Category: NCUA

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NCUA’s 2024/5 Budget and the Impulse to Spend

Recently I visited Bentonville, AR the home of Walmart.  There is a Walmart Museum that provides a history of the company.  Included is a hologram figure of founder Sam Walton who will answer questions, using an AI program, that  visitors may ask.

One  posed this query to Sam’s artificial reincarnation, “Are you cheap?” referring to the Walmart’s tagline,  “Always low Prices.”

Sam response started with his operating habits as the founding CEO. When he started the company they did everything possible to control costs, including sleeping two to a hotel room when traveling and always eating at low cost restaurants.

His reasoning was “Every dollar we save, stays in the customer’s pocket.”

Corporate America and Expense Control After the COVID Bounty

Both consumers and business benefitted from the government’s largess funding COVID programs to ensure the economy did not stop as people stayed home and commerce shut down.  That era is over. Inflation resulting from stimulus spending became the economic priority in the fall of 2022.  The political fight in Congress is now how to control or even reduce, government spending.

Company’s are seeing that consumers are once again aware of higher prices, and cutting back.

Layoffs of staff, even at some credit unions, are part of quarterly earnings updates and future projections.

One example is the turnaround by Spotify which returned to profitability for the first time since 2021 in this year’s third quarter.   Their monthly active users increased 26% (2 million more ) and income hit $34 million in the latest quarter.  The reason?

The company kept costs tight.  The CEO Daniel Ek said they had laid off 6% of their employees and raised prices.  His rationale: “We are still focusing on efficiencies, but efficiencies for us doesn’t mean just cost cutting, it means getting more out of each dollar.”

The Federal Government ‘s Institutional Spending Predisposition

 

The forces that drive CEO’s such as Walton and Ek to “get more out of each dollar” come from  competitive market forces.  These forces do not exist for government agencies.  In some state and municipal governments, legal constraints require a balanced budget.  But there is no such limit on deficit spending by the federal government or its separately funded agencies.

One result is that success in federal performance is measured by a department or agency’s spending authority and staff size.  The larger the spend, the more that good works that can be done.  Effectiveness is equated with resources deployed.  Government’s response to challenges and/ or service issues is based on the belief that more money is necessary to resolve all goals.

This institutional belief in ever more spending is part of NCUA’s culture as well.  There is no Congressional appropriation. The board can approve whatever increases two of the three political appointees agree upon.  The board is all powerful in setting the operating fees and internal transfers needed to fund the increases they approve.  No check and balance exists.

However this administrative habit of open-ended spending was not always the case.

In December 1984, the headline in the NCUA News read, FCU Operating Fee slashed 24% with the sub title announcing:  “Brings Cuts to 64% Over Three Years.”   This outcome was because the agency reduced its operating budget for three consecutive years.

Two examples of savings for credit unions were given in the article.  For a small Ft. Shafter  FCU the fee was reduced from $8,765 in 1982 to $4,587 three years later.  For the largest credit union, Navy FCU, the fee fell from $403, 503 to $295,481.

The result was to keep credit union money for members’ benefit.

How the Cost Savings Were Achieved

Under President Carter the administration had tried to implement zero based budgeting in an attempt to control ever increasing government spending.  It didn’t work.

At NCUA the expense reduction  was a result of how the agency was administered.  This is Chairman Callahan’s explanation in the NCUA’s 1982 Annual Report.

I want to report to you on decentralization because I think that ties in with regulation.  We had a very strong Central office, a very talented Central office and one that developed over time for very good reasons, I’m sure.  But as I viewed it, it had become so talented and so strong that the very mundane operational things that our field people tried to do got caught up in this pipeline—this pipeline of talent and centralization in Washington.  Seldom did things come out the other end in a very efficient manner.

