Category: credit union data

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A Valuable Library Resource from NCUA

In following up an article by David Bauman in which he referenced his FOIA request to NCUA, I was directed to  NCUA’s FOIA Library.

Under the Frequently Requested Information section was what I had asked for:  NCUA’s response to Congressman French Hill on December 14, 2023.   Other items in this section included previous multiple requests that can be accessed by just clicking on the link.

Another section of the Library was the FOIA Request Logs  which include 474 requests going back to 2019.  I scanned the requests that were open and closed for 2023 to see what information had been asked for.

The log table has the date of the request, sometimes the organization, a description of the information sought and final disposition: granted-partial or full, denied, or “no records” responsive to the request.

I have reached out to NCUA to ask if anyone can use the FOIA log number to review previous responses without having to submit a whole new request—just to learn about the agency’s response.  When the reply is received, I will add to this blog.

In the meantime here are some of the more intriguing request descriptions, all of which were filled in whole or in part.

Selected Titles In the FOIA Library from 2023

Copies of all FOIA appeal logs by year from 2010

Records sufficient to identify all employees who entered into a position at the agency as a Political Appointee since January 20, 2021, to the date this records request is processed, to include a list of enumerated parameters to include resumes and waivers.

Documents and data sufficient to account for the monthly occupancy or vacancy rates for the agency’s five largest buildings (measured by square footage) from January 1, 2020, to December 31, 2022. 

A list of federally insured credit unions with agricultural loan portfolios greater than $100 million.

The application, approval, and any attached materials from the most recent field of membership change by Thrivent Federal Credit Union, headquartered in Appleton, WI.

A copy of the charter for NBC (N.Y.) Employees Federal Credit Union, charter 22351, prior to its merger into XCEL Federal Credit Union, charter 16218. 

A list of nationally insured credit unions that have failed and/or been acquired since January 2001 to include credit union name, charter number, opening date, failure date, and acquiring institution. 

The most recent NCUA salary data.

1)The number of federal credit union mergers completed each year between 1980 to 2020; and 2) The number of active federal credit union charters each year from 1980 to 2020 (as of 12/31 or other uniform date for each year). Note: If information is not available going back to 1980, please provide information going back as far as NCUA records allow. 

A list of all credit union CEOs and volunteers as of March 31, 2023.

NCUA salary data specifically under the category of political appointee.

Quarterly lists of all credit union board members for each quarter from Q42012 through Q42022.

1)Field of membership (“FOM”) criteria and approval documentation for FirefightersFirst Federal Credit Union (“Firefighters”); 2) Firefighters’ application and documents related to add “employees of non-profit foundations authorized by their organizing documents to be for the benefit and support of firefighters” (“Foundation”) to its FOM; 3) OGC’s legal opinion and analysis that supports the addition of the Foundation to Firefighters’ FOM; 4) CURE’s office summary that supports the addition of the Foundation to Firefighters’ FOM; 5) CURE’s approval letter and GENISIS worksheets reflecting approval of the Foundation to Firefighters’ FOM. 

Entire consumer complaint file from 2013.

An Important Resource

This is a partial 2023 listing.  In addition to some interesting reading, it also shows the agency as a resource for names of CEO’s and volunteers (including even CUNA and NAFCU) and for credit union data or other files going back years.

There might even be some valuable credit union press stories in following up some of these past requests.

 

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Three Examples of Credit Union Success

Credit unions can be inventive when communicating their special nature.  Here are three different approaches.

A Few Great Numbers (KPI’s)

This traditional view of success is from the yearend numbers of an exceptional coop. This CEO’s team focuses on the 5 key performance indicators (KPI’s) in 2023 as shown below.

metrics goal actual
member growth 5.10% 4.10%
net earnings 1.00% 1.23%
service quality 82.25 83.3
P&S per member 4.64 4.61
deposit growth 10.00% 12.80%

These along with many others not shown (net worth, loan growth etc.) would be outstanding in any year.  However in this year of flat to down trends overall, they are extraordinary.   How was it accomplished?

This credit union implements the most traditional and important strategic advantage credit unions enjoy–“relationship banking.”  It provides stable deposits, long term members and intense focus on their community and its well being.

The organization does this by putting people first. The CEO tells employee and member care stories as a central part of his monthly updates.  Not words, but deeds, sometimes confessing honest shortcomings.

The credit union leadership has set boundaries, what to do well and what not to attempt.  No mergers, no bank buys.  They are in a market dominated by a super coop competitor ten times their size.

For those who believe scale is necessary for success, this credit union grew to over $700 million in 2023. It did so while recording the fifth consecutive year of lowering its operating expense to average assets ratio. In this five years the ratio has fallen every year going from 3.08% to 2.55%.

That result  is lower than the majority of credit unions over $5 billion.  It is because they know who they are as a credit union.

Celebrating a Community That Cares

For any credit union striving to communicate its role in the communities served, I would urge you to look at this latest video from Whitefish Credit Union in Montana.

It is from Josh Wilson, Senior Vice President for Marketing.  The video centers around people in all walks of life serving their community in local food banks.

It is a moving documentary.  So powerful it should be entered in the Sundance film festival. The stories honor those who serve and are being served.  It is a tribute to the small rural towns and the natural environment in which the credit union operates.

Watching it makes you feel good about this example of caring for others.  There is not a word about Whitefish’s financial services, which says everything you need to know about the credit union.  Enjoy.

(https://youtu.be/9t7xl3IQRw4)

The Special Opportunity for Credit Union Leaders- I Feel Like Makin’ Love

Yesterday I linked to a song by the rock group Green Day.  A fan, Bob Bianchini, sent me their latest video from two weeks ago.  It is a real picker-upper to start your day.

You might ask who is Bob Bianchini?  He is the only League President who simultaneously served in the state legislature.  That was in an era when credit union leaders knew how to get things done.

This video reminded me of Rex Johnson’s exhortation to the credit union audiences who attended his many lending symposiums.   He would close by telling them, “your job is to treat your members so well that they become fans for your credit union.”

Here is what genuine fandom looks like-in a New York subway station from Bob and Green Day.

https://www.youtube.com/watch?v=EiF28zBaOlI

(https://www.youtube.com/watch?v=EiF28zBaOlI)

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Credit Unions Top Users of Bank Term Funding Program (BTFP)

At the end of the September quarter, credit union total assets of $2.25 trillion were just 9.7% of total banking assets.  However their participation in the special emergency Federal Reserve lending program equaled 27% of the BEFP’s loans at yearend or three times their share of total assets.

The September 2023 call reports show 307 credit unions with Federal Reserve borrowings  of $34.9 billion, an average of  $114 million.  For these credit unions, the Federal Reserve represents 66% of their total borrowings.  For 112 of this group, the Federal Reserve is their only source.  The largest reported loan is $2.0 billion and two credit unions report draws of just $500,000 each.

In an ironical coincidence with the BTFP participation, this total was also 27% of all credit union borrowings at the quarter end of $130.3 billion.  Moreover this $35 billion was only a small portion of the reported $173.4 billion in total lines these credit unions  had established with  the Federal Reserve.

Most of these loans were drawn following the banking liquidity crisis in March.  The Fed created the  emergency Bank Term Funding Program (BTFP) after the Silicon Valley Bank failure to prevent a system wide run by uninsured depositors on other depository institutions.

This facility was different from traditional Federal Reserve programs.  Eligible collateral security was expanded,  all collateral was valued at par, not market , and draws could go up to one year.  The rate for term advances under the Program is the one-year overnight index swap rate plus 10 basis points. The rate is fixed for the term of the advance on the day the line is drawn down.

What Happens Next?

In a January 9, 2024 speech to Women in Housing the Federal Reserve’s Vice Chairman  for Supervision, Michael Barr, was  asked about the program’s future when the initial one year life is over. Here are portions of his reply:

Moderator: I wanted to ask you about the future of the BTFP. We are rapidly approaching the one-year mark, is this something where the Fed is planning on extensions, or any information to be released to the public on usage?

Vice Chair for Supervision Barr:  So when the funding stress happened in March 2023, over the weekend the Federal Reserve, FDIC and Treasury agreed to a systemic risk exception to least cost resolution for the FDIC. And the Federal Reserve and the Treasury worked together to create an emergency lending program for banks and credit unions, the Bank Term Funding Program that you are referencing. And the Bank Term Funding Program enables banks to use collateral that was in place as of that time – as of March of 2023 – that is, essentially Treasuries and agency mortgage-backed securities, to pledge those, and to be able to get borrowing against that up to a year at the par value of those securities.

That program was really designed in that emergency situation. It was designed to address what in the statute is called unusual and exigent circumstances – you can think of it as an emergency. . .we want to make sure that banks and creditors of banks and depositors of banks understand that banks have the liquidity they need. And that program worked as intended. It dramatically reduced stress in the banking system very, very quickly. And deposit outflows which had been very rapid in that short period of time normalized to what had been going on before and in fact maybe flattened out to some extent a little bit.

So that program was highly effective, banks and credit unions are borrowing under that program today, but it was really set up as an emergency program. It was set up with a one-year timeframe, so banks can continue to borrow now all the way through March 11 of this year. . .a bank could continue to borrow or refinance under the program and in March of this year have a loan that then extends to March 2025. 

I expect continued usage until that end date of March 11, but it really was established as an emergency program for that moment in time.

Arbitrage Opportunity Grows Outstandings

Two days after Barr spoke, the Wall Street Journal published an update on the program: Banks Game Fed Rescue Program.

The article reported that the BTFP pricing, based on the benchmark interest  rates average  plus 10 basis points, was less than the 5.4%  the Fed was paying on overnight excess reserves. This arbitrage opportunity has resulted in an increase of  $12 billion in more drawdowns since yearend even though  no liquidity strains were apparent in either system.

Credit unions can request extensions up to one year until March 11, 2024.   After that date, the statement above and the most recent activity suggest the program will end.  Credit unions should plan to either repay or tap other sources of liquidity.

And the CLF?

It should be noted that the Central Liquidity Facility reports no loans this year as of its November financial statements.   In fact it has initiated no new loans since 2009. The BTFP participation suggests credit unions certainly have liquidity needs. However  the CLF, designed to serve and funded totally by credit unions, is not as responsive as the Federal Reserve Banks.

 

 

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A Reader Writes on Mergers and Group Think

I  have written several  posts critical of merger rhetoric and the lack of any shared or concrete member value.

A senior executive who  participated in one of these events sent his reaction, which he asked remain anonymous:

My current belief (call it a strong opinion, loosely held ala Jeff Bezos) is that credit unions need to progress while returning to basics. Progress with less traditional banking/teller line activity, prioritize financial wellness and remote banking experiences. Return to basics with more transparency, increased collaboration and innovation.

It seems to me that in the pursuit of progress, the trend is to become tight-lipped. The other undeniable trend is the belief that scale is absolutely necessary and that the only viable method to scale is to merge/acquire. I don’t agree with the trends, but I don’t have anyone around me who seems capable of an open debate on the matters. 

Our greatest threat today, IMO, is group think.  Well…At least I hope you don’t mind me keeping the conversation going with you.  Currently, I have to stay off the record here.  I want you to know that I’m reading…and learning.  

Group Think & Credit Union’s Future

When internal staff are uncomfortable with the direction of their credit union, this is a sign those closest to the action see  problems.  But it is hard to speak up against a leaders who do not encourage dialogue, let alone dissent.

CUToday publishes periodic updates on proposed mergers with the details sent NCUA. Most are well-capitalized, many are small, but focused. Below is one data point that especially stuck out from each merger summary:

Name                                                Charter Date

Freedom Community CU, Fargo, ND:    1954

Mt. Carmel Church FCU, Houston, TX:   1954

Virginia Trailways FCU, Charlottesville, VA: 1949

Airco FCU, Pasadena, CA:      1957

Mt. Lebanon FCU, Pittsburgh, PA:  1936

Parkside CU, Westland, MI:   1953

United Methodist of MS FCU, Booneville, MS 1961

Elevator FCU, Olive Branch, MS:  1967

G.P.M. FCU, San Antonio, TX:  1970

Our Sunday Visitor Employees FCU, Huntington, IN: 1968

Lubbock Telco FCU, Lubbock, TX:  1940

The list goes on.  These credit unions have navigated  multiple economic crisis, technology evolutions, deregulation and regulatory backlash.

Yet their leaders have given up, even with strong balance sheets and decades of member participation.

These are not financial failures.  They are failures of morale.  The greatest threat to the coop system is not external, but internal.  The belief that the legacy of multiple generations of human investment they inherited, no longer matters.

Like any behavior, the more the pattern of giving up occurs,  the more acceptable the option appears.   Ed Callahan described this challenge as the danger of self-fulfilling prophecies.  If you think your team can’t win, you will probably lose.

The concern above was from a career professional about his credit union and group think.  To address his worry, he is looking for leaders who believe in the advantages of cooperative design.  And who realize it every day to further the legacy their predecessors handed to them.

FDR observed,  “Humans are not prisoners of fate, but only prisoners of their own minds.”  What better time for leadership that believes in creating the future, rather than surrendering to  “tight-lipped group think.”

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Future Forecasts: Who to Believe?

 

From Bloomberg News, November 4, 2023:

It’s been quite a journey for the US economy over the past several years, from pandemic supply chain upheaval to the Federal Reserve’s hyper-focused battle against inflation. Consumers have kept spending, and the job market has proven perpetually robust, with predictions of recession regularly falling flat.

Now, the central bank’s aggressive interest rate-hike campaign is bearing fruit as the red-hot labor landscape begins to cool, with employers slowing hiring in October and the unemployment rate rising slightly to a still-low 3.9%.

Employees do remain in a position of power, securing record-breaking wage hikes and contract wins, not the least of which was the victory notched by striking United Auto Workers against the Big Three automakers.

NCUA Chairman Harper on October 24, 2923 speech at Reach Conference:

Warning Signs

But, that good news is only part of the story. Economists are forecasting an economic slowdown as the lagged effects of elevated interest rates take hold. Moreover, the downgrade in the Moody’s credit ratings for several regional banks earlier this year signals ongoing stress on the financial system’s funding and economic capital.

