NCUA’s 2021 Year End Forecast for Credit Unions

At the September Board meeting, CFO Eugene Schied presented the forecast for the NCUSIF’s year end NOL.   The ratio he gave was 1.28%.    The slide showed the outcome  and the formula, but not the numbers used to calculate the ratio.

NCUA’s public affairs officer Joseph Adamoli has provided that data.

Large Slowdown in Share Growth Last Six months of 2021

NCUA staff projected yearend insured shares totaling  $ 1.597 trillion.  This would be an 8.8% growth from 2020’s yearend total of $1.468 trillion.

Since we know the midyear insured shares were $1.580 trillion, this indicates NCUA believes credit unions will add just $17 billion more in the second half of the year.

The 2020 yearend share growth was 20.9%;  the 12-month growth at June 30, 2921 was 15.4%.    Therefor NCUA foresees a significant decline in new deposits from these actual double digit  trends.

Net Income for the NCUSIF

The yearend retained earnings are estimated to be  $ 4.701 billion which would be a decline from the NCUSIF’s  July report of $4.739 billion.   In other words, NCUA projects an operating loss for the final five months of approximately $38 million versus a positive net income through July of $118 million.

There was no information to explain the decline in net income. Since monthly investment income more than covers all operating expenses, the agency must be projecting an increase in  the insurance loss expense.

2021 NCUSIF Equity Ratio

NCUA’s two yearend forecasts of $4.7 billion of retained earnings and insured shares of $1.597 trillion, results in the fund’s equity ratio of .294%, or almost at the 1.3% historical NOL level.

This forecast shows the importance of the NOL cap.  For if retained earnings exceed the NOL, then any overage must be paid in dividends to credit unions.

If instead of negative net income for the final five months, the NCUSIF were to report a gain of just $52.8 million, the equity ratio would be right at .3%.   Even that result would be less than half the net reported in the first seven months.

Transparency and Responsibility

No matter how close NCUA’s estimates prove to be, the first conclusion is that this will be a good year for the NCUSIF, even if share growth ends up higher than the forecasted 8.8%.

The estimates also demonstrate the importance of resetting the NOL based on actual historical performance versus hypothetical scenarios with no objective validation.

We don’t know if there will be an NCUSIF update during today’s Board meeting.   If there is, the credit union owners have the data necessary to track performance which is one of credit union’s most important responsibilities.

For if the owners and contributors of the 1% perpetual underwriting show little interest in the NCUSIF’s performance, the prospect of a dividend or effective use of the fund’s investments, then the  accountability for oversight built into this unique  co-op model will break down.

The transparency from NCUA is helpful, but only if credit unions use it to monitor the fund and provide comments  to the board.   For the next big NCUSIF decision will be setting a new NOL level (currently 1.38) at one of the two monthly board meetings remaining this year.




Harper’s NCUA Priorities: “Fiddling While Rome Burns”

Chairman Harper’s Senate hearing for a second term confirmed his intentions for NCUA.  In his opening statement and when answering questions, he reiterated his regulatory to-do list.  Along with prior speeches and proposals these include:

  • Establishing a separate consumer examination force (he stated NCUA is working on a white paper to validate this need).
  • Eliminate all current legislative constraints on NCUSIF funding and premium assessments.
  • Seek authority for examining and supervising third party vendors serving credit unions.
  • Climate change risk must be included when evaluating safety and soundness.
  • And the need for multiple agency investments to “continue prioritizing capital and liquidity, cybersecurity, consumer financial protection, and diversity, equity, and inclusion.”

His opening Senate statement reflects his experiences as entirely within the “legislative, regulatory and policy” arena.  He sees the scope and purpose of his role as running a government agency, not facilitating the relevance, role and reach, i.e. the sustainability of the cooperative system.

Since the late 1990s, I have worked as an advisor, manager, and executive on banking, insurance, and securities legislation and regulation. These jobs have given me broad knowledge of financial services policy and a deep understanding of the many issues facing our nation’s $2 trillion credit union system. 

One Vote Short to Enact Harper’s Agenda

Sooner or later all of Harper’s desires to expand NCUA’s authority and resources will receive a second board vote.  Either by convincing a current member that “bipartisan compromise” is the correct leadership response, or due to the expiration of one of the other board member’s term.

Harper’s positions are not driven by facts, data analysis, or even trends.  He has been advocating for risk-based capital (now linked with CCULR) since 2014 despite all the factual evidence that it is both unneeded and does not work.  He persists in immediately imposing this 400+ page rule even in the face of statements such as this by former board Member McWatters at a June 2019 board meeting:

Board Member McWatters: Okay, so there’s work to be done on the rule. And I should also note that when this rule was proposed and finalized, I dissented from it. And I dissented from the rule because in my view, as a lawyer for over 37 years, the rule violates the Federal Credit Union Act. I said that twice in written dissents in some detail in some legal analysis.

Now, I understand that reasonable minds may differ. Other people, other people in this room have a different view. I respect those views, but I also think that if this delay passes, we should look at that. We should go through that analysis again. I don’t want a rule on the books that in my view as a lawyer dealing with issues like this for a long, long time simply does not comply with what Congress told us to do. So I hope that, I hope that we can do that.

The Danger of a Misguided Regulator

We all see what we want to see.

Harper has spent most of his professional life working on legislative and regulatory policy. His goal is to enhance government’s role, not sustain the cooperative movement that created the agency in the first place.

His position on issues is to promote a regulation- heavy outcome.

His lack of credit union experience, knowledge and operations is a serious blind spot.

Today the credit union movement faces growing challenges. They have nothing to do with Harper’s understanding of safety and soundness, forecasting the next recession or even competitors overwhelming the movement through innovation or scale.

There are two wildfires burning uncontrolled throughout the cooperative environment. Both were started internally, and each is continuously fed by NCUA’s actions.

Not “Mergers” but “Collective Euthanasia”

The first wildfire is the increasing use of self-interested mergers, allegedly for economies of scale by managers of sound, stable and long-standing credit unions to become part of a larger one.  The increasingly brazen appropriation of credit union members’ common wealth is exemplified by a CEO’s arranging $35 million in funding for the non-profit organization he will run after his $650 million credit union is merged.

