Category: NCUA

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People Helping People-A Major Government Agency’s Program

“People Helping People”

No, this is not  NCUA’S  motto.  It is the IRS’s. And it relies on volunteers.

“The Volunteer Income Tax Assistance Program offers free tax help to low- to moderate-income (generally, $60,000 and below) people who cannot prepare their own tax returns. Certified volunteers sponsored by various organizations receive training to help prepare basic tax returns in communities across the country.

“VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations(such as credit unions). Most locations also offer free electronic filing.”

Free Tax Return Preparation for You by Volunteers

“If you are an individual interested in becoming a volunteer, but need to find an organization in your area to link up with, please submit your contact information using the VITA/TCE Volunteer and Partner Sign Up. Your information will be forwarded to the appropriate local IRS office.

VITA Volunteer Testimonials

“One VITA Site Coordinator had this to say about her VITA site, “I feel comfortable saying all taxpayers using our services were extremely grateful for the patience, expertise and timeliness of volunteers preparing the tax return.

We have many repeat ‘customers’ from year to year and – even during the down months – we are greeted throughout the community with a warm hello and ‘see you at tax time.’ This speaks highly for the good work these gifted volunteers perform.”

A VITA volunteer stated this about her volunteer experience, “VITA helped me acquire more knowledge on my tax benefits. I really love it because you are learning and helping the community at the same time. It’s the best feeling.”

An Example for the Cooperative Regulator

This is the IRS — a government agency which seeks and encourages volunteers to carry out its mission of tax filing and compliance.   The words come right out of the credit union playbook.   I wonder why this spirit is not part of NCUA’s game plan?

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Transparency: A Test for the Cooperative System

“Democracy Dies in Darkness.”

That is the official slogan of The Washington Post, adopted in 2017. The slogan was introduced on the newspaper’s website on February 22, 2017.  The phrase was popularized by investigative journalist Bob Woodward, who used it in a 2007 piece criticizing government secrecy.

Yesterday long-time credit union supporter and reporter Frank Diekmann published an “editorial” on the CU Today web site, Why NCUA Should Require Credit Unions to Disclose What They’re Paying for Banks.

Based on years of covering bank purchases, he critiques the absence of meaningful data in many of these transitions.  No information is provided, such as the purchase price,  that would show how the members collective capital is being used to pay off owners of banks.  Here is some of his logic:

“Why the secrecy?

“It’s quite the hypocritical disconnect for a CU community that defends the federal tax exemption largely on the back of the “structure,” that is that credit unions are democratically run cooperatives where the members are the owners, to then turn around and say certain information belongs to some but not others (never a good sign in a democracy) and that some cooperators are more equal than others. . .

“There is another big, CU-principal-grounded reason for letting members know how much of their money is being spent and for what, and it’s a real ironic kicker: if the acquiring credit union were a publicly traded bank buying up another bank, it would be required to disclose the purchase price, and analysts/customers/the market would have the opportunity to put the ROI under the microscope. . .

“And then there is this other “let’s not go there” issue. But I say, let’s do. While this may not be the primary reason for buying a bank, it’s also not an innocent bystander: CEOs who have language in their contracts tying their compensation to asset size are getting raises out of these deals. Members have a right to know about that, especially since—again—it’s their money being used to goose the comp.

“It’s time to dispense with the rosy sounding but generic banality and to specifically document how members of the acquiring credit union benefit, and how the former customers are better off, with some real dollar figures around the savings on loans and fees and the increased rates on deposits. You know, how much more is going into people’s pockets?”

Transparency Is the Lifeblood of Democracy

Frank’s concern about credit union’s secrecy extends far beyond bank purchases.  Boards and CEO’s have grown used  to not disclosing or even explaining anything to members especially around their leadership roles and activities.

Credit unions want to retain their “private” character, but to act unfettered in the public market place.  CEO and board salaries are  not required to be disclosed by federal charters.  For states the information is supposed to be provided in the 990 filing, but it is often late, after the major participants have left and not reviewed by any authority for accuracy.  Many credit unions check the disclosure box on the report as provided only “on demand.”

While some merger disclosures were required from a 2018 rule, NCUA’s oversight of the rule is inconsistent and lacking in any meaningful effort to inform members about the transaction.  Merger actors have perfected the arts of circumventing required benefit disclosures.

The supposed democratic governance model of one person one vote in annual board elections never happens, because there are no elections.   The board controls the nominations to just equal the vacancies.

Even when the rare election takes place, the ability of members to learn about candidates’ position is not offered by the credit union-except for incumbents.  See the current SECU board contest as an example.

In almost all other institutions dealing with the public, the SEC mandates disclosures far beyond anything credit unions provide so that owners of companies can be informed about the basis for transactions.