Everyone was overdoing their job; so we found that decentralization was the answer. We found it necessary to cut the size of the Washington office by a third an to rechannel these resources to the field and to delegate to the Regional Directors the responsibility for using these resources in a timely way to get the exam cycle down to an annual one. . . to give back up information to the field examiners . . . and to make those decisions right on-site that involve safety and soundness, chartering and supervision.  (page 45)

The Washington office was reduced from eight Departments to two offices. The head count went from 207 in fiscal 1981 to 135 in 1982, a reduction of 72 positions.   Overall headcount was reduced by 97 but field examiners were at the highest level of staffing in five years representing 57% of the workforce, a total examiner force of 400 positions.

1982 was the first year operating expenses declined in the agency’s history.  At yearend the agency had examined all 11,120 FCU’s plus 18 Federal corporates.   From 1982 through 1985, the credit union system reported double digit growth in shares and loans.    As summed up in the 1984 Annual Report, NCUAs administrative approach was “More Service for Fewer Dollars.”

The agency’s culture was based on management performance and outcomes, not bureaucratic resource accumulation.  The dominance and slow response described by Chairman Callahan of the NCUA’s Washington office in 1982, feels similar to anyone trying to get an answer today.

NCUA’s 2024/5 Budget Hearing on Thursday

At a public meeting on Thursday afternoon, the credit union system can present comments on NCUA’s staff drafted 2024-25budget.    The 64 page staff draft shows an 11% operating increase from the current year to $382 million in 2024.

The third quarter results presented in Callahan’s Trend Watch update showed the credit union system returning to a normal level of performance outcomes following the extreme growth and historically low market interest rates (near zero) due to government’s COVID response.   This is a return to the long term traditional cyclical range of credit union balance sheet growth, moderate earnings and asset quality.

The NCUSIF as an example is well resourced. At September 2023 it reports a net recovery in reserve for losses of $6.5 million.  The loss reserve of $214 million is the highest level in ten years (since 2013).   The ratio to insured shares represents a level of loss that is almost five times the actual net cash losses reported in the last five years.

And yet the agency wants more.  The current proposal for double digit budget increases is a function of agency ego, not industry circumstance.

 

 

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The Onboarding Process of a Credit Union Leader

Credit Union Times has been publishing  multipart interviews with Tru Stage’s new CEO, Terrance Williams.  He has a long resume, but is from outside the credit union industry.

He is not the only recent external CEO arrival.  Another newcomer in a major credit union role is Beverly Anderson who became BECU’s new CEO in December 2022. Her professional resume is almost all in banking.

For “outsiders” onboarding is a critical  leadership process for someone new to the cooperative system.  Currently a major transition is underway at NCUA as  new board member Tanya Otsuka will shortly succeed Rodney Hood’s whose term expired in August.

Similar to these new CEO’s, she has no direct experience with credit unions.  Rather her background is mostly as an FDIC employee.  While not CEO, she will have a significant responsibility in overseeing and managing NCUA’s priorities.

What Makes an Effective Executive Onboarding?

Both new credit union leaders above have been quite open with the press discussing their backgrounds and how they are making the transition to their new responsibilities.

Here is an excerpt from Tru Stage’sTerrence Williams on his leadership approach:

“I often talk about the fact that leaders who push change for change’s sake are likely to meet with doom or demise. Because I guess change for change’s sake is not something that’s worthwhile. But change to ensure that you are evolving to maintain relevance, to ensure that you are continuing to adapt to the ever-changing needs of members is really what’s paramount for us …

We have a lot of work ahead of us collectively to figure out how we ensure we create a level of relevance with the next generation of future members, and ensuring that we are designing processes and solutions and tools that align with their needs and how they wish to interact.”

Similarly BECU’s Beverly Anderson gave an extended CU Times interview describing her transition to becoming a first time coop CEO:

“What’s exciting about this role is, one I’m a first-time CEO, two I’m in the credit union movement for the first time, and three it’s my first time at BECU and here in the Pacific Northwest.  . .

“The first six, seven months or so have really been about listening and learning. I did 30-plus deep dives with the organization, used that time to get to know the team and have them get to know me, and learned a lot about the business.