During the last few quarters, the NCUA has also seen growing stress within the system because of a rise in interest rate and liquidity risk. In fact, this financial stress is reflected in the increasing number of composite CAMELS code 3, 4, and 5 credit unions. Assets in composite CAMELS code 3 institutions increased sizably in the last quarter, especially among those complex credit unions with more than $500 million in assets. And, such increases may well continue in future quarters. We have also seen more credit unions fall into the composite CAMELS code 4 and 5 ratings during the second quarter.

The increase in the level of reserves in the Share Insurance Fund — more than $6 million since the last quarter — is tied directly to the number of troubled credit unions. Further, we are seeing growing signs of credit risk emerging, especially in the commercial real estate market and among families with increasingly stressed household budgets, which have spent down pandemic-related savings and struggle with higher prices for goods and services. Although inflation has moderated over the last year, many households are increasingly showing signs of significant financial strain, as seen in rising delinquency rates for various credit union loan types, including automobile loans and credit cards.

The recent rise in home equity lines of credit balances could also indicate financial stress in some households stretching to make ends meet. . .

To compound those concerns, we are seeing an increase in net charge-off ratios at credit unions and declining annualized returns on average assets. Plus, the high levels of interest rate risk we are seeing can increase a credit union’s liquidity risks, contribute to asset quality deterioration and capital erosion, and place pressure on earnings. . .

 

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The Latest Cooperative Score:  3 Wins and 107 Losses

The credit union system continues its losing ways.   As of September 2023  there had been a total of three new charters and 107 failures that is, charters given up by boards.

The trend is the same pattern as 2022’s full results.  Last year there were four new charters and 146 cancellations.

While some characterize the closings as mergers (rarely liquidations) they are operating failures of organizations that have existed for generations.

When a previously independently led, local credit union becomes a branch or, in some cases completely closes its physical presence, and transfers members accounts to a new entity with whom members have no relationship, this is a business failure.

The dollar value of a credit union charter is $500,000 to $1 million or more.  That is the order of magnitude NCUA requires of organizers of new credit unions to raise.   Instead of repurposing long standing charters, most of whom from NCUA’s own characterization are financially solvent, this value and legacy is lost.

Is Anyone Accountable?

Why is this failing trend continuing?    Three years ago NCUA announced a new chartering approach consisting of three phases:  proof of concept, charter application, and final approval.  There is no evidence this has made the chartering steps any easier.

In February 2023 , Vice Chair Hauptmann in a speech to the GAC announced the implementation of a new “provisional charter,” an approval that would facilitate organizer’s raising NCUA’s required capital.  Eight months later, it is just an idea.

NCUA’s Prior History of Charter Support

New charter numbers began to show decline from an average of one per week in the 1980’s to only single digits (fewer than ten) for an entire year in 1998, again in 2008 and every year since 2011.   One might surmise that expanded fields of membership met some of the interest in new charters.  But a more likely reason is that there is no constituency promoting and supporting new charters.

In the past NCUA has advocated and promoted  chartering as an integral part of its supervisory responsibility.

In its May 1984 NCUA News, the agency reported on “Student CU Conference a Success,” a meeting of 70 students from 15 colleges with student credit unions or in the process of organization.

In an October 1984 article the News reported that “McDonalds has something new, and not fast food.  It is a credit union.  A New York City based franchise recently became the first in New York state to sponsor a credit union for its employees.”

These examples were part of NCUA’s efforts to increase credit union membership.   In its December 15, 1982 Letter to Credit Unions these were outlined as follows:

“In an effort to preserve and expand credit union membership, the Board has delegated to the Regional Directors the authority to approve and disapprove most new charters . . .

A major credit union expansion effort called CUR-84 was launched late in 1982.  It is a two-year national program involving the cooperative efforts of NCUA, state regulators, national trade associations, state leagues and others interested in strengthening the credit union system. . .  CUE has as its minimum goal 50 million credit union members by 1984, the 50th anniversary of the Federal Credit Union Act. This will be accomplished by chartering new credit unions where feasible. . .”  (page 5)

These efforts are profiled in the full 1982 NCUA Annual Report (pages 10-11).   It also highlighted the Regional Directors’ role.   “Region I grabbed the chartering and expansion ball and ran with it.  Thirty nine new Federal credit union charters were approved by the region during the year, 34 percent of all Federal credit union charters granted in 1982. 

This was followed by a list of significant new charters including New York University Employees FCU and Fidelity Employees FCU.  (page 15)

The NCUA’s 1983 Annual Report singled out new student charters as well as ones for employees of Dow Jones & Company and Channel, Inc the cosmetic company.  ((page 8).

Here are the total new charters granted for the years 1981 through 1985:   119, 114, 107, 135, and 55.

NCUA set the tone, promised support and organizers stepped forth.   When the board meetings were held on the road, it was a common practice to present a new charter in the region where the event took place as part of the agenda.

