Re-Imagining Federal Credit Unions’ FOM

In NCUA’s 1982 Annual Report Chairman Callahan’s  opening Foreward presented his approach to the Agency’s priorities:

“One year ago we were in the midst of a dialogue with credit unions about deregulation. . .our sense was that government was doing too much.  In the name of safety and soundness, we the regulators, had become overzealous. . .

In acting to change this direction, we were not advocating that credit unions should “do something” . . .Instead we tried to give credit unions self-determination . . .we tried to get out of their way. Government can’t react quickly enough to allow credit unions . . .to remain competitive.”

In every speech Ed reminded: “Deregulation is not freedom.  It is responsibility.”  To  a NAFCU conference he stated: “I think the vitality (in credit unions) comes from the initiative and ingenuity of the individual boards. Hopefully they’ll all do it differently so that the country’s eggs are not all put in the same basket. “

Reexamining FOM “Groups”

After NCUA approved the total deregulation of share accounts in April 1982, attention focused on the agency’s interpretation of the FCU Act’s common bond definition.   Callahan described this review in the Annual Report :

“Traditionally the agency viewed that “groups” meant an occupational credit union would be one sponsor, one employer period.  Groups within a well-defined neighborhood, rural district or community meant 5,000 people, then it meant 25,000 people; then we weren’t sure how many people it meant.  But numbers were all it meant. 

“We believe that this very narrow interpretation was probably far more insidious than the rules and regulations promulgated over time.   We have taken a more liberal view.  We think that if the law does not say no, it certainly leaves room for yes.  . . And so we think this interpretation is a far more deregulatory action than doing away with rules and regulations.”

Ed looked at the full scope of credit union history. Open charters were present alongside more  restrictive common bonds.  The practice in Rhode Island for example, was that their state charters could apply for statewide authority  to serve anyone who lived, worked, or worshiped via a bylaw amendment.  Many states had much more responsive FOM interpretations than NCUA allowed.

The result was that beginning in 1982 federal fields of membership became more flexible through senior clubs, multiple group charters and  allowing members  to  select from multiple credit unions, that is overlapping charters.

Still today, federal FOM changes are much more deliberate than most state processes. NCUA common bond oversight has metastasized as a  vestige of bureaucratic control.  Numerous vendors including former NCUA employees still offer consulting services to help credit unions seeking FOM change.

The Context for Callahan’s Reappraisal

Ed’s  belief in the importance of deregulating the common bond was shaped by his life experiences.  These include his thirty years as a teacher and administrator in the parochial school system; his six years overseeing the Illinois credit union system as director of DFI; and his belief in the unique self-help possibilities of cooperative design.

In  Illinois there were almost 1,100 state charters in 1977 when he became Director. He saw first-hand the challenges of unprecedented short term double digit rates.  The old economic and regulatory order was passing;  the need to change how credit unions responded to their members was urgent.

For example  in 1978 Sangamo Electric Credit Union in Springfield lost its sponsor when the company moved to Georgia. I was credit union supervisor and said the law required that we close or merge the credit union as it no longer had a sponsor.

Ed’s reply was: “The company moved, not the people. They need their credit union now more than ever.”  We changed the credit union’s FOM so it could continue serving members.

In these initial years at DFI we  saw how government regulation and process  at all levels had become so slow and bureaucratic that the members, the people credit unions were meant to help, were the last to be considered.

More Than an FOM Interpretation

In his speeches Callahan called the credit union system a “sleeping giant.”  He believed that all Americans should have a cooperative financial option.

During his tenure as Chairman, field of membership flexibility was just one aspect of credit union expansion.

New chartering efforts were encouraged with universities and colleges a point of emphasis to bring the next generation into the movement.

In November 1982 a group of credit union leaders met in Philadelphia to plan CUE-84.  This stood for Credit Union Expansion.  The  goal was  50 million members by the 50th anniversary of the FCU Act in 1984.  The honorary Chairman was NCUA board member Elizabeth Burkhardt.  In addition to the presidents of national trade associations,  leagues and  NCUA staff, the committee included the credit union CEO’s of Navy, United Airlines and the president of CUNA Mutual.

Spreading the word about credit union opportunity was more than an FOM change.  It was the  belief that helping grow members was in everyone’s and the country’s interest.

FOM: Inclusive, not Exclusive

Before deregulation, the public impression was that one had to be a member of a sponsoring company, association, or church to join.  That was often the case.  Ed wanted to turn that traditional view upside down.

He believed credit unions should be inclusive, not exclusive.   As he was often quoted,”I do not believe in THE common bond.  I believe in a common bond.”  That “a” was the responsibility of each credit union’s board and management to define and serve.

Many Different Frames- One Goal

Today there are as many practices of the common bond as there are credit unions.  The FOM is like the frames in the National Gallery’s thousands of paintings.  Every picture, every frame is different.   That diversity is the credit union system’s strength.

To see the common bond as an advantage or not, is to misunderstand the core of credit union success.

Credit unions are a prime example of the “relationship economy.”  We all connect in our lives with some group(s) to fulfill  a sense of  purpose.  As human beings we aspire to join together in productive, self-fulfilling ways.  We rely on others and they depend on us.

Credit unions are one option.  When led well, they become much more than “just a job.”  Or when members use the phrase, “my credit union,” more than a financial alternative.