“The second thing I did was begin to understand the movement. It was very clear when I started using language like ‘profitability’ and ‘ROA,’ and people very quickly suggested I use some different language. It’s helped me to understand that the movement is in fact very, very different. Our return is around return to member, not necessarily return on assets, and that was a very big shift and pivot, but one that I quite relished.

“The third thing was getting to know my board – I have a new kind of boss and leader, a board. . .they are encouraging, engaging, experienced in their own right, and they have a lot of support and commitment for this organization.”

Important Steps in an NCUA Board Member’s Onboarding

Following are a number events that could mark NCUA board member Otsuka’s approach to her responsibilities. These cues will come from the statements and actions she takes in the initial days of her tenure. They include:

What is her understanding of the role of the credit union cooperative system?  How does its purpose as a non-profit, tax-exempt, member-owned system fit  with other financial options?

Who is on her team as advisors?  What is their knowledge and experience with credit unions?

How does she learn about the credit union constituencies she is serving?  Who does she see or visit on her first forays into the system?

What points of view does she bring to credit union issues?   Does she ask for data, seek options, and/or reference experiences from prior responsibilities?

What is her view of an NCUA board member’s role?   Is it a part-time or full-time job?  An in-the-office or show-up-for-Board meetings responsibility?  Is her focus on high level policy generalities or demonstrated interest in concrete operating outcomes and results?

Also, how transparent is she about the learning process that goes with any newly installed senior executive?  Does she give unscripted interviews?   Is she candid about her approach and areas for learning?  Is she available or kept in situ by the agency? 

The bottom line is whether Otsuka will become the Chairman’s doppelgänger in her board role? Or, as an outsider with a new generation’s vision, bring fresh hope and enthusiasm  to the credit union system?

When one reads the interviews of Terrance Williams of Tru Stage and Beverly Anderson at BECU there is a sense of confidence, commitment, and positive leadership energy.

That is what one would hope for in any NCUA board member, but especially at this juncture of credit union opportunity and challenges and NCUA’s peripherality.

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Future Forecasts: Who to Believe?

 

From Bloomberg News, November 4, 2023:

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

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

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

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

Warning Signs

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

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

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

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

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

 

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The Latest Cooperative Score:  3 Wins and 107 Losses

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

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

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

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

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

Is Anyone Accountable?

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

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

NCUA’s Prior History of Charter Support

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

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

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

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

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

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

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

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

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

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

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

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

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

Are we the Future?

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

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

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

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

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Wisdom: On Regulation

 

Share Insurance & Regulatory Choice

“The fact that there is an insurance option-private insurance for state-chartered credit unions-assures that the NCUSIF will be different from the premium based FDIC fund, that it will be funded with deposits from credit unions, and can be counted as an asset on the books of credit unions.  The fact that there is an insurance option guarantees there will be a charter option, and thus a regulatory option.

This is to the good for everyone.  A single regulator is sooner or later bound to become a lazy or an arrogant regulator.  The best ideas will not bubble up; the regulated will not flourish to their maximum potential.  But with two regulatory options, competition is going to allow the best ideas to come to the fore and allow the dynamic credit unions to expand.”  (pgs 46-47)

 

Note: From the Coach’s Playbook,  a collection of  Ed Callahan’s observations.  These are a summary of operating values for the credit union system. Ed began his professional career as a high school math teacher and football coach.  His thirty years in credit unions included Chairman of NCUA (1981-1985), co-founder of Callahan & Associates, and CEO of Patelco from 1987 through 2002.

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Government and Investment Portfolio Management

In a Marketplace analysis yesterday, the daily financial update reported how the Federal Reserve’s management of its multi-trillion dollar portfolio can reduce or increase the government’s overall operating deficit.

As reported, for the last 15 years the Fed’s been making about $100 billion a year a profit sent right to the Treasury which, as revenue, reduces the federal deficit.

The “profit” comes from the net spread between what the Fed earns on the trillions of  bonds and mortgage-backed securities that it began purchasing during the financial crisis of 2008 under the policy of “quantitative easing.”

This macro economic policy continued and expanded during the Covid shutdown.   The cost to carry these interest earning assets in the Covid era was near zero.  The majority of funding was from the excess reserves banks kept with the Fed which was paying less than 1%.

Today that spread is upside down as the cost of funds has risen to nearly 5.5% on overnights.  Rates on the portfolio are mostly fixed and at much lower yields as securities were purchased in a much different part of the interest rate cycle. Interest expense is now greater than interest income with the result that “the Fed has lost on the order of $100 billion since last fall,”

Here are the Fed’s total balance sheet holdings as of October 18, 2023 showing almost $8 trillion in total assets.  Tables show that the majority of assets have maturities beyond ten years.

When the Fed has a loss, it files the loss away until it can pay it back once it’s making a profit again. This year’s “loss” will equal about 5% of the total government deficit.  So instead of lowering the shortfall as in prior years, it adds to it.

The NCUSIF Analogy

The largest asset managed by the NCUA is the NCUSIF’s $22 billion investment portfolio.  As of August 30, $4 billion was invested overnight with a yield of 5.4%.  The remaining $18 billion was invested in maturities as long as seven years with a combined yield of 1.4%.

At month end the portfolio’s market value was $1.5 billion less than book.  As short term investments become a greater portion of the total, the duration has declined slightly to 2.64 years.  This is the approximate time that it would take the cash flows from the maturing investments to be at  market–should the current yield environment become the new “normal.”

If the NCUSIF’s portfolio yield were 5% or greater, the fund’s total revenue would exceed $1 billion. This would result in dividends to the fund’s credit union owners. When the portfolio is below market for an extended period this shortfall comes out of credit unions’ pockets.

Time for Credit Unions to Be Alert

It will be critical for credit unions to monitor the monthly updates of the fund. The Agency’s upcoming investment decisions are critical. Its interest rate risk management and duration will  have a critical impact on the Fund’s future.  This includes total revenue, its financial soundness and credit unions’ bottom lines.

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A Credit Union’s Calling: Be “Stewards of Humanity”

Everything in life comes around, full circle, even in credit unions.

“In 1908, Monsignor Pierre Hevey, Pastor of Sainte-Marie’s parish in Manchester, New Hampshire, organized what was soon to be known as the first credit union. The goal was to help the primarily Franco-American mill workers save and borrow money.

“On November 24, 1908  in Manchester, New Hampshire  “La Caisse Populaire, Ste-Marie” (The People’s Bank)  became the first credit union in the nation.”  (from Our Story, St. Mary’s Bank)

Today the Bishops and priests of the Episcopal Diocese of New York are following in Monsignor Hevey’s footsteps.   And for many of the same reasons, as demonstrated in these founders’ statements:

“As a diocese, we are committed to making a meaningful impact on the lives of those who have traditionally been marginalized and underserved. That’s why the establishment and launch of our diocesan credit union is such a pivotal moment for us.

“It’s not just about providing financial services, it’s about creating an inclusive space where everyone, irrespective of their financial standing, can feel valued and supported. . .

“These initiatives are more than just programs or ideas, they are a call to action, a call to embody the love and grace of God in the world.”

A second organizer:

“As a member of the inaugural board of trustees and co-chair of the Diocese’s credit union task force, I am thrilled to see the New York Episcopal Federal Credit Union open its headquarters and first branch here in the Bronx. It’s a testament to our commitment to the local community and our mission to serve everyone in our field of membership, regardless of their financial circumstances.

The existing banking system often neglects the needs of those who are underserved and overlooked, and that’s why we’re excited to offer a financial institution that prioritizes the well-being of all its members. We look forward to empowering our neighbors in Fordham and throughout the Bronx, as well as the entire Diocese of New York, with the tools and resources they need to achieve financial stability and thrive.”

The biblical calling to be “stewards of humanity” was featured in this short recording by the Diocese announcing the credit union’s formation.

In the June 30, 2023 call report, the credit union reported $477,000 in total assets, all in investments, and a net worth of the same amount.

A Long Journey

Here are some details of the charter journey from an Episcopal  News Service May 23rd story:

“The journey towards establishing the NYEFCU began in 1990 when the Diocese of New York committed 10% of donations to its endowment funds to economic justice efforts and created a task force to recommend projects. Despite initial discussions and resolutions in 2003 and 2004, the credit union’s development was slow.

“It wasn’t until 2014 when the diocesan convention voted to “authorize the establishment of a task force to prepare a charter and solicit initial grants and deposits to establish the Episcopal Diocese of New York Credit Union.”

The Diocese embraces a lively community of faith, fellowship, service and spiritual commitment across almost 200 congregations and 50,000 members.

“The task force submitted an application for a federal charter to the National Credit Union Administration in December 2020, and spent 2021 and 2022 addressing the federal agency’s requests for more information and revisions before finally receiving approval.

“The credit union was launched with an initial investment of $500,000, with $250,000 from the diocese and another $250,000 from Trinity Church Wall Street. An ongoing fundraising drive aims to secure an additional $300,000 to cover the first five years of operating expenses, including staffing, office supplies, and computer technology. After this period, NYEFCU aims to have enough members to sustain itself without further external funding.

“The first branch of the NYEFCU is located next to St. James, Fordham in a new mixed-use development (St. James Terrace) that will house 102 affordable apartments, half of which are allocated for formerly homeless individuals. In its inaugural year, the credit union aims to cater to the specific financial needs of its low- to moderate-income members by offering an array of services.”

Credit Unions’ Future as Credit Unions

No matter the size of America’s collective consumer wealth,  many still have limited access to fair financial options.  These are often the targets of for-profit financial offerings.

It’s no accident that people of faith have played a major role in the establishment of coops as a way to serve their congregations.   They remind all of the values animating credit union pioneers.  And the values that make cooperatives more than “nice banks.”

The fact that this charter application and processing will take from 2020 (when submitted) until the end of this year to raise sufficient capital,  shows the perseverance required overcoming government bureaucracy.

These spiritual founders are responding to the call to serve by creating a financial cooperative.

The major difference is that the Diocese had one hurdle that Monsignor Hevey did not have to deal with, the NCUA.  It just shows it helps to  have God on one’s side.

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Once . . .

Yesterday the North Carolina Credit Union Commission met to discuss a member’s complaint that SECU’s recent bylaw change proscribed members’ rights.  I noted three outcomes.

  1. The chair recused under the ethics rules as he is an employee of SECU.
  2. SECU was approached about voluntarily deferring its bylaw changes until after today’s annual meeting, but declined.
  3. A Commission subcommittee was formed to review the process for bylaw changes and make recommendations as soon as practical.

The Commission’s role in this oversight has not ended. The bylaw issue will continue on its agenda.

Today at 1:00pm SECU’s Annual meeting will be held. A link for the virtual broadcast will be published on its website.  The voting outcome for directors will be announced.

This Annual Meeting will be a seminal event no matter the result. For once members have been brought into the process,  it will be hard to shut them out in the future.

Once . . .Is Today

Once to every man and nation
Comes the moment to decide,
In the strife of truth with falsehood,
For the good or evil side;
Some great cause, God’s new Messiah,
Offering each the bloom or blight,
And the choice goes by forever
Twixt that darkness and that light.

Then to side with truth is noble,
When we share her wretched crust,
Ere her cause bring fame and profit,
And ’tis prosperous to be just;
Then it is the brave man chooses
While the coward stands aside,
Till the multitude make virtue
Of the faith they had denied. . .

The Members’ Voice

Once empowered, the members’ voice is hard to still.   In a democracy people will act when they see their self interest in jeopardy.

Member rights have not been a priority across the credit union system.  Federal and state regulators have been absent and at times, negligent, when overseeing this aspect of their responsibility.

Democratic governance is a vital factor in the credit union model.  Legal equality in governance was deemed to be a precursor for economic equality.

Democratic voting is more than an organizational design.  The one-person-one-vote is a core value.   For decades credit unions have struggled to tie their cooperative moral laces.

Today as recited in James Russell Lowell’s poem above, may be a reawakening of that effort for SECU and the cooperative system.

