Category: Credit union History

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40 Years Ago Today, An Epic Cooperative Event Began

On December 9th, 1984 a unique, one-of-a kind credit union event took place at the MGM Grand Hotel in Las Vegas.

The National Credit Union Examiners Conference was the inspiration of NCUA Chairman Ed Callahan.  It reflected his belief that state and federal  regulators had common purpose with the credit union community.  While each had separate responsibilities their shared goals could best be accomplished through collaboration and continuing communication.

The Operational Context

This unprecedented national initiative was accomplished while NCUA was doing its “day job” overseeing 11,000 FCU’s and monitoring 5,000 state charters with NCUSIF insurance.   The agency was in the process of completing an annual exam for all FCU’s for the third consecutive year. CLF membership, in partnership with the corporate system, included all 16,000 credit unions in its liquidity coverage.

The NCUSIF redesign was passed by Congress with complete credit union support.  This structural change from cooperative principles created the strongest of all three federally managed funds-a fact still true four decades later.

The 1985 agency budget had been passed in the fall.  It slashed spending by  4.9%.   This spending cut enabled a third reduction in the FCU operating fee of over 20% for a total of 64% over the three yers. Moreover, it was NCUA resources that underwrote the conference including the attendance by all its field examiners plus regional and DC staff.

The credit union system was moving forward in the market. In August the agency reported credit union loans had grown 26.2% over the 12 months ending in June 1984.  Member shares were in their third year of double digit growth following deregulation.

This year was also the 50th Anniversary of the passing of the Federal Credit Union Act, an event celebrated by the agency in many ways, including new chartering and total membership goals.

The Conference  Launch

On March 14, 1984 NCUA’s press release announced the initiative:  NCUA to Hold First Conference of Federal and State Examiners and Credit Union:  It read in part:

“This National conference is a unique opportunity to bring together credit union officials, state and federal credit union examiners and regulators and representatives of the credit union trade associations,” said Chairman Callahan.  “It will be a chance to discuss current concerns and share problem-solving techniques.  Examiners need to be exposed to a wide range of ideas and procedures that will enable them to do a better job of ensuring  the safety and soundness of credit union particularly in a deregulated environment.”

We want to make it possible for the public and private sectors to learn from each other and openly discuss the progress, and problems of the credit union movement.”

A registration card was placed in the NCUA’s 1983 Annual Report sent to every credit union in March 1984.  It showed the two sessions, the first with examiners, and then followed with all credit unions joining from December 9 through the 14th.

The May 1984 NCUA News reported why registrants said they would be coming:

Don Beall, President of NASA FCU was quoted:  I think this is a welcome relief from the  past when we had little opportunity for constructive dialogue with the regulatory. The operational types and examiners live in different worlds.

Robert Sorin, Superintendent of the Ohio Division of Credit unions wrote:  “The field staff has never had the opportunity to gather with other state or federal examinders to exchange ideas. . . we want to come away with some new friendships and many new ideas.” 

And the price was right.  NCUA secured the government room rate of $38 for all participants including spouses.   Two people who choose to share a room would pay only $19 apiece.

A registration form was included in the June newsletter.  A conference registration packet was mailed to all FCU’s that same month.

The form also announced that the agency had negotiated a substantial airline savings with United and gave a toll-free number for credit unions to call for discounts for Vegas flights.

In September the News headline read Two Per Credit Union Attendance Placed on Conference Attendance.   The explanation:  “Due to heavy demand, registration is now limited to a maximum of two persons per credit union, a move designed to allow as many credit unions as possible to participate.”

On September 28, 1984 the NCUA announced the conference was sold out.  Registrations were coming in at 100 per week and the 2,500 person room capacity limit was reached two months ahead of schedule.

“We are thrilled but not surprised by this tremendous response.  Credit unions were quick to recognize this will be the kind of learning opportunity they just can’t get anywhere else,” said Chairman Callahan.

The Conference  Speakers

The conference schedule offered over 60 different panels, workshops and case studies.  The sessions speakers included all three NCUA board members plus Federal Reserve Board Governor Martha Seger; Richard Breeden, staff director to the Vice President’s task Group on Regulations of Financial Services; former NCUA board chair Larry Connell,  former FHLB Chair Richard Pratt,  former NCUA board member Harold Black and Al  McGuire former Marquette basketball coach, and current NBC sports analyst.