NCUA has completely ignored any obligation to protect the rights of member-owners compromising the fundamental governance mechanism in a cooperative.

Transparency Is a Requirement for Democracy

It’s no accident that the Post’s motto was aimed at governmental secrecy. The one exception I would raise to Frank’s thesis is that he wants NCUA to require greater disclosure.  The regulators are part of the problem.

NCUA repeatedly draws its own curtains of secrecy over its actions and even “facts.”  Listen closely to today’s hearing on the NCUSIF for reference to undisclosed econometric models and staff actions not subject to public or even board scrutiny.

When the NCUA chair was asked recently about a well-publicized problem in a credit union, he commented that he couldn’t talk about such situations and pivoted to the need for more authority over vendors.   NCUA itself fails to put on the public record the details for its decisions leaving both members and the industry in the dark about its effectiveness or even awareness of key events.

The Transparency Advantage

Frank closes with another reason, beyond the owners right for relevant information to make informed decisions about the credit union’s activities.

It is a moral issue that can put cooperatives on the ethical high ground or cast them as just another form of  self-serving enterprise:

“Not only would documenting all that (about bank purchases) be the right and ethical thing to do, it would make for an effective response to critics. . . that claim credit unions are just “profit-seeking enterprises masquerading as tax-exempt non-profits.”

Transparency is a leadership requirement.  It creates trust and confidence even when things go wrong.  Doing the right thing should not require a rule or reg.   It is a character trait.  Cooperatives and transparency are naturally intertwined, until pulled apart.  As Frank points out, that separation undermines the special possibilities and accomplishments cooperatives were empowered to do.

 

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What to Listen For in Thursday’s NCUSIF Update at NCUA

Cooperative design is a unique competitive advantage in a capitalist society.  The success of for- profit firms is based on their ability to extract value from their customers to create maximum return for their owners.

In coops the owners are the customers.  This alignment creates a financial and a trust superiority versus competitors when the model is managed well.

In 1984 the NCUSIF was redesigned following coop practice. This change drew from the experiences of over a dozen successful state chartered insurance funds. The design’s core feature is the 1% deposit perpetual underwriting with explicit checks on the oversight and management of the fund by NCUA.

One of these oversight tools is the monthly posting of the full NCUSIF financials on NCUA’s website. This is the same regular reporting NCUA requires by credit unions to their member-owners.

Quarterly the NCUSIF Board is publicly briefed on staff’s management of the fund.   This provides the credit union owners insight into the Board’s oversight of credit union members’ funds.

The June 2023 financials have been posted.   There will be additional numbers  such  as CAMELS score distributions, projections and updates on investment management-the Fund’s largest asset in the meeting.

What should credit unions look for in the briefing?  How do board members query staff’s performance?

What NCUA Staff Manages: Retained Earnings

The primary indicator of the Fund’s performance is retained earnings.  The responsibility is to maintain a retained earnings ratio of  .20% to .30% (the traditional floor and cap) of insured savings.   This ratio can be tracked every quarter as the industry reports its insured share total in the 5300 call reports, and NCUA reports NCUSIF’s retained earnings for the same quarter end.

The history shows this ratio tends to be very stable with minimal change even when some factors, such as share growth, show wide fluctuations. Below are the actual results of this ratio over the past three and a half years:

Dec ‘20:  .3179%

Dec ’21:  .2942%

Dec ’22:  .2922%

Mar ’23; .2883%

Jun  ‘23:  .2908%

Adding the 1% of insured savings as of the same date shows that the normal operating level (NOL) has been very steady at the upper end of its traditional cap of 1.3%.

In the May 2023 NCUSIF board update as of March, staff projected an NOL of 1.25% at June, down from the December ’22 ratio of 1.3%. This hypothetical forecast suggested the retained earnings “cushion” would fall by half in just six months.  It was misleading and incorrect.

This 4 basis point error was due to two inaccurate projections in the presentation:  the retained earnings for June came in $31.3 million  higher and insured share growth $32.3 billion lower than the forecasted numbers.  This outcome should be a caution about future projections. This estimate was provided just  45 days before the June month end with  recent trends readily available.

Managing the Retained Earnings Outcome

One revenue and two expense items are management’s responsibility in achieving  retained earnings.

The first and most immediate is operating expenses.  Through June the NCUSIF expenses have grown 13.7% or $14 million more than expended through the first six months of 2022.  This is double the Fund’s long term rate of expense growth since 2008 of 6.9%.  Across all three credit union provided funds, the combined expenses grew 14% in the first six months of 2023, an indication of government’s ability to spend when checks and balances are lacking.

