Category: NCUA

Surely the biggest human failure is not learning from failure. 

The turnaround of Municipal Credit Union, which NCUA took over two years ago, continues with a six-month ROA of 3.65%.  This strong bottom line raised the net worth from 4.42% to 6.32% over the past year, even while total shares grew 14.2%.

Kyle Markland is the third CEO NCUA has put in the credit union since appointed conservator  by the  New York regulator in May 2019.  He is the only interim leader with a previous credit union CEO track record.

NCUA’s Conservatorship Actions in 2019

On May 17, 2019 NCUA conserved Municipal shortly after it reported a first quarter net worth ratio of 7.6%, delinquency of .77%, and an allowance account funded at 150% of total delinquencies, positive ROA—and no taxi medallion loans.

Just 45 days later in the June 2019 call report, the newly arrived NCUA conservator reported a $123 million YTD loss reducing the net worth to 3.41%.  No reasons were provided.

By the end of 2019 the credit union had undergone a miraculous turnaround.  It reported a $30 million net gain in the 4^th  quarter alone and a total improvement of over $40 million since the  June 2019, $123 million loss.

The June 2021 Results in Context

NCUA’s third CEO selection arrived in mid 2020. The recovery remains steady.   So how did this extraordinary performance in the first six months of 2021 compare with earlier activity?

The credit union has grown to $4.2 billion in assets at June 2021, continues to add new members, and has over 50% of its assets in investments with ¾ less than one year maturity.  Loans are flat and delinquency continues to decline to .54%.

Two other numbers suggest a slightly more modest assessment.   For 63% of the net income is due to significant changes in expenses from the prior year. The provision for loan loss shows a net reduction of $12.6 million for a total reversal of $22.8 from the expense reported the prior year’s first six months. Miscellaneous expense also shows a recovery of $15.4 million a $24.5 million reversal versus the expense of the prior year.  Perhaps a bond claim payment?

Together these two “reversals” contributed 63% of the bottom line.  Without these, the ROA would have been 1.3% still excellent, but not as spectacular.

When Transparency is Lacking, Credibility is Forfeited

Since NCUA’s conservatorship in May 2019, Municipal has reported operating results ranging from the sublime to the ridiculous.  These include a quarterly loss of almost $130 million to a $30 million positive net two quarters later.  The two expense “reversals” totaling $47 million in 2021 are not as spectacular, but raise questions about how such dramatic change happens.

Without clear public explanations the impression is that the performance numbers are either entirely uncertain, or subject to great variation not seen in any other credit union this size.  Either option raises the issue of what is the credit union’s real operating capability versus seemingly arbitrary changes in accounting valuations.

So the good news is that Municipal is on the way back.  The unfortunate news, no one knows how or why. If we cannot learn from failure, one thing is highly probable, there will continue to be more failures.

When the causes of problems are hidden then the possibility of others making similar mistakes becomes greater.

Is Municipal’s turnaround the result of skillful management interventions?  Or just adjustments to exaggerated loss estimates?  Was conservatorship a means to cover up years of ineffective supervision?   Is the current CEO, Kyle Markland, free to make long term decisions to position the credit union, or are all his leadership decisions subject to NCUA approval?

The inability to learn from failure is a human shortcoming.  But NCUA’s lack of institutional transparency is a defect undermining confidence in its oversight and judgments.  Municipal is just the latest of a long series in which NCUA hides behind a practice of not commenting on problem cases.

That silence harms the credibility for NCUA’s actions; but more importantly it undermines the regulator’s reputation for the safety and soundness of the cooperative system with members and the public.

During the 2020 virtual exam and work-from-home administration, NCUA reduced its total NCUSIF and Operating expenses by over $64 million. This result certainly deserves a shout out to the NCUA board which oversaw this.

The million dollar question is whether these efficiencies and exam oversight improvements will be sustained? Or might the instinct to make up for “lost expenditures” take over?

The Numbers Total $64 million

The agency’s operating expenses, after OTR transfer, fell by $3.2 million from 2019. However, the $116.3 million total was still $40.6 million, or 54% higher, from five years earlier. At least for one year this inexorable upward trend was reversed.

The greater savings were in the NCUSIF. Administrative expenses fell by over $10 million to $181 million which is the lowest level since 2014.

The largest amount was in the net cash losses (payments less recoveries) for credit union failures. Net cash losses are a more accurate reflection of real performance as the provision expense has shown little or no correlation to actual losses for the past 13 years.

In 2019 the NCUSIF reported net cash losses of $41 million. In 2020 there was a net recovery of $10 million, the first time this has occurred in the past 13 years. This positive recovery was in a year of the worst economic downturn since the Great Recession.

These NCUSIF savings due to a $51 million loss turnaround, plus $10 million in administrative expense reduction added to the $3 million in lower operating costs, together total $64 million.