These acts of the CEO and senior leadership cashing out via merger are not new.  But they are increasingly promoted by third parties who draw up “change of control” clauses for CEO contracts.  Then the same CEO’s go out and negotiate their own change to collect the bonus.

NCUA routinely signs off on these self-serving charter cancellations.  The problem is more than self-enrichment.  Every merger of these long serving credit unions rips out roots feeding the cooperative model. Members’ accounts, loyalty and common resources are transferred to a third party which has little to no relationship to the community which loses their decades old local financial institution.

These mergers destroy the credit union system at its roots.  Members leave and the entire basis of the credit union’s soundness, the member relationship, withers and dies.

The continuing credit union may seem strong, but that is a temporary illusion.  Loyalty, trust and confidence cannot be bought.  They are earned via long standing service relationships.

The common bond which first brought the credit union to life is now transformed into an act of  cooperative euthanasia in these merger manipulations.

The rot then shows up in the continuing credit union even when it tries to regain former member’s allegiance. The roots have been severed.  As a result  the solution is sometimes to ask its own members to approve this collective merger death ritual by the continuing credit union— the story of Xceed CU.

Using Member Reserves to Buy Banks

The second challenge is credit unions using members’ accumulated reserves to buy banks.  Often these are outside the credit union’s existing network and market influence.  The reasons are to grow faster than might otherwise occur, especially in new markets.

However, paying $1.50 to $2.00 for each $1.00 of book assets sooner or later will lead to a financial dead end.  Unlike mergers, these purchases are for cash.  There will have to be a return over years to support the premiums being paid for these assets.  The results of each purchase will not be known for some time.  Meanwhile, credit unions will have to convert new employees, customers and  products and services in a process different from the credit union’s traditional member-chosen relationships.

The jury is out as to whether these financial investments will ever payout.  But one trend is apparent.  Bank purchases to pursue growth becomes a narcotic.  It is like an opioid that a CEO and board become addicted to when their own efforts at internal expansion no longer seem enticing. Some credit unions have completed more than one bank purchase.  It is not unusual to see a credit union undertake two transactions back-to-back or in a current case, two at once.

The Common Source for these Growing Cooperative Wildfires

Both of these activities are failings of fiduciary duties.  The common characteristic in both is  credit unions have lost touch with their own members.  Their leaders believe the credit union is their personal fiefdom to do as they like, even when the decision is to ask members to commit cooperative suicide by giving up their generations-old charter.

As institutional growth and performance is prioritized over member well-being, the credit union model becomes more and more like the competitors’ it was meant to replace.

In both activities members are kept in the dark- told nothing about bank purchases. Or in mergers, members are given  a series of assertions about better products and services that omit significant information or misrepresent the entire situation—and given less than 45 days to act before voting.  Few vote, rightly sensing the system is rigged against them, which is often the case.

The solution to these two failings is as straight forward as the cause—empower members to be truly informed and engaged about their credit union’s activities.  Transparency is critical whenever members’ collective wealth is used outside the normal business model.

In mergers members are given nothing more than PR cliches.  Should ending a successful, sound charter be so much easier than what is required for a new charter in the first place?

Harper sees “consumer protection” as crossing every “T” and dotting every “I”.  That approach is  fiddling while the cooperative industry burns down.  In the meantime, members’ collective legacies are stripped away by their boards and managers.

Sound, well run credit unions are losing their cooperative roots and purpose.  No one is willing to address the situation for what it is and stop these extermination.  Unfortunately, we know how this movie ends.  The original version was called the S & L industry.


A $35 Million Example of an “Emperor with No Clothes”

Hans Christian Andersen’s story about the emperor who had no clothes is familiar to most. You can read the parable here to refresh your memory. Two swindling weavers convinced the entire court and the emperor that their invisible new uniforms were perfect. They pocketed the gold and silver threads for the garments stealing them for their own use.

I have always wondered why it took a small boy in the crowd watching the king’s parade of “new” clothes to shout out, “But he hasn’t got anything on.”  What was the reason for everyone else’s silence?

  • Fear of authority when challenging the emperor’s actions?
  • Loss of a senior position if a trusted advisor should speak up?
  • Who am I to argue with the emperor’s wisest, most senior advisors?
  • Onlookers: not my problem if the emperor wants to go out naked
  • Too isolating to be a person stating an inconvenient truth?
  • Situation so far-fetched that no one believes the facts before their eyes?
  • Perhaps an example of: “you can fool all the people some of the time”

Whatever the explanation, the story raises the issue of people avoiding uncomfortable realities that no one else wants to acknowledge. In the merger situation below, a single thoughtful and brave member decided to call out what no one else would, even though the facts were presented in plain sight.

The Merger of Financial Center and Valley Strong Credit Unions

On May 31, 2021, Michael Duffy, CEO of the $643 million, 65-year old Financial Center Credit Union(FCCU) announced the intent to merge with the $ 2.4  billion Valley Strong:

The phrase ‘Growing Together,’ is a perfect adage, as this merger represents a strategic partnership between two financially healthy, future focused credit unions committed to providing unparalleled branch access, digital access, and amazing service for the Members and the communities they serve,” says Michael P. Duffy, president/CEO of Financial Center. “In a financial services sector that is constantly evolving, this merger is a true embodiment of the credit union industry’s cooperative mind-set. At its core our partnership with Valley Strong represents us selecting the best credit union partner to help us achieve our goals faster than we could duplicate on our own.

“As the CEO of Financial Center Credit Union for the past 21 years, my perspective on mergers has evolved just as much as our industry has in that same time period,” Duffy continued. “As credit unions built by select employee groups (SEGs) increasingly partner with community credit unions, I have marveled at what credit unions of today’s scale can accomplish when they join forces with their Member-owners and communities chiefly in mind.”

The 86% member approval in the merger vote was announced in a September 27 Valley Strong press release which included this statement by CEO Duffy explaining the rationale:

“In a financial services sector that is constantly evolving, this merger is a true embodiment of the credit union industry’s cooperative mindset. At its core, this is about a collective mindset that allows us to achieve our goals faster than we could duplicate on our own.”

When asked what it means to Members to achieve these goals faster, Duffy added, “We recognize merger critics may point to our healthy capital and ask why we didn’t just opt to go it alone. That was of course the first consideration. But the reality is, we do the same things for the same reasons so why not eliminate redundancy and grow faster and better together. On our own, it would take years to develop and implement while still having the challenges scale, so why not give members more and build the organization for the next decade at the same time.” Duffy continued, “We took our national search for a partner seriously. Together with Valley Strong, it’s a win-win, because members are the focus, and we will be able to serve even more people throughout San Joaquin and the state of California.”

The Member-Owners’ Notice of the Merger

As required by NCUA rule, FCCU provided members the reasons for the merger. These general descriptions included “consolidation of energy and resources, to better serve members through competitive pricing and services, additional products, enhanced convenience and account access and continued employee and volunteer representation.”

The member Notice then listed seven categories of benefit with a little more detail.  For example, Duffy will become Chief Advocacy Officer for Valley Strong and be “actively involved in the day-to-day operations.”  In addition, the Notice described two contributions to a non-profit charitable foundation FCCU2.  More on this community outreach initiative later.

Share Adjustments and Golden Handshakes

At midyear 2021, FCCU had net worth of 16% totaling $107 million or twice the ratio of Valley Strong. The Notice included a special dividend distribution of almost $15 million based on two factors.

  1. Each member will receive $100 for every five years of membership to be capped at $1,000 for members who joined in the oldest tier 1946-1976.
  2. A dividend of .869% on the 12-month average balance for “Base” shares with a $500,000 ceiling on the maximum shares included.

Each member’s pro rata share of the net worth at the merger vote is $3,620.  However, the credit union will pay only an average of $505  per member just 14% of their common wealth.  To equalize FCCU’s with Valley Strong’s per member net worth, each member should have received an average of $1,800.

The four golden handshakes, that is additional compensation over and above what employees would have earned without the merger, will be paid to:

  • Nora Stroh EVP for $150,000 if she stays with the new credit union for 30 days following the merger;
  • Steve Leiga, VP Finance of $150,000 for staying 30 days after merger completion;
  • Amanda Verstl, VP HR $257,352  for retention, severance opportunity, accrued sick and leave payout;
  • David Rainwater VP Information for $244,000 for staying through the system conversion.

These special payments are similar to other merger transactions although the special dividend structure is unusual and recognizes the generations of member loyalty.

Two questions arise from these disclosures in the Notice:

  1. Why would a $643 million credit union with over 16% net worth and $521 million in investments believe it is unable to provide competitive member services and pricing into the future?
  2. And why did CEO Duffy not receive any merger payment? The Notice further notes that he and the VP finance would not receive anything from the one-time bonus dividend.

Some Context

Michael Duffy joined the credit union in October 1993 and has been President for over two decades.   The EVP and COO, Norah Stroh, has been with the credit union for almost 32 years. She joined as HR, benefits and personnel manager in February of 1990.  In January 2001, she was promoted to her current number two role.

Michael and Norah are brother and sister.

Steve Leiga, VP Finance, joined the credit union in January 2002.  Amanda Verstl’s employment at FCCU exceeds 13 years.  David Rainwater’s connection began as a summer intern in 2011.

For an experienced team to suddenly decide merger is the best course for members after three decades seems somewhat unusual no matter the rationale. Why are the senior leaders of this credit taking their severance bonuses and closing up shop? Where is the succession planning, or was merger a predetermined strategy?

One FCCU trend seems especially puzzling. Why is there no Lending VP? Who had this responsibility for this most critical role in every credit union?   The loan to asset ratio has declined in the last five years from 39% to 16.9% at June 2021. The $107 million in reserves equals the net amount in outstanding loans, for a risk based net worth ratio of 100%.  All the $521 million investments are in cash or government and GSE securities.

When reviewing the two last available 990 IRS filings for the credit union, a dramatic change occurs.

In 2017, the three most senior employees were paid a total of $1.4 million or 21% of total salaries and benefits.  In 2018 the three were paid $3.1 million, or 46.5% of total salaries. The 121% increase is in just one year.  In both years the CEO is a member of the five-person board which approved these compensation packages.

No IRS 990’s are yet available for 2019 and 2020 to know if this trend continues.  It would certainly be useful for the credit union to post public copies of these required filings in light of the merger decision.

A Million Dollar Public Contribution-Conflating Personal and Professional Roles


As the credit union’s lending portfolio continued to decline and member numbers fell from a peak of 32,382 in 2017 to 29,101 today, the credit union made a very public contribution to the city of Stockton.

In April, 2020 Michael Duffy presented a $1.0 million check to a COVID relief effort, the 209 Stockton Strong fund. The  subsequent  press release described the effort as follows: “This donation represents a continued commitment from the entire FCCU team. They are donating, together, out of the care and concern for others in their local community. . . Duffy presented this opportunity to the FCCU team as a way to help their community and received immediate support with a resounding yes.”

Even though the announcement states the $1 million donation is from “the entire FCCU” team and the Michael Duffy Family Fund, there is no information of how much came from each source.   The only public reference to the Duffy Family Fund is as one of several donor advised funds managed by the Community Foundation of San Joaquin.

The mayor’s office prepared for Facebook an 11 minute video of this donation featuring Duffy and a six foot enlarged check with the credit union’s name. And here is this brief excerpt on the KRCA evening news.

Philanthropy can certainly be positive.  Donor advised funds are an easy way for individuals to manage the timing of their contributions.  But it can also be self-interested.  This $1.0 million single “gift” is one of the highest donations I can recall associated with a credit union during this time of COVID, or any other time.

The credit union or Duffy could certainly have donated the money to the identified charities directly.  Why Duffy would combine his personal philanthropy with whatever the employees donated for this appeal is unclear.

One might suggest this conflation of professional and personal activity is a PR effort to promote the credit union, not just Duffy.

However, the IRS 990’s  show credit union funds given to a wide number of political campaigns.  There were 17 donations totaling $60,250 in 2018, including a second $10,000 contribution to the current CA governor, and donations to Stockton’s mayor.  Is this credit union money to political campaigns in the members’ best interests, or to promote the public influence of Duffy?

Why the Merger?  Why did the CEO do this?

FCCU has been a closely-run, family operation for almost three decades.   The CEO is a member of the five-person board. The credit union is more than financially sound, with its very liquid balance sheet and net worth two and a half times the well capitalized 7% standard and twice Valley Strong’s ratio of 8.7%.

Why would the entire leadership of the credit union give up their 66-year history of relationships at the peak of financial capability?  Motivations can be hard to discern.  But on August 26, 2021, a member posted his analysis for opposing the merger on NCUA’s website for comments:

Vote NO on the proposed merger until the provision to transfer $10 million of member assets to a non-profit foundation for “Community Outreach” is eliminated from the proposal. Member financial assets of any amount, especially $10 million, should not be given away for any purpose. If Financial Center Credit Union is so flush with cash that it wants to give away $10 million, then that amount should be distributed to members. I’ve written to FCCU twice asking for the rationale for giving away $10 million. They have failed to answer me, obviously because there is no rational reason for giving away $10 million from its member-owners.

Given that FCCU’s current CEO Patrick Duffy is being given the unexplained job of “Chief Advocacy Officer” in the Continuing Credit Union, it’s easy to guess that Duffy’s only job duties will be running the new foundation doling out the $10 million to his favorite groups and his own large compensation. The so-called “FCCU 2 Foundation” was created less than two months ago for setting up Duffy in his new give-away-our-assets role. In any case, FCCU’s failure to explain to members any rationale for GIVING AWAY $10 MILLION OF MEMBER ASSETS is insulting and outrageous. Vote NO on the merger until the $10 million giveaway of our assets is eliminated from the merger proposal.

The FCCU2 Foundation was set up on June 25, 2021.  The two persons listed with the registration are Manuel Lopez, the credit union’s chair, as the Foundation’s CEO; Michael Duffy is the agent for service.  The organization is described only as a domestic non-profit.  Its address is the same as the credit union’s main office in Stockton.  As stated in one other public notice: The company has one principal on record: The principal is Michael P Duffy from Stockton CA.

The member merger Notice states the total funding committed for this new foundation is $35 million.  There is the initial grant of $10 million from the members’ reserves at FCCU. The Valley Strong members are committed to donate $2.5 million per year of their  funds for the next ten years for the remaining $25 million.

The purpose of the non-profit in the merger Notice is:  “community outreach-charitable and educational activities to benefit the greater Stockton area.”  No further rationale is provided why this entirely new organization created and run by Duffy should be given $35 million of members’ money.

A lone member, Frederick Butterworth who in August posted on NCUA’s comments page makes the obvious point: this emperor has no clothes.

The Duty of Care and the Duty of Loyalty

But the situation is more serious than the action of establishing a $35 million fund as a personal sinecure for CEO Duffy as he transfers leadership of the credit union to another board.

In a widely publicized court sentencing hearing last week of a former credit union CEO the following statements were made in court:

U.S. Attorney Audrey Strauss: The (CEO) shirked his duty to act in the best interests of the credit union and its account holders, exploiting his position for personal gain.

Federal prosecutors said the CEO viewed the credit union as his personal fiefdom, repeatedly betraying his fiduciary duties to the institution and its members.

“This was a family-run business,” Judge Kaplan said of the credit union. . . “If you ran a delicatessen you could do what you want. But this was a federally insured credit union and you were oblivious to that fact.”

The fiduciary duty of directors and managers is more than avoiding criminal conduct.    NCUA’s legal suits against selected corporate directors and management were based on violations of their fiduciary duties of Care and of Loyalty.

Were the boards and managers following these standards when committing $35 million of member money to the FCCU2 Foundation to fund the work of the Chief Advocacy Officer Duffy?   Is this two-month-old foundation just a means of providing future compensation to the former CEO? Was this ten-year funding commitment from Valley Strong a requirement of the merger?

Whatever word one uses to describe this setup -a bonus, a buy-out, or a quid pro quo/kickback-it appears to be a betrayal of fiduciary duty to the members of both credit union by their respective CEO’s and directors.

In March NCUA conserved the $ 106  million Edinburg Teachers Credit Union with a 22% net worth ratio and a loan to share of 14.6%.   The only public information suggested by the  media for the action, given the strong financials,  was the average compensation of $189,000 per employee and the CEO’s compensation in excess of $8.7 million over the past eleven years.   The Texas Commissioner explained the conservatorship as “to ensure the businesses in these industries. . .are entitled to the public’s confidence.”

All NCUA participants from the field examiner to the highest levels in DC admired the clothes this emperor said he was wearing.  NCUA’s RD and assistant RD, the supervisory examiner, CURE which posted the Notice and member comment, and the California Department of Financial Institutions, liked what they saw.

All were bystanders to this event without asking why a 66-year-old credit union, overly-liquid and over-capitalized with a declining loan portfolio and inbred leadership could not continue to be run as an independent credit union for the benefit of its member-owners.  But perhaps that has not been the case for years. The CEO just took the logical next step.

The Hans Christian Andersen parable above ends as follows:

“Did you ever hear such innocent prattle?” said its father. And one person whispered to another what the child had said, “He hasn’t anything on. A child says he hasn’t anything on.”

“But he hasn’t got anything on!” the whole town cried out at last.

The Emperor shivered, for he suspected they were right. But he thought, “This procession has got to go on.” So he walked more proudly than ever, as his noblemen held high the train that wasn’t there at all.

Is NCUA playing the emperor in this modern version and just walking on by? Are other credit unions the crowd? Might the “whole town” be today’s public press and Congress?

One vigilant and thoughtful credit union member proclaimed the truth about this situation.  He gave a shout out to everyone.  Is anyone listening? Or do we continue to live in a fantasy land complying with regulations that don’t protect the members who credit unions were designed to serve?

Good News from NCUA’s Board Meeting & an Overlooked Update

NCUA’s September board discussions provided much positive information about the state of the industry and the funds credit unions provide to manage the agency.

  • Credit unions are performing very well with net income running far ahead of 2020 and delinquencies/charge-offs at very low levels.
  • Code 4/5 credit unions continue to decline and account for just .5% of total credit union assets. Code 1/2 CAMEL-rated credit unions are 97.1% of assets.
  • There is a projected yearend operating surplus of $28.6 million from both this year’s budget ($15 million) and amounts unspent from 2020 ($14 million).
  • Staff projects a yearend NOL for the NCUSIF of 1.28% primarily due to a slowing of insured share growth and low losses.
  • Staff will publish the NCUSIF’s investment policy which is how the board oversees the $20 billion fund and its primary revenue driver, the portfolio’s yield.
  • Three agenda items were added to the October through December agendas to finalize open proposals.