The second factor is the expense provision for insurance loss. To date  in 2023 the fund has added $20 million in additional provision expense versus  actual losses of just $1 million.  The June 2022 reserve was $169 million increased to $204 million one year later.

The reserve expense comes out of retained earnings.  Currently it equals 1.2 basis points of total insured risk.  Since the taxi medallion losses, the NCUSIF has not reported net cash losses for an entire year exceeding 1 basis point since 2013.   If there is a formula NCUA uses in preparing this reserving level, then that should be published so the assumptions can be validated with actual experience.

The Single Revenue Driver

The third factor and only revenue item other than an infrequent premium, is the earnings on the $22 billion par value investment portfolio.  By law, no premium can be charged if the NOL exceeds 1.3%.

Since December 2021 the NCUSIF’s portfolio market value has been below book.  The market loss was $1.7 billion at Dec ’22, $1.3 billion at March ’23 and then rising back up to $1.5 billion at June.

The year to date yield is 1.79% but is slowly rising and was 1.95% for June.  At the close of markets yesterday,  short term treasury rates up to one year were in the 5.5% range.   The seven year bond closed at 4.47%.  The inverted yield curve started in July 2022 when short term rates were higher than longer maturities.   NCUA announced a change in its short term liquidty target in November of 2022.

The NCUSIF’s investment strategy is to provide sufficient funds “to meet operating costs and liquidity needs without having to sell investments at a loss or use the agency’s borrowing authority.” 

The market loss at every investment bucket except overnights at June monthend, shows this objective has not been met.   If even half of the $22 billion investments were short term, the yield of over 5% would produce revenue of $550 million and result in more than sufficient income to meet the fund’s operating needs, sustain a 1.3% NOL and pay a significant dividend to the credit unions underwriting the fund.

The NCUSIF’s current weighted average yield is 2.85 years. Should market rates stay at this level, that is the approximate time it would take for the entire portfolio to return to par.   This would result in a market underperformance of five years or more from the time the first time the fund showed a combined value below market.

Tomorrow’s meeting will be a critical time to see how staff has evaluated this extended period of below market performance. What changes do they anticipate going forward to better align performance with the two policy goals?  What interest rate risk monitoring enhancement is needed to avoid this situation in the future?

What about Share Growth?

The only other factor affecting the retained earnings-NOL ratio is credit union share growth.  To maintain a stable .2 to  .3 ratio, the net income must grow at the same rate as insured savings.

But NCUA staff do not control share growth, only the three factors above. In the second half of 2022, insured savings had a negative growth of $5.0 million.  That could be the outcome again in 2023.  For example the second largest credit union, SECU NC, had a negative share growth of 8% for the 12 months ending this June.

Fortunately it is very easy to model all four variables in a dynamic spread sheet through the end of the year.   For example if one assumes fund expenses of $220 million, insurance provision of .5 basis point of insured shares, 2% annual share growth, a 1.85% portfolio return, then the current retained earnings ratio would increase from the June level to .2969 or just short of the .30 historical cap triggering a dividend.

Here is the model anyone can use.  Any of the four variables can be changed, even the yearend  retained earnings currently at .30%.  The latest actual data can be input daily if necessary.

One option is to run what ifs and breakeven analysis. For example if the fund’s investment yield had been 2%  higher for this year (3.85%), and all else the same, the yearend outcome would be an retained earnings ratio of .3225 or $387 million above the .3% traditional cap resulting in  a dividend for credit unions.

The 1% True up Calculation

At the current time, NCUA uses a bifurcated ratio calculation for the yearend NOL.   It uses the most recent retained earnings and insured shares.  However staff,  instead of recognizing the 1% statutory liability from credit unions, includes a six month old figure  from June in the denominator.

The currrent NOL number is an inaccurate and misleading presentation of the fund’s real financial position.

For example using the current June 1% capital deposit number omits entirely the obligation of 49% of credit unions with assets less than $50 million.  These are not required to submit a June 1% trueup.

In the past, the use of a six month old total 1% deposit amount has led to an understatement of the actual NOL calculation at yearend.   This underreporting keeps credit unions from a potential dividend which was the commitment made for their open-ended perpetual 1% underwriting.

If that same method is used at 2023 year end and there is a major runoff in insured savings in the second half, then using the six month old 1% deposit  will overstate the NOL and potentially trigger a dividend from a ratio six months out of date.  If the 8% decline in SECU’s 12 month share growth were to occur across the industry, a dividend would be likely even with the 1.33% NOL.

This 1% late trueup recognition has been raised in Board meetings for almost 2 years.   Staff has promised to provide options from an outside CPA firm’s review.   Board members have referred to recommendations in the study that provide ways to better present the actual ratio.  It’s time the NCUSIF bring this ratio into a better presentation of the fund’s stability and strength.

The NCUSIF is a Cooperative Advantage

When well managed the NCUSIF is a competitive advantage for credit unions versus FDIC insured institutions.   The FDIC ratio of fund balance to insured savings was 1.10% at June 2023.  Banks are facing increasing insurance premiums far into the future to bring the ratio back to the immediate goal of 1.35%.   For cooperatives, the 1% deposit ensures the NCUSIF size is always relatively constant to the insured shares risk.

Since the 2008/9 financial crisis and the Federal Reserve’s quantitative easing to sustain the economy, short term rates have fallen to historic lows.  Folling the Covid shutdown this resulted in ZIRP, or zero interest rate policy, leading to the subsequent inflation.

The Fed has made clear its intent to return to a 2% inflation level with real interest rates in excess of that goal.   During this time of near zero rates, the NCUSIF, like many credit unions, went long hoping to pick up yield.  In doing so it fell short of its two primary objectives of liquidity (without resorting to borrowing) and easily covering operating expenses.

This Thursday’s board meeting is an opportunity to see how Board members and staff react to the changing rate environment and their role overseeing the fund’s performance.  Tune in.

 

 

 

 

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A Democratic Renaissance Emerging In Credit Unions

Three events, two ongoing, one finished for now, have centered around member voting on the future direction of their cooperatives.

Each election is triggered by specific circumstances.  But they illustrate the benefits of going to member-owners for approval.

Voting is the essence of democratic governance, whether this is for local school board candidates, a political office or national politics.

The instinctive “rightness” of individual voting is so obvious that  the most authoritarian regimes  put on a charade of democratic process.  For even the most dictatorial leaders, voting connotes legitimacy.

In America, freedom and voting are inextricably linked.   When those in power seek to perpetuate their positions, manipulating or questioning the voting process is an ever-present threat to democratic rule.

A Frustrated Member’s Article

One long-time credit union member expressed his exasperation with his Board’s “closed shop”  elections in this opening of a public article.

I asked a friend recently if she could provide an answer based on the following clues:

1) It has billions of dollars in assets;

2) The overseers are not elected, rather;

3) they are appointed among themselves;

4) there are never any elections; and

5) all meetings are closed.

My friend guessed Belarus – a good guess, but Belarus has elections.

The answer is Orange County’s very own SchoolsFirst Federal Credit Union – the largest financial institution in the county and the fifth largest credit union in the nation. . .

The rest of the critique, Schools First . . .Democracy Last, by Dr.  Barry Resnick is here.

What makes credit union design unique is democratic governance–each member has one vote no matter their  savings and deposit balances.  Federal credit unions prohibit proxy voting  further reinforcing each member’s  ballot sovereignty.  Not all state charters have this limitation.

In credit unions, the people rule.  Cooperatives are, in theory, on the front lines in the practice democratic governance.  This was central to their public purpose and tax exemption. Since there have always been more poor people than financially well off, credit unions were intended to be a means to enhance economic equity for all.   Through member loans, the bulk of the population was to have  financing access that  those with wealth easily take for granted.

Moreover, voting for directors converts private, closed decision making in institutions into public accountability.

But to work, the people need to be informed even educated as to their owner role.   Voting is one of vital means for this process.   Candidates or leaders present their priorities to the membership  and seek support.

Democracy is much more than rules, bylaws, or following Robert’s Rules of Order at the annual meeting. These details do matter, but democracy requires a commitment for leaders to take their ideas to the public versus bureaucratic maneuvers to perpetuate positions of power.

Without the test of the ballot, incumbents may not see things as they are.  Rather they see the things that confirm to their assumptions or preferred way of looking at the world.

The Growing Distance

When  credit unions were predominately local,  member voting may be less vital because they see what’s happening with their own eyes.   When credit unions grow large, distant and generic, their responsiveness via democratic process becomes more crucial.

Credit unions have proven to be a success in creating very large, financially successful depository institutions.   But they rarely cultivate their members’ ownership role.

Absent voting where there are more candidates than open seats, credit union strategic priorities reflect incumbent power not policies  supported via a public contest of ideas and priorities.

When boards are on top, any public voting can be viewed as  threatening to their position.  Without leaders efforts to build “civic virtues” democracy can become form without substance.

Why Voting matters

“Democracy holds us together. We are a country rooted in the rule of law, where the protection of the rights of all people is paramount.” (G-20 Press release) Credit unions are a small but vital part of the democratic ethos that Americans often take for granted.

Member  voting is how their ownership  rights are cultivated and protected.  NCUA has long turned its back on any role in this responsibility.

When the will of the people is circumvented, the result is a growing erosion of member influence.  It is easier to lose member confidence than gain it.  Becoming customers versus owners, makes it easier for members to move accounts to a better deal whenever than comes along.

The Need for political courage

Democratic leadership is hard.  It takes courage and maturity to control the  human instinct to accumulate and maintain power.

Cooperatives  must evolve not merely financially, but also in their political  role with members if they are to remain bearers of their trust and unity.   Institutions should work for people, not the other way around.

Today, one can easily identify institutions and activities in the cooperative system that appear more motivated by self-interest than mutual benefit.

The first rule of democracy is the willingness to discuss, debate and argue about what troubles us.   Truth is not achieved by hiring a PR firm to sell a story or presenting a one-sided marketing campaign that has all the hallmarks of propaganda.

Transparency with full and timely information is the key to democratic practice.  I will follow with  commentary on three situations that I believe show the upside of cooperative democracy in action.

Also, a current  example of a credit union’s promotion of open board elections at Frontwave is described in this July 6 blog, Here They Go Again.

 

 

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An Opportunity for the Combined Trade Group: America’s Credit Unions.

The merger of CUNA and NAFCU proceeds apace.   The 60-day voting period by members began yesterday. Already scheduled NAFCU educational and network meetings continue. CUNA President Nussle will attend NAFCU’s Congressional Caucus in September to show a united Washington effort.

Joint transition committees have been appointed.  One initial product was a proposed dues structure. As I read the announcement, members of both organizations are expected to continue  paying the same dues  to the new organization until 2027 (three more years) following the same fee structure in place at December 2023.  It seems illogical  to pay dues for a nonexistant organization three years past its demise.

If credit unions are members of both trade groups, “Dual members are encouraged to pay membership dues for both organizations” even though NAFCU nor longer exists.  Apparently, economic efficiency is not a current goal of the merger.

An Immediate Opportunity for a Unified Effort

The merger process has been focused on the political steps necessary for member approval and  less the potential offered from a “unified voice” in DC.  Even though the political agenda may emerge down the road, there is one immediate opportunity that could demonstrate the possibilities of a combined lobbying capability.

An NCUA board position is now open as Rodney Hood’s term expired this month.  This new member’s six-year tenure should outlast the two current members.  It could extend over two presidential election-administration cycles.

For many recent appointments the expectations, even needs, of the credit union community have not been seen as a factor in the Administration’s choices.   The result is that new board members are strangers to both the Agency and the credit union system.  Think Metsger, McWatters and Hauptman.  Having prior NCUA experience as a staff or board member (Harper and Hood) may be useful, but it still does not bring an industry or coop perspective.

One longtime, now retired, CUSO CEO Randy Karnes (CU*Answers) commented during an earlier appointment cycle: “Cooperative principles make us different. When the NCUA believes that and Washington believes that, we have a stronger system.  But when nobody believes that, then it’s simply about banking regulations. I think our system’s position is weaker, and NCUA is not even thinking about their own brand.”

“Congress didn’t create the credit union charter because the nation needed “nice banks.”

In that same appointment cycle, there was a public White House petition, CO-OPS 4 Change, asking that the administration,  “choose NCUA leaders who understand cooperatives.”  And, “who recognize the shared economic value for people and communities created by the Cooperative model from the seven cooperative principles.”

Jobs for the “Boys” or for Cooperative Leadership

All NCUA appointments result from political ambitions and relationships.   That need not be inconsistent with cooperative leadership.  Earlier NCUA appointments included candidates with credit union experience such as retired and active CEO’s, state coop regulators, CUSO executives and even some with trade association connections.

Knowledge of the evolution of the credit union system and its current status can make regulatory decisions more informed and relevant. The unique structure of the NCUSIF, the potential for a fully engaged CLF, the self-interested trends in mergers, the paucity of new charters, and the continuing use of members’ savings to pay off bank shareholders are critical industry topics.

Even with experienced senior advisors, appointees without credit union knowledge easily default to Agency staff perspectives.

As the combined America’s Credit Union marches forward under a single banner, this appointment is an immediate test of its potential role.  Will the promise of enhanced influence bring forth potential nominees who have cooperative experience? Or will the person be another unknown to credit unions? Can the industry hope members’ needs will  be paramount in a proposed board member’s regulatory views?

The appointment, whenever announced, could provide vital insight about potential benefits of a united credit union voice in DC.

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Mid Year Numbers for NCUA

NCUA requires all credit unions to post monthly financial statements for members.

Similarly NCUA posts monthly financial statements for the three funds it manages. This is an important  transparency commitment as all the agency’s revenue is from money provided by credit unions.

Timely publication permits credit unions and the public to follow how the funds are used and overall spending trends.

These monthly updates are a promise the agency made when the 1% NCUSIF underwriting was agreed to by credit unions in 1984.  The dominant concern of credit unions with the 1% requirement was, if we keep sending money, how do we know the government won’t just keep spending it?  (see pgs 18-19 in NCUA’s 1984 Annual Report)

Timely publication is critical for credit unions which provide the funding, to be able to monitor what was being done with their member’s money.

 NCUA’s June 2023 Operating Expense Trends

The following is an overview of one aspect of each fund’s financial report, the trend in operating expenses.

         Operating Expenses   ($ millions)

Fund    YTD June ’22   YTD June ’23     % change

CLF          $       521          $     1,051                  98 %

Op Fund $ 61,145          $ 69,770                14.1%

NCUSIF   $101,164        $115,010               13.7%

TOTAL     $162,840       $185,131                14.1%

These numbers actually understate several expense or cash outlays.   For example the NCUSIF operating expense does not include a YTD $20 million increase in the provision for insurance losses (a non cash outlay).

In the Operating Fund, NCUA has spent $3.4 million in cash outlays for fixed and intangible assets, but only records depreciation expense of $1.8 million.

Depending on which measure of inflation one uses, the 14.1% increase is three to four times (300%-400%) the most recent reported annual price increase.

The Board Action with a Budget Surplus

The staff’s mid year budget update in the July board meeting, projected a $5.1 million surplus by year end.

Here is the recommendation from staff of how to use these funds:

Based on projections for the remainder of the year, staff estimates that spending will be approximately $5.1 million lower than the Board-approved 2023 Operating Budget. Reprogramming a portion of this projected surplus would provide funding for new requirements related to cybersecurity in the Office of the Chief Information Officer (OCIO), support to credit unions provided through the Consumer Access Division in the Office of Credit Union Resources and Expansion (CURE), reasonable accommodations, and the hiring initiative. The estimated cost of these proposals is $737,000 for 2023, which is factored into the estimated budget surplus stated above. Six new full-time positions related to the NCUA’s cybersecurity efforts and CURE are part of the proposed action for Board consideration. 

Credit union concerns about the spending of their funds sent to NCUA are as relevant today as in 1984.   Staff routinely recommends and the board approves the carryover of funds unspent from prior years, not their return to credit unions.   Or, as in this situation, adding new positions and increased expenditure in other areas as described in the memo.

NCUA provides credit unions with the facts.  It is up to credit unions to respond.   After all, it is the members’ money.

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NCUA’s General Counsel On Directors’ Number One Responsibility

Fiduciary Duties “Are Properly Owed to People, and Not to Entities”

Credit union leaders often state priorities for their financial institution’s future but not how members will benefit. The following is NCUA’s view of directors’ principal fiduciary duty.

This analysis was in response to a state league CEO’s concerns about a proposed rule on directors’ responsibilities. NCUA General Counsel Bob Fenner wrote on March 15, 2011 as follows:

At the very beginning of your letter, you do not state that you are writing to NCUA on behalf of credit unions. Instead, you and your fellow authors state that “[a]s associations representing 18,280,456 members in nine states . . . we want to call your attention to several key issues.

. . . .” I presume that by “members” you mean the people who are members of the credit unions in your states, and I commend you for attempting to look beyond credit unions as entities and through to the people that credit unions were structured to serve. As our rulemakings make clear, the directors of federal credit unions must also represent the interests of the members of their credit unions.

The “Interests of Members”

I do not believe that a rulemaking clarifying that FCU directors owe their fiduciary duties to the membership of the FCU is a difficult concept or one that should surprise or concern directors. Section 701.4 is intended to make clear that the law with regard to federal credit unions is in direct alignment with the credit union philosophy; that is, that credit unions exist to serve their members; that credit unions are about people, not profits; and that the members own their credit unions. As the NCUA Board stated back in 2006 . . . when making important decisions affecting the FCU, directors should ask themselves the following questions:

What financial services do my members need and want? How do I know this? [And] [w]ill my decision today help the credit union provide these member services in a quality manner and at low cost to the members?

Fiduciary Duties Are Owed to Members

Your letter, however, states that “[i]t is our position that the director’s duty should be to the credit union as an organization, and not to the members of the credit union.” I disagree. As the NCUA Board has discussed at length in rulemaking preambles going back to 2006, for federal credit unions the law (as determined by the FCU Act) and philosophy align: the directors’ duties flow primarily to the membership. Id. at 77154-55.

As a practical matter, however, we believe that in the vast majority of situations what is good for the credit union will also be good for the members. See 75 Fed. Reg. 15574, 15575 (fn. 5)(March 29, 2010). . .

 . . .we also believe that fiduciary duties are properly owed to people, and not to entities. FCU directors must understand the people who are affected by the directors’ decisions and identify which people the directors are serving.

The danger is that, if the directors are allowed to focus only on the credit union when making a decision – without regard to how the members are affected – the directors can justify making self- serving decisions, or decisions that serve primarily the FCU’s insiders, under the guise that the directors are simply doing what is best for the credit union.

Ed. (emphasis added)

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How This Story Ends May Show the Future of a Unique Coop System

Oscar Abello, economic editor at the non-profit reporting site Next City, finds instances where credit unions provide “solutions for liberated cities.”  In his latest coverage, the event is a six plus years effort to charter a new credit union for North Minneapolis.

However the end of the story is not clear.   Will there be a new community financial institution, or will the process be stillborn?

Abello poses this fundamental question:  The travails of Arise Community Credit Union, set to be Minnesota’s first Black led-credit union, raise the question: How hard should it be for communities to have their own financial institutions?

The link to his analysis posted on July 11th can be read here.  While recent events are promising, the charter has yet to be granted.

I have three takeaways from his description of this new chartering effort.

Three Lessons

  1. New charters require people with passion and commitment, that is entrepreneurs who believe in their cause. His article profiles Daniel Johnson the CEO-designate who left a successful financial career to serve a clear community need where businesses have been “disinvesting” for years.

Johnson’s motive for leaving his career security: “The community said,(after George Floyd’s death) ‘We don’t want another park. We don’t want another place just to throw flowers. We want something more tangible, something that we can have as an institution that will be around long after we’re gone.’”

  1. In addition to the community’s decline, the market timing was right as Minnesota had just capped payday lenders at 50% APR: One fact: “The average borrower took out nine payday loans, at an average loan amount of $365, and was charged an average of 197% interest per loan.”

The process is not easy as Abello describes:  But chartering a new credit union today is like traversing a long-lost trail through the woods, one that used to be well-traveled but is now overgrown or littered with fallen trees or other obstacles no one has had to navigate previously.

Prior to 1970, there were 500 to 600 new credit unions chartered across the country every year. After a steep decline to near zero, the numbers have never recovered. Over the past ten years, fewer than 30 new credit unions have been chartered across the country.

Changes of leadership, loss of local funding from foundations, the challenges from Covid have led to stops and restarts.   The  Minnesota Credit Union Network and AAUC have stepped up to help.  Credit unions have contributed to a $1.0 capital fund and pledged deposits of several million when up and running.

NCUA is apparently requiring $3.0 million in committed capital based on the credit union’s projections to be $10 million in assets in three years-or a 30% net worth ratio.  This capital base would equate to 50% of the first year’s asset goal of a $6 million balance sheet.  This is an amount not required by law, regulation, or common sense.

In addition to this enormous fundraising barrier, the requirement distorts the fundamental dynamics of self-help for a new charter.   Raising capital encourages investments in fixed assets and operational capabilities that may not be required for years.  It discourages the boot-strapping and learning that must occur when a new  charter reaches out to find the best ways to serve their community.

  1. The chartering process is failing the communities which most need credit union support. Abello points out that “out of 4,700 credit unions across the country, only 500 are self-designated minority credit unions.”

The executive director of the Minnesota Credit union foundation has a new goal from this effort: “One thing that we’re working on right now is coming up with a playbook because the chartering process is quite complex, and really trying to take the learnings that that we’ve had working with Arise and trying to come up with a resource that’s going to be helpful for additional groups going forward.”

Abello tentatively answers the question he posted at the beginning with this observation:

“If a community wants it, if it can prove there is a market for such services that no one else is meeting, and if it can marshall the necessary financial, professional, technological and other resources necessary to pass regulators’ muster, then for now, any community has the right to try and answer the question for itself.”

The obvious answer is few would want to navigate this obstacle course before even entering the market’s fray.

Why did CEO-designate Johnson decide to join a startup in this context of financial consolidation, established competitors and bureaucratic barriers:  “It’s important for people to be able to see that an institution has planted a flag that really represents them and isn’t driven by stockholders.”

In other words:  You own it.  But will that motive be enough to overcome a process that discourages new coop charters?

How this story ends may be a harbinger for the future of the unique credit union financial system.

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The Source for Credit Unions’ Greatest Peril

When concerns are raised about risks to credit unions’ future, the most common threats  are perceived to be “out there.”   The potential for recession,  a continuing rise in rates, cyber threats, technology innovations, or other external marketplace disruptions.

However the greatest challenges may not be external, but closer to home.   In a speech to a major credit union conference, a former NCUA Chairman described his five greatest concerns as:

  1. The combining of the deposit insurance funds;
  2. The possibility of merging the federal regulatory agencies;
  3. Doing away with credit union’s tax exemption;
  4. Abolishing the CLF and having credit unions go into the Federal Reserve bank;
  5. The FFIEC requiring expanding its regulatory disclosures for credit unions comparable to banks.

The concerns are from a speech by Chairman Ed Callahan to the 49th Annual Meeting of CUNA in 1983.  (Source Credit Union Magazine, June 1983, pg 10)

Two lessons.   What Ed describes is exactly the sequence of events that led to the demise of the S&L industry as an independent  financial system.  While the tax exemption was ended in the early 1950’s, the later changes occurred in just ten years beginning in the mid 1980’s due to the system’s inability to transform when facing deregulation.

Secondly,  the five  concerns were being considered  by  entities in Washington D.C.   These included commissions on governmental efficiency and reform,  congressional proposals following deregulation, and both Treasury and opponent’s questioning cooperative’s tax exemption.

These winds are still blowing in DC.   They blow harder every time  terms such as “level playing field” and “parity” are used.

Credit unions can continue to excel in members’ eyes. However, they could  lose in the  political marketplace if their primary goal is to have the same regulatory options as their banking competitors.

Why some in Washington will ask, do we need a separate agency to oversee the same activities?

 

 

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Two NCUA Chairmen Report to Congress on the State of the Credit Union Industry

Following are excerpts from two NCUA chairmen on the state of the credit union system.

Both presentations came following severe economic disruption.  In one case the events included double digit inflation and unemployment levels, plus the highest short term Fed Funds rate ever-in the mid teens.

In the second,  the economy had emerged from a post covid shut down with inflation rising to 9% and a Fed once again tightening.

The two updates were in May before Congressional banking committees, but 40 years apart: 1983 and 2023.

One statement expressed confidence in credit unions, with sufficient agency capabilities and a pragmatic approach for the future.  The primary concern was including credit unions in any potential banking regulation.

The second statement suggests inevitable failures, insufficient agency resources and the desire for “parity” with any  changes to banking oversight.

The question for readers:   Two assessments 40 years apart: Which understanding of NCUA’s relationship with credit unions is most likely to enhance the movement’s future?

We know the answer to the first approach.  What will be the outcome of the second?

From May, 1983: Chairman Callahan’s testimony before the Senate Banking Committee:

The overall condition of FCU’s is “quite good” thanks to the grassroots strength of the CU movement and to the freedom CUs have been given to adjust to local market conditions, NCUA Board Chairman told the Senate Banking Committee.

The committee which is conducting oversight hearings into the conditions of the financial system was told by Callahan that “few if any changes should be made in the existing  CU operational and regulatory environment.”

Reporting on 1982 financial performance Callahan said that savings at FCUs grew by 17.2% and assets rose by 16%.  As a result, CUs increased their share of the overall consumer savings market from 4.25% to 4.5%.

“I’m pleased to report that deregulation really works,” Callahan said.  “It’s time to leave the credit union system as it is for a while and observe the results.”

The committee is considering  potential changes in the financial industry and Callahan warned against the tendency to apply these changes to CUs.   “CUs, he said, “come from a different mold.  The biggest threat to the movement is not competition, but homogenization to the financial services industry.”

(Source:  Credit Union Magazine,  June 1983, pgs 19-20)

Excerpts From: Chairman Harper’s Written Statement to the House Banking Committee, May 16, 2023:

Legislative Requests

The recent failures of Silicon Valley, Signature, and First Republic banks are a reminder of the dangers of concentration risk and the need for effective risk-management policies and practices to manage capital, interest rate risk, and liquidity risk. These fundamentals have remained true throughout all economic and regulatory cycles and have recently been areas of supervisory focus for the NCUA. Credit unions that fail to manage these core issues can and will continue to fail. . .

Accordingly, to better manage such liquidations in the future, the NCUA requests amendments to the Federal Credit Union Act to provide more flexibility to the NCUA Board to manage the Share Insurance Fund, bringing the fund’s operations more in line with those of the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (FDIC). Likewise, as Congress considers amending federal deposit insurance requirements, the NCUA supports maintaining parity between the Share Insurance Fund and the Deposit Insurance Fund. . .

Specifically, the NCUA requests amending the Federal Credit Union Act to remove the 1.50-percent ceiling from the current statutory definition of “normal operating level,” which limits the ability of the Board to establish a higher normal operating level for the Share Insurance Fund. Congress should also remove the limitations on assessing Share Insurance Fund premiums when the equity ratio of the Share Insurance Fund is greater than 1.30 percent and if the premium charged exceeds the amount necessary to restore the equity ratio to 1.30 percent.