Ed believed in credit unions as a community just as John Tippet stated in his 2001 speech to Navy Federal.

Ed’s lifelong leadership of multiple organizations demonstrate  the special skills required  to build  “communities”  of shared purpose. The FOM should be a building block for credit unions, not a regulatory stumbling block.

Fields of membership are a “frame” for credit union performance.  What occurs, the painting within the frame, is what makes each credit union unique.























Field of Membership: How Important Is It ?

Field of membership (FOM )has been a legal characteristic of credit unions from the first charters.

Virtually all credit unions in operation today were started with no financial capital  The “common bond” of association, employment or community provided vital support along with organizers’ sweat equity to provide the critical “capital” to get the effort started.

As financial reserves were built over generations, credit unions grew increasingly independent of sponsor support.  In the case of many employer based credit unions, the FOM became a vulnerability. Especially when a company failed, moved away or laid off employees.

An example is the International Harvester sponsored coops.  At one time almost 20 credit unions served its factories, Chicago offices and subsidiaries such as the Wisconsin Steel Plant.  Today none of those businesses exist.

The FOM has come to be viewed by many as a constraint on credit union expansion.  Even with the multiple interpretations now possible by state and federal regulators.

The debate continues and practices evolve. FOM’s vary greatly from the very limited charter of State Farm FCU to the “anybody can join” definition of PenFed. Its reported FOM is 330 million potential members!

Is the FOM, which is  a legal requirement even if loosely interpreted, a strength or a constraint?

Below is  a traditional view.  This is an excerpt from John Tippet’s presentation on American Airlines FCU’s strategy to Navy FCU’s board in 2001.  John was CEO at the time and has since retired.*

Here is his opening comment focusing on the common bond:

Thank you for the opportunity to speak – this assignment has given me the challenge to organize my thoughts and better comprehend how membership common bonds have contributed to the success of credit unions, and to realize what the benefits of that principle are to us now and will be to who we are and what we do in the future.

A couple of years ago, the Credit Union National Association (CUNA) encouraged credit unions to participate in their “Project Differentiation.”  They asked us to prepare statements and other forms of documentation about what it is that we as credit unions do and why we are different than banks or other financial services providers.

We were then encouraged to share those materials with our members, Congressional representatives, and in other public forums.  In doing ours for American Airlines Federal Credit Union (AAFCU), we labeled it “Who We Are and What We Do.”

Who we are is the common bond shared by those described in our field of membership – employees, former employees, retirees, spouses, and children of those associated with American Airlines and the related companies originally created by American Airlines.

We’re very proud of our common bond and we’re grateful for the part it has played in defining who we are.

A Strategic Advantage

It is my conviction that common bond is a credit union’s strategic advantage.  Common bond  helps make us different, contributes to our operational efficiencies, helps make our branding effective, and is a catalyst to increased focus on who we are and what we do.

In fact, part of the 1925 Edward Filene quote in your advance reading materials reads, “Whatever the common bond uniting the members, the bond must exist.”

Mr. Filene understood the value of common bonds.  In those formative years of U.S. credit unions, they were already learning from their past and the, then current, real world of financial institutions.  Mr. Filene had seen the banking panics and failures of 1895 and 1907.  He also had seen credit union models working in other countries, so he learned from them both.

By trial and error, the current U.S. banking system has emerged, including regulatory structure, the role of federal insurance, and a new tradition of credit unions within that system. 

We are a product of an evolutionary process, having survived as a result of unique adaptations and specialized advantages, one of which has been the common bond – the shared interests and affinities of credit union members.  (end of excerpt)

This statement is only 5% of his strategic presentation.  The entire talk contains an additional twenty slides.  He covers branding, products and the credit union’s response to 9/11– offering to help finance a plane for the sponsor.

Tomorrow I will offer another perspective from Ed Callahan.  As NCUA Chairman (1981-1985) he played a critical role in enlarging the interpretation of the FCU Act’s requirements.  A decade later one aspect was taken to the Supreme Court by bankers where the multiple group policy was overturned in a 5 to 4 decision in 1998.

What was Ed’s underlying philosophy? How did he reference credit union history in his understanding?

* Tippet’s brief biography:

John worked for 25 years in the ‘for-profit’ world (American Airlines) before becoming the AAFCU CEO.  He was an Officer with Sky Chefs, an AA, Airport Restaurant and Concessions, and Airline Catering, subsidiary.

He served as the credit union’s CEO from 1991 to 2008.  When he left the credit union was in the top ten by total assets.  Today it is 23rd.

The one material change after this talk was to take advantage of the TIP (trade, industry, profession) FOM option. This allowed other employer’s co-workers at the Airports to become members.  Airports were the credit union’s “community.”

John’s email:

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.



“Change of Control” Payments in Executive Contracts are Anti-Credit Union

Change of control clauses in executive contracts of credit union leaders should be prohibited.

This form of executive payout occurs when a credit union’s charter is ended, always via merger.

NCUA has indicated that they must be disclosed as a merger related benefit, but compliance oversight has been uneven.  Global Credit Union’s $750,000 CEO payment upon merger with Alaska USA was disclosed.

In the case of Capital Communication’s merger with State Employees FCU, the member notice stated the CEO and CFO were due payments. However, the amounts were not revealed.

Why These Payments Are Contrary to the Cooperative Model

Change of control in executive contracts is primarily for those leading publicly traded stock or privately owned companies.  In these situations existing owners  may sell  to another  entity either through  friendly negotiations  (think Warren Buffett) or via a hostile takeover bid.  The firm’s controlling ownership has changed.  The existing CEO receives some additional economic benefit if new owners then want a change of leadership.

Credit unions are coops, not stock owned firms.  Management is not threatened by hostile takeovers.   Member-owners cannot sell their voting interests to a third party.  Proxies are not allowed. Management alone is in position to initiate a merger and negotiate the details.

Adding a change of control payment to a management contract adds an incentive, even the prospect, of seeking a merger. Mergers then trigger this payment as well as  multiple other benefits  (eg.SERPS)  that become 100% vested upon termination of a charter.  These merger-related gains are a direct conflict with the CEO and board’s fiduciary duty to its member-owners.

In addition, these CEO initiated and arranged combinations often include job guarantees and bonus payments for senior management in addition to the benefits compensation triggered by the firm’s demise.

This is why such financial conflicts were mandated to be disclosed in NCUA’s 2017 merger rule.  But reporting does not remove the stain of conflict.  Especially when the complete context for these benefits are almost never declared.  Moreover member notices state that NCUA has “approved” the merger subject to member vote-so how can owners object?

Member Owners Left Out

Management takes care to secure their personal self-interest when developing merger plans. They are offering their  ongoing entity, its equity and intangible franchise value for free to the continuing credit union.  A transaction unheard of in a market economy.  What’s wrong with taking a little off the top for the person(s) that initiated this strategic move?

Member-owner interests are last in these combinations of well-capitalized , long-servicing credit unions.   Rarely is any objective member benefit detailed.

The most frequent assurance is that existing branches will remain open and/or all employees are assured future positions.  These are embellished with pledges of a continuing superior service culture, as the board and management turnover all their accountability to a third party—a credit union which members had no role in choosing and know nothing about.

I have yet to see a specific benefit listing for members in a merger that the existing credit union could not provide itself without a merger.   Members are given only words.  By contrast management has no problem determining its assured roles and remuneration down to the penny.

Self-interested motivations by CEO’s are not new.  The change of control is just the most recent addition to merger initiated financial grabs.  It is openly marketed by compensation consultants to “protect the CEO’s interest” as part of a standard benefits package.

What Should Be Done

Ideally boards should not approve any contracts with a change of control clause as antithetical to cooperative design and their fiduciary duty of care.

But that is unlikely as increasingly CEO’s select their boards, not the other way round.

Or credit trades and spokespersons could state their opposition to the practice. Not likely either for the CEO’s pay the associations’ dues.

The single piece of credit-union-only legislation which the trades steered through the last Congress gave credit unions the ability of expel members.  A “success” so loaded with reputational kryptonite that even NCUA is loath to touch it.

However, another regulator may provide a model for this increasingly anti-member practice.

On January 5, 2023 the FTC proposed a rule that would ban non-compete clauses in employee contracts.  One in five Americans is bound by non-compete agreements.  In some industries such as technology and health care, studies have found as many as 45% of primary care physicians and between 35% and 45% of tech workers are bound by non-compete clauses.

The FTC asserts the agreements are noncompetitive and “block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.”

In 2015 Silicon Valley firms including Apple Inc.Alphabet Inc.’s Google, Adobe Inc., and Intel Corp. agreed to a $415 million settlement over allegations that they conspired to avoid luring each other’s staffs.

A few states have already passed laws limiting their use, especially for lower paid workers.

The FTC’s goal is to protect and enhance workers’ employment rights.  FTC asserts these agreements prevent open competition for labor, and limit employees from optimizing returns from their skills and experience.

Power to the People?

For NCUA the fundamental issue should be member rights, especially in mergers.  Change of control clauses put the interests of credit union senior management ahead of their fiduciary duty to members. It provides personal incentives for the individuals who determine when and how such an option should be considered.

Whether by rule, supervisory interpretation or public statements the NCUA board should affirm that member-owners are always the first priority versus management’s self-interest in mergers.

The democratic cooperative model of one member, one vote was designed to give coop owners the ultimate control of their credit union’s future.  In all other financial institutions one group or another is given preference based on their varying legal positions as owners.

Given the paucity of information in mergers, member voting has become a meaningless administrative exercise to gain the owner’s sign off.  This empty gesture is easily gamed by those who have the most to gain.

Banning non compete clauses is a first step to restoring a modicum of democratic integrity to cooperative mergers.




Who is NCUA’s Customer?

Several leading business schools, Harvard, Yale and Wharton, have offered courses to explore the role of capitalism.  Does business have a responsibility beyond expanding shareholder wealth?  How do concepts like ESG or DEI impact strategy?

Five years ago one professor noted these issues would not be part of the core curriculum.  Why are these courses outside the norm being offered?  Who is the school’s customer?  Are business schools becoming socially progressive?

A cautionary note about these boot camps for capitalism becoming more socially conscious was given by Jim O’Toole a long time USC business school professor.  “In the Dean’s view, the business community is their primary stakeholder. . . ranking of business schools reflects who hires the students. . .  most business are not trying to hire woke students.”

The Question for NCUA

Every organization, no matter the legal design or setting, has a customer.  Even governmental agencies.