When the conference agenda was finalized, more than 300 speakers and panelists were listed including federal and state regulators, leading credit union professionals and trade associations officials.

In posts later this week, I will present some of the content offered and photos.  I believe this will illustrate the unique charater and significance of this extraordinary event.

The Conference’s Significance

This National Conference was a celebration of recent success and a dialogue about the future of the cooperative system.  It was not an addition on top of NCUA’s traditional roles of examination, supervision and administration.  Rather it was a culmination of the values, practices, and common purpose for how NCUA had been involved with the credit unions since deregulation.

Chairman Callahan believed the single most critical responsibility of a leader was communication, both listening and sharing points of view.  From frequent press releases, open press conferences, board meetings on the road, transparent dialogue was the foundation for common industry efforts.

This conference was designed as an optimum opportunity for these exchanges.  It was the high point for a new relationship paradigm for NCUA with credit unions. This “tipping point” in the positive and constructive  relationships between credit unions and regulators would stay in place substantially until undone by athe Financial crisis in 2008 and thereafter.

 

 

 

 

 

 

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NCUSIF 3Q Public Update:  How to Enhance the Board’s Stewardship (Part 2 of 2)

My earlier analysis, part 1,  of the NCUSIF’s financial performance in 2024’s first three quarters, highlighted the fund’s soundness.  It concluded with Board member Otsuka’s statement about the board’s role to be good “stewards” of the fund.  This post shows how that oversight role could be improved.

The Benefit of Public Board Meetings

The board’s quarterly discussion of the fund’s performance is an important responsibility.  It demonstrates each board member’s “grasp” of the subject matter, their preparation and their reasoning for any conclusions.  Just like a credit union board’s role, their judgment is critical in overseeing staff’s recommendation.

It is in the board’s particular roles in this quarterly review, that the public learns each member’s understanding of general policy, especially the role of America’s cooperative financial alternative.

Additionally, NCUA’s monthly publication of the NCUSIF’s performance provides the fund’s cooperative owners the opportunity to monitor how their 1% deposits are managed by following critical financial indicators.  This monthly update was a condition for the open-ended funding model of the 1% deposit by credit unions.  If the trends are in the wrong direction, then credit unions have the facts to speak up.

Critical NCUSIF Financial Issues

The fund’s finances have one primary revenue driver, the yield on the investment portfolio.  This was by design.  It was a dramatic change from the premium based approach of the FSLIC and the FDIC which was also followed for the first 15 years of the NCUSIF’s operations.  That premium model proved fundamentally flawed. That history is described at the end of this post.

The NCUSIF’s Investment Underperformance

Slides from the September financials in November meeting clearly demonstrates the agency’s continuing shortcomings  in managing the Fund’s interest rate risk.

The first tracks how the fund’s yield (blue line) began trailing its market indicators as of mid-2021.

The next shows that the NCUSIF portfolio has been “underwater,” that is below market in value and return, since December 2021.

The first consequence of this portfolio strategy is that the fund’s primary revenue source is  shortchanging the fund and credit unions. The second is that the majority of the fund’s investments are not readily liquid in the event needed without either borrowing or selling investments at a loss.

Below is the latest investment report provided to the board in the quarterly review.

It shows an overnight yield of 4.79% on 24% of the portfolio; 1.74% on the remaining 76%; and a weighted average YTD yield of only 2.48%.  This below market return is  due to the fixed rate bonds purchased following a robotic investment ladder out to over seven years independent of any ongoing IRR assessments.

At September 2024, every investment maturity bucket except overnights, and recent investments for seven years, are below market value.

This update shows one investment action during the third quarter: $1.1 billion of bonds purchased on August 15, 2024  at “various” yields of 3.5% to 3.85%.  Following are the other yield-investment  options that same day from the Department of the Treasury.

Date 8/15/2024
1 Mo 5.53
2 Mo 5.4
3 Mo 5.34
4 Mo 5.22
6 Mo 5.04
1 Yr 4.52
2 Yr 4.08
3 Yr 3.9
5 Yr 3.79
7 Yr 3.83
10 Yr 3.92
20 Yr 4.28
30 Yr 4.18

This August investment decision  yields less than all other Treasury options with maturities less than three years-shown in blue.  It extends the interest rate risk as measured by the fund’s weighted average life (WAL). It follows the same pattern of activity that resulted in the fund’s past three plus years of underperformance. 