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Are Credit Unions  Moving Beyond NCUA ?

In yesterday’s post on the recent borrowing trends in credit unions, every lender had stepped up to meet the 300%, $90  billion increase in external funding since June  of 2022.  Except one.

While the FHLB system and Fed  Reserve were the dominate providers, all sources from corporates (102%), to  sub debt (24%)  and even  other credit unions  (3,800%) increased their outstanding loans.

The only credit union provider that showed no borrowings was the credit union funded Central Liquidity Facility.   The last  CLF loan origination was in 2009.

CLF’s August 2023 Financial Condition

At August 31, 2023, the  CLF  Financial Statement reports  assets of $875million all invested in US Treasuries.  This was funded by $800 million from 390  credit unions’ capital stock purchases and another $17 million in deposits.  There were no corporate agent members. Retained earnings were $40.4 million.

Year-to-date operating expenses  are $1.3  million, up 86% from the prior year. Dividends on the credit union capital shares are paid quarterly.  The posted rates  would appear to trail the overnight Fed funds return by about 50 basis points.

The Facility’s borrowing authority-lending capacity was $19.7 billion.   And there were no loans.

Why Is There No CLF Lending?

The facility’s funding authority is large enough to  meet significant loan demand.   Its lending parameters mirror those of the Federal Reserve  which  had $30 billion outstanding to credit unions  at June 2023.   Moreover $20 billion of this total was advanced in the June quarter in the aftermath of  market uncertainty due to multiple banking failures.

How are all these other sources growing their portfolios  but the public-private  CLF partnership has no activity?

I have seen no effort by the CLF to promote its services to its own members.   It would be helpful to analyze how many of these 390 CLF shareholders had borrowings elsewhere.  However NCUA will not release the  members’ names so no one can check this possibility.

CLF the Missing  Player

The primary reference to the CLF by the three NCUA board members has been to urge congress to reinstate the special lending/agent membership options passed during the pandemic which expired at the end of 2022.

However today, the CLF lacks neither financial resources nor authority to offer loans that could meet member needs now–as all other lending institutions are  doing.   That is how these firms, public or private survive.

One might  speculate about why there is no CLF effort.   Does it have the operational capability and professional  skills to make loans?   For example, can credit unions even preposition collateral?

In prior lending activity the CLF  partnered with the corporate network which did the underwriting  and disbursements but drew on CLF funding. This operational  capability was lost when the NCUA ended this option by closing U. S. Central.

The  last CLF loans were $5 million each to the conserved WesCorp  and US Central in 2009.

Those two loans were an extension of the NCUSIF’s support.    No other corporates were offered CLF loans even though several had similar exposures to  underwater securities.

In  short, the  CLF  loans were just an extension of NCUA’s supervisory actions, not a liquidity lifeline .

My Thought on Why the  CLF is no Longer Relevant

In addition to its operational incapacity,  I believe credit unions have realized that, unlike other options, the CLF is not an actual  public-private partnership.   Its lending response  is at the whim of NCUA supervisory priorities, not credit union need.

Credit unions do not view the CLF as a reliable partner in times of balance sheet stress.

Therefore, they have moved beyond the CLF for the more proven reliabilities from the multiple options now available–both debt and subdebt.

In short,  credit unions  no longer need the CLF.  They have plenty of tested alternatives.  Ones that don’t impose supervisory judgments on top of collateral values.

For credit unions the CLF is a vestigial  organ, still within the body but not serving any system purpose.   It  continues tp accumulate  retained earnings but has no balance sheet risk.   The income  pays an increasing expense load (up 86% so far in 2023) even with no operational activity.   The regular members shares are subsidizing the  facility  which pays  a  below market quarterly dividend.

The challenges are not a lack  of institutional or member need— just look at the expanding FHLB lending programs.   Rather the challenge is leadership.

This  is  not a situation requiring  a congressional legislative fix.   What’s missing is NCUA’s ability to partner with the members who fund the CLF and develop collaborative solutions to  benefit the cooperative system and their members.

