For the credit union story is always being updated.

Can you help me fill in some of the missing parts from an earlier era?  It will be entertaining, illuminating and educational.   Please let me know what you find or where I might look.



Are Members Losing the Cooperative “Savings” Game?

While the 2022 calendar has turned, we do not yet know the full results for the credit union system.  And how member returns may have ended up.

The number one economic topic in 2022 was inflation.  In response the Fed raised short term rates from 0-.25& to 4.25-4.50% in seven steps.   The rest of the yield curve rose although not  always in a parallel fashion. In some time periods,  the yield curve has inverted meaning short term returns exceed longer maturities.

Credit unions fund on the short end of the curve. Liquidity was, and still is, a top credit union priority.   At September 30, annual loan growth was 19.4% versus share growth of  just  6.5%.  Unrealized investment losses had grown to $40 billion, Total investments had fallen by over $100 billion.  FHLB borrowings were double the amount versus a year earlier.

So how did credit union member owners fare overall in this rising rate environment?  For the entire industry the year-to-date results through September show loan yields have risen, cost of funds has fallen by 2 basis points, and the net interest margin has increased by almost 20 basis points.  Rising loan demand was the primary reason for this margin increase.

The Top 100 Report a $51 Million  Decline in Dividends Paid

A commonly accepted truism in credit unions is that the larger the credit union, the greater the possible member value.

In 2022 Vanguard’s federal money market fund had a total return 1.55% rising from .01% in Q 1 to a 3.99% distribution at December 31, 2022.   These savers returns rose as did market rates.

For members of the top 100 credit unions there was a very different outcome.  In 63 of the largest credit unions the total dividend dollars fell by an average of 12%.  The total decline was $241.7 million versus the amount paid in the first three quarters of 2021.  For some the fall in rate was precipitous.  One credit union reduced total dividends by 46.3%; three credit unions reduced their dividends by over 30% versus the year earlier.

In contrast, thirty seven of the top 100 reported an average 21.7% increase in paid dividends.  One caveat: approximately seven of these increases were due to mergers or bank purchases which increased total shares by this externally acquired growth.  Their dividend payments may not be an apples-to-apples comparison.   However, ten credit unions in this group, all with only organic growth, reported over 20% increases in dividend payments.

When adding up the total dividends paid by the 100 largest credit unions through September, the combined result is a $51.2 million decline in member income on their savings.

The proviso:   The game is still has one quarter to go.  Some credit unions pay significant yearend bonus dividends and /or interest rebates.  These will need to be added in the final quarter.  With full year data we can also estimate the average dividend rates to compare with  alternatives during the year.

The Existential Question for Credit Unions

In the first three quarters of 2022, members are paying more for loans, credit unions are earning higher investment returns, salaries and benefits continue to grow, and total capital has  increased. However, many members are seeing a reduction in the dollars paid on their savings.

I will revisit these top 100 to see the full game’s results at December 31.  Did member-owners win or lose in this rising rate environment? Which credit unions navigated this rate transition most effectively for their savers? How did they do it?

Will members continue to “subsidize” the largest coops, many with increasingly public visibility, by accepting falling returns on savings? One money market fund today pays 4.25% (seven day SEC yield) with an expense ratio of only .10 basis points.  Will large shareholders start to move funds from their lower paying credit union money market products?

CEO’s frequently assert that member loyalty lasts for only 25 basis points.  The US economy has had historically low rates since 2009.  Lower inflation and the Fed’s “quantitative easing” have led to an unusual financial period where the cost of money was at or near zero.  Can credit unions avoid the “bubbles” created by this historically rare very low-rate environment?

Will CEO’s adjust their business models so that member savers can be winners in 2023?   So far the data show there is a significant gap  for coop owners to receive the results they will increasingly expect versus other options.

In 2023 will the largest 100 turn into leaders, or the majority continue as laggards in savings returns?

If many of these largest firms cannot remain competitive for savers, is the cooperative financial model at risk?

Or do these falling returns, just reflect management slowness in responding to the changed interest rate situation?



When Goodwill Becomes Ill-will (part II of II)

In this second blog I look at examples of goodwill. What are  some of the financial and regulatory implications of this ever increasing intangible asset?