December is a pivotal month on the NCUA calendar.   Multiple budgets, staffing changes, project priorities are being reviewed at the board level.  The NCUSIF’s NOL is reset.  The 2023 expense parameters are laid down including the OTR and the FCU operating fee.

Who is NCUA’s customer?   How does this focus affect these multiple spending and organizational priorities?  Is there evidence NCUA is becoming more sensitive to its customers?

Who is NCUA’s customer?

Is it the 100 million plus credit union member-owners?    There is no evidence of this.   In fact I can think of no example in which NCUA has responded to individual members’ concerns, let alone supporting their ownership rights.  In fact NCUA has ignored numerous situations where members are routinely disadvantaged by their own institution.

Could it be the 4,500 cooperative institutions?  Much of NCUA activity is directed toward the industry, its examinations, supervisory and admin roles and rules.  But NCUA does not treat these as customers in any traditional sense of the term.  It is very unusual for anyone at NCUA call out a credit union’s contributions on behalf of its members or communities.

Perhaps Congress is the “customer.”   NCUA claims independence from any traditional Congressional oversight via appropriations.   It keeps its own funds and maintains backup liquidity from Treasury.   It is an agency completely self-sufficient,  outside of any Congressional approval.

If not Congress, then the executive branch which nominates the three-person board.   Certainly board members assert party loyalty and will sometimes make overt efforts to follow administration priorities.  But in the overall governmental structure, NCUA is not a very visible part of any administration.

There is one other possibility which is alluded to in the frequently used justification for NCUA’s actions to “protect the insurance fund.”   From whom or what is never spelled out.  But the implication is NCUA is guarding the US Treasury from credit union’s somehow calling on the government for support.  There is no legal basis for such a belief, but this phrase is often used to justify some new rule or abrupt action without further explanation.

If all the obvious constituencies for who is NCUA’s customers do not align with current practice, then who do NCUA board members and senior staff see as their primary customer?

The  answer:  themselves.   The primary purpose of NCUA is self-preservation.

Just like the business school curriculum, the ultimate customer determines the outcome.   It is not the credit union member, credit union institutions or even a cooperative system that drives NCUA’s agenda and budgets.   It is institutional growth as measured by budgets, staffing and multi-year capital projects.

You might ask where does purpose fit into this organizational picture?  It doesn’t.

If in doubt about the agency’s priorities, just follow the money in the upcoming board agenda setting.  While there are multiple constituencies that claim an interest in NCUA’s activities, only one stakeholder matters when it comes to counting the money.




An Eye-Opening NCUA Board Meeting

Last week’s  NCUA board meeting had only one topic: the financial state of NCUSIF.

The interest rate context for this briefing was described by a CNBC commentator as follows:

“What we’ve seen in the last few years was a cost of money that was 0. Throughout history, that’s very rare. Now we have a cost of money that is high and going to keep going higher.”

The implications of this context were  absent in the initial presentation.

A Puzzling Omission

The CFO’s presentation of the September 30 NCUSIF financial position was the routine reciting of numbers on slides, until the questions started.

Vice Chair Hauptman referenced the fund’s cooperative nature and the importance of transparency.  He pivoted to making a pitch for CLF legislation to enhance liquidity for 3,600 small credit unions and “for the NCUSIF.”  His first question was , what is an appropriate liquidity level for the NCUSIF?  The September overnight number was $362 million.

That’s when the bombshell was dropped.  CFO Shied said that the NCUSIF now held $1.7 billion in overnights. This is almost four times the amount initially presented. This increase was partly the result of $650-$700 million in additional 1% deposits.  Partly because the fund was “pausing on long term investments.”

This $1.7 billion yields almost 4% or three times the year to date yield of 1.31%.  For over a year the fund’s declining NEV showed that the robotic laddering over 7+ years was locking in significant NCUSIF underperformance for  years in the future.

Why this  dramatic balance sheet change was not part of the initial update is puzzling.   It marks a change in the year-long investment explanation that changing the ladder approach in the face of the rise in rates would just be “timing the market.”

No one asked the obvious question.  Is this a change of investment tactics to a managed WAM approach?  Or just a temporary pause?

It was  Board member Hood who brought out the impact of the underperformance of the fund.   His three questions follow.

Q. Given how interest rates have increased, every security we have currently is underwater, correct?  

Answer: That is correct Board Member Hood.  The continued and sizable increases in interest rates mean that the entire portfolio other than the overnights is underwater at this time.

Currently the NCUSIF’s portfolio has lost over $2.0 billion in market value(NEV).  The agency continued NCUSIF’s  auto investment policies even when rates were at “historical lows.”

Now every security in the $22 billion portfolio is underwater.   Even long term securities purchased this year in the rising rate environment.

The result will lock in  below market portfolio yields for a long term (up to the WAM of 3.7 years).  This underperformance means credit unions are on the hook should the fund’s operating expenses (liabilities) exceed its annual income.

Q. At a previous board meetings on the status of the Share Insurance Fund, we discussed the outside accounting firm we hired to look at the true-up issue and how this impacts the equity ratio. For the record, at one of the last share insurance board updates, we discussed that the true-up memo by the outside accounting firm states that the timeliness and accuracy of the data is required in the Federal Credit Union Act so this provision in the law, and I quote, “May provide some latitude from a strict interpretation, that the equity ratio must be calculated based on the financial statements amounts, particularly given the knowledge of the timing effect on the calculation of the equity ratio. Accordingly, it may be permissible to use the pro forma calculation of the contributed capital amount when calculating the actual equity ratio.”  In a previous board meeting, I noted that the letter pointed out the current practice understates the equity ratio by several basis points and that there were several options for correcting this understatement.  Can you please provide an update on next steps?

CFO Schied said a committee was studying this issue.  The memo in question was presented a year earlier.  One would hope that this considerable delay would result in a more accurate NOL calculation. For as Hood noted the present calculation  understates the actual yearend ratio by 2-3 bases points.

Q. I see several sizable institutions changed in their CAMELS score.  Is there any takeaway from these data?  Do we think any of this has to do with the new “S” component–or any individual scoring component? 

Answer: This does include elevated interest rate risk, but examiners also noted increased liquidity and compliance risk in these institutions. The downgrade in CAMELS ratings also reflects a lack of governance or poor risk management practices.

Not a Liquidity Issue but Risk Management

Other board members spoke to the importance   of liquidity.  This has become more pressing as any sale of a security from the portfolio would result in a realized loss to the fund.

With an NCUSIF portfolio nearing $22 billion and regular predictable cash flow, the last concern should be liquidity.

Credit union owners should receive more than a perfunctory reading of data on slides when an NCUSIF update is presented.   The critical issues of investment performance, NEV risk management and detailed explanations of allowance expenses should be the routine.

Anyone can read numbers on a slide.  What they mean should be the substance of every update.  It should not require board questions to discover that the data presented was not timely, relevant or representative of current conditions.

Hood’s questions show the need for better risk management in the NCUSIF.  They also demonstrate the need for a more professional and current briefing by staff.




The Tragedy of the Commons:  The End of a Movement?

Last Friday’s blog described the multiple losses should the merger of Vermont State Employees (VSECU) with New England FCU proceed on January 1, 2023.

The members lose their credit union; 190 employees their career paths and individual agency; local communities– their partnerships; the state of Vermont– its leading cooperative financial institution; and the overall credit union system, another pubic example of  purpose compromised by leaders’ self-interest.

The tragedy of the commons occurs when persons in positions of responsibility exploit the common resources of the community which they oversee for personal gain.

Should credit union leaders continually seek to acquire and merge sound, long serving credit unions, like VSECU, to fulfill their individual ambitions, I believe this will lead to the demise of the cooperative credit union movement.

Documented Success

VSECU’s example and innovative track record were so successful, that it was the subject of a 15- page analysis by Callahan’s September 2021 Quarterly Report.  Several of these accomplishments were republished in five articles in January 2022 on, for example this description responding to the COVID crisis.

At September 30, 2022 the credit union reported $1.1 billion in assets;  71,625 members and 9 branches;  $6.5 million in YTD net income and $102 million in equity.  Average salary and benefits per employee exceeded $100,000.

Against this documented track record of long-term innovative performance, VSECU’s merger information offered nothing about the future.   The credit union was already more than full service; it had pioneered special initiatives pursing a “greener” environment.

The continuing credit union’s leaders at NEFCU made no commitments to  VSECU’s 71,000 credit union members’  who hold $922 million loans and $980 million savings.   These members will be under the full sway of a board they did not elect and management that has no connection with their firm.

So undefined is this transaction that both CEO’s admitted in this twitter post, the consolidation would take over a full year to conclude and will require a completely new brand identity and  name.

The back office conversions, product/service alignments and leadership selections will be the top priority at a time when  members of both credit unions face economic uncertainty and anxiety from decades-high inflation.

In the Calling All Members website, the opponents point out that the two credit unions have very different fields of membership, histories, and market focus:

The continuing federal credit union’s Field of Membership will not be based on geography or residency.  It will be numerous employer groups and organizations located in Vt, MA, ME, RI, CT, MI and even groups headquarters in San Diego and San Francisco. . . our statewide cooperative built by Vermonters for Vermonters will be gone—forever.

Why Should Credit Unions Care?

Two typical industry reactions to this latest example of a successful credit union being acquired by another include:  “Not my problem” and  “Didn’t the members approve?”

I believe this pattern of sellouts and acquisitions by cooperative leaders will ultimately lead to the end of a cooperative financial system in America.  Here’s why.

The foundation of every credit union is member relationships.  Almost all credit unions were started with no capital.  They earned the loyalty of members by promising to be a different kind of financial firm.

Member-owners were invited to put their trust in their leaders and board. The  affirmation  of this process  is the democratic one-member, one-vote design.

This merger now places VSECU’s relationships under the direction of strangers.

The action is based on the illusion that size is all that matters. Credit unions have never competed on size.  It is a unique coop fantasy that coops can marry two mice and produce an elephant.

When size is the dominate goal, it becomes a trap of endless growth not creation of member value.

VSECU’s members have continually contributed more than sufficient resources to continue a long-term vision of hope empowered by local control and focus.  The credit union has become a financial “sanctuary” established by members’ belief and trust.

Now their leaders (senior management and board) have abandoned them for the “Golden Calf” of “instant mass,” not substance.  There has been no planning or discernment with those that built the institution and who own it.

The process of voting is nothing but an administrative fig leaf completely under the control and oversight of those temporarily in power and who have a vested conflict of interest.   Only 21% of members voted.  Of the total membership. just 316 votes (.4%)  is the difference between those supporting and those opposing.  This was certainly no vote of confidence in charter cancellation.

It would seem fool hardy to decide the fate of a 75-year old, high performing coop with such a micro thin margin of owner approval.   It also raises the question of how the voting was managed by those who advocated only their side of the issue.

Regulators Abdicate

Regulators continue turning a blind eye and washing their hands of responsibility.

Mergers are the wild west of today’s financial markets.  Second only to Crypto transactions, until that industry’s implosion is over.

Coop CEOs/boards are literally buying and selling millions of member relationships to firms with no connections, increasingly out of state, and who are unconstrained with what they can do with them. These kinds of hollow transactions and disclosures would normally attract the intense scrutiny of an SEC or FTC regulator if these were stock owned institutions.

Coop regulators would rather talk about inflation, consumer protection, fintech, DEI or other current topics rather than the elephant in their room.

Contrary to their assertion that this is just the free market at work, these are back-room deals, negotiated in private, devoid of transparency and without any public attempt to find the “best” deal for members.

Regulators avert their gaze pretending to be deaf, dumb and mute as they oversee the disintegration of the coop system.

Financial Eunuchs

VSECU’s leaders betrayed the trust members gave them.  Credit unions embody the spirit of community.  This action dissolves this special bond built by three generations of members.

The merger destroys the fundamental foundation of a cooperative leaving a financial eunuch in its place.   It has no cooperative character or roots.  Unlike a stock transaction, it lacks the credibility of a market affirming price.  In these transactions, coops have devolved into purely private entities, controlled by individuals acting to consolidate and accrete their own power.

These are not people helping people; rather these mergers demonstrate CEO’s helping themselves.

One can understand why NEFCU’s CEO wants control of 71,000 member accounts with average combined member loan and savings balances of over $43,000. And to be given over $100 million of their collective savings while eliminating this vigorous, innovative competitor.  No more “free” market choice for either firm’s members, or the general public.

This kind of transaction has no economic rationale or “market” driven basis.   There is not a firm anywhere in America, coop or otherwise, who would not line up to accept such a generous “gift.”

VSECU’s leadership had embraced the Global Alliance for Banking Values (GABV) vision of “Finance at the service of people and the planet for the real economy.

Their collective decision to transfer their fiduciary responsibilities to another firm show that corporate and personal values need not align.  It certainly refutes the biblical adage that a person cannot serve God and mammon at the same time.

The Members Will Respond

Self-interest may appear to succeed in the short term, but in the long term, it fails as a strategy.   When the vision of the cooperative is “all I want is everything” personal ambition will fail for what only a community can sustain.

People are not stupid nor uninformed about these sham transactions.  Most members follow their personal financial situation as a top priority. It is a heightened concern especially in a time of rising rates.  When member generosity and loyalty is compromised by self-interested  mergers, their support will  fade away.

These transactions will end the unique public role for credit unions. Acting like banks, they will be treated  like their for-profit competitors.

Regulators who have approved these pillages of common wealth for private gain will find themselves thrown in with all other financial overseers.  The playing field will indeed be level.

There will be no credit unions on it.  No tax exemption.  Just wealth seeking institutions led by similarly motivated individuals.

Trafficking Relationships & Destroying Good Will

The practice of buying and selling relationships is not new.  It is part of the capitalist markets drive for greater and greater market share.

It is why the states and Congress authorized the tax exempt cooperatives as an option to prevent this exploitation.

A coop system reliant on values as a differentiator cannot long continue with coops and market capitalist wannabes side by side.  For the latter will continue to prey on the former until everyone joins in the rush to get their share of cooperative gold.

Nothing will stop this pattern of private theft until persons of courage and confidence step up to call out this rapacious behavior.  If this fails to occur, then as predicted on the Calling All Members site the national system of cooperatives, just like VSECU,  will be gone-“forever.”


NCUA’s 9.6% Increase in the Proposed 2023  Budget Shows the Need for A Better Way for Spending Oversight

NCUA’s 2023 Staff Proposed Draft budget is 84 pages. It adds 25 new positions and an 80% increase in spending on the Merit technology system.

CUNA and NAFCU provided 8 and 9-page detailed suggestions for changes.  Credit unions pay all NCUA’s expenses. The two trade associations critiques are an excellent starting point for readers who want to see the critical issues.

A Longer Term Spending Perspective

Two weeks ago I posted a blog called NCUA’s budget hearing and inflation that included a chart from the Bureau of Labor Statistics showing the 22 year cumulative price increases for many sectors of the economy.  The largest was the 240% gain in hospital services followed by college tuition and fees at 180%.

Average hourly wages had increased  100% and overall inflation was 74.4% in this time frame.

In this 22 years the US population has grown by 50 million. Each of these economic sectors are serving many more customers with more products and more facilities than was the situation in 2020.

NCUA’s proposed 2023 budget would result in a 283% increase for this same period, higher than any other economic sector.   Meanwhile number of NCUA insured credit unions has fallen from 10,316 to 4,853.

NCUA’s budget process is one sided.  It details all spending request but provides  no cost control or expenses reductions.  An example is this excerpt from CUNA’s analysis of administrative costs:  Specifically, the budgets for contracted services, administrative expenses, and rent, communications, and utilities are proposed to increase by 30.3%, 10.8% and 21.8%, respectively.

Without external oversight, the budget process becomes a PR exercise with scripted answers and no independent review.   Board members readily give in to the inflation rationale.

NCUA’s budget grows inexorably faster than every other sector because there is no check and balance.   The agency is answerable only to itself.   Or as one board member frequently observes, “NCUA is a monopoly.”

Chairman Ed Callahan’s Last Congressional Hearing

For there to be accountability over NCUA’s spending, the process should be changed.  The example of former NCUA Chairman Ed Callahan’s final Congressional testimony suggests a possible solution.

On April 24, 1985 Ed appeared before Chairman Boland’s  subcommittee of the House’s powerful Committee on Appropriations.  He presented the CLF’s 1986 appropriation request.

The following are excerpts from Chairman Callahan’s opening statement:

For fiscal year 1986 we are requesting a $600 million in new loans, the same number as the previous five years. The expense limitation $850,000 is the number as the current fiscal year and has been unchanged for the past four years. . .

We believe the lending limit is adequate to meet the needs of over 18,000 credit unions. . . Our agents, the 42 corporates,  have reported minimal increases in loans even though loans outstanding at their member credit unions have increased 44% the past two years. . .

The CLF’s loan balances of $288.5 million represent a very slight increase since our fiscal year end. . .

Mr. Chairman, today the (CLF) system provides services to more credit unions at a lower cost and with fewer employees than at any other time in its history.   Credit unions and we are proud of its success.

At the time of this hearing, NCUA insured 18,000 credit unions with six regional offices and a DC headquarters.  Total employment was 600. The CLF’s bottom line of no increases in operating expenses for four consecutive years was the same outcome for both the NCUSIF and  agency’s operating budgets.

In contrast, NCUA’s total spending has grown over 200% more than the economy’s total inflation for the past 22 years.  The solution to NCUA’s open-ended spending is to make the entire NCUA budget subject to Congressional oversight and approval.

A Better Way:  Put  NCUA Spending “On Budget” for Congressional Review

All CLF spending was subject to Congressional oversight until the 2008/2009 crisis changed this annual approval process.  Congress no longer reviews CLF lending or expenses.  The CLF’s coverage has never been as comprehensive or meaningful since.

Currently the NCUA is seeking to extend the CARE Act provisions enlarging the CLF’s capabilities. This legislative request  is an ideal opportunity to put the CLF back on budget along with the remainder of the Agency’s spending.

In the real economy, constraining costs is the first responsibility of leaders when facing unprecedented inflation and the prospect of an economic downturn.   Personnel and other resources must be redirected to immediate priorities, rather than just adding staff for new initiatives.

Both efficiency and effectiveness concerns were raised in NAFCU and CUNA’s detailed budget responses.   However, these comments come with no formal authority. NCUA routinely restates its positions, such as the need for consumer examiners or more specialists.   Board members, with rare exceptions, just support each other’s spending priorities.

Putting the NCUA on-budget would open up the process to independent monitoring and public commentary.   Congress would review and approve the spending as well as the underlying “themes” or policy justifications.  As the NCUA’s taxpayers,  credit unions would then have a meaningful way to comment on NCUA’s budgets and operating performance.

It worked for the CLF.  It would be a better way for insuring accountability for NCUA’s performance today.


NCUA’s 2023 Budget Hearing and Inflation

Today is NCUA’s public hearing on its proposed $367 million budget for 2023.

Inflation is the number one topic on many people’s minds.  An NCUA board member has presented numerous examples on  LinkedIn  of the impact of inflation on consumers. The posts include reporting on  the price of beer in sports stadiums, the cost of a Five Guy hamburger and presenting the two decade chart below tracking  price increases in various sectors of the economy.

His latest comment reads as follows:

Ouch. Average monthly payment for new cars hits $738. Throw in gas, insurance, registration and that’s $1000 a month just to drive around.

#cars #inflation

Now he is in a position to do something about his observations.

NCUA’s Spending and Price Increases in the Economy

The Bureau  of Labor Statistics chart below is a 21-year history of the price changes of various services and products from 2000 through June of 2022.  The changes are compared with  the  average hourly wage increase.

Some services or products are “more affordable” as their price changes are less than the increase in wages.   The “less affordable” group have seen prices rise faster than wages.

The  overall inflation in the period is 74.4%.  The highest increase in this 22 years  is in hospital costs with a  240% price surge, just ahead of college tuition.

At the same time TV’s, computer software, and cell phones have become more affordable with price rises less than the increase in wages.

Where would NCUA’s ever swelling growth in total regulatory costs paid by credit unions be on this chart ?

NCUA is Number 1: What to Look for in  Today’s Hearing

In 2000 total NCUA  expenses for the operating fund, NCUSIF and the CLF were $129.9 million.   For the 2023 budget NCUA proposes spending $367 million.

At yearend 2000, NCUA oversaw 10,316 federally insured credit unions.  At June 30, 2022 the number was 4,853.

NCUA’s proposed new budget would result in a  283% increase for this 22 year period.  This places the agency number 1, at the very top of the chart of price escalations across all sectors of the economy.

Inflation is the most urgent  economic challenge facing the country.   The only sure way dealing with this challenge is to reduce costs.  Companies across the economy have announced hiring freezes and layoffs to control their ability to compete.

Even some credit unions are announcing layoffs especially in their mortgage lending personnel.

The issue for the NCUA board members is whether they just want to talk about inflation; or, will they have the courage and capability to do something about it in this area of their direct responsibility?