However, a significant update was overlooked.  A result that benefits every credit union is the latest corporate AME financials posted on September 15.   Those numbers show a payout to credit unions of $3.158 billion, an increase of $33 million from the March update, or more than the just revealed 2021 operating fund surplus.  More details are provided below.

The Surplus Discussions

What will happened to the $28.6 operating fund surplus?  Part is being “reprogrammed” i.e. spent.  Seven new staff positions were approved which will have a full year’s impact of $1.9 million or $271,000 per position.

Of more significance, three of the positions are to enhance cybersecurity capability and three for the Office of Ethics counsel.  One might conclude that the agency sees the vulnerability from its internal ethics issues as equivalent to risks from cybersecurity bad actors.

The NCUSIF’s June NOL calculation of 1.23% continues to significantly understate the actual ratio.  As of July 2021 the NCUSIF’s retained earnings are $4.739 billion and insured shares at June 30 are $1.579 trillion. Dividing the two gives an equity ratio of .30 plus the 1% deposit true up required of all credit unions resulting in an NOL ratio of 1.30%. This continued underreporting of the NOL misleads both users and the public about the actual condition and trends in the NCUSIF.

A $176 Million “Cushion”

In several of the financial dialogues the word “cushion” was used to describe the accumulation of funds beyond those needed for operations.

Cushions are nice to have.  They bring comfort to hard surfaces or strict budget limits.   But credit unions have always worried that once their members’ money was sent to NCUA, it might not come back in NCUSIF dividends  or be managed wisely.

At the end of July, the NCUA’s operating fund had a cash balance of $176 million and total fund equity of $139 million. This equity is at the highest level ever.   The cash on hand is almost twice the annual operating expenses.   Both are the result of NCUA assessing federal credit union operating fees in excess of actual expenses in every year since 2015 when the fund equity was just $38 million.

The $176 million operating fund cash earns minimal interest on its Treasury deposits. If this surplus was held in credit unions, members and the system would have a much higher return.

NCUA has chosen to roll over surpluses instead of returning funds to credit unions, reducing the OTR charged the NCUSIF, or lowering the operating fee to the actual projected net cash outlays.  They have become a cushion for management undercutting effective control of both expenses and capital outlays.

Financial Cushions, Corporate Crisis, and Historical Myth Making

The NCUSIF’s current NOL cushion is even larger.   Because 80% of the NCUSIF assets are from the 1% credit union deposit, the primary responsibility for NCUA staff is managing the fund’s equity ratio of .2% to .3%.  This equity was originally caped at .3%.  This was a legal constraint so that NCUA would not spend unconstrained the money credit unions provided in their open-ended, perpetual underwriting role.  Amounts above the NOL cap must be returned as a dividend to credit unions.

CUMAA in 1998 gave the Board discretion to set a cap from 1.2% to 1.5%.  In 2017 the NCUA Board, for the first time ever, raised the cap to accumulate excess funds above 1.3% from the merger of the TCCUSF.  This was after the fund had expensed $748 million from the TCCUSF merger surplus to add to the NCUSIF’s loss reserve to liquidate two taxi medallion credit unions in 2018.

NCUA’s reasons for raising the NOL cap to 1.39% after this loss expense transfer were at best dubious and at worst, just made up.  Multiple commentators pointed out these flaws in their comment letters about the TCCUSF merger.

Today each basis point in the NCUSIF is worth $160 million.   The 13-year actual loss rate (2008-2020) per insured share is 1.51 basis points.   In every year since 2014 the actual cash loss in the NCUSIF has been under .5 basis points except for the taxi medallion liquidations paid in 2018.

Corporate Myth Making

The only push back against this actual loss record is referencing the Corporate debacle in 2009-2010.  Chairman Harper again used this recurring trope at Thursday’s meeting.  He stated that if Congress had not bailed out the NCUSIF, credit unions would have to write down their 1% deposit by 69 basis points causing a cascading problem in the industry.

Like myth makers in other areas of politics and society today, this fable continues even as facts completely contradict this historical story telling. Today the surplus  from the corporate “legacy” assets exceed $6.2 billion and counting. The histrionic 2009 loss projections, made decades into the future, were completely at odds with the external TCCUSF audit results at that time.

The exaggerations reflected the fear and the uncertainty rampant during the crisis, not a considered analysis of options or actual performance.  They were the result of “modeling myopia” arising from a complete misdiagnosis of the situation.

The State of the Corporate Resolution Today

Fortunately we know the outcome versus these hyperbolic forecasts. On September 15, 2021, NCUA posted the latest quarterly updates for the five corporate AME’s.   It shows total projected recoveries to shareholders of four corporates of $3.158 billion, an increase of $33 million from the March quarter.   As of June 30, $2.619 billion of the recoveries were still to be paid.

What is the cost of NCUA’s oversight of the AME’s?   The answer: $4.825 billion to manage the P&A’s and all other expenses from the NGN refinancing.  Subtracting the legal expenses charged each AME still leaves a total of $3.567 billion the agency expended administering the NGN’s and AME operations. In other words the net legal recoveries would just pay for NCUA’s liquidation expenses.

For comparison the total operating expenses for the NCUSIF from 2008-2020 were only $1.9 billion or half those of the corporate resolution program.

The TCCUSF surplus and fees paid into the NCUSIF over $3.0 billion and the $ 3.2 billion projected payments to shareholders, all come from the legacy assets.

The TCCUSF legislation provided no capital for credit unions.  It provided only temporary liquidity draws, all of which credit unions were obligated to repay. The TCCUSF merely set up a separate fund for tracking the corporate resolution and moving the accounting out of the NCUSIF.   However, all of the funding for any corporate losses and loan repayments came from a single source: credit unions.

Financial cushions  can encourage misjudgments in difficult situations. The challenge today is not the adequacy of the historically validated NCUSIF structure and an NOL of 1.3.  The real issue is the ability of NCUA to work mutually with credit unions when problems arise to resolve them in the most cost-effective manner.

The typical government instinct is that money can solve any problem.  Without effective constraints on spending, NCUA’s solution will be to liquidate  problems.  Unrestricted spending is the real lesson from the corporate resolution.  The results were catastrophic. How many more times must it be learned?






Experts Views on Why Risk Based Capital Fails

Following the 2008/9 Great Recession and financial crisis,  many commentaries and studies asked why the risk-based capital requirements did not prevent severe losses in banks.

The following are the conclusions from several regulators and studies.


Risk Based Capital’s Basic Flaw

Credit unions were very critical of both NCUA’s risk based capital proposed rules  in 2014 and 2015.   Among the major objections were:

  • Failing to document any objective need for the rule
  • Creating multiple shortcomings and inconsistencies in asset risk weightings
  • Establishing a competitive disadvantage  versus bank capital options
  • Undermining member value in  both costs to implement and higher capital levels
  • Providing open ended examiner authority to interpret circumstances and override the rule
  • Imposing a one-size-fits-all national formula for risk and capital adequacy for over 5,000 diverse institutions serving thousands of different  markets
  • Ignoring banking regulators’s experiences which led them to drop RBC in favor of a simple leverage ratio
  • Overlooking the negative impact of  RBC on the corporate system’s ability to serve members

The concept of RBC can be useful at an institutional level because decisions and reserves are based on specific experiences (delinquencies and returns) for an asset’s known historical performance.

However, what works locally does not scale up to a single national formula.

The Fundamental Flaw of The RBC Concept

No team in any sport would try to win a contest by only playing defense. To compete in any activity, an organization must have both offense and defense.

But a one-sided approach to financial soundness is what RBC mandates. It requires credit unions to reserve based on a formula for risk and ignores all factors for income or return.

Every cooperative succeeds by pursuing,  sometimes seizing, opportunity. Credit unions were begun as a solution for consumers that were not well-served by existing choices.

A formula that attempts to measure only risk means examiners and credit unions will be inhibited or even restricted in  responding to individual or unusual circumstances.   Especially members in a crisis.

Every credit union monitors risk daily when it prices loans or evaluates investment yields.  The projected return is balanced with an asset’s risk whether duration or credit, and in the context of the balance sheet’s overall ALM position. Using a single formula to evaluate these decisions distorts everyday business practice and experience.

Risk for an individual credit union is more nuanced than a simple formula that assigns  relative risk weightings for almost 100 asset classes. As any board or manager knows,  such an approach is not how asset strategies are developed.

RBC does not reflect pricing  to pursue market opportunities.  It imposes a single national risk profile to replace the accumulated financial experiences and judgments which managers now use in each of their  institutions.

Risk is not a bad thing. Risk is considered whenever a credit union makes a loan, a CUSO or other investment, or a fixed-asset purchase. The judgment in the decision is the opportunity to help a member or enhance the credit union’s financial management,  not how it conforms to a one-size-fits-all  rule.

Risk Based Capital Is A Tool, Not A Rule

The risk based capital rule is a mistake.

If there is any benefit in a single formula to assess a cooperative’s financial soundness, then NCUA should validate that  by using the risk-based analysis as a tool in examinations.

Imposing  a one-size-fits-all rule denigrates the knowledge and experience of credit union managers across the country. It is contrary to the purpose of the cooperative model.

If risk analysis were as simple as a single formula, then there would be no need for cooperatives — just one financial charter license, one common set of rules, and one way to serve the market.

Credit unions were started because the existing financial frameworks and ways of doing business did not meet the needs of member-owners or of their communities.

For more than 100 years, credit unions have used a reserving-capital process that requires they  set aside an amount or percentage of income as a cushion for difficult times and to meet minimum well-capitalized targets.

This approach has worked. It has well served  members, the regulators, and the American economy. Reserving  is a holistic judgment that balances opportunity and member need with the uncertainties inherent in any market economy.

RBC plays defense only by focusing on one very narrow factor in managing safety and soundness.   It adds nothing to the evaluation of specific opportunities or individual credit union business situations.

More importantly, if the complex formulas are wrong overall, or in respect of any asset category, that mistaken judgment could push credit unions over a cliff who followed the letter of the law.

Reserving beyond meeting the well-capitalized minimum leverage ratio of 7% is best done by the boards and managers who are directly accountable for their judgment, not government bureaucrats.


The Fallacy of Risk Based Capital

Vice Chairman Hoenig’s 2016 WSJ editorial reprinted yesterday described both the actual experience and logical failures when using RBC for measuring bank capital adequacy.

In October 2015 the NCUA board approved a new rule, in a 2 to 1 vote, imposing this standard on all credit unions over $100 million.  All the required risk based weights are in this two-page NCUA summary.

NCUA’s 424 Page Rule

The final rule is 424 pages.    Here is how NCUA estimated the costs to the 4,784 credit unions under $100 million not yet subject to the rule and the 1,489 who would be covered:

Additional one-time costs estimated by NCUA are $152,562 collectively, spread among 4,784 non-complex, non-covered credit unions, at an average of 1 hour for policy review and revision, for an average of $31.89 per credit union; and $1.9 million collectively, spread among 1,489 complex covered credit unions, at an average of 40 hours for policy review and revision, for an average of $1,275 per credit union. 

NCUA states it will only cost $1,275 for each credit union covered by the rule to implement it; and $31.89 each for the 4,784 credit unions not yet subject to review it.  These estimates cause one to wonder what operational world NCUA is living in!

The two page summary shows over 75 categories of risk weights with multiple subsets that would make each RBC calculation a spread sheet with over 100 different inputs with multiple percentage weights. Several risk weights for the same asset can vary from 100-300% of the asset’s book value.

The following are some examples of how NCUA would implement the rule.

Deductions from the numerator (net worth) of the RBC ratio include 100% of the NCUSIF capitalization deposit, all goodwill and any other intangible assets.   This treatment is contrary to GAAP accounting presentation and how credit unions report these assets in their financial statements for their members, examiners and the public.

FHLB capital  is risk weighted at 20% and the  CLF equity at 0%.     NCUA is  100% sure there is no loss in the CLF, assigns a 20% risk to FHLB stock, and 100% certain the NCUSIF deposit is at such risk that it has no value.  This reflects a complete lack of confidence in NCUA’s own supervision  of credit unions-even under RBC!

Off-balance sheet items, not yet  assets, are included in the denominator.  Unfunded draws under lines of credit are added to the denominator at various percentages of total value and then weighted at 100% risk.   All loans transferred with recourse are included at 100% of value, no matter the kind or amount of credit enhancement provided by the credit union.

A 19% RBC Ratio

NCUA’ s  impact analysis from Oct 2015 states the average RBC ratio for all “complex” credit unions would be 19%.  Only 16 new credit unions (out of 1,489) were determined to be  undercapitalized that had not already been identified by the existing RBNW rule.

Of the 1,489 cu’s  subject to the rule, 482 would report RBC greater than 20% with 110 of those over 30%.   This is  one example of the distortion and misleading impression created by RBC versus the easily understood and comparable  leverage ratio.

If in doubt about the negative impact of this burden, then review  the tables of risk weights to understand the complications when calculating the RBC ratio.   Or better yet, review the 424 page rule.

There is one primary reason this approach was dropped by the banking regulators.   The “juice is not worth the squeeze.”




Are Credit Unions Being Treated Like Bananas?

What does the fate of bananas have to do with credit unions?

In 2016 BBC news reported on the potential death of the world’s favorite fruit:

For decades the most-exported and therefore most important banana in the world was the Gros Michel, but in the 1950s it was practically wiped out by the fungus known as Panama disease or banana wilt.

Banana growers turned to another breed that was immune to the fungus – the Cavendish, a smaller and by all accounts less tasty fruit but one capable of surviving global travel and, most importantly, able to grow in infected soils.

Do we need to worry about banana blight?

The story was updated in 2019 when the Cavendish itself became subject to blight:

While there are more than 1,000 varieties of bananas, which come in different colours, shapes and sizes, just under half of global production is the Cavendish type. While the fungus is not harmful to humans, it has the potential to eventually wipe out Cavendish bananas, according to experts.

Millions of people around the world rely on bananas and plantains as a staple food and as a cash crop.”The potential for devastation if it does reach them is almost total.”

“The world would carry on if we lost bananas but it would be devastating for those who rely on it economically and very sad for those of us who enjoy eating them.”

The Fungus Problem

The disease is “a serious threat to banana production” because once it is established, it can’t be eradicated, the UN says. And fusarium fungus can remain in the soil for 30 years.

It has been spreading for decades through Asia, Australia and Africa. It has now been detected in Latin America, which supplies the bulk of the world’s bananas grown for export. No other types of banana are yet ready for cultivation on a commercial scale.

If one plant is susceptible to a disease, all of its offspring will also be susceptible.

Monocultural crop

The Cavendish was brought in as a monoculture crop after “banana wilt” all but wiped out the world’s previous favourite dessert banana, the Gros Michel, in the 1950s.

According to Prof Kema, the main problem stems from the over reliance on Cavendish varieties for export, which he describes as a “monoculture”.

“We have to diversify banana production,” he said. If there is only one type of banana plant being grown, resistance to infection is lower.

There are trade-offs between the costs of containing it and the profits from growing bananas, he said.

Small producers may not be able to afford the mitigation measures, he added.

People in the UK eat 10 kilos of bananas per year, on average, or about 100 bananas.

So the market is there, but will Cavendish bananas be in the future?

The Credit Union Lesson

The critical issues in the potential extinction of this popular banana product include:

  • The need to diversify the varieties of bananas grown;
  • The tradeoffs between costs and benefits when fighting the fungus;
  • The disadvantage of smaller producers when using mitigation efforts;
  • The monocultural approach to new varieties;
  • The time needed to cultivate new strains;
  • The consumer need remains, but will there be an option?

In just 120 days NCUA’s oft-deferred RBC rule takes effect, unless the board acts.

The agency’s Risk Based Capital rule has every issue associated with the banana example. A single risk assessment applies to all firms; the lack of cost- benefit analysis; new approaches are discouraged; and credit union are encouraged to follow a “monocultural approach” to business practice.  Buy a bank here, merge a credit union there, and embrace the isomorphic actions of one’s peers to hide in the crowd.

If you question the banana parallel, the Financial Times printed the following assessment about how the US banking problems had been “resolved” during the Great Recession:

Will credit unions following NCUA’s RBC rule become another example of a banana plan?  Or will common sense prevail before the January 1, 2022 deadline?

“The Best Damned System in the Country”

NASCUS members’ Annual State Summit meeting  begins today.  It includes a “fireside” chat with new NCUA Chair Harper.  Hopefully this dialogue will be enlightening.  For two of his recent proposals pose an existential threat to the dual chartering system.

The first would fundamentally alter the legal framework of the unique, cooperatively designed NCUSIF, by removing all the guardrails on expenditure.  Harper defends these changes by reference to the FDIC, a premium based fund that has failed repeatedly since the NCUSIF 1984 redesign.

The second Harper initiative is a new three-pronged capital structure for all NCUSIF insured credit unions.  Some credit unions would be allowed to follow the current risk based net worth (RBNW) model. Others would be required to follow the 2015 risk based capital (RBC) rule, yet to be implemented.  A third group of so-called complex credit unions could elect a new CCULR ratio that would raise their well-capitalized requirement by 43% from the current 7% to 10%.

All of these capital changes would take effect on January 1, 2022, or in five months, if Harper is able to get a second board vote.

The End of Dual Chartering

Aside from the lack of any substantive basis for these proposals, the outcome would effectively end the dual chartering system.   Risk based capital would throw a single regulatory blanket over every asset and liability decision made by an NCUSIF insured credit union.

NCUA would be the single hegemonic regulator for all coop charters. This single lens for risk evaluation would create a homogenous cooperative balance sheet.  Instead of increasing safety and soundness, if this uniform approach to risk analysis is wrong, it could lead the cooperative system over a cliff.

The One Sure Defense: Choice

This prospect of NCUA dominance was foreseen decades ago.   The following is a timely and timeless reminder of this threat in a speech by former NCUA Chair Ed Callahan in 1986.   The excerpt of these remarks to the Association of Credit Union League Executives is under three minutes.

“The insurer is the regulator.  The system only works when there are choices.”

Mergers: Can’t We Do Better than This?

At last week’s Senate Banking Committee hearing, Senator Warren challenged banking regulators about their oversight of bank mergers.

Warren told the FDIC and OCC leaders the data indicate the regulators have “no credibility” when it comes to merger supervision.

“This has turned into a check the box exercise where the outcome is predetermined,” said Warren, who plans to introduce legislation to revamp the bank merger process.

“Our regulators have a job to do and it’s our job here in Congress to make sure they do it,” Warren said.

Her observations/questions included the following as reported in the CUToday article:

“Community banks are being gobbled up. The market is being dominated by big banks. There is more concentration, higher costs for consumers, and greater systemic risk, and it is happening in plain view of the federal agencies whose job it is to keep our communities safe.”

In a question directed at the FDIC Chair McWilliams: “The FDIC has a searchable database of all merger applications received since 2013, and there have been 1,124 such applications. Out of those, how many has the FDIC denied?” The total number of denials for any reason whatsoever?”   Before McWilliams could respond, Warren said, “It’s zero.”

Is the credit union system vulnerable to this political critique?

Here is a current case.  The $52 million South Division Credit Union has called a special members’ meeting on August 30 to approve its merger with Scott Credit Union, both Illinois state charters. Is this just another “ordinary” merger announcement?

The Credit Union’s Website Promises

Since 1935 South Division Credit Union, headquartered in Cook County, IL, has been guided by these founding principles:

To meet the financial expectations and needs of the Members by providing the highest quality products and services, delivered with a sense of professionalism, friendliness, and respect for the individual Member and their common financial bond with one another. The Next Evolution in Personal Banking

Member-Focused Attention Meets Diverse Banking Options

As an open-to-the-public, not-for-profit institution, our unique focus is on you, the consumer. Our end goal is to provide service that’s customized uniquely to you, backed by offerings that address all of your banking needs.

Our credit union offers a complete array of products and services to our Members —checking, savings, debit and credit cards, vehicle and consumer loans, money market accounts and certificates of deposit, along with a variety of mortgage products. 

Member Ownership 

Unlike at a bank, you’re not just another “customer” at South Division Credit Union. You’re a Member with a say in everything that we do. And what we do is strive to add more value for our well-deserving Members. As a nonprofit, rather than pocket any profits, we pour them back into the institution to provide better rates and additional benefits for you.

SDCU is owned and democratically operated by our Members, who elect our all-volunteer Board of Directors. In turn, the Board represents our Member-owners’ interests in credit union policymaking.

Open to Anyone — Become a Member Today!

What South Division is Telling Members Now

In the July 14, 2021 Notice of Special meeting sent to members, the credit union gave the following explanation for going out of business:

The directors of the participating credit unions have concluded that the proposed merger is desirable for the following reasons: South Division Credit Union has not grown in size or membership participation for several years and has been faced with increasing operational, regulatory and compliance expenses; lack of managerial expertise, aging Board of Directors and no effective succession plans. We believe a merger would offset these trends by offering South Division Credit Union’s members access to an array of new services, more modern account management systems, improved remote electronic access for lending programs, better savings and loan rates, and additional facilities.

Voting by Proxy: A Foregone Outcome

The Notice continues: The merger must have the approval of a majority of members of the credit union who vote on the proposal. . .Illinois permits voting on merger proposals only at the meeting or by proxy. If you DO have a proxy on file at the credit union, to vote in FAVOR of the merger, you may attend and vote in person at the meeting or, do nothing and the Board of Directors will vote in favor of the merger in your stead.

To vote AGAINST the merger, you must either attend in person and vote at the meeting. . . If there is no proxy enclosed with this notice, you have a proxy on file with the credit union, and to vote NO, you must revoke that proxy by giving written notice to the board secretary. . .

What is Left Unsaid

Scott Credit Union is a $1.5 bn, strong performing credit union located in Southern Illinois.  Its main office is 240 miles, a five-hour drive from South Division’s headquarters in Evergreen Park.

Scott founded in 1943 at Scott Air Force base, sits across the Mississippi river from St. Louis.  Its multi-county southern Illinois charter is in a very different economic, social, demographic and political environment from the Cook County, Evergreen Park-based credit union.   The combination would appear to be an act of charity by Scott.  The four small branches of South Division are anything but a viable foothold in the greater Chicago market.

In addition to South Division’s board and management confession of their leadership shortcomings—aging board, no succession plan, managerial inexperience-there is the question of their fiduciary oversight.

In 2020 the credit union reported a loss of almost $2.0 million reducing the net worth from 14% to 8.4% in just one year.   The major reason for the loss was an increase of over $1.0 million in salaries and benefits above the $1.2 million of the prior year.   What were these payments for?   Was staff helping themselves to the net worth prior to announcing a merger where such payments would have to be disclosed?

A Challenge for the Credit Union System

Both the Illinois credit union supervisor and the NCUA regional director signed off on this merger.   Are they OK with the $2.0 million loss in 2020, and therefore welcome to another credit union taking this emerging problem off their hands? Were local credit unions approached and turned this “opportunity” down?   How did Scott Credit Union end up with the short straw?

Where are the other components of the credit union system as this 85-year old credit union decides to close: the league, the vendor business partners, the sponsors?  Are there no other leaders or groups in the community willing to step up to this challenge?

The promises on the credit union’s website recruited over three generations of members.  Is this legacy of failure the best option the cooperative system can devise for these members, their children and grand children?  Because of the Board’s proxy voting process, the members will have no say in this dissolution.

When Collaboration is Most Needed

The credit union system was founded and built by collaboration.  No credit union would exist today without sponsor support, volunteer effort, member loyalty and system provided solutions.   But when it comes to ending a charter, collaboration seems nonexistent.   Without all-hands-on-deck  participation in these decisions, the ability of members to trust and respect their credit union’s choice to dissolve, is suspect.  Leaders at every level of the system are abandoning this charter at a most critical time.

This merger is based on a guilty plea of incompetence.   The 2020 salary payouts raise a question of integrity.  The process is devoid of “any respect for the individual Member and their common financial bond with one another.” (web site purpose statement)

Mergers in circumstances like this undermine the cooperative system’s reputation for acting in the member’s interest.  These credibility stains cannot be washed away no matter how competent or well-meaning the continuing credit union’s intent.

One more credit union charter gone, one more hole in the cooperative boat.  Will the sinking ever end?  How will Senator Warren or other members of the committee react when they see this example of a cooperative merger?