It’s  been done before.   It is being done now by multiple organizations and firms (see examples below).   Credit unions have seen these more reliable options and have decided to move on from an impotent NCUA-CLF.

This situation also raises  a broader issue than the future of the CLF. When might this liquidity experience cause some credit unions  to consider moving even further away from the coop system  altogether.

NOTE: Examples of Proactive Efforts to Serve Credit Union’s Current Liquidity Needs

The following are  examples of  lenders and institutions with outreach to credit unions in this critical liquidity period in 2023.

First,  is the announcement of the  Federal Reserves’ new Bank Term Funding Program (BTFP) on March 12, 2023 for which credit unions were eligible.

The following is from from a  promotion highlighting CD  options:

Inclusiv/Capital and Primary Financial will host a webinar to discuss deposit strategies and resources to support your credit union’s impact lending and liquidity management strategies.

Primary Financial is a credit union service organization (CUSO) owned jointly by 10 corporate credit unions nationwide. This unique ownership structure gives Primary Financial potential relationships  with credit unions across America.

Examples of FHLB special programs and assistance are in numerous press stories:

Ken Bauer, EVP & CLO, OneAZ Credit Union:

“Particularly in Arizona, more of a person’s monthly wages are going to housing than ever before,” Bauer says. “We asked ourselves how we could help members navigate this market and bridge that gap to homeownership.”

To provide members with down payment assistance, the credit union is working with two grant programs offered through the Federal Home Loan Bank (FHLB).

In  Wisconsin:

Summit Credit Union of Madison, Wis. ($6.6 billion in assets, 248,245 members as of June 30) announced Thursday that it was able to help 70 borrowers through the $700,000 in grants it was provided this year by the Federal Home Loan Bank of Chicago. Buyers must earn no more than 80% of the area’s median income.

The grants reduce down payments, closing costs or pre-paid expenses by $10,000 for each of the 70 borrowers who benefitted from January to August 2023.

This is  Ryan  Donovan President and Chief Executive Officer, Council of Federal Home Loan Bank promoting the system’s “private-public” partnerships:

The Federal Home Loan Bank system is a terrific example of a private-public partnership that works, providing tremendous benefit to #homebuyers. Through our members and their activity, we help save homebuyers more than $13 billion each year in interest payments; we facilitate an additional 16% of #mortgage originations; we help make the 30-year fixed rate mortgage an opportunity for many homebuyers; we support community financial institutions across the country; and, we’re one of the largest private-sector contributors to affordable housing efforts.

One can also list numerous financial consultants, ALM  advisory firms,  and brokers seeking to assist credit union liquidity needs, for a fee.  But there is no CLF outreach.

 

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Important New Data from NCUA’s Recent Board Meeting

In anticipation of the NCUSIF update at last week’s board meeting I described several topics of vital importance. These included the fund’s operating stability, the investment lag from market rates, the loss reserving level and the reliability of projections of future performance.

In answering Board member Hood’s questions, there was important new data from staff.

The Fund’s Normal Operating Level is Stable and Growing

As in any enterprise with a bottom line, NCUA’s outcome is to optimize the fund’s retained earnings. Adding the 1% required credit union deposits, these two factors sustain a stable Normal Operating level.  CFO Schied responded that the actual level of the NOL ratio at June 2023 would be 1.29% if the retained earnings and required 1% trueup were recorded in the same accounting period.

Staff’s NOL projection in May had been for a 1.25% at June. This 4 basis point projection materially understated the Fund’s trends and financial stability.

Moreover, we learned that using a six month old data point to calculate the 1% trueup, overstated the reported December 2022 actual ratio.  There had been a $5 billion decline in total savings in the last half of 2022.  That resulted in  $72 million net returns of the 1% deposits from June’s 2022 total. Using this six-month old 1% datapoint resulted in a higher NOL number than if all three ratio factors were from the same accounting period.

The Fund’s Loss Reserve Equals Four Times Its Recent Loss Rate

CFO Schied reported net cash losses in the fund since the taxi medallion write offs, were just .31 basis points of insured shares.   The current loss provision ($204 million) is 3.8 times this recent experience and equals 1.2% of insured savings.

The actual net cash loss for the first six months of 2023 is only $1 million. However,  over $20 million has been added to the provision expense.  When asked why this difference, Schied replied:  “The general reserve is derived using an internal econometric model that applies estimated probability of failure and loss rates.” 

No details of this model were provided to evaluate  assumptions and whether they were validated by actual experience. This is critical detail for users to have confidence in the financial estimates provided.

The loss provision expense comes directly from retained earnings.  The current level reduces the reported NOL level  by over 1 basis point of insured savings.

The NCUSIF’s Below Market Valuation

Current short-term rates under two years are yielding over 5%.   The NCUSIF’s portfolio has a YTD yield of 1.79%.  This was due to the Fund’s continual investing out to seven years when rates were near zero.  The result was a weighted average maturity for the portfolio of almost three years.  That is the time it will take to bring the portfolio back to par once rates normalize.

The market value of the portfolio went negative in December 2021 and was $1.5 billion below book at June, 2023.   This results in revenue far below current yields.   Investment revenue is the primary driver of retained earnings.  This is the most critical management responsibility in the NCUSIF’s financial performance.

When asked about the status of the investment committee’s  policy review begun early in 2022 Schied’s response: The investment policy has not been updated.  The investment committee has identified a few modest updates and clarification, and is still considering one item.  So again, at this point the policy that is on our website remains the current investment policy.

Is there a more important priority for the board than to understand the reasons for the recent underperformance?  And then to update the NCUSIF’s interest rate risk management policy/practice to avoid this outcome in the future?

The Accuracy of Staff Projections

The June forecast for the NCUSIF’s NOL was 1.25% provided to the  board in late May.  The actual outcome was 4 basis points higher at 1.29%.

The staff gave an updated NOL projection for this December of 1.27%.   Projecting the Fund’s actual numbers at June, this would be a gain of $70 million in net income, or lower than the first six month’s bottom line.  The 12-month growth in insured shares was forecast at 4.2%.   The real growth for the first half of the year was 1.8% from the previous June.  In 2022 last two quarters there was a net outflow of $5 billion.

There was no information to support these assumptions and the NOL of 1.27.   If  share growth is zero from June, and the same net income estimate, the retained earnings ratio would rise to .2948 at yearend. This would be an increase from the actual .2922 at December ‘22.

As with the econometric model used in the loss provision expense, this NOL forecast cannot be evaluated without the underlying assumptions being transparent.

The Board Meeting Process

The board members’ comments, their Q & A with staff and staff’s responses were all scripted.  Board members read their statements, there was no effort at dialogue, there was no learning from the supposedly differing points of view represented.

Only Hood engaged the staff on what the NCUSIF numbers mean.  Chair Harper followed his ever present “MO” of hyping future risks after acknowledging the fund’s sound condition.  Hauptman talked about how interest rates are set by buyers and sellers of money, but did not apply his observation to the current outlook for rates.  And how this might affect future decisions.

Hood’s questions brought out some very important aspects of the NCUSIF’s management.  New information from Schied included a positive  forecast of $12 million in further recoveries from US Central’s AME.

The Q&A highlighted the shortcoming of current accounting presentations and  investment practices.  These can mislead users of the financials statement.

The Fund’s below market investment performance will cause lower revenue for the fund and its credit union owners by hundreds of millions of dollars.

Moreover the investment position compromises the two primary goals stated for the investment committee’s performance.  These are liquidity (never borrowing to meet the fund’s obligations) and meeting all operating expenses, plus dividend.  These two outcomes should be a walk in the park in current conditions.

If the fund were earning 5% on its portfolio, total revenue would be over $1 billion, a result that would pay real dividends to credit unions for their underwriting commitment.

There is great potential for the cooperative structure of the NCUSIF to be a positive contributor to the credit union system.  It will be up to the board to ensure this outcome is indeed realized.