A Tale of Two Credit Union Liquidity Options

The dramatic drying up of market liquidity since the Fed launched its fight on inflation earlier this year has been multidimensional.

The 16.2% surge in credit union loan demand in the first two quarters  was the highest this century.  Cash on the balance sheet fell by $66 billion in the second quarter alone.  Investments are 30.5% of the system’s assets, totaling $655.5 billion.   Only 42.6% of this total was under one year maturity at June 30.

Most of the remaining portfolio over one year, would be underwater, that is with book value less than current market.  These funds could be converted to cash only at a loss.

Consumer savings previously buoyed by COVID relief plans, fell to 5% in June, and are at a lower level than historical norms.

Finally market competition for funds is increasing.  The SEC 7 day yield on government money market funds is 2.75%.   Online banks such as Marcus are offering one year CD’s at 3% and higher for longer terms.

Credit union’s are responding with multiple balance sheet straggles, such as CD specials, loan sales for cash, higher pricing to slow loan demand, and looking at borrowing and other funding strategies.

Two Credit Union Created Liquidity Options

Credit unions have created two system options to assist with managing liquidity.  One is industry managed, the corporate network owned SimpliCD, a CUSO.  The second is the CLF, created by Congress in 1977.

Both partner with remaining corporates as one option for access.  Credit unions can also go direct as regular members of the CLF or by calling the CUSO, Primary Financial, directly.

Even though both were created by credit unions and both rely on the corporate network for broad coverage, the results of both efforts could not be more different.

A CUSO’s Results

SimpliCD has posted its activity through the June quarter.  With almost 3,000 credit union investor agreements, the CUSO reported $2.9 billion CD’s placed at June 30.  The current largest outstanding was for $239 million and 228 credit unions report current funding.

President Chris Lewis says the market is the tightest he has seen in his 30 years with the industry.  Some credit unions are making early withdrawals from purchased CD’s or sell at a discount for cash.  Finding credit unions to invest in CD’s is getting harder.  Credit unions generally seek  funds in the 1-3 year maturities.

SimpliCD’s advantages include a centralized way to access CD funding, quickly, in whatever amount needed.   Most of the top ten credit unions have used the service in past with the largest placement at $400 million.  Twenty million can be raised in just a couple of hours.

The funds are unsecured and structured so that the $250,000 NCUSIF insurance covers all issuance.  If the transaction is done via the credit union’s corporate account, all monthly interest payments or receipts are automatically settled with confirmations provided to the credit union.

Two current examples:  A billion dollar credit union placed two CD’s as  of September 30th  via their corporate,  $5.0 million for 182 days at 4.1%, and a second $5.0 million for 272 days at 4.15%.

A $150 million dollar credit union placed a $1.5 million 182 day CD for 4.05% at September month end.

The October 3rd rates for secured FHLB Boston advances for equivalent six and nine month maturities are 4.29% and 4.37%.

The CUSO was originally founded by Corporate One in 1996 and converted to corporate wide ownership in 2004.  In addition to the speed and ease of one stop funding, the CUSO has earned the trust of its credit union users who range in size from the very smallest to the largest.

Lewis comments that the other advantage of SimpliCD is that credit unions can “keep their borrowing powder dry” for use as secondary liquidity.

The CLF Today

Opened in 1978, the CLF was intended to be the third leg of the regulatory structure which added share insurance in 1971 to NCUA’s initial chartering and supervision responsibilities.

Last week I received this query from a colleague:

Today, as interim CEO,  something came up, and I immediately thought of you.  It’s the CLF.   While we are managing liquidity well, but don’t have the FHLB currently – I put it in process –  I thought I read that the CLF was broadened in scope through CARES ACT and was more user friendly.

I contacted the Corporate CU, as we are just under $250M, and asked about it, and they said no one is using it.  I thought that response was very odd considering the drain on the system of over $80 billion from March. 

Seems from what I was told that the CLF doesn’t have much value.  Do you believe this is true?   Am I missing something here?

Any advice would be greatly appreciated.

As of July 30, 2022, the CLF has $1.3 billion in total equity, all invested in treasury securities.  Its total borrowing authority from the Treasury is $29.7 billion.   The 10 corporate agent members, and the 349 direct credit union members cover approximately 26% of all credit union assets.

The CLF has not made a loan since the 2009 financial crisis.  Its major activity then was to lend $10 million to two conserved corporates guaranteed by the NCUSIF.   There has not been a loan extended since.

The CLF currently earns 1.39% on  its portfolio and spends about $1.2 million to keep the CLF open.  It currently pays 80% of its net earnings to its credit union owners.   The CLF continues to add to its retained earnings of $40.5 million even though it has had no “risk” assets for over 12 years.

A Story of Two Systems

Both SimpliCD and the CLF were formed to serve credit unions.  The CUSO managed by credit unions is active at every level providing financial intermediation, funding, and market options to almost two thirds of all credit unions.  It partners with its corporate owners to market, inform about funding options and facilitate transactions.  It is active in both good times and periods of stress.  It continues to innovate, be present and evolve.

The CLF does not interact with credit unions.   It has created no programs or options.  Until the leadership of the CLF engages with its member-owners and the system to develop solutions relevant for them, it will remain unused, untried and without purpose.  A vestigial regulatory organ frozen in bureaucratic time.