That regulatory inspired, system-wide effort is missing today.  The result is an industry with slowing growth more and more dependent on mergers, bank acquisitions and wholesale financial markets for expansion.  Without new entrants, any industry becomes mature, lacking entrepreneurial drive and increasingly dependent on external versus internal organic growth options.

Are we the Future?

In the December 1984 largest ever credit union conference of all regulators and credit unions in Las Vegas, Chairman Ed Callahan gave the closing charge.  He said:

We are the future.  But If credit unions are lumped together with banks and S&L’s, that will be a challenge.  The future depends on how you look at yourselves. Credit unions are different, and you must go public with that attitude. 

You must hammer away at the differences (with banks) with deeds as well as words.   For 75 years credit unions have been doing one thing.   To have an identity crisis now makes no sense at all.  Seventy-five years of success should tell you what the future is-it’s been people in the beginning, it’s people now and it will be people in the future.”

What does the first two decades of charter decline in this century portend for the future?  Where are the innovators who will promote and expand this unique system?

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The Value of a Critic-Even a Dishonest One

Yesterday Politico published an article on credit unions written by a Brookings-based economist.

The title and subhead give his  message:

Credit Unions are Making Money off People Living Paycheck to Paycheck

The subhead:  There’s a new predator making money off overdraft fees: Credit unions.

The article was prompted by a new report required of all California state chartered banks and credit unions beginning with 2022 data.  The first report is 17 pages and lists in data tables the total overdraft and NSF fees collected by each firm the year.  The final column shows these dollar amounts as a percentage of net income and total revenue.

The author’s academic and /Congressional staff credentials suggest an objective study of an important topic: the  sources and importance of non interest income.

However as I read the article Mark Twain’s observation came to mind:  “Figures don’t lie, but liers do figure.”  But this shortcoming should not cause readers to overlook lessons from even a biased report.

In addition to the headline, the author’s target shows early on: And the first report of that data reveals that many California credit unions are taking millions from their most vulnerable customers and spending it on perks and bonuses for executives that resemble those of big banks more than nonprofits.

He uses one ratio from the study, total fees as a percentage of net income and then prepares a brief table listing the ratios for 12 credit unions (out of 114) with highest combined $ fees.

However this single ratio  can fluctuate dramatically depending on net income, independent of the numerator being studied-combined OD/NSF fees.   

To suggest  a credit union like FrontWave is abusing members because its ratio is 140% ignores the  study’s second ratio which is 12% of total income.  This ranking would give a very different listing.

FrontWave’s net income in 2022 declined by 33% from $8.4 to $5.6 million (.44 ROA) thus making the fee/net income ratio appear much higher than a “normal ROA” might present. 

Whereas Dow Great Western’s ratio was a negative -200% and only 1.32% of total income.  Was the credit union giving back more fees than they collected?  No, the credit union reported a negative net income.   Perhaps it should charge more fees?

Predetermined Conclusions

But the author has made up his mind, and now wants to condemn a practice without  examining other relevant details, such as the actual fee charged per transaction.  He downplays the other ratio of fees as a percentage of total revenue, which would show each firm’s  dependence on this one area of income.  These ratios range from 0% to 15%.

He makes no attempt to understand the data by calculating mean or the average fee-to-income ratio.  His conclusions  were formed before he knows what the data might mean:

Let’s be clear: Overdraft fees can be predatory. Every overdraft by definition turns money from someone who has run out of it into nearly pure profit for the bank or credit union that charged it because they get paid back immediately when the next deposit hits. Eighty percent of overdraft fees come from just 9 percent of account holders, highlighting that this product is targeted at people living paycheck to paycheck who run out of money from time to time.

Even given his limited analysis, the situation is dire:

The full picture among California’s 114 state-chartered credit unions is alarming.   And not just in California.  One suspects similar trends across the country. Several of Michigan’s largest credit unions have been sued for abusive overdraft practices and research from the Consumer Financial Protection Bureau shows credit unions averaging similar overdraft fees as banks.

A Political Lens

Near the end the author’s political bias comes out as he talks about democratic congressional members’ rhetoric against junk fees, and then this sentence:  Todd Harper, chair of the National Credit Union Administration (NCUA) has spoken out against abusive overdraft practices, but the NCUA Board has a Trump-appointed, Republican majority that is continuing to deregulate.

All three board members are Trump-appointed.   I’m not aware of any reg, rule or guidance letter that Harper has issued on this topic or that the other two board members opposed.  The singling out of Harper’s alleged views (no links) raises the question whether this is just a comrade in arms fronting for someone.

The Benefit of a Critic’s View

The author is a sceptic of credit union business practices:

California’s data shows that some credit unions are making a lot of money from overdraft fees. California’s largest state-chartered credit union, Golden 1, took $24 million in overdraft from their members, while spending $6 million a year for naming rights for an NBA stadium in Sacramento. North Island Credit Union bought naming rights for a famed music venue in Chula Vista and created an exclusive entrance, ticket discounts and other perks for some of its members while taking over $10 million last year in overdraft and non-sufficient funds charges from its members.

Do these business practices sound like those of nonprofits designed to provide basic banking services to people who share what the law calls a “common bond,” such as a workplace or other connection required for membership? Or are they what would expect from for-profit banks?

A Wakeup Call

The author asserts this not a single state issue:  California’s data is a wake-up call for the nation as a whole.

Even though he critiques mutiple credit union activities through his very limited NSF/OD lens, the article is a wake up call for those who believe credit unions are not banks in sheep’s clothing.

The article has all the indicators of a planned “hit piece” on credit unions.  But to try to kill the messenger or discount all the data is to miss the point.

Even when a public critic may be wrong, the better approach is to engage on the issue with facts and logic that show a grasp of the issue.  More rhetoric just makes the issue burn hotter but with no more light.

The need for fee transparency at the individual and macro levels is valid.  Credit unions, consumers and analysts/regulators can all better understand the role these fees have in a firm’s business model.

Comparisons between credit unions can be valuable, if all the data is known. How do some have very low fees and others relatively higher?

Members can more easily learn as they seek information on fees as they do now about loan and savings rates.

The author believes the only solution to his alarming “problem”  is more regulation.

But what kind of regulation would be relevant and consistent with one’s views on government’s role for coops and in markets? Should government regulate the fees somehow, mandate more disclosures, or control business practices as he hints by limiting fees to a percentage of net income.

More regulation will not stop credit unions tempted to put institutional priorities ahead of member-owner interests.

Regulators should ensure members have the tools to hold their repesentatives  to account-with the information and the ability to openly raise these topics in the traditional annual meeting and director election format.

What is missing is not regulation but the ability of members to play an effective governance role as owners in their credit union.   Enabling members to be more aware and active is critical to any credit union’s long term success.

No regulation, no matter how well intended, can replace members exercising their rights as owners.  That’s how markets are supposed to work.

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The Borrowing-Liquidity Trends in Credit unions

From a September 2023 CEO’s team memo update:

Liquidity

“We remain laser focused on managing liquidity risk in this environment of aggregate decreasing money supply.  

“We finally sold our $18 million pool of auto loans that we’ve been marketing  for two months.  As with all other loan sales, we will service the pool in order to maintain and grow member relationships.  The transaction generated cash of just over $15.3 million.  

“We expect to end the month at a loan to deposit ratio in the 102% neighborhood, down from a high of 106.41% in July.  Our goal remains to reduce this ratio to no more than 100% by year end.  

The best way to accomplish this is through acquisition of core deposits from our friends and neighbors in our primary market.  We’re also marketing another pool of loans so that we don’t have to slow our lending origination machine any further.”

This not an isolated event.  Yesterday’s Credit Union Times summarized  auto loan  securitizations by credit unions since 2019, with two totaling $501 million in this past week.

Economic Forces Drying Up Liquidity

Two factors have disrupted normal  credit union ALM liquidity management over for the year ending June 2023.

The first is the 18 month long increase in interest rates by the Federal Reserve to reduce inflation.  The process began on March 17, 2022. The Fed raised its overnight  Fed Funds target from effectively zero to today’s range of 5.25-5.50%.

The Fed’s intent is to slow the economy, lower demand for financing and lower inflation to 2%.

The second was the sudden bank crisis in March of this year.  Here is the cascading sequence of events from one summary report:

In the lead-up period to the crisis, many banks within the United States had invested their reserves in U.S. Treasury securities, which had been paying low interest rates for several years. As the Federal Reserve began raising interest rates in 2022,  bond prices declined, decreasing the market value of bank capital reserves, causing some banks to incur unrealized losses. To maintain liquidity, Silicon Valley Bank sold its bonds and realized steep losses.

The first bank to fail, cryptocurrency-focused Silvergate Bank, announced it would wind down on March 8, 2023 due to losses suffered in its loan portfolio. Two days later, upon announcement of an attempt to raise capital, a bank run occurred at Silicon Valley Bank, causing it to collapse and be seized by regulators that day. Signature Bank, a bank that frequently did business with cryptocurrency firms, was closed by regulators two days later on March 12, with regulators citing systemic risks. . .

The collapses of First Republic Bank, Silicon Valley Bank and Signature Bank were the second-, third- and fourth-largest bank failures in the history of the United States.

The Fed created a new lending option to cope with the uncertainties resulting from these failures. To calm rattled financial markets and support banks, the Bank Term Funding Program (BTFP) began on March 13, offering maturity dates of up to one year.

The BTFP’s role was focused on  firms that had large unrealized losses on their government bonds and potentially at risk of large-scale deposit withdrawals.  The intent was to prevent losses from forced sales of underwater securities to fund deposit outflows.

The new program charges a higher rate than the discount window.  One other important difference  is that while the BTFP requires banks to offer collateral, it values the collateral at par, rather than on a mark-to-market basis.

The Credit Union System’s  Borrowings at June 2023

Credit unions did not have the lending or deposit concentrations of the failed banks. But like all financial institutions, their term investments have declined in value.

Members were seeing very competitive savings rates in money market  funds and CD specials.  Share growth for the year ended June 2023  was just 1.4%.  At June 2022, the 12-month growth was 8.1%.

Loans however are still increasing at double digit rates (12.8%). Short term liquid funds are declining.

One response to tightening liquidity was increased borrowings. The table below shows the five most recent quarter-ending  borrowing totals and their  source for the credit union system.

Total Credit Union System Borrowings    (June ’22 to June ’23)

Source:  NCUA call reports

The trends from the data show:

  • Total number of credit union borrowers grew 50% from 838 to 1,260 in one year.
  • Outstanding loans increased by $90.1 billion or 300%.
  • The Fed Reserve Bank (FRB) became a significant new source growing from 1.6% to funding 25.5% ($30.8 billion) of credit union borrowings.
  • The largest lender was the FHLB system increasing from $26.1 billion (86%) to $84 billion (69.7%) of total loans.

Total borrowings of $120.4 billion are 5.4% of total industry assets (compared to 1.4% at June 2022) and 55% of June 2023 capital.

System liquidity is tightening. The second observation is that in the market uncertainty following the banking failures and continuing liquidity demand, the credit union funded facility, the NCUA-managed CLF still has zero borrowings.

The last CLF loans were paid off in  2010.  There has not been a single borrowing in the thirteen years since.

The Federal Reserve loan window stepped up quickly and creatively to respond to events.  The FHLB system expanded its traditional lending role.  The CLF has the borrowing capacity and legal authority to match the needs being served by these two primary lenders. But it is “missing in action.”

Tomorrow I will evaluate what the CLF’s absence means for NCUA and the credit union system.

 

 

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Reporting Coop Success In the Glare of Live Market Updates

This is the season for reporting quarterly earnings by all public companies.  Even credit unions must file their 5300 financial updates with the regulator which are then open to the public.

These many forms of quarterly financial reports are required by law and regulation.   For stock companies, shareholders, traders, investment funds and market analysts, the daily news is dominated by the ups, or downs, in company performance. Here is one example of this reporting frenzy:

Earnings season marches on

This week brings another busy slate of quarterly earnings reports, from tech giants to restaurant stocks. Apple and Amazon are the biggest names due up, along with Starbucks and CVS Health. Earnings this season have so far defied expectations and have been somewhat stronger than expected. Here are the big names on deck . . .

None of those big names will be credit unions.  Credit unions are required in their bylaws to post a monthly financial report in a conspicuous place in the credit union and file the quarterly 5300, but few will provide a public description of these results.

Credit union have shareholders, as do all public companies.  The members’ interest in the performance of their firm is the same as the owners of a bank or any other firm.   How is my ownership benefitting me versus other options?

For stock companies, the market readily evaluates this performance as documented by changes in the daily stock price.   Analysts evaluate the current results and make their “calls” about whether a stock is a buy, hold or sell.  Explaining a firm’s quarterly performance to all market participants is an important skill for CFO’s and CEO’s of all companies, even the smallest.

Credit unions generally provide no such reports or future forecasts (guidance). There is no stock price to provide market feedback.   But is the interest of the member-owners any less deserving than those of public companies?  Is the responsibility to coop shareholders by the credit union’s professional staff any less than to a publicly traded or even a private firm?

When Credit Unions Did Speak Up

In the March-April closures of three banks led by Silicon Valley’s failure, credit unions launched major PR campaigns to assure their members that they were sound.  CEO’s stated there were no parallel circumstances in the coop industry.  Some credit unions devoted a major part of the Annual Meeting to this public concern.  Some of these updates highlighted the credit union’s percentage of insured shares, or capital levels, or liquidity.  The message was to assure members the credit unions were able and willing to continue meeting their needs.

I believe each quarter’s financial filing is another opportunity for credit unions to tell their special story.

What Do the Numbers Mean For Me?

Numbers matter and presenting the credit union’s financial position and key trends is a beginning.   The most important message, just like a public company, is to tell what the numbers mean to the individual owner.

How has the credit union enhanced the value it brings to members?  What investments has the credit union made and what was the member benefit?  As the interest rate environment remains high, what changes has the credit union made to its rates?

Members will assume their credit union is safe and sound, or they would have left.  Credit unions will often announce events, such as branch openings, sponsorship with a local sports team or venue, and even the comings and goings of senior management.  These PR events and community engagements matter, but are not the same as the quarterly status report.  At this time everyone presents their financial results-so how did our members specifically benefit?

The Radical Cooperative Model

Since the 2008-2009 financial crisis, there has been a singular focus within financial systems on stability.  Financial outcomes are all that matter.  The more capital the better.  The only equity that matters is net worth, not social responsibility.

Financial performance is evaluated by the money made, not by the people served.  The relevance of a coop is becomes  its size, its growth and its superior numbers.   A credit union that focuses on what it helped members accomplish becomes a radical act.

Transparency is the key to member-owner confidence and trust.  And competitive advantage.  It is as important for coop leaders as it is for those whose performance is judged daily by the fluctuation of share price in the market.

However credit union’s quarterly numbers are not merely about financial outcomes but for how the performance aligned with the aspirations of members.  Coops should be presenting the values and partnerships that demonstrate their role in communities beyond the conventional financial success measures.

We should be holding up a model that is better for individuals, especially those often unaware of better opportunities.  The quarterly updates should show how a credit union’s purpose is more than making money.   It is a report on the difference made for the members.

A Renewed Commitment to Using Numbers to Say Who We Are

As all three major U.S. stock indices closed higher for July, the S&P 500 and the Nasdaq mark their fifth consecutive months of gains, and the Dow is riding a 14-day winning streak, its longest since 1987; however  cooperatives have a different benchmark to report.

Our momentum is not market driven, but member focused.  There will be a big new batch of corporate earnings the rest of this week not to mention the July jobs report due Friday.

Instead of  live market updates, we should be offering our reports of improved member lives and opportunity.   That is the difference coops should make.

 

 

 

 

 

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A Big Deal: The 990’s Are Here for State Charters

Candid, the company which publishes the 990 IRS returns for non-profits, announced that it has loaded over one million returns for the filing years 2020, 2021 and 2022.  Candid includes the previous service provided by Guidestar.

Because state chartered credit unions receive their federal tax exemption from an IRS ruling, they must file this report annually with the IRS. The form is due  on the 15th day of the 5th month following the end of the organization’s taxable year. For most credit unions whose fiscal year ends in December, the Form 990 is required by May 15th of the following year.

Credit unions and other nonprofits with gross revenue  of less than $50,00 or total assets of smaller than $500,000 are not required to file.  A firm failing to file for three consecutive tax years will automatically lose its tax-exempt status.

In addition to the balance sheet and income statement, the report also contains details of financial, governance/compensation, business relationships and donations available nowhere else.  For credit unions some of this new information includes:

  • Officers and directors total compensation. All current and former key employees who earned over $100,000 must be listed in Part VII with the total number who were paid more than $100,000. Schedule J Parts I and II gives much more detail of compensation policies and benefits including first class travel, club fees and gross up to cover tax expenses.  Compensation is shown in multiple categories of benefits.
  • Political contributions and lobbying expenditures in Schedule C.
  • Statements with the number of directors, affirmations of policy oversight and questions of family relationships in Part VI.
  • Section C sets out how the 990 filing will be publicly disclosed.
  • Section B of Part VII lists the names of the five highest independent contractors paid $100,000. Examples would be PSCU, MasterCard, Fiserv, and Microsoft along with the total number of all firms paid more than $100,000.
  • Part IX shows expense details, not in the 5300 report, such as compensation by category of employee, travel and conference expenses, even taxes paid.
  • Schedule I provides a listing of grants to individuals, organizations and the total number of all such grants.

Transparency and Accountability

The 990 information is much more comprehensive than the financial data NCUA collects primarily for safety and soundness monitoring.   It tries to pull back the covers on a nonprofit’s use of funds both internally and with external parties.

The form runs almost 40 pages.   The additional schedules listed above provide greater details for the summary  information first shown.

Every member would be much better informed about their credit union’s operations and use of funds from this report versus the 5300.

There are two areas where the current process could be improved.

  1. The 990 filing is almost a year and a half old by the time the form is published. At the moment the latest filings are for the year ending 2021.
  2. There is only one form per year, so that multiple years are necessary to see trends, rather than just a single point in time disclosure.

Why This is a Big Deal

The following is from the June 15 Candid press release about the availability of this recent data:

Before the COVID-19 pandemic, Candid received comprehensive IRS 990 data about 1.5–2 years after the end of a given calendar year. But IRS extensions, process changes, and delays during the pandemic slowed this timeline to a frustrating crawl. We’ve dubbed this the data/crisis catch-22—the fact that the pandemic made up-to-date data more critical to access and yet also more difficult to come by.   

In fact, between August 2022 and April 2023, the IRS released very little 990 data at all. Because of this, we have been considering 990 data for fiscal years 2020 onward “incomplete”i; research leveraging 990 data for years 2020 and on required the caveat that data collection was ongoing.

Between May 5–18, 2023, the IRS released around a million 990 files. To put these numbers into perspective, in April 2023, Candid could only account for about 60k 990 filings for fiscal years 2021 and 2022 combined. 

Here is one link to either login or subscribe to look up information.  The basic look up is free.