With the portfolio’s current WAL, this revenue-yield shortfall could extend for another 2.5 years.  Have no lessons been learned from this latest interest rate cycle?

Since 2008, the fund’s data shows that a portfolio return between 2.5% and 3.0%  is more than sufficient to maintain an NOL of 1.3%.  Returns above that breakeven range would give credit unions a dividend to recognize their open-ended underwriting commitment. More importantly, it rewards their collective risk management.

The Fund does not need more assets relative to risk, as some board members have stated.  It needs more effective management of the portfolio investments it already receives.

The Chairman of the investment committee and two of its four members were at November board table responding to questions.   This would have been the perfect time for a dialogue about whether alternative investment options were considered.  This one day’s investments in August increased IRR risk, reduced liquidity  and returned a lower yield than multiple other options.

Instead of explaining this decision, the board continues to put its head in the sand.  It glosses over performance charts that would not get past questioning by the newest examiner should a credit union report this outcome and unexamined policy.

In the meantime, credit unions are on the hook for NCUA’s mismanagement of the fund’s return, not just the industry’s potential insurance risks.

The Lack of Transparency

There are a several calculations used in the final numbers that are vital to understanding their reliability.  At times in the past these assumptions and data are shown in detail at briefings. This time only a final number is given so that it is impossible to validate the results presented.

The classic example of a lack of transparency was that until February of 2024, the staff had provided its calculation of the modeling data used for recommending the normal operating level (NOL) for the fund’s coming year. This cap determines when a dividend must be paid from net income.   In February however, the board continued the 1.33% with no underlying data or assumptions presented to justify a cap higher than the long time, traditional 1.30%.

That 1.30 was exactly the actual NOL reported for December 2023.  The financial model was working exactly as designed, yet the staff and board just rolled over the old higher level with no factual justification.  The fund’s own performance belied the need for an NOL above the historic cap.

In the prior two years of staff’s 1.33% NOL recommendation, the underlying data were provided.  But when modeled out this information did not support their recommendation.  Rather it showed that the historic 1.3% cap would have covered all the forecasted model’s contingencies in the next five years.  Is that why no details were given for 2024’s NOL setting?

One board member commented in the Q&A for 2024’s NOL that he did not know what the right number should be.  Moreover he didn’t think it would make a difference for credit unions whether the cap was 1.3% of 1.33%.  As of September 30, the fund’s equity ratio was .303% and headed higher by year end.  Should the December 2024 exceed 1.3% that decision will matter greatly, causing credit unions to forego tens of millions in NCUSIF dividends.

The question is not, what is the right cap on the NOL;  rather, it is what is the appropriate range for the fund’s equity so that credit unions can share in the success when all goes well.  That judgment is no different from managing a credit union’s capital ratio, a decision and responsibility familiar to every credit union board member and CEO.

Other Missing Details

Another disclosure shortcoming was the  investment report.  Instead of listing the individual investment purchases as in past reports,  “various” maturities and a range of yields  (3.8 to 3.85%) were given.  This suggests the individual securities were for at least 7 years.  This investment choice was at a time when the yield curve offered multiple higher returns on all options with maturities less than three years.

These shorter investments would reduce liquidity risk, improve yield immediately and enhance portfolio flexibility—but no board member questioned these August 15 investment decisions.

Undocumented Projections

The 2024 year end NOL projection by staff was given in a footnote as 1.28% in the last slide.  In  previous  December year end forecasts, the staff has presented a full NOL calculation in a single slide. The data included projected retained earnings,  insured share totals  and the resulting NOL outcome.

Insured shares grew only .46%  in  the third quarter.  If that growth pattern continues in Q4, then the NOL could be much higher than the 1.303 at September. Why present such an important forecast result (1.28%), which is below the current actual level with no substantiating numbers or assumptions?

Yet no board member commented on this lack of disclosure—and its implications for credit unions.

An Increase in Allowance Account and No Losses

Another critical number is the loss expense which is used to increase, or sometimes lower, the total dollars in the reserve account.   For the quarter the additional expanse was $21.7 million raising the total allowance to $232 million or 1.32 basis points of September 2024 insured shares.  So far in 2024 the total actual insured losses are near zero.

Th allowance ratio is greater than the NCUSIF’s average annual loss experience since 2008. In the most recent five years there have been no major losses.  Yet the reserve continues to grow in both dollars and relative to insured risk.

The formula being used for this reserving should be disclosed.  This expense comes right out of retained earnings and thus reduces the NOL number. Just as when presenting an NOL forecast, the underlying assumptions and data should be open for board, public, and credit union scrutiny.

The State of the Board’s Stewardship

As for Otsuka’s call out of the board’s stewardship of the NCUSIF, the examples above are some of the specific opportunities to enhance this responsibility. And we haven’t even gotten to the backward looking calculation of the NOL, but that issue is for another day.

Endnote: Brief History of NCUSIF Redesign

The new NCUSIF financial design in 1984 was based on a study of insurance alternatives and the fund’s initial 15 year trends.  The traditional premium approach in the first years of the 1980’s required double premiums assessed by NCUA.  But even then, the fund made no headway toward the statutory goal of 1% of insured shares.

There were two major reports of this in-depth reassessment.   One was a 100 page study sent to Congress on April 15, 1983 by Chairman Callahan.   The report addressed specific congressional questions, provided a history of cooperative stabilization and share insurance funds, and gave recommendations for change.  It also included extensive comments from credit union leaders.

When the new design, A Better Way, was established by Congress in 1984 the background analysis for a new model was explained in the video below.  It was sent to all credit unions outlining this unique collaborative effort and its benefits for credit unions. For without the credit union support, there would have been no congressional action to authorize this unique cooperative approach to NCUA’s share insurance model.

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

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Learning from the Past:  NCUA and Credit Unions During a Change in National Political Leadership

The 1980 election of Ronald Reagan brought a spirit of hope and joy for some.  For others , deep concern about the future of the federal government’s role.

Recall Reagan’s policy priorities:  Supply side economics-tax cuts, defense spending to counter the Soviet Union, tighter money supply, reducing the rate of government spending and deregulation.   In August 1981, one of his first dramatic actions  was firing 11,345 striking air traffic controllers and banning them from federal service for life after they refused to return to work following a contract dispute.  Federal agencies and employees were worried about their future.

A specific initiative that has parallels with Trump’s appointment of  the Musk-Ramasamy duo to reduce government spending was the Grace Commission.  Here is a summary of its role:

The Private Sector Survey on Cost Control (PSSCC), commonly referred to as the Grace Commission, was an investigation requested by  President Reagan authorized in Executive Order 12369 on June 30, 1982. In doing so President Reagan used the now famous phrase, “Drain the swamp“.[1] The focus was on eliminating waste and inefficiency in the United States federal government. The head of the commission, businessman J. Peter Grace,[2] asked the members of that commission to “Be bold and work like tireless bloodhounds, don’t leave any stone unturned in your search to root out inefficiency.”[3]  (Wikipedia) 

A year later when the Commission issued its report it called NCUA Board Chairman Edgar Callahan a “role model” for government agency executives.  It noted that, “in one year, NCUA cut Agency staff 15% and its budget by 2.5% while maintaining their commitment to preserving the safety and soundness of the credit union industry.”  (NCUA 1983 Annual Report page 3).  What was this transformation like?

How NCUA and Credit Unions Fared During Reagan’s First Term

When Reagan took office, inflation for the prior year 1980 was 13.5%.  The short-term Fed Funds rate was 13%.  Federal Reserve President Volker’s goal was to drive inflation down by raising rates further if necessary.

The NCUA’s new Chairman was Edgar Callahan, whose immediate prior responsibility was over five years as Director of the Department of Financial Institutions in Illinois. DFI supervised over 1,000 state chartered credit unions.  At the February 1982 GAC conference, the primary concern for the audience of national attendees was industry survival.  Callahan said the response was to put responsibility for fundamental business decisions in the hands of credit union boards and managers, not the regulator.  He called this multi-faceted change “deregulation.”

During the next three years NCUA became what the Grace commission described as a model for effective governmental performance.

The following are highlights of how NCUA changed from a November 15, 1984  agency press release titled: FCU Operating  Fee Scale Slashed 24%; Third cut in Three Years

The excerpts from this two-page, detailed release describe how this unprecedented reduction was achieved.

The NCUA Board today slashed by 24% the operating fee scale for federal credit unions in 1985, bringing to 64% the fee scale cuts over the past three years.

The dramatic 24% cut will save federal credit unions more than $4.3 million in 1985 and has saved them $14 million since 1983, the first year in NCUA’s history that the fee scale was cut. 

“For the third straight year, the efficient operation of the Agency has allowed us to put money into the pockets of federal credit unions, “ said NCUA  Chairman Edgar Callahan.  “It’s an impressive track record, one that the agency and entire credit union system can be proud of.”

“NCUA is the only  federal financial regulatory agency that is assessing its constituents less this year, than it did three years ago and I think that is a tremendous accomplishment,” said NCUA Board Vice Chair P.A. Mack. 

Federal credit union operating fees, which are pegged to a sliding scale based on federal credit unions’ assets, are the primary source of funding for the Agency’s operating budget.  The fee pays for the Agency’s annual examinations of each federal credit union as well as its chartering, supervisory and administrative activities.  NCUA receives no tax dollars.  Operating fees, the earnings on the investments of those fees, and insurance premiums are the sole sources of funding for the agency. 

(The next six paragraphs show the specific dollar  impact on credit unions of different asset sizes including Ft Shafter, Hawaii Federal and State Employees and Navy Federal Credit Unions.)

Continued cost cutting efforts at NCUA, coupled with a projection for robust federal credit union asset growth and increased earnings on NCUA investments are the key elements that made a third consecutive operating fee scale cut possible. 

The NCUA board attributed the Agency’s success in keeping costs down to high productivity by NCUA staff, personnel reductions and the shifting of resources from the central offie to the field where they are needed most.

For example, NCUA for the second consecutive year has completed an annual examination of each federal credit union, and achievement not seen since the mid-1970’s.  Although total agency employment has been reduced by 15%, the number of examiners has increased to an all-time high (369).  Getting back to a once-per-year exam cycle exemplifies the Board’s desire to promote safety and soundness while leaving the management decisions in the hands of each credit union.

The resulting gains in efficiency enabled the Board to reduce the Agency’s fiscal 1984 budget by 4.9%-the biggest cut in the Agency’s history.  It was the third straight year the Board approved a total agency budget that was below the previous year’s request. 

Federal Credit unions in the six months ended June 30, 1984 had grown 12.5% from $55.5 billion to $61.3 billion. 

Taken together, the budget cuts, investment income and credit union growth are expected  to leave NCUA’s operating fund with substantially more than it needs to meet its expenses. By slashing 24% from its operating fee schedule, the board is effectively eliminating a $3.4 million surplus.  “We believe in returning as much as possible to credit unions,” Chairman Callahan said. 

This action is another in a series fiscal and operational improvements the NCUA Board has approved of in the past three years. . . most recently the adoption of rules to revitalize the National Credit Union Share Insurance Fund (NCUSIF) transforming it from the lowest reserved to the strongest of the three federal deposit insurance funds. (End quote) 

Some of the Lessons

Chairman Callahan’s leadership at the agency was based on professional competence, experience and pragmatic solutions.  Some of his colleagues had worked with him on credit union issues for over five years. Internally Callahan placed responsibility for problem solving with the six regional directors.  The agency had become top heavy in D.C. where issues got bogged down between 16 separate offices.  He streamlined this structure into two primary responsibilities: an office of administration and the office of programs.

Resources were moved to the field so that an annual exam became the minimum standard for performance. Competence, not seniority or appointment status, were the criteria for responsibility.  Mike Riley went from head office to become RD of the largest and most problem challenged region as the youngest RD ever.  Rosemary Hardiman was board secretary and Joan Pinkerton, and Sandy Beach led public information and congressional affairs—all were appointees chosen by the previous Chair Larry Connell.

Money was not the most critical resource; it was management talent and willingness to innovate to resolve problems with effective supervision.  Staff was provided enhanced training that included Video Network recordings such as Rex Johnson of Lending Solutions, leading sessions with  examiners to identify sound and  unsound loan underwriting.  Another video session was a case study of an actual credit union problem for the agency led by a business school professor.

These efforts were supported by disciplined research, constant dialogue with credit unions and open, frequent communications.  New data analytical tools (financial performance reports) from the call report were provided for both examiners and credit unions.  NCUA board meetings were taken on the road so credit unions could attend and speak directly with senior staff and board members.

NCUA and credit unions worked collaboratively to transform both the agency-the  CLF, the NCUSIF and the exam program-and the credit union system to the new world of open market-based competition.  These institutional changes have endured even when subsequent Chairman were chosen from individuals with no coop experience, and several who had just lost a recent election (Senator Jepsen and Congressman Norm D’Amours).  The agency staff and administration were comfortable working with the industry even when board members had little or no relevant credit union, regulatory or leadership experience.

Celebrating Success

The high point of this collaborative approach was the largest ever regulator-credit union conference held in December 1984 in Las Vegas, organized by NCUA.  All state regulators and examiners and NCUA staff met with over 2,500 credit union attendees to hear from experts and debate the future.  I will write more about this seminal event that has never been repeated.

The conference demonstrated the power of cooperatives to share and learn from each other. This was a summit that ushered in over three decades of credit union expansion and resilience as the S&L industry failed and the banking system and FDIC went through multiple bailouts.

The bottom line: as shown by this 1981 transition, new faces can be opportunities for creative leadership and strategic change. The 1981 selection of Ed Callahan as chair enabled NCUA and credit unions to become financial pacesetters for their members and the country.  It is the quality of the appointee, not the party, that matters.

One should advocate for a similar considered appointment and proven leadership in this coming transition.

 

 

 

 

 

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Celebrating a CEO’s 48 Years at the Credit Union

On October 1 CEO Catherine Tierney  entered her 49th year with Community First Credit Union.  The Appleton, WI based coop is today  $5.8 billion in assets  serving 158,000 members with 29 branches and over 580 employees.

She posted this thank you on her LinkedIn page upon beginning her new year. I describe her post using her own words as, the gift of doing what you love:

“October 1st is a special day to me.

“Today marks a milestone of 48 incredible years at Community First Credit Union. It’s been a journey filled with growth, challenges, and countless memories that have shaped not only my professional life but my personal one too.

“From the early days of learning the business to now being part of this amazing organization’s transformation, I’m grateful for the opportunity to have worked alongside so many talented people who share the same dedication and passion for our members, our industry and our communities.

“Thank you to my colleagues, past and present, and to our loyal members for being part of this remarkable journey. Here’s to the gift of doing what you love and the joy that comes from making a difference together!”

From the archives I thought it would be helpful for people who may not met her to see how she and the credit union present their work.  Following are two examples of the joy making a difference together.

The first is a short excerpt of a Catherine interview from several decades ago about how the credit union employees are the first responders for identifying members in need:

(https://youtu.be/lzAN0HXXQBo)

This second video is a story how Community First helped a young couple get started in life when they didn’t think there was any way to adopt their son and then buy a home.

(https://www.youtube.com/watch?v=d6AQbDYSmpg)

Catherine’s long service of leadership with her team is an example of what credit unions do best for their members and communities.   All who believe in the difference credit unions can deliver, should be grateful for her two generations of professional member-centric commitment.

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When Credit Union Members, Regulators and the White House Were in Alignment

From the President to the Treasury Secretary (1936):

In the first years of implementing the  1934 Federal Credit Union Act, oversight of the emerging federal option was placed in the Farm Credit Administration.   The FCA’s publication, Cooperative Saving, was a quarterly sent to all credit unions about how to set up and run a credit union.  William Myers, the FCA’s administrator, wrote this statement in the July-August 1938 first issue.

Note the “Memorandum-The Basis of Credit Union Success” is addressed to all FCU members.  And his statement, “If anyone should ask for the reason for this success. . . I should refer them to you.”

Aligning NCUA with administration on  priorities is critical to legislative change, such Congress’s  1984 restructuring of the NCUSIF following cooperative principles. The White House’s Assistant to the President David Gergen, acknowledges NCUA’s role for “restraining excessive government spending.”

When members, regulators and the Administration’s priorities are aligned in support  of cooperatives, credit unions “will continue to flourish greatly as one of the hopeful and lasting institutions of American life.”  It has happened before.