Sustaining Success by Incorporating Lessons Learned

These numbers are a tribute to credit union resilience and the ability of all segments of the cooperative system to pivot to virtual management. The critical test is whether these virtual gains can be incorporated as ongoing activities so they are maintained when the COVID adjustments are over. Doing so would mean lessons learned that can bring benefits for years to come, even from a crisis. $64 million is a solid achievement not to be lost.

In my Credit Union Museum video, I described NCUA’s approach to credit unions since 2009 as an era of “regulatory backlash.”  The term summarizes the unilateral imposition of rules, premiums and new examination tests after the Great Recession crisis. The agency repeatedly asserted it was an “independent” ruler and  treated credit unions as their subjects.

One example is the creation of the 424-page risk based capital rule which is so burdensome that it has been postponed for almost 8 years.  Meanwhile the FDIC has dropped this as a required calculation.

One reader disagreed.  He said the backlash began in 1998 with the imposition of PCA on credit union net worth assessments as part of the Credit Union Membership Access Act.  (CUMAA)

However NCUA’s record suggest this is not the case.   When the Supreme Court ruled 5 to 4 in 1998 that the field of membership of a federal credit union could only be a single group, a substantial portion of new members added by FCU’s would have been thrown out if CUMAA not been passed.  It was Treasury, not NCUA, that imposed the PCA, in return for their not opposing this legislative change.

NCUA’s Support for the Credit Union System

The following are brief highlights from NCUA’s 2000 and 2001 Annual Reports demonstrating multiple ways the agency continued to support the credit union system beyond its traditional examination and supervision roles after PCA.

This cooperation began in the deregulation era of the 1980’s.  This early effort culminated in the passage of Congressional legislation redesigning the NCUSIF along cooperative principles in 1984.

Chairman Ed Callahan described this Great Victory in this 1.5 minute NCUA Video Network excerpt from 1984.  His central point is how everyone contributed to achieving this unique result.

The Key Themes of a Cooperative Regulatory Approach

The Annual Report excerpts that follow demonstrate the agency’s efforts at cost control, financial transparency, joint assistance programs, and an overt willingness to support cooperative expansion.   NCUA  recognizes and supports the diverse and unique nature of all credit unions, large and small.

They acknowledge their accountability to the credit union system (stakeholders) in their communication efforts and their stewardship of credit union resources.

This was the culture developed in the three decades following deregulation. These are only a few of many mutual efforts that had characterized this most critical cooperative system relationship in this period.

That mutual respect  is what was lost during the Great Recession and is missing in NCUA’s approach to its role today.

From the 2000 Annual Report

Student Internship Program

The OCDCU 2000 College Student Summer Internship Program was the most successful to date. The program creates partnerships between low-income designated and other credit unions (large or small) and college juniors and seniors to train and develop a pool of potential future credit union managers. The students selected are business, finance or marketing majors.

With technical assistance grant stipends, the 2000 summer intern program matched 29 college student interns with 58 different credit unions. Stipends provided the interns totaled $72,500 in 2000 compared with $67,500 in 1999 for 27 students.  Pg 16

National Small Credit Union Program

The NCUA Board adopted the National Small Credit Union Program (NSCUP) in March 1999. The NSCUP exists to:

• Promote credit union service to people of modest means;
• Increase access to credit unions for individuals in underserved communities by fostering a regulatory environment where small, newly-chartered and low-income designated credit unions can provide appropriate and needed services to members;
• Promote successful, financially healthy small credit unions through appropriate technical and financial assistance; and,
• Facilitate a regulatory environment that empowers small credit unions.

Nearly 500 credit unions voluntarily participate in the program. The NCUA has committed 74 field staff — 13 economic development specialists (EDS) and 61 small credit union program specialists (SCUPS) — located throughout the nation to carrying out the NSCUP objectives.

These specialists focus on increasing access to credit unions and credit union management development through training and mentor relationships. Recognizing the uniqueness of small credit unions and the necessity to maintain an informed staff, OCDCU conducted two EDS/SCUP training workshops during 2000. The workshops focused on increasing access to credit unions, business development, information technologies and alternative capital sources.

Reducing the Operating Fund’s Balance

The 2000 budget projected a $7.4 million net loss to the Operating Fund as the agency continues efforts to reduce the fund balance. However, because of budget savings from vacant staff positions, the net loss for 2000 was approximately $4.1 million. As a result, the Fund balance at year-end 2000 was $2.2 million.  Pg  31 (note: it was $136.3 million at December 2020)

From the 2001 Annual Report

The Board itself demonstrated its commitment to more responsive accountability for agency operations and finances by conducting NCUA’s first ever Public Forum and Budget Briefing, which resulted in stakeholders having a better understanding of the agency’s budget and operations.

Likewise, the NCUA initiated an internal Accountability in Management self-study, which presented opportunities to streamline operations, reallocate resources and improve the overall efficiency of the agency. These important initiatives are being implemented and will remain a high agency priority in 2002.  Pg 5

As part of NCUA’s strategic planning and as requested by Chairman Dennis Dollar, via his Accountability in Management (AIM) initiative, all areas of agency operation are being reviewed to determine efficiency and effectiveness. NCUA’s 2002 budget incorporated many recommendations attributed to that purpose and one result was the consolidation of several central offices.

Consolidation coupled with regional staff reductions, due in large part to the new flexible examination schedule, results in a projected 3.4 percent reduction in staff by the end of 2002 and positions the agency to achieve at least a 4 percent staff reduction by the end of 2003.

Just as the credit unions NCUA regulates and insures continually plan for the future, we will continue to review both the central and regional office structure with an eye toward boosting efficiency and saving cost. We expect many cost saving changes in 2002 — risk-focused examinations, flexible examination scheduling for qualifying credit unions and accountability in management initiatives — will result in an improved examination program and continued good stewardship of agency resources. Pg 8.

In the Future

During my first year as executive director, we made a commitment to establish open, frequent lines of communication with NCUA’s stakeholders. Chairman Dennis Dollar’s groundbreaking idea to conduct NCUA’s first open budget briefing and public forum provided an excellent opportunity for timely, direct input from our key stakeholders. Due to the success of this approach, you can be assured that NCUA will remain committed to providing open forums for gleaning input, which allows for an optimal decision-making environment

NCUA News was produced by PACA and sent to more than 10,000 credit unions and related organizations. NCUA News is often the voice of NCUA for credit union officers and volunteers, those who need to know what is happening in and around the agency. Responding to media inquiries, issuing press releases, advancing media contacts, writing the NCUA News and Inside NCUA, an internal newsletter for NCUA staff, monitoring and updating the NCUA web site and producing the annual report comprise the core public affairs responsibilities of PACA.  Pg 11

Small Credit Union Program

The Small Credit Union Program (SCUP), which is monitored by OCUD, is operated by the regions to promote successful, financially healthy small credit unions (those under $5 million in assets; in operation less than 10 years with under $10 million in assets; or low-income designated credit unions). This is accomplished through appropriate use of technical and financial assistance (e.g., on-site contacts and workshops).

The NCUA Board has committed 78 specialists —17 economic development specialists and 61 small credit union program specialists—to this program. There are 4,381 credit unions that fall within the SCUP criteria that are eligible to participate in the program. At December 31, 2001, there were 721 credit unions participating in the program. During 2001, the regional specialists performed 705 on-site visits providing one on one, on-the-job training.

Another aspect of SCUP is group training, where germane topics are addressed with program credit union officials and staff members. Outreach was in high gear during 2001, with the regions completing 43 workshops. More than 2,100 credit union officials attended these workshops.  Pg 16

 

 

(part 2 on NCUA’s new capital proposal)

The new capital proposal’s complexity and burden is evidenced in that eight senior staff were required at the board presentation. If the agency needed eight, how many senior credit union employees will have to be involved to respond and implement it?

The new rule is 126 pages on top of the 424 pages of the 2015 RBC rule. 530 pages in total.

This proposal imposes three different plans: the 110-year old simple leverage approach for credit unions below $500 million. For credit unions over $500 million, some will have a choice between the not implemented RBC or the new CCULR. An untold number would not qualify for CCULR under the reg, so they will be forced to use the untried RBC.

Mandating $24 Billion Addition to Restricted Reserves

The CCULR alternative raises the well-capitalized minimum to 9% on Jan 1, 2022, and 10% on Jan 1, 2024. The 117 credit unions below the 9% level would have just months to raise an estimated $3 billion to be at 9% or fall under RBC. No estimate was given for the net worth shortfall for these 117 at the 10% level.

The rule also states: Subordinated Debt would not be eligible for inclusion as capital under the CCULR framework unless the complex credit union is also a low-income designated credit union.

NCUA estimates complex credit unions eligible for CCULR must hold approximately $24 billion more as regulatory capital than the total under the RBC proposal. So why would a credit union not opt for RBC?

Regulatory Coercion

NCUA’s logic is that the “simpler” CCULR calculation will cause credit unions to opt for it since 48% of complex credit unions now have total net worth exceeding 10%.

NCUA offers this regulatory “alternative” for credit unions to avoid the burden and unknowns of RBC. All that is required is to reclassify 3% of assets now in net worth from unrestricted retained earnings to the rule-mandated legal reserves, a 43% increase.

Vice Chair Hauptman explained the tradeoff this way in his opening statement:

. . .all of that (prior wording) is an (admittedly long) way of saying that a simpler-yet-higher capital standard isn’t just useful because it saves time and effort. It’s also a way of protecting the system from the problems inherent in any risk-weighting process.

This is not choice, but regulatory blackmail. Here’s one example of how NCUA says this coercion will be applied:

While a qualifying complex credit union opting into the CCULR framework, is required to have a comprehensive written strategy for maintaining an appropriate level of capital, such strategy may be straightforward and minimally state how the credit union intends to comply with the CCULR framework, including minimum capital requirements and qualifying criteria. In contrast, complex credit unions that do not opt into the CCULR framework will be required to have a more detailed written strategy. The NCUA intends to review the written strategies during the supervisory process.

A Lack of Respect for Process and Credit Unions’ Track Record

Springing a completely new capital requirement to augment one that has yet to be tried with at best a 90-day implementation timeframe, is regulatory autocracy. It shows total disdain for credit unions’ proven record of capital management.

Throughout this rule there are many movable definitions and unexplained criteria. The definition for “complex” has no meaning other than asset size. Even that simplistic approach has moved from $50 million, then $100 million and finally to $500 million to define what “complex” means.

Using this superficial asset criteria, NCUA throws its complex blanket over every large credit union. Even the $5 billion State Farm FCU with minimal products would be included.

The proposal uses two different definitions of net worth in the numerator of the capital ratios: one for CCULR and a different one for RBC. (Page 49 proposal). Net worth means one thing and then another. This overturns GAAP accounting by whatever the regulator puts in rules.

Both capital options provide four ways to calculate average assets. This makes intra-industry comparisons at best uncertain.

Even the illusion of capital choice is incorrect. Credit unions can move from one capital plan to another within the same quarter in one part of the rule. However, in another section, NCUA can stop that. Under a new Reservation of Authority, NCUA can prevent a credit union going from one standard to the other.

Credit Unions’ Capital System Is Fundamentally Different from Banking Options

Banking regulators ended the RBC requirement in 2019. The rule requires only a simple tier 1 leverage ratio which is exactly the historically proven credit union practice for measuring capital adequacy.

NCUA has kept RBC and added another banking solution overlooking fundamental differences when comparing the two systems’ capital options and purpose.

The cooperatively funded NCUSIF can provide capital assistance if that is the best solution to address a problem.

This NCUSIF’s role supporting member owned cooperatives is very different from the FDIC’s. NCUA is authorized and has used capital injections and other support (208 guarantees) to return credit unions to self-sufficiency. The FDIC cannot assist privately owned firms to restore their financial solvency.

Banks have two primary equity sources: share capital and retained earnings. Generally, the two are split about 50/50. Bank equity comes in many forms: preferred shares, subordinated debt, public and private common equity. Moreover, there are different organizational structures: bank holding companies and stand alone to increase capital flexibility.

$1 of Credit Union Capital is Worth More than $1 of Bank Equity

Moreover, $1 of credit union retained earnings is much more valuable than $1of bank earnings. The taxation of bank earnings means that each firm must earn $1.25 to $1.50 to retain $1 in reserves. Also, shareholders expect to be paid dividends on their shares or see appreciation in their stocks’ market value.

Credit union capital is Free in all respects. All sources of bank capital have requirements that do not make them “free” when choosing options.

Action Needed Now

When Board Member Hood asked staff if the majority of credit unions opposed the 2015 final RBC rule, staff replied:

“Yes, a majority of the comment letters opposed the proposal in its entirety, and many suggested the rule be withdrawn.”

So why can this comment outcome be different? I think two factors can lead to the withdrawal of this rule:

1. The rule lacks any data, objective criteria or historical analysis as the rationale for increasing the risk based net worth ratio. There is zero objective evidence for the rule.

When commenting, must show the history of their capital details to demonstrate the credit union’s record in managing risk. Include capital plans and other documents to demonstrate your competence.

1. Hauptman and Hood are open to listening and learning. If they are to object to this dramatic extension of regulatory micromanagement, they must be armed with information to counter the unproven assumption that credit union capital is not sufficient.

Hood closed his Board meeting statement:

The world has changed since 2015. The reality is RBC should be a tool — not a rule. If it is effective in identifying risk, put it in the examiners’ toolbox, but the last thing the NCUA should do is impose it on credit unions as an operating model. The juice just isn’t worth the squeeze for risk-based capital because this is a regulatory burden with limited benefit. Again, we already have a risk-based net worth framework as required by law, so this is not needed.”

I would add one thought, what if there is no juice? How many credit unions faced with a 500-page new capital rule will just give up and close?

Credit unions rarely fail from too little capital. They fail because their leaders’ spirits are broken. This could be the final straw for many boards and managers.

Last Thursday the NCUA board asked for comment on a new capital rule that would:

• Raise the well capitalized threