Category: NCUA

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Member Voices After Being Merged

In June 2018, the NCUA board approved a new merger rule.  The rule was extended to all FISCU’s because the agency believed there were safety and soundness risks if a merger was not done in the members’ interest:

For example, members of a merging credit union who discover, after the fact, that they were inadequately informed about the details of the merger may become disgruntled. The dissatisfied members could create bad publicity, creating a reputation risk for the continuing credit union. Unhappy members could also choose to stop doing business with the continuing credit union, affecting earnings projections.

In contrast to commenters’ assertions, the statutory factors the Board must consider in granting or withholding approval of a merger transaction include. . . the general character and fitness of the credit union’s management.

Members Reacting Post Merger

There is no “after the fact” process for NCUA to learn members’ reactions to the merger of their credit unions.  The following  comment posted on January 14, 2022 to Just a Member is an example of one reaction:

Comment:

Recently, Teresa Freeborn has left Kinecta to manage her Daughter’s Business interests.  The merger of Xceed FCU and Kinecta was a disaster.  After months of wait, the transition was a bust.  Poor customer service.  Problems with online access and mismanagement of credit cards from XFCU visa to Kinecta Mastercard.  I paid off my Visa and the balance rolled to the unactivated Kinecta Mastercard.  I had to file a complaint with NCUA to get it resolved.  I have now closed my accounts and ended an over 40-year relationship with XFCU.  I have found better banking deals at BOA and Citibank.  I think you have made a smart decision, Teresa Freeborn, to exit credit unions after protecting your interests and abandoning the Credit Union members!

George E. Skelton

Today’s social media options provide multiple sources for members’ post-merger experiences.

When PenFed merged with Postal Employees in Madison Wi, in April 2021 the following comments were provided about the subsequent service:

NameWithheld
August 30, 2021

Lousy place. Abusive. Fails to do what’s requested. Online phone help just as bad. Says being done but not. Waited 65 days for free personal checks that never showed. Still waiting for refunds and account closures. Worse place ever in my 45 years of banking. Local Person at Madison Wi extremely abusive. Place needs to be shut down. Don’t waste your time here. Consider a class action lawsuit.

PETER SCHNEIDER
August 24, 2021

POOR customer service…..so impersonal….hate being treated like a number and not an individual.

PenFed’s Merger with Miramar FCU

Years after the May 1, 2017 merger between PenFed and Miramar FCU, members continue to compare their post-merger service to that received prior to the event:

February 8, 2021

The employees here are nice but the service is not efficient – employees do not know procedures for certain requests or processes. When it was Miramar FCU the staff were more equipped to answer questions and work through solutions with members.
Also, the hours are incorrect. Penfed office of Miramar is closed and there was no update on the website nor any message to inform members. Penfed, please update your information on your website and your employees on procedures. 

Joanne
July 31, 2020

It is 1245 on a Friday afternoon and the hours are stated that you are open until 1pm. so why is no one picking up the phone? have been on a continuous ring and redialing for the 15 minutes, until 1 pm. a business is supposed to answer it’s phone. this never happened to me in the the days of mfcu.

Brad Hines
April 9, 2020

This was a topnotch organization when it was Miramar FCU. Since PenFed took over there’s been a complete overhaul of the staff – and not for the better! I’ve had numerous times where tellers have made mistakes, or they just didn’t know what to do and had to ask for help. Most recent situation was transferring a large amount of funds out of a CD that had matured. The teller didn’t know the procedure, so had the manager come over to help. She explained that my best course of action was to put the funds into a “premium” savings account which yielded decent interest. I authorized this, and the teller made the transaction (after the manager had left). Several days later I just happened to check my account online only to see that that large amount of $ had been put into a “regular” savings account that had very poor yield. Fortunately when I called the national help desk they were able to fix this – but what a gigantic error and problem this would have cost me if I hadn’t discovered it!

A member’s report of service at a former branch of Ft. Belvoir FCU, now merged with PenFed, and the credit union’s response:

Chandra G a month ago

I would like to say that I was so hurt when I left the PenFed on Davis Road. A teller was helping me with an issue. I needed a letter to send to my other bank so she had to refer me to a manager. Before I went into the office, I told the teller that I needed that document back when they were done with it.
By this time I was walking in the office with a manager and a member service representative. The teller is so kind so she wanted to tell the manager that I needed the document back. Before she could say anything, Regina Lawton told her, “you don’t need to be in here. Go back out there.”
She then repeated it two more times, “You don’t need to be in here. Go back out there and help them. You don’t need to be standing in here.”

The teller was just attempting to tell her that I needed the document. She was providing excellent customer service!
I couldn’t imagine working for Regina Lawton. If you speak to your employees like that in front of customers, I can only imagine how you speak to them privately. TERRIBLE
Also, the teller DOES NOT know
I’m reporting Regina Lawton. I went to my car, after the incident, and my conscience wouldn’t allow me to leave knowing someone is being treated like this.

Response from the owner a month ago

Hi Chandra, thank you for bringing this to our attention. We will share this with our branch leadership team. We appreciate your membership and feedback.

Google reviews of PenFed’s merger with a Georgia Credit Union

Yasmin 4 days ago NEW

No customer service whatsoever. I’m a patient person so I waited 30 minutes to eventually walk away and take my business somewhere else. But what I don’t tolerate is when you have 2 customer service reps just staring at the group of people waiting for membership services. No, we will be with you. No, thank you folks for your patience. Just no acknowledgement whatsoever or managing expectations. Then for some reason, they were done with the prior members, it had been about 10 minutes, and they didn’t come for the next group. Not efficient at all. So rude.

Jason Boyd 3 weeks ago NEW

This is a federal credit union that is united but you can’t do business with your other credit union accounts (such as safe federal credit union) unless you have an account with them directly. Not only is that greedy but a poor business model. I will never bank with you and I will make sure no one I know does either. Oh, and thanks for the 15 minute wait for nothing too btw.

Where’s the Problem?

NCUA’s statement that poorly done mergers create bad publicity and soundness risks affects more than a merging credit union’s members.   The reputation of the credit union system is stained.

But the problem is not just badly executed mergers.  When mergers are pursued as an acquisition strategy, institutional ambitions easily become more important than the members’ best interests.

There are fundamental gaps  in NCUA’s oversight  of its merger rule.   Board member Metsger stated at the time of the revised rule:

“Our focus is on ensuring member interests are protected through the regulatory process.”   

However efforts to protect member interests are not evident in NCUA’s supervisory oversight. Egregious self-dealing and hollow future benefit promises are routinely approved.

The member comments above are indications that something is amiss in regulatory oversight.  A later blog will provide some examples of self-dealing, at the members’ expense, routinely approved by the agency.

 

 

 

 

 

 

 

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Managing the NCUSIF-Is It too Late to Act?

What should credit unions do when the regulator who makes the rules, does not follow its own rules?

Yesterday the consumer price increase for calendar 2021 was reported as 7%, the highest in 40 years.  This was not a surprise.   Concern about increasing inflation and the Fed’s response had been growing since the summer of 2021.

Interest rate risk is not a new topic. NCUA first proposed adding an S for sensitivity  to the CAMEL rating in 2016.  In October 2021, the board approved a rule adding this “S”  with Chairman Harper saying:

The NCUA’s adoption of the CAMELS system is good public policy and long overdue.  Separating the liquidity and market sensitivity components will allow the NCUA to better monitor these risks within the credit union system, better communicate specific concerns to individual credit unions, and better allocate resources.

The agency’s description of interest rate risk was straight forward:

The sensitivity to market risk reflects the exposure of a credit union’s current and prospective earnings level and economic capital position arising from changes in market prices and the general level of interest rates. Effective risk management programs include comprehensive interest rate risk policies, appropriate and identifiable risk limits, clearly defined risk mitigation strategies, and a suitable governance framework.

Ignoring its Own Rules

However Just six days prior to this, those responsible for managing the NCUSIF’s portfolio invested $1.0 billion (5% of the portfolio) at an average weighted life of 5.95 years and yield of 1.19%.

These investments actually extended the portfolio’s overall maturity from the month before.

This was a continuation of the robotic process  the NCUSIF investment committee had followed since market rates had fallen to near zero in 2020.

In December 2020 question were raised about these investment decisions: What Is NCUSIF’s IRR Investment Policy? Is this a Gap in NCUA Board Oversight?  The article pointed out NCUSIF’s most recent investments included a 7-year fixed rate yielding only .45%.  Would any reasonable person make this investment at this point in the cycle of historically low rates?

In August 2021, the NCUSIF continued its market tone-deaf investing by placing $1.2 billion at an average weighted yield of .943% and life of 5.7 years.   The analysis pointed out that these decisions were hurting credit unions.  One immediate decision that month cost credit unions $4.2 million in foregone revenue over the next 7 years before it matures.

At the same time, credit unions in contrast, reported keeping 53% of their record level of investments in overnight funds.

Who Makes These Decisions?

The NCUSIF has an investment committee of four people including the Chief Financial Officer, the Director of E &I, the chief economist and the head of the Capital and Credit Markets division.

NCUA preaches interest rate management,  but does not practice it.  One doesn’t have to run a stress test to see the devastating results  of these recent decisions. The  NCUSIF’s monthly data documents the decline in portfolio value as rates began  rising over the past 12 months.

In September 2020, the $17 billion NCUSIF reported a market gain of $586 million. In October 2021, the latest report available, this had fallen  by 97%, to just $16.2 million on a portfolio $20.3 billion.  Large portions of the most recent investments are now worth less than their purchase price.  These low yields will hurt the NCUSIF’s performance for years to come.

Who Is Responsible for this Performance Failure?

The NCUA board receives a monthly report on the NCUSIF and a quarterly in-person update.

In questions about investments as recently as December’s meeting, staff’s response is they are just following Board policy.   In the September’s 2021 board meeting the CFO agreed to make public this investment policy.  It didn’t happen.  Several meetings later, he explained the policy was under review and would not be released until that was completed-at some indefinite time in the future.

The Board unanimously approved the new interest rate sensitivity rule in October 2021, which was first published in March.   It receives the monthly report showing the robotic investment activity and steadily falling portfolio values.  The board’s  words and deeds are far apart when it comes to IRR.

The Costs to Credit Unions and NCUA

When the agency’s highest professionals show an inability to manage the agency’s largest asset, the $20 billion NCUSIF, in accordance with its own rules on interest rate sensitivity, fundamental questions are raised.

Are senior staff competent for this task?  Are these investments what the Board really intends with policy?   Is no one in the agency,  staff or board, able to see the damage this causes to the fund’s revenue and its financial soundness?

Good judgement comes from experience.  And experience?  That comes from bad judgement. How many more bad judgements does the board need?

More than the NCUSIF’s future is at stake, as important as that is.   This year-long example of failure to respond to the changing economic conditions in managing the funds, begs the question: Is the agency capable of overseeing this issue in credit unions?   The IRR monitoring of the NCUSIF is simple.  In most credit unions the issues are much more complex.

Both the NCUA board and senior staff are letting credit unions down.  Sooner or later the bill for this failure will come due.   A simple portfolio yield of just 2% on $21 billion is sufficient to cover the normal financial expenses in the fund.  When these investment decisions lock in rates of 1% or less for 5 or 6 years, a premium may be required to pay for the damage caused by poor management.

If this failure is the outcome for the simple management of the NCUSIF’s IRR, the bigger issue is whether the agency has the grasp to properly monitor the industry through the coming rise in the interest rate cycle.

The first test will be what the leadership does about their responsibility for the NCUSIF.  Will the board and senior staff continue to kick the can down the road, blind to the consequences of inaction, or make a difference now?

 

 

 

 

 

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A Reflection on the Anniversary of the January 6th Attack

Today is the one-year anniversary of an attempt to overturn the 2020 presidential election by mounting a physical assault on Congress’ certification of the electoral college vote.

There have been and will continue to be newly researched and passionate reporting about the day’s riot and events before and after.

One well-reasoned analysis is a short essay entitled A Day of Infamy, a year later.

I agree with this viewpoint but want to suggest another lesson. Does a latent January 6th gene potentially exist in anyone in authority? Or are required formal processes and structural checks and balances sufficient to inhibit such leadership temptations?

Everyone Experiences Authority

The crime of Trump and his followers was an attempted coup to overturn  legal and fiduciary  norms of governance and accountable behavior.

Most Americans have or will occupy positions of authority by election, selection or  demonstrated merit.   For example, most households have a dominate wage earner; sports teams-a chosen captain; each church or non-profit–volunteer boards; and coops led by elected directors.

Every public employee, whether by employment or election serves a constituency to which they should be responsible.

Positions of public authority can bring out the best or sometimes, the worst in people.

Bucky Sebastian and Ed Callahan’s decades long relationship showed the vital role of a leader with the right complementary partner.  Ed was an educator, football coach, administrator and powerful motivator–a person skilled in the arts of leadership.

One of Bucky’s important adjunct roles was to be Ed’s “counter-ego,” able to challenge his too emotional reactions to people or situations.  When Ed was tempted to counter someone using direct authority (as a football coach might call out), Bucky would confront him urging he should change his approach versus blaming the other.

Every leader needs a Bucky-like figure when inclined to follow their autocratic instincts in exercising power.

Many adults will achieve authority in an organization through personal ambition and effort, whether that role is paid or volunteer. Once achieved, there is a natural belief in the correctness of one’s judgments whether based on vision, factual analysis or using the rationale-that’s why I was chosen (or elected). 

The Unique Role of Public Servants

This is especially true in governmental employment. Trump’s authoritarian excesses and public delusions are consequential because of the ultimate power and responsibility of the Presidency.  Many believe he subverted the very premise of American democracy with his lies about the 2020 election outcome.

He ignored traditional formal processes.  There were no longer guardrails the public could rely upon.

Whether elected, appointed or selected through competence, public responsibility is always paired with assumed and/or explicit authority.

From parking enforcement, collecting taxes to setting rules and overseeing them, public roles are different in character from private employment.  There is an implied common duty, but often accountability is diffused or lacking.

Regulators of Cooperatives

I believe the Jan. 6th gene is ever-present, latent much of the time, but always ready to be activated in regulatory actions.

The symptoms include unilateral policy diktats, dismissal of inconvenient facts, neglect of administrative oversight, lack of transparency, and most critically, an unwillingness to work mutually with the credit union system.

This authoritarian impulse is most easily seen when those new to the organization first experience the culture.  Mark McWatters joined the NCUA Board in August 2014. He described Chairman Debra Matz’s leadership of NCUA during  in a public speech  several months later:

“NCUA should not treat members of the credit union community as Victorian era children—speak when you’re spoken to and otherwise mind your manners and go off with your nanny—but should, instead, renounce its imperious ‘my-way-or–the-highway’ approach and actively solicit input from the community on NCUA’s budget and the budgetary process. With the strong visceral response within the agency against budget hearings, it seems that some expect masses of credit union community members to charge the NCUA ramparts with pitchforks and flaming torches to free themselves from regulatory serfdom. I, conversely, welcome all comments and criticism from the community. 

Regulatory wisdom is not metaphysically bestowed upon an NCUA board member once the gavel falls on his or her Senate confirmation.

NCUA should not, accordingly, pretend that it’s a modern day Oracle of Delphi where all insight of the credit union community begins once you enter the doors at 1775 Duke Street in Alexandria, Virginia.”  (source: CU Today May 19, 2015)

McWatters is a very conscientious individual, courteous in manner with a rational temperament. He approached decisions using detailed legal and logical analysis.  His reaction to Matz’s autocratic style only corroborated what credit unions had experienced for years, since the Great Recession and unilateral liquidation of corporates.

The irony is that when McWatters became chairman in January 2016, the agency’s “Stockholm syndrome” effect had overcome this initial misgivings. In 2017 he merged the TCCUSF surplus into the NCUSIF to pay for natural person credit union losses, despite explicit congressional wording against this.  When explaining the action, he also admitted circumventing the FCU Act’s limits on premiums.

My immediate concern is that Chairman Harper, who was Matz’s Senior Policy Advisor and protege, also embraces her view of leadership.  He has shown by temperament, in board meeting exchanges, and prior actions as senior advisor, that he is not a person who should be leading the cooperative regulatory agency.

His primary justification for policy is because that is how the FDIC functions. I have described these positions with his own words  in several articles.

At a time when credit unions are transforming their roles with members due to Covid, Harper’s top priority imposed the hoariest and least relevant of all rules, a 28% immediate increase in minimum capital requirements.  Unlike McWatters when confronting the same issue, the current board members blinked and approved this regulatory tax on members and their credit unions.

The Jan 6th Gene and Credit Union Democracy

NCUA’s performance matters because it regulates  one of the unique features of cooperatives—the industry’s democratic, member-owner governance.

The concept that credit unions are democratically governed is misleading.  Few boards are elected today; most continue through reappointment and renominations when terms expire. Members’ involvement is not sought or encouraged. The idea of a contested election with more nominations than open seats is scary for incumbent directors.

Members are routinely requested by CEO’s and managers to give up their charter via merger for a rhetorically better credit union that members do not know and have no part in choosing.  These same “votes” frequently approve significant monetary handouts to departing senior staff who arranged these sales.  In one case over $35 million of self-funding was set up by a former CEO who continues working at the merged institution.

Even the hint of an external director nomination by petition can cause a credit union to change its bylaws to prevent such an occurrence. Pentagon FCU did this immediately after a successful at large nomination.

Credit unions in these actions are following the unilateral leadership style they see at NCUA.

Democratic Practice in National and Local Arenas

Leadership responsibility does entail authority and explicit processes to function.  How that authority is implemented is fundamental to the sustainability of the enterprise. Whether that is the American democratic political experiment, or a cooperative charter founded generations ago.

The fate of America may feel bigger than any one individual can influence.  But democratic norms and duty are not limited to the Congressional and Presidential elections. It is a skill each can hone whenever we participate in an organization’s governance or membership

The first place to ensure democracy remains meaningful is in the arena s of our participations, no matter how great or how small the organization.

As I consider the January 6th assessments, my hope is that anyone who might carry a gene of this kind, will keep it dormant by exercising democratic efforts in those local and national arenas  we care about.

 

 

 

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Reflections on December’s NCUA Board meeting

No exact count is available, but close to 1,000 pages of staff material including BAM’s, budgets, proposed rules and other supporting material were provided NCUA  board members for December’s meeting.  The material was for decisions having, I thought, great moment for credit unions’ future.

Discerning what matters in such an output in the 5-10 working days when staff’s final versions are delivered is an impossible task.  Decisions are made and priorities set, not by rational debate or objective facts, but fatigue overload.

The so-called “bipartisan” vote is cast because there is no way to develop alternatives. Process overwhelms the participants unless you’re the one in charge of the process.

Here are two reactions about the meeting’s outcomes:

From a longtime colleague:

The slow but steady March to oblivion continues.

There were 18,000 credit unions when I started. Are we under 5,000? And over 1/3 of them are under 50 million.  It used to be 80% of the assets in 20% of the credit unions. Is it 90/10 by now?

You’re 77, I’m 70. The question is “will credit unions outlive us, or will we outlive credit unions?” I’m going to eat well and go to the gym to increase my chances.

By Elon Musk:

Rules and regulations are immortal. They don’t die. And if more rules and regulations are applied every year and it just keeps growing and growing, it just takes longer and longer and it’s harder to do things. (from WSJ interview).

If I heard correctly during the meeting, one part of the new RBC rule dealing with goodwill has a 2029 expiration date. In this case immortality is only ten years.

If Only in My Dreams

My first reaction to the meeting was deep disappointment for both credit union leaders, their members and NCUA directors.  Decisions were disconnected from reality and relevant data.  Political agendas set half a decade ago were now being imposed by fiat, not need.

During this time of year in 1943 during WW II, one of the most popular songs was Bing Crosby’s  I’ll be Home for Christmas. It begins:

I’ll be home for Christmas
You can plan on me
Please have snow and mistletoe
And presents by the tree 

The final stanza:

Christmas eve will find me
Where the love light gleams
I’ll be home for Christmas

If only in my dreams

The melody is memorable; however, the meaning is quite somber. The reality longed for will be just a dream.  Until the bigger events involved are over and life can once again be lived on terms we are free to choose.

In our life’s most earnest commitments, usually work or family, we continue to long for the best. That “feeling of being at home” gives us satisfaction and meaning. We use our creativity to achieve this sense of purpose, where we truly feel comfort.

I slowly realized my and others’ disappointment with the Board’s actions were from my thinking NCUA was “home” for credit unions.

A Mortuary Is Not a Home

The “home” credit unions pursue is their side-by-side journey with the members. It is not a set of rules promulgated by a government agency.  NCUA is no home for credit unions.  Its primary role today is as the mortuary for credit unions.

Looking to NCUA to understand the aspirations of credit unions, their members’ longings and the power of cooperative design is “only in your dreams.”

Hope is intrinsic for life to have meaning.  That is what credit unions at their very best try to deliver in every member relationship.

My error was believing that NCUA leaders might also share that same goal. The meeting was a slap of cold water in my face, an important reality reminder.

For that I am grateful.  It is credit unions that bring members the “wonderful life” this time of year, and all year round.  As the angel Clarence says to George Bailey: “Each man’s life touches so many other lives, and when he isn’t around he leaves an awful hole, doesn’t he?”

NCUA’s primary capacity is creating  holes.

Credit union’s strength is because members believe this is their own financial home which they can trust.

That financial reality is not based on new rules, budgets or even a guardian angel fund.   Instead, it is created from loyalty and relationships built over decades, or what, at this time of year, we call Goodwill.

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Today’s NCUA Board Decisions: Encouraging Credit Unions to Help Members Succeed or Adding More for the Regulator

There are two weeks left in the year.  But we already know that in the second year of pandemic pivots and uncertainties that credit unions have again and again responded to urgent  member needs.

Daily reports of year-end bonus payments and record levels of loan re-financings are adding  millions of dollars to member’s wallets.

While yearend NCUSIF numbers are not yet complete, it appears this will be a second year in a row of net recoveries and no insured losses.

But America is not out of the woods.  Covid continues to play havoc with well laid plans.  Interest rates will go up.   Both costs and prices are in a rising phase-no one knows for how long.

2022 looks to be another year of “transitions.”   To the office or not.  More virtual or hybrid meetings.  Continued efforts to find the right employees.  How can we save costs.

The Environment for Today’s Meetings

The notices below in the DC’s Union train station and a vending machine in a hotel capture what the ordinary person is dealing with in this uncertain economy.

These are glimpses of the  external context for  NCUA’s decisions that will set agency’s spending pattern and priorities for next year.

Will the board’s decisions inspire credit unions to do even more for their members especially those who are vulnerable still?

Will the last two years of virtually no NCUSIF losses encourage the board to adopt the historically proven 1.3% cap and reaffirm the NCUSIF’s long proven cooperative design?

Will the enormous burden and cost in member value of a CCULR/RBC implementation be paused or even tabled, while more data can be gathered about the benefits it is supposed to bring?

The NCUA board is facing hard decisions.  Will they recognize the unique challenges for credit unions to do more for members?  Or more for NCUA?

 

 

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“No Wonder We All Are Bored with NCUA Board Meetings”

This week I asked my good friend Randy Karnes for his perspective  on the upcoming NCUA board meeting (12/16/21). Here’s what he had to say:

Chip hoped that I might inspire the NCUA board to consider its agenda differently; to move away from the agenda’s details and towards activities that would craft a new expectation for us all.   

NCUA and its governance needs to focus on bigger issues. Issues that inspired owners. Issues that made business fun for those who derive  meaning from their efforts. Issues that extended value so that the everyday owners, and professionals reporting to them, would care about board meetings and NCUA’s  oversight functions.

He hoped the three politically selected directors would consider that we need more from the regulator.  We want a group that cares about our professions, our ideas for governance,  and our safety nets.  That the credit union-funded institutions at NCUA are still there to back our plays, our efforts, and our belief in the work ahead.

So I read Chip’s 12/13 blog as the inspiration for my comments, but only found the inspiration to declare I understand why no one gives a sh*t anymore.

Here’s what we’re looking at for Thursday; an agenda that claims we should be paying attention:  Got to wonder?

Multiple issues with the RBC/CCULR capital regulation, a topic of great concern that will affect the CU industry for years to come – a bureaucratic press headline and a staff that cries wolf.

    1. Lots of numbers (NCUA/FDIC) – far from any consequence for those locally looking for numbers that will sustain them.
    2. CU’s have already maintained enough dollars for last few “so called crises” – but who would waste a crisis yet to come?
    3. Is it credit unions  or the NCUA Board  who is focused on “change for change” to their own ends – we see no need for any capital change.
    4. Why trust their “ends” at all, no wonder we all are bored with NCUA board meetings, they are not for us and we hear no mention of us in their words or declarations.
    5. More reg burden for the sake of burden. Another option for NCUA to leverage their situational control of our members’ futures. These new tools are ineffective and simply clutter other work that screams for action.
    6. Confusing stats for the sake of stats, oil and water displays, confusion just to take our eyes off the ball – member value.
    7. Member faith in NCUA thinking is muddled by over wrought academic complexity.  No workman’s simplicity in this group, that would take experience; a care for the work.

Now shift to the budget item.

The next budget is just another edition off  an assembly line of budgets – cranking out ugly babies with no mirrors in sight. More spending wanted, when less would send a message of hope and clarity.

    1. Planners who expect a rising  curve of more money in this to the next year, to every year – void of awareness from past exploits or value adds.
    2. More people to pad our importance, to enhance processes now un-manned, and with no plans for when needed. We need more people without recognizing there are none to be had.
    3. The budget is not about the flow of our industry and the requirements for its sustainability.  It is simply to ensure the NCUA outlasts its ward, that the NCUA is the last group standing.
    4. The industry’s funds are always there to direct, and NCUA will always be  quicker, slicker, and quietly positioned to direct those funds from members’ activities to a bureaucratic engine fueled by money.
    5. Just give us more, we are hungry.

These are the “minutes” for the 12/16 NCUA Board meeting,  ahead of time, a template of expectations from a bored audience of the industry’s CU members – customer-owners who wonder why the value of ownership has lost its punch.

But the funny thing is we all really do still give a sh*t! We are hungry to believe, follow, and to give homage to the NCUA’s efforts if they would simply find the heart to sell us that they still have the will to deliver value to our members. The heart to simply believe in the work of cooperatives. The heart to inspire us with the simplicity of a local community’s effort to lift itself up by work well done.

I know that Chip wants me to declare that 12/16 is a day for us to rally our voices and take on these tactics from the agenda – to shout we give a damn about RBC/CCULR or the board’s broken budget processes, but I can’t.

The only goal I have for the NCUA’s board and bureaucrats is to work harder, and work smarter to bring back those days when we waited in earnest to read the press reports of an NCUA board meeting. To read the reports ready to smile with the effort and the intent that made us believe we had a valuable ally for our futures.

It’s not that America has given up on its institutions that ensure our success; rather we simply forgot how to promote  leaders for these institutions whose roles are to guard and foster our efforts. We need to change how NCUA board members rise to the occasions ahead.

Too many times these directors have started out as lame ducks….and it has nothing to do with their terms. Lame work is becoming the standard.

Tell Me Why I’m Wrong.

 

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Tomorrow’s NCUA Board Challenge:  A Turning Point of Just More of the Same?

Most individuals and organizations  realize at some point in their journeys,  that money does not guarantee success.  Nor happiness.

Thursday’s NCUA Board is, at first glance, all about money.  Tens of millions.  And how it is to be raised, allocated and spent.

Since all NCUA’s funds are from credit union members, it behooves we all pay attention. For NCUA has no other revenue. It is the steward of almost $400 million in annual costs paid by members.

The Board’s financial decisions on Thursday  include:

  • The size of NCUA’s annual and capital budget spending;
  • How these costs are allocated (OTR) between the CLF, NCUSIF and Operating Fee;
  • The limit, or cap, on the maximum relative size of the NCUSIF via the NOL, after which a dividend must be paid;
  • The disposition of the approximately $100 million in surplus retained in the Operating Fund from excess FCU annual fees collected over recent years.
  • Even the proposed CCULR/RBC rule is about money, not just burden. It would require credit unions to retain from revenue initially as much as $26 billion more in reserves that would otherwise be available for greater  member value and service.

All About Money, or Is It?

The justifications for the amounts NCUA is seeking, is that the regulator’s financial resources are what sustains a safe and sound movement.  More financial resources enables more effective supervision.

This leadership approach is a fallacy.  It is often used to explain NCUA’s and even many  credit union decisions.  Institutional strength or capability is measured by asset size, by net worth ratio or for NCUA, the annual spend or dollars on hand.

Resilience Not Resources

However, over and over again especially this year, events have shown that resilience is a leadership characteristic, not the amount of resource an organization controls.   Credit unions with double digit net worth, managing hundreds of millions, even billions, are routinely merging saying they lack the resources to cope with future challenges.  That is a leadership failing, not a resource gap.

Every credit union in existence today was started with no financial capital.  They survived, prospered, and thrived because of volunteer sweat equity, sponsor support, member self-help and shared belief in their purpose.  In other words, leadership.

These critical intrinsic motivations are being replaced with an assumption that more and more dollars are the key to survival.   The thought that resilience depends on more dollars cuts against the grain of what a coop financial system is and can be.

This reasoning is used by some CEO’s who end their tenure with mergers accompanied with large added retirement or financial bonuses.  Greed not gratitude becomes the hallmark career-end.

Who Will Credit Unions Become?

How the Board decides the issues before it tomorrow will send a clear message who they believe credit unions are today and what they will become in the future.  Will it be about more money for NCUA or an effort to inspire credit unions through careful stewardship of their resources and decisions based on objective data?

During the past two years of the pandemic credit unions have shown their best side.  Waving fees, making loan adjustments, lowering charges, and being with members or in person no matter the severity of the epidemic.   The growth in member savings and bottom lines have resulted in back-to-back record setting outcomes and zero NCUSIF insurance losses.

Daily credit unions are announcing bonus dividends to members to share their success in the millions.

The board’s decisions on resources will communicate their view of whether credit unions are special kind of financial service provider that warrants further inspiration, or just a minor-league version of banking.

Will the board present made up worries and projects lacking outcomes to support funding?  Will it succumb to temptation to offer unknowable future risks to retain unneeded reserves?  Will it affirm the idea that every credit union must stand on its own bottom—no system safety nets or mutual support in the event of problems?

All for One and One for All?

Credit union’s manage people’s money to promote other member’s financial opportunity. The well-being of one is linked to the well-being of all.   The same approach has, in the past, applied to credit union’s intra-dependent cooperative system design.

The result is credit unions are much stronger than individual numbers alone would ever indicate.  The member relationships, based on a premise that this financial community will help ones neighbors, creates goodwill and loyalty creating value that far exceeds  financial ratios.

Credit unions are a classic example of American innovation with leaders that have attracted  tens of millions of adherents or fans, called members.  It is self-help, self-financed and self- governed, formed from the grass roots and built on community respect.

A Contradictory Stance On Credit Union’s Role

The NCUA board has represented a different portrait of the system.  In the past decade, NCUA’s priorities suggest credit union’s meaning and value is measured primarily by how many dollars are on the  balance sheet and in net worth.

The whole theme is to get more.  There is no underlying recognition about the practical life of the members or their credit union’s role.  Such a world view cannot inspire the movement let alone feed the soul of  members.

NCUA’s increasingly dystopian views augmented by faulty analysis and misleading numbers blinds them to see what they can’t see.  NCUA no longer see credit unions as they are, because NCUA see things as they are.  They no longer seek information that would change their approach;  rather they look for a story that confirms what they already have in mind.

NCUA’s decisions rest on a simple falsehood that more is necessary rather than a more  complex reality.  Resilience and credit union success is not built on financial performance, but by leaders imbued with purpose and community well-being.

Inverting Common Sense

Even worse is the proposed RBC/CCULR rule.  It inverts the legal maxim that bad cases make bad law. In NCUA’s  view a bad loss requires an ever more complex rule.

When NCUA approves a generally applicable rule like RBC to counter an extreme outcome or circumstance, the risk is that all credit unions’ freedoms are now restricted by the behavior of a very few.

The burden of the RBC/CCULR rule will fall directly on the membership, in the initial proposal by at least $26 billion.

Will the NCUA board respond to the incredible credit union performance during the pandemic for members.  Will it say, “Job well done?”  Or now is our time to get more funds?  Will they respect and recognize the documented track record of the industry since 2008 (reported yesterday) or will they continue to present misleading analysis and mythical future outlooks?

Whatever the outcome, it will set the tone and direction for years to come.  It is unlikely there will be a better time or circumstance for the NCUA board to affirm its faith in the credit union system, the performance of cu leadership during COVID,  and to restrain the never ending instinct  to acquire more resources.

 

 

 

 

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Why the RBC/CCULR Should Be Dropped

The following observations ares from an expert who has worked financial institutions for years.   This academic-style analysis uses  NCUA and FDIC data.

The author sent this summary comment along with the charts:

Any increase in net worth regulatory requirement is a tax on asset growth. Credit unions must grow to maintain market relevance (i.e., they need income to invest in technology, security, regulation, product development, etc.). Adding to the burden just makes it more difficult for credit unions to fulfill their mission. This is a statement of fact.

The corporate credit union collapse was really a double-whammy to credit unions. Not only did they need to replace reserves due to loan losses, but they had to shoulder the burden of NCUSIF and TCCUSF expense/assessments. Had the system been only holding 7% net worth in the aggregate, it would have been able to overcome economic fallout from the Great Recession without falling below 6%. (see the stress test observation #3)

In any system outliers exist. There will always be a few that engage in activities that put themselves at risk (fraud, credit risk, concentration risk, interest rate risk, etc.). The role of the examiner is to identify those activities and enforce policy to make sure they don’t happen.

Asking everyone to hold more capital, because of a handful of outliers, does not fix the root problem; rather, it allows it to propagate knowing a safety net is in place. At the end of the day, it would be a lot cheaper (and more effective) to increase  examinations instead of asking credit unions to hold more reserves.

Observation #1: Sound underwriting protected credit unions during the Great Recession years.

The biggest threat to credit union reserves is loan losses because of the speed and magnitude in which they can occur.

The bars on the chart are net charge-offs as a percent of assets (to facilitate comparison with reserves which are also measured as a percent of assets).

In the five years prior to 2008 and the nine years following 2012, loan losses averaged 0.33% of assets with a small standard deviation, a sign of consistent and sound underwriting.

During a five-year stretch from 2008 through 2012, credit unions reserves were hit the hardest, due to economic fallout from the Great Recession. Loan losses averaged 0.62% of assets (almost double the normal rate). However, credit union losses were 37% lower than FDIC insured banks which averaged 0.99% of assets.

Observation #2: Credit unions added to reserves during the Great Recession years and the economic fallout resulting from COVID 19.

The line on the chart is income before net charge-offs as a percent of average assets. It represents the surplus available to offset loan losses and add to overall reserves (loan loss reserve or net worth). The bars on the chart are net charge-offs, also as a percent of average assets.

The difference between the line on the chart and the bars is the amount added to reserves. This chart includes NCUSIF and TCCUSF expense, to demonstrate the impact of the corporate credit union failure on the system.

Despite elevated loan losses and NCUSIF/TCCUSF expense, credit unions added to reserves every year, including the Great Recession years and during the COVID 19 aftermath.

Observation #3: A stress test shows that at 7% net worth, adequate reserves were present to weather the Great Recession and subsequent corporate credit union collapse.

The line on the chart is income before net charge-offs as a percent of average assets. It represents the surplus available to offset loan losses and add to overall reserves (loan loss reserve or net worth). The bars on the chart are net charge-offs, also as a percent of average assets.

The dots with data labels are the result of a stress test that set net worth at exactly 7% of assets prior to the onset of the Great Recession and subsequent corporate credit union collapse.

Under this real-world stress test, credit union reserves would have dipped below 7% well capitalized but would have exceeded 6% adequately capitalized, even after absorbing just over $8.4 billion in TCCUSF and NCUSIF expense from 2009 through 2013 – the equivalent of 0.89% of credit union assets.

Furthermore, credit unions would have built up ample reserves to absorb the shock to net worth in 2020 and 2021 due to stimulus activity that inflated the liability side of the balance sheet (not the riskier asset side via loans).

Observation #4: Credit unions have consistently maintained excess reserves beyond 7% well capitalized.

The line on the chart is net worth as a percent of assets. The dashed line is net worth plus loan loss reserve as a percent of assets (i.e., total reserves).

Credit unions have consistently maintained excess reserves beyond 7% well capitalized – and those reserves have been sufficient to offset loan losses resulting from the Great Recession, the subsequent corporate credit union collapse and the rush of stimulus dollars injected into the economy in 2020 and 2021.

Observation #5: An impact assessment shows that increasing the capital requirement would affect up to 651 credit unions greater than $400 million in assets requiring an additional $26.5 billion in net worth.

Proposed regulation would impact credit unions exceeding $500 million in assets. Credit unions approaching that threshold would also be impacted as they must prepare for crossing it. The impact assessment looks at the 808 credit unions who currently have more than $400 million in assets as of 2021 Q3.

The bars on the chart to the left represent a distribution of credit unions by net worth strata. There are currently 349 credit unions with net worth below 9.5%. The line on the chart represents the cumulative number of credit unions across the strata. There are 651 credit unions with less than 11.5% net worth.

Credit unions will always hold a buffer above the regulatory net worth requirement. System-wide, credit unions currently have a 3.2% net worth buffer (10.2% 2021 Q3 net worth minus 7.0% well capitalized equals 3.2% buffer). To evaluate the impact of an increase in regulatory net worth, an assumption that credit unions will hold a buffer of 1.5% is used. So, if the definition of well capitalized increases to 10.0%, then a credit union would hold 11.5%, a buffer of 1.5%.

The chart on the right shows the amount of additional net worth dollars required to reach a target net worth ratio. If the regulatory requirement increased to 10% then credit unions would hold 11.5%, requiring an additional $26.5 billion of net worth.

Regulatory net worth is a tax on asset growth. This is a statement of fact. It requires resources be directed to reserves held idle on the balance sheet, instead of being used for investment in credit union products and services, technology, security, wages to provide employees with a fair standard of living, DEI (diversity, equity, and inclusion) and community impact initiatives. Increasing the regulatory requirement erodes competitive position and makes it harder for credit unions to fulfill their chartered mission.

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A Pivotal Week for the Credit Union System’s Future

On Thursday, December 16, the NCUA board will meet to decide a slate of issues that will affect the credit union system for years to come, not just 2022.

The most consequential item is the proposal to approve and implement an entirely new RBC/CCULR capital regulation.

Tomorrow I will share one expert’s  analysis of the capital adequacy of credit unions since 2008.   All the numbers use NCUA and FDIC information.

The data, stress tests and bank comparisons demonstrate that credit unions created and maintained more than sufficient capital during the two most recent crisis, and the unprecedented growth in shares in 2020-2021.

The numbers are tested against actual data.  They clearly document credit union’s superior loan loss record versus banks.

The analysis poses the core issue: How does changing a tried, tested and proven system of capital sufficiency improve safety and soundness?   The rule provides no evidence that it would have in the past, or will in the future.

In fact the outcome is likely to be just the opposite.

If RBC/CCULR rule is implemented in any form, it will place a regulatory burden on credit unions that will be greater than any other rule ever passed.  Every credit union over $400 million (approaching the $500 million complex threshold) and above will have to maintain two different capital calculations under CCULR/RBC.  This occurs no matter which new standard a credit union  might wish to follow. For it will have to constantly monitor which is most advantageous for its circumstances.

Cross industry comparisons will become at best confused and at worst completely useless.   How do you compare a CCULR reporting credit union with one who has adopted the RBC approach with 8% net worth but a 19.5% RBC compliant ratio.

This new burden will fall directly on the members.   Members across the board will lose value for a rule that has no objective validation.

Budgets: Approving Spending Years into the Future

NCUA’s budget has a procedural flaw.  Estimates for the next year’s budgets are based on prior year’s budgets, not expenditures  or what was actually needed.  Therefore assumptions are carried forward, regardless of whether the circumstances justifying prior year’s requests  still exist.

For example one of the budget explanations  is a charge to the CLF as follows:

“total NCUA staffing includes five FTEs funded by the Central Liquidity Facility in 2022”

The CLF has not made a loan in over ten years.   Why should there be a need for any full time staff for an organization  that only manages a billion or more of credit union shares but has never developed a single program or made a loan to assist the credit union system for more than a decade?

Once a position is approved, it never goes away.

NCUA’s budget process is designed to justify spending rather than evaluate whether more resources are actually necessary to do the jobs at hand.

The major budget decisions include:

  • Increasing millions in additional spending charged to three funds plus capital spending;
  • Adding up to 48 new positions in addition to the seven approved at midyear;
  • Approving an allocation of NCUA overhead to the NCUSIF. Will it be based on the percentage of insured savings in state charters or some arbitrary number adjusted year to year without objective validation?
  • Setting the normal operating level (NOL) for the NCUSIF.

The question for the board is whether to direct staff to better manage the resources on hand or continue growing budgets unrelated to actual outcomes and efforts.

Each of these decisions will have significant impact in future years.   Will the NCUA board stop practices that are disconnected from actual facts and analysis, or will it just kick the can down the road?

Read the draft of the NCUA 2022-2023 budget here.

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A Better Way-NCUSIF Losses and Revenue Management

(Part 3 of 3 on the NCUSIF , A Better Way for credit union share insurance)

In 2010 GAO reviewed the FDIC’s financial statements for 2008 and 2009 (report 10-705). The summary, What GAO Found, contained the following comments:

“Because of a material weakness in internal control related to its process for estimating losses on loss-sharing agreements, in GAO’s opinion, FDIC did not have effective internal control over financial reporting  . . As of December 31 2009 the DIF had a negative fund balance of $20.9 billion and it had a negative 0.39 percent ratio of reserves to insured deposits.”

This was the third negative position for the fund since deregulation. In the most apocalyptic and highly erroneous NCUA projections about the corporate crisis during (and after) the Great Recession, none projected the NCUSIF would ever be in a deficit position.

After these two significant  economic downturns in one decade, the NCUSIF stands tall, stable and resilient.  However current NCUA Chairman Harper has openly called for the NCUSIF to be changed so it can mirror the FDIC-an entirely different financial design.

His suggestions show a  lack of knowledge about how the NCUSIF has succeeded in an environment that has seen every  other federal deposit insurance premium-based system fail.

NCUSIF’s Record in Recent Crisis

The 13-year period from 2008 through 2020 includes two serious economic downturns.

The cumulative insured loss rate for credit unions during this period is 1.5 basis points(bps) as shown below.  The annual losses range from 0 in 2020 to 6.96 bps when the taxi medallion losses were recorded in 2017.

The NCUSIF’s financial design rests upon the 1% deposit underwriting which grows proportionately with the insured risk plus an equity cushion that has had a traditional cap of .30 basis points of  insured shares.

The board is required to manage this equity level between .2 and .3.  If the NOL is under 1.2%, then the board must present a plan to return to this range.  Above the 1.3% cap (or other limit set by the board to a maximum of 1.5%), the board must pay a dividend to credit unions to reduce the equity to 1.3%.

Loss Provision Estimates Way off Mark

The fund has never incurred losses close to this 10 basis point range.   However NCUA’s loss estimates have often been spectacularly in error.   This graph shows that net cash losses reported in audits have no relation to provision expense.

The next chart shows how the much the overfunding of reserves  compares to actual losses.

The yearend loss reserve has fluctuated wildly  exceeding subsequent actual cash losses by over 10 times in multiple years (1,000%).

These wide disparities between actual losses and provision estimates require subsequent reserve adjustments.  These create very misleading financial bottom line results.  The provision expense, subtracted from or added back to earnings does not present  actual loss experience in a timely and consistent manner.

The fund’s structure is more than adequate for insured credit union losses.   What is most ominous is that NCUA seems to have no consistent, objective and verifiable method for setting the loss reserve.  That is a management problem, not a fund design issue.

When the  annual operating expenses of 1.8 basis points are added to the 1.5 basis points, total costs average 3.3 basis points.  As outlined earlier, the most persistent increasing expense is NCUA’s overhead transfer, not the costs from insured loses. This expense should be more controllable but has in fact become an increasing funding source covering almost two thirds of NCUA’s annual budget.

What About Revenue?

Costs are covered by revenue.  In addition to the two costs above,  income is required to maintain the retained earnings portion of the NOL growing at the same pace as share growth to keep a ratio in the .20-.30 equity range.

The math is easy.   An example. Assuming $1.5 trillion of insured shares, a cash loss rate of 1.5 basis points requires $225 million of income.   As investments equal 1.3% of insured savings, the an investments yield 1.2% covers losses.  To pay the 1.8 bps overhead expense adds another 1.4% for a 2.6% yield to cover all costs in the most 13 years.

If  the long term growth rate is 6.5% of insured savings, an additional yield of 1.3% is necessary to maintain equity. Using just the last decades results would seem to require a 3.9% yield to sustain the funds NOL.

But this return on investments is not required in most normal years.  And a far lower yield, as in the 2021 of 1.23%, can still result in a very strong bottom line.  Here’s why.

First, average insured losses at 1.5 bps are much higher than the long-term historical outcome.  The 13-year experience reflects two unusual events: the Great Recession of 2008-2009 and the taxi medallion losses.   If those three years removed from the average, the average insured losses are far below 1 basis point.

In 2021, insured share losses have been zero and there have been net recoveries from previous loss expense provisions.  In 2020, there were nil insured losses. In the previous three decades prior to 2009, insured losses were often zero and far under the most recent period’s 1.5 bps.

Overhead expense can be controlled.  It has grown at the same rate as insured shares (6.5%) because NCUA has transferred a disproportionate amount of its budget increase in every year to the NCUSIF—over 62%.  If the NCUSIF expenses grew at the same percentage as NCUA’s overall budget, this would reduce the 1.8 basis point portion significantly.  Moreover the growth in the investment portfolio shows that in 2021, the yield needed to cover this year’s projected $195 million OTR is only 1 bps.

Finally the equity ratio is a range of 1.2-1.3.   It can and has historically varied between a low of 1.24 to the cap set by the board in the past 13 years.  In other words a 1 to 2 basis point variance in yearend NOL is normal.  And if there is a truly unforeseen event, then the premium option can be exercised.

But the average model does provide guidance to the fund’s most important month to month role of managing the investment portfolio.   As described in prior posts, the NCUSIF investment committee seems oblivious to the current period of historically low interest rates.

As recently as August during the increased market worry about inflation and rising rates, the  investment committee acted by rote. It laddered out $1.2 billion (6.2% of the fund) at an average weighted  life and yield of 5.7 years and .943% .  One seven-year investment decision alone cost credit unions $42 million in lost revenue because of the committee’s timing.

This is not the first time the committee has made similar decisions seemingly oblivious of the historically low interest rate period the economy is passing through.

These kinds of investment decisions, the continual piling on of expenses, and significantly erroneous estimates of loss are all examples of inadequate management.  No fund design can overcome human folly.

A Dynamic Model to Follow performance

Even with a 1.22% yield in 2021, the financial reports through September suggest the fund will in fact have positive net income and grow the equity ratio.  Why?  There is minimal loss reserve expense and net recoveries from prior loss reserves, a lower cost  of operations, and a decline in insured share growth from 2020.

A simple spread sheet model can track all these variables in real time.  The spread sheet accessed here uses the September numbers for the NCUSIF and insured share growth.  It projects a year end equity ratio of 28.19 which with the yearend 1% deposit true up equals an NOL of 1.2819%.

So even in an historically low yielding and poorly managed investment portfolio, the fund’s result is within the designed outcome.

Even Better News

Traditionally the fund’s equity has not included the loss reserve which has been expensed from earnings but not used.   When this reserve is added to the yearend actual equity ratio, then the NCUSIF reserves are even stronger, always exceeding .30, sometimes by as much as 10-20 basis points higher.

The Better Way design works, not because it is perfect, but because it is flexible and aligns resources with insured risk through constant 1% deposit required from credit unions.  It tales prudent management of expenses, careful loss control and conscientious investment management.

To continue NCUSIF’s performance pattern, four steps should be taken:

  1. Audit and present the fund’s financial position following private GAAP accounting standards. Reset the NOL cap to 1.3% and follow accounting practice used prior to the 2001 change in recognizing the 1% deposit true up.
  2. Reduce the OTR to 50% to correspond to the percentage of state-insured shares in the fund.
  3. Update the oversight and transparency of the NCUSIF investments.
  4. Continue to minimize losses to the fund by working through problem cases not cashing out losses problems by sales to outside bidders.