The following are the  34 credit unions (out of 277) with the largest amounts  of good will at September 30, 2022.

The goodwill net worth ratio, column three, compares the size of this intangible asset to net worth. This ratio ranges from a high of 31% for Chartway to a low of .32% for Navy FCU.  There is no regulatory limit on how high this percentage can be.

While I do not know the details of every credit union listed,  most of these goodwill leaders occur  from either whole bank purchases or mergers with other credit unions.  The first two names, GreenState and State Employees (NY) are examples of each activity.

The Regulatory Situation

As discussed in Part I goodwill is an intangible asset representing  future economic benefits arising from assets acquired in a business combination,  traditionally mergers or purchases.

It is not part of equity or retained earnings from a presentation standpoint.

Goodwill lacks physical substance.  It is an accounting estimate based on assumptions used to project potential future value. Unlike mortgage servicing assets which are also an intangible, goodwill can’t be bought or sold.

If credit union A merges with credit union B which has goodwill on its books, credit union A receives no benefit.  Credit union B’s goodwill is devalued to zero. It is not carried over onto credit union A’s books.

As the underlying  benefits  are realized, impairments to goodwill can be recorded.  A credit union can also amortize goodwill over ten years.  In both instances those charges flow through the income statement and reduce  retained earnings.

In either option, all goodwill must be assessed for impairment at least annually.

Goodwill and Net Worth

For credit unions following CCULR:   Goodwill is not part of Net Worth (numerator) for ratio purposes but is included in total assets (denominator) to determine the net worth ratio (NWR).  Goodwill balances must be less than 2% of total assets to opt into CCULR.

For credit unions subject to RBC:  Goodwill is a reduction from the RBC Numerator and also from the Denominator.

Goodwill Uncertainties

In corporate America public companies report over $4 trillion of goodwill on balance sheets, primarily from mergers and acquisitions.

While accountants agree on what goodwill is, how to value that goodwill after it’s passed onto the buyer’s ledger sparks plenty of argument.

There is much uncertainty about forecasting goodwill’s future benefit for a firm – it involves more judgement calls than many accountants are comfortable with. And while goodwill is listed as an asset on the balance sheet, is it really worth its stated value? What if it was a bad buy at an inflated price in the first place?

In June 2022 FASB announced it had given up on a four-year effort to simplify goodwill accounting determinations.  The current annual impairment test remains the requirement versus a  straight line annual amortization approach.

The Credit Union Goodwill Challenges

When creating goodwill, credit unions have all of the same accounting challenges as public companies but none of the checks and balances .

The ongoing difficulty is assessing post acquisition performance to see if  it is meeting the values projected when the goodwill was first established.

In cooperatives this  is made much more difficult because in both mergers and acquisitions, there is virtually no public disclosure of an acquisition’s costs  let alone  future projections.

For purchases, credit unions rarely report the total price paid(except when a bank is publicly traded)  the broker and transaction fees,  the future impact on ROI or ROE and the longer term performance goals to be achieved.   For mergers, no details of a combined operational plan are provided just the asserted advantage of bigger size and more capital.

Most large mergers and whole bank purchases take years for operational and business integration to be fully realized.   These transactions generally end relationships  and market presence created from years of continuous service.  That history  and local advantage is now gone.

In some large credit union mergers a whole new corporate brand and identity are part of the combined entity’s future business plan.   Shedding past connections to create a whole new market persona would seem to undermine a valuable legacy.

No Accountability

Credit union mergers and bank purchases are not market based transactions.  They are private deals negotiated for mutual advantage by CEO’s and then announced to members. Because there is no transparency or numbers provided,  little future monitoring possible.

Both transactions create  goodwill but the credit union is playing with members’ house money.   If the deal works out after three or four years, whatever benefits of expansion have been achieved are trumpeted as the result.   If  the bank purchase was overpaid, there is no stock price or performance metric that would highlight this misjudgment.

The bank owners are paid a cash premium for their shares from the members’ savings. They have left  with cash in hand. If a transaction is poorly priced or managed, then the goodwill is written down from  members’ existing capital.

The goodwill concept allows managers to pay premiums for purchases absent any performance goals.   In a merger, goodwill in excess of book net worth just enhances the  ongoing credit union’s capital but members receive nil for this value.

Transforming Goodwill Into Ill-will

When leaders operate in a closed environment, unconstrained by member or board governance, personal ambition can run amok.

With no meaningful credit union disclosures to members or the public in either mergers or bank purchases, managers are free to wheel and deal.   A number of CEO’s have been very public about their “nonorganic” growth plans.   Goodwill is the intangible asset created to make things appear OK regardless of price or terms.

The animal spirits of capitalism are quickly embraced versus the cooperative focus on members’ well being.  But unlike truly competitive markets, there is no stock price or market assessments monitoring  performance.

When goodwill accounts begin to approach 10% or higher of net worth, the credit union has disguised its ability to produce operating earnings.   To keep the game going, more purchases and goodwill are pursued, always justified by scale and more diversification.

At some point the economy turns, the acquired assets become overvalued and members are given the short stick as dividends are reduced to keep up the ROA goals. In several of the credit unions  listed dividend payments were reduced in 2022 versus 2021 to sustain ROA even though short term rates have risen by over 3%.

Staff layoffs are another indication of overcommitments.  Examiners or accountants  will start to question the goodwill asset’s value.

The goodwill that underwrites cooperatives can quickly turn to ill-will.  When members realize their collective legacy in mergers was transferred to solely benefit senior managers, the loss of confidence will undermine both the new entity and the cooperative system’s reputation for fair dealing.

When the out of state or out of market bank purchase shows no growth, the tactic of buying market share begins to fail.

The facade of goodwill falls away for both the credit union and the members.   Once gone, it is lost forever.  That is what intangible means.




Two Meanings of Goodwill (part I of II)

Tis the season for evoking goodwill.   Company/organizational holiday parties, the daily mail full of greeting cards,  Giving Tuesday, community food drives and dozens of other personal and firm initiatives make Advent a time of joy.

Wonderful and colorful decorations enhance this sense of a special time of year. Sporting events promote opportunities to help others. Even if there is constant hurry up, it is a toward good ends.

Concerts and carols bring back familiar lifelong memories.  There is even a heavenly musical declaration of good will in music.

This most dramatic announcement is in the Messiah’s fourth chorus, Glory to God.  As described in Luke 2 v.14, the heavenly hosts sing to shepherds of Jesus’ birth:  Glory to God . . . and peace on earth. This opening is followed by repeated proclamations  of “Goodwill towards men.” 

Angels celebrating a new era in words repeated still today.

More Than Christmas

 Goodwill is not limited to this holiday season.  In everyday usage, goodwill is the feeling of trust, loyalty and support that emerge from a relationship or event. It is the bond greater than any underlying transaction.  It is much more than a feeling of satisfaction.

Rex Johnson, the credit union lending guru, described this as the art of converting members to fans, not just spectators.

For cooperatives, goodwill is an essential component of their market advantage.  It is rooted in members’ belief that the credit union acts in their best interest.  It is embedded in cooperative design. Current generations expect the fruits of their loyalty will be passed to future ones.

When active, goodwill underwrites member relationships giving credit unions a competitive standing no other firm can match. Although real, it shows up nowhere in a credit unions ordinary financial reports.

Accounting Goodwill

There is also an accounting term, goodwill.  It is an intangible asset.  It arises when a credit union acquires a bank or merges with another credit union. The excess of book value  over fair market value of the net assets gained, creates accounting goodwill.

Credit union accounting goodwill has grown dramatically.  The first reported total as of March 2009 was $160 million.  At September 2022, the total was $2.2 billion recorded in 277 credit unions.  Since that initial March date,  it has grown at an annual rate of 21%.

Goodwill is only 2.2% of these 277 credit union’s net worth.  But in some cases it is much higher: 31% of Chartway’s and 21% of Lake Michigan credit unions’ total capital.

Why an Intangible Asset?

Goodwill is classified as an asset because it provides an ongoing revenue generation benefit that extends beyond one year. It may include  such items as customer relationships, liabilities (shares) acquired at below market rates, corporate expertise,  operating (FOM) authorities, or proprietary technology.

Goodwill is recognized only through an acquisition. Unlike member relationships, it cannot be self-created. It is the excess of the “purchase consideration.”

Negative goodwill arises if the acquired assets are purchased at a discount to their fair market value (FMV) and is referred to as a “bargain purchase.”

A description of goodwill accounting and how it works is at this site.

The Status of Accounting Goodwill in Credit Unions

Since December 2018 the total of accounting good will has doubled to the present $2.2 billion. The reasons are two:  premiums paid on whole bank purchases and mergers with credit unions uncovering significantly understated value.

An example of the premiums on whole bank purchases is GreenState which reported $123 million  (12% of its net worth) as goodwill.  The second highest is State Employees in Albany at $112.5 million (16% of net worth) as a result of its merger with Capital Communications.

Because accounting goodwill is an intangible asset, there are numerous issues about how it is considered in net worth calculations, its amortization, and its role in financial decisions.

Tomorrow I will look at the largest reported individual goodwill totals, NCUA’s view of the asset and how it could change the future of the cooperative system.







The Power of the Credit Union Press

Many challenges confront credit union focused news reporting.  Publishing daily via social media is hard.   Staff is limited.  Original stories take time to develop.   Amplifying press releases is often an easy solution when faced with daily deadlines.

Credit Union Times and CUToday  have developed  important reporting niches however.   If readers  follow these original stories, they can provide insight into events that have consequences for the future of the cooperative system.

Following Court Documents

Peter Strozniak of Credit Union Times  follows  court cases about credit unions.  On October 4, he reported on the embezzlement at the $3.2 Prairie View FCU: Former CEO Pleads Not Guilty to Embezzlement Charges.   Some of the details in his coverage included:

  • The CEO’s scheme lasted from 2010 until August 2020;
  • She embezzled over $211,000 from 34 elderly members accounts;
  • Created fraudulent loans for over $791,000;
  • Formed 58 nominee loans by creating fake share loans in the names of relatives and friends

In eight of this ten-year fraud time frame, the credit union reported annual operating losses on its call reports. The credit union was merged in the first quarter of 2022 due to “its poor financial condition.”

The question that jumps out  is how could NCUA examiners have continually missed this illegal activity for ten years?

Peter did not go there with this story, but the details certainly raise a core question about NCUA’s supervision of the FCU.  It was small, with few employees and only 600 members.  The call reports showed  losses for most years.  What does this case imply about the  efficacy of NCUA’s annual examinations?

CU Today Goes to the Public Record

For most of this year, CU Today has summarized the merger activity posted from NCUA’s web site, Comments on Proposed Mergers.

Their latest reviews showed “CUs seeking to merge in multiple other CUs at once, combo’s in which the merging and acquiring CUs are both losing money, and several examples of credit unions reaching across state lines and even across country for merger partners.”

This reporting which includes the latest data and quotes from the member notices, takes a lot of work. Some examples.

One summary is for AIM Credit Union in Dubuque, IA.  It is merging two Keokuk credit unions.  Members of both merged credit unions were given identical Notice statements.  They will be voting on the same day at the same location, First Christian Church.  The two towns are 150 miles or about three hours apart.  Was a local merger of  the two credit unions considered?

In the merger of two Michigan credit unions, Community Alliance Credit Union ($108 million) with People Driven Credit Union ($355 million), the top three executives can receive a total of $542,000 in severance.

Community reported  midyear capital of 8.39% and  a loss of $73,000. The members were offered nothing of the over $8 million in capital being transferred.  Is this an example of taking the money and running away?

The three-year old Maine Harvest FCU with 56% capital is merging so that “its mission of lending to farms and food producers will be better preserved with a larger credit union that embraces that mission.”   Was this option researched at the start?  Why not create a partnership, versus merger, with a larger credit union if more services are needed?

The $210 million Emory Alliance Credit Union in Decatur GA is merging with Credit Union 1 whose main office is listed as Rantoul, Il.  One wonders why?  Were no local options available?   Did Emory do any due diligence on behalf of their members, especially of Credit Union 1’s recent initiatives before recommending this out of state takeover?

Finally, the $226 million Parsons FCU in Pasadena, CA  is merging with the   $1.1 billion Skyla FCU in Charlotte, NC.   Parsons has almost 11% capital.  Merging with a credit union across the country, especially with very strong instate options, would appear contrary to every common sense notion of member service and value. What is the reason for this  “merger” almost 3,000 miles away.

Presenting the Facts for the Public

CU Today and Credit Union Times are serving a vital public, cooperative service developing this fact-based reporting.

Both media raise important questions about motivations and fiduciary duty of persons responsible for these events.

This original reporting  raises critical questions about the directions of credit unions, the regulator’s oversight  and how members’ best interests appear to be so cavalierly and repeatedly disregarded.

Sooner or later the stories behind these events will come out.   The political and repetitional consequences will impact every credit union even when excesses may be the work of only a few.

A diligent, informed and questioning press is critical in holding those in positions of responsibility to account. CU Today and Credit Union Times are doing the job of the 4th estate.  Are credit union leaders getting the message?


Credit Unions and Liquidity Management

Managing liquidity will be an ongoing priority during the interest rate transformation now being led by the Federal Reserve.

Today  I want to show how credit unions have prepared.

Relying on a Cooperative System

Credit unions managing  74% of assets ($1.57 trillion) use the FHLB system.   To borrow from the banks, credit unions must invest in a bank’s capital with borrowings a multiple of their contribution.

As cooperatives, the banks are owned by their members, pay a dividend on the capital and offer multiple borrowing, hedging and funding options.

These 1,271 credit unions report a total of advised lines of  credit of  $288.1  billion at June 30, 2022.

The credit union funded CLF at June 30 reports total membership 349 regular members plus 10 corporate agents which have funded the CLF capital requirements for their members with less than $250 million in assets.

The total CLF capital contributions represent approximately 26.2% of all credit union shares as of June 30.

In addition the CLF has total borrowing authority of $29.7 billion but has no advised lines of credit with credit unions.  This lending capacity, if fully utilized would equal just 10.3% of the total advised lines credit unions report from the FHLB system.

Two Observations

Credit  unions rely on the cooperatively designed, privately managed FHLB with boards elected by the owners, as their primary source of external liquidity.

The CLF, specifically designed for credit unions, has not evolved to respond to credit union needs.   The CLF managed by NCUA has no credit union representation or programs to encourage credit union involvement.

There have been no loans from the CLF to credit unions since 2010.   At that time the two most significant loans were initiated by NCUA as part of their corporate conservatorships of US Central and WesCorp.  These two borrowings were for $ 5 billion dollars each, guaranteed by the NCUSIF.

In the upcoming period of enhanced liquidity management, credit unions are turning to the organizations they own and can rely on.



A Lookback: The NCUSIF Four Decades after Redesign (1985-2022)

Knowing the past is essential to understanding the present and charting the future. This is true for individuals, institutions and society.

History provides us with a sense of identity. People, social movements  and institutions require a sense of their collective past that contributes to  what we are today.

This knowledge should include facts about our prior behavior, thinking and judgement.  Such information is critical in shaping our present and future.

The NCUSIF’s Transition Story


The NCUSIF legislation was passed by Congress in October 1970 authorizing  a premium based financial model imitating the FDIC’s and FSLIC’s  approach begun four decades earlier. This multi-decade head start was how those funds achieved their 1% required statutory minimum fund balance. This reserve growth occurred  during the post-war years of steady economic growth with only modest cycles of recession.

Then the economic disruption with double digit inflation and unemployment of the late 70’s and 80’s led to the complete deregulation of the financial system established during the depression.

Ten years after insuring its first credit unions, the NCUSIF’s financial position at fiscal yearend September 30, 1981, was:

Total Fund Assets:   $227 million

Total Fund Equity:    $175 million

Insured CU assets:    $57 Billion

Total Insured CU’s:    17,000

Fund equity/Insured shares:   .30%

CUNA president Jim William told NCUA Chairman Ed Callahan before his GAC speech in 1982, the dominant concern of credit unions was survival.

Because the fund equity ratio was so far short of its 1% legally mandated goal,  NCUA  implemented the only available option  to increase the ratio.   Double premiums were assessed in 1983 and 1984 totaling 16 basis points of insured savings for every insured credit union.

However, the ratio continued to decline primarily due to increased losses from the country’s macro-economic challenges. These trends and the prospect of double premiums caused  credit unions to ask if there were a better way.

The history of the analysis of the fund’s first dozen years leading up to these changes is in this seven minute video from the NCUA Video Network.

In April 1984, NCUA delivered a congressionally mandated report on the history  and current state of the NCUSIF.  It included the development of private, cooperative share insurance options and league stabilization funds.  It presented four recommendations to restructure the NCUSIF from a premium revenue model, to a cooperative, self-help, self-funding one.

Today’s NCUSIF after 40 Years

The four decades of NCUSIF performance since 1985 have proven the wisdom of the redesign and generated enormous financial savings for credit unions versus annual premiums.

Today the NCUSIF is $21.2 billion in total equity giving a fund insured share ratio of approximately 1.29%.   This size represents a 12.7% CAGR since 1981 when the fund’s equity was  just $175 million.

The critical success factor  of the 1% cooperative funding model is that it tracks the growth of total risk with earning assets, whatever the external economic environment.

This was and is not the fate of the premium based funds. The FSLIC failed and was merged into the FDIC in 1994.  The FDIC has assessed an annual premium(s) on total assets every year since the 1980’s.

The FDIC’s ratio of fund equity to insured shares at March 31, 2022 was 1.23%, down from its peak of 1.41% in December 2019.   On a number of occasions, the FDIC fund has reported negative equity during financial crisis.

NCUSIF Twice the Coverage Size of FDIC

It should also be noted that FDIC insured savings are only $10 trillion (41%) of the $24.1 trillion total assets in  FDIC insured institutions at the end of the March 2022.  The FDIC  is only .51% of all banking assets.

For credit unions insured shares are 78% of total assets.  Today, the NCUSIF’s total assets are  1% of all credit union assets, a ratio two times the size  of the FDIC’s.

Five Decades of Reliable, Sound Coverage

Throughout the redesigned NCUSIF’s history, a premium has been assessed to augment the fund four times: 1991 and 1992; and 2009 and 2010.   In both situations the premiums were levied based on reserve losses expensed but then subsequently reversed in later years.

In 1985, the fund’s first full year of the redesign, NCUA reported “for the first time ever, the NCUSIF paid a dividend.”   The NCUSIF Annual Report further stated that “credit unions were returned $275 million in tangible benefits.” (page 5).  This from a fund that just four years earlier reported $175 million in total equity.

The fund continued to pay dividends including six consecutive years from 1995 through 2000, and again in 2008 when the equity ratio was above 1.3%.

These results were achieved because of a collaborative partnership between NCUA and credit unions.  The changes were based on an analysis of prior events.  Options were evaluated and based on open dialogue at every stage.  Ultimately this consensus for change was critical in obtaining congressional support for this unique cooperative solution.

The redesign included commitments by credit unions to guarantee the fund’s solvency no matter the circumstances. But it also mandated guardrails on agency options and required transparency in reporting and managing the fund’s assets.

The NCUSIF four decades of performance has also provided a valuable record for reviewing credit union loss experience in multiple economic circumstances and events.   It provides an audited account of actual losses during the many years when there are none and credit unions received a dividend.

But it also documents the actual cash losses in the four or five short recessions or economic upheavals such as the aftermath from the 9/11 attacks, the Great Recession and the most recent COVID economic shutdown.

The NCUSIF’s record is sound.  It is proven. The facts are known.   So what could possibly go wrong?

Tomorrow I will review the temptations awakened by the NCUSIF’s successful track record.





Credit Union’s Status at June 30, 2022

Last week a reader responded to my analysis of credit unions investments at June 2022. His comment was so insightful and comprehensive, I asked Mike Higgins to convert his response to a post, which follows.

Musings On the State of Credit Unions June  2022

Another quarter has passed, and the economy is behaving like a moody teenager – one day up, the next day down.  Wall Street has a slightly optimistic outlook, but the Federal Reserve has different plans.  A lot of mixed messages. This leads me to a handful of musings and situations to consider based upon second quarter credit union call report data.

  • Net interest margin finally improved this quarter (up 16 bps to 2.73%). It was driven by two items:
    1. Rising loan to asset ratio (more assets earning higher loan yield vs. lower surplus funds yield).
    2. Higher surplus funds yield (up 34 bps).

I count cash as surplus funds because I am ruthless about sloppy funds management, so if you see a slightly different number somewhere else, you will understand why.

  • Those credit unions with short weighted average maturities (WAM) in surplus funds will see immediate benefit from continued (signaled) rate hikes.
  • Loan yield barely budged this quarter.  It increased 1 bp to 4.29%.  Why?  Let’s look at where the massive amount of loan growth came from this quarter:
    1. 40% from real estate lending (1st mortgage held and commercial real estate).
    2. 35% from vehicle lending.

Those tend to be fixed rate.  So huge loan growth, mostly fixed rate, adds little movement in loan yield.  When rates go up, the incentive to pre-pay is reduced, so duration will extend here.

  • On the funding side, we normally see price inelasticity as rates on core checking and savings are “sticky” tending to lag markets. However:
    1. The Federal Reserve is starting quantitative tightening.  Bank deposits declined this quarter, which rarely happens — the supply of funds is shrinking.
    2. Credit union deposits were basically flat this quarter.
    3. Credit union borrowings and non-member deposits increased by 36% this quarter.
    4. Deposits are becoming valuable again!  The spread between cost of funds and the yield on surplus funds is producing a high rate of return after being low for so long.

Banking Like It Used to Be

So, the tendency is greater demand for funds going forward.  Banking like it used to be  with deposit and loan spreads near equilibrium (deposit spread = surplus funds yield minus deposit cost; loan spread = loan yield minus surplus funds yield).

  • Unrealized losses on available for sale (AFS) securities now represent 12.6% of credit union net worth.  This will only grow larger with each rate hike.  I realize there is no loss on any security held to maturity, so it’s just a paper loss, but it reflects the following:
    1. Credit unions will be reluctant (or unable) to stomach losses, so they will hold the securities until maturity.
    2. This effectively converts the securities to fixed rate loans for interest rate risk purposes.
    3. Fixed rate loans held to maturity reduce liquidity, thus increasing demand for funds to support continued loan growth.  Fortunately, there is still room left in the loan to asset ratio. However AFS securities should really be viewed as a loan for ALM analysis, because they are going to model the same behavior.

Navigating to a New Normal Interest Rate Curve

How would you characterize your balance sheet today?  What concerns do you have and how do you plan to address them?

Every credit union will be in a different position, but here are four general situations I am seeing right now:

  • Nothing Changes.  Credit unions that are good at lending don’t have to worry about surplus funds management — because they don’t have lots of surplus funds to begin with.  Assuming they are following sound ALM practices, they should be just fine. Suggestion:  Stay the course.
  • Happy Days Are Here Again.  For credit unions who are not so good at lending, and as a result, have excess amounts of surplus funds, but did not chase yield in the investment portfolio, their ROA is in for a big boost from rapidly rising rates. A reasonable deposit spread has finally returned after a long drought. Suggestion: Closely monitor any outflows of deposits and increase rates on shares to avoid runoff–which should also make members happy.
  • Can You Say Liability Sensitive? For credit unions good at lending but chasing growth using price/terms as a differentiator (low yield, fixed rate), you will experience increasing liability sensitivity.  The funding side of the balance sheet will see faster increases in costs than the asset side can absorb. Decreasing net margin may cause ROA to wane.  If you have a large enough net interest margin, you should be able to ride things out; however, run some net income simulations to get a better read on P&L exposure.
  • A Forecast That May Incur Pain. Those credit unions not so good at lending, and with excess amounts of surplus funds which chased yield hard, are facing a net margin squeeze. Rapid rate increases are not a friend.  Increased unrealized losses will come with each rate hike.  Suggestion: Re-evaluate your liquidity. Your securities are like fixed-rate loans in ALM analysis.  To grow, you may need new funds since much of your liquidity is “underwater.”

Asset liability management is changing quickly now after a two plus years of historically low rates and a flat yield curve.  The current market consensus forecasts an overnight rate in the 3.50-4.00% range before the Fed pauses to let things get sorted out.

Those of you who remember banking before the Great Recession can draw upon your experience.  Those who were not in the industry at that time may want to do a little research of the interest rate cycle post 9/11 and the return to “normal.”




Mike Higgins is a consultant helping credit unions and community banks improve their competitive position through performance-based compensation.  He sees financial statements for just over 100 financial institutions every month.  He was also a founding investor in a 2006 community bank startup.


Credit Union Investments at June 2022 and the “Wisdom of the Crowd”

Wisdom of the crowd is a theory that assumes large crowds are collectively smarter than individual experts. It believes that the collective knowledge and opinions of a group are better at decision-making, problem-solving, and innovating than an individual or single organization.

The collective judgment of a diverse group  compensates for the bias of a small group.

On September 2, Credit Union Times published an analysis by Callahan’s Jay Johnson of credit union investment trends at June 2022.  How did the industry respond to 2022’s rise in market rates?

Investments 30.5% of Total Assets

Total investments held by credit unions, including cash balances, fell 9.5%, or $68.6 billion.  But the June total $655.5 billion was still 30.5% of the balance sheet.

As reported in the article, credit union investments boomed in the past two years, growing from $389.3 billion in December 2019 to a high of $724.0 billion in March 2022, mostly by  Covid relief payments held as cash. Even after this quarter’s decline, total investments are well above where they stood at the start of the pandemic.

 Credit Unions Favor the Front of the Curve

Johnson’s analysis reported the  trends in market rates at quarter end as follows:

“The yield curve flattened after the Fed raised rates 75 bps in both June and July. Short-term Treasuries, which are most sensitive to Fed action, priced in expectations for additional rate hikes. The two-year yield increased 40 basis points in June after some dramatic intra-month swings. It settled at 2.95% at month end after reaching as high as 3.45%.

“The market struggled to price in both recession risk and more Fed rate increases at the same time, as the two forces counteract each other. The 2-year/10-year spread finished the month at 6 basis points, threatening inversion.

“Portfolio allocators took advantage of the increase in shorter-term yields and reinvested funds into securities of more near-term maturity. The one-to-three-year maturity category took in $4.2 billion from credit union investors since March, good for a 3.6% increase and enough to become the largest non-cash category.

“Investments in securities are spread relatively evenly across each of the maturity categories within the one-to-10-year range, understandable given recent changes to the yield curve. Cash comprises 28.3% of total investments.”

Portfolio Yield up 21 Basis Points

“The average yield on investments increased 21 basis points quarter-over-quarter, up to 1.12% through June. While this marked the fifth straight quarterly increase, it was the most significant change in yield since the first quarter of 2019.

“Of course, with rising yields come unrealized losses on available-for-sale securities, and these, perhaps temporary, losses now total $28.3 billion throughout the industry.”

A Crowd Sourced Benchmark for WAM and Investment’s NEV Risk

As shown below 42.6% of credit union investments are cash or under one year maturity.  Obviously it is difficult to reposition longer maturities as rates rise, without incurring a loss.   This short-term liquidity build up allows credit unions to “ride the yield curve up” as rates are taken to a new normal by the Fed in its inflation fight.

The overall weighted average investment maturity for all credit unions is 2.83 years.  Every institution’s balance sheet, cash flow and business priorities are different.

The 2.83 years is the risk profile of the total credit union portfolio.  It is based on 4,900 independent decisions about managing risk as measured by WAM at the end of June.

Individual credit union investments may have a longer or shorter WAM.  But this is the “collective wisdom” at this point in the upward rate cycle as the Fed tries to rein in the highest inflation in four decades.

Total Balance Sheet Analysis

Investments are one component of overall balance sheet risk management.  In addition to NEV calculations, credit unions use net interest income (NII) simulations to project possible outcomes for net income in changing rate scenarios.

NII is a comprehensive look at the repricing of assets and cost of funds.   The June data showed that the industry’s net interest margin  improved in the latest quarter.

Rising market rates will lead to increased cost of funds. The ALM challenge is to manage this adjustment in tandem with the repricing of both investments and loan assets.  So far, so good.

While market “narratives” about future rate hikes can vary daily, the overwhelming consensus  about future  Fed moves is “higher for longer.”

Investments are just one aspect of interest rate risk management. For this component, how would your portfolio’s risk profile and  recent decisions compare with the industry’s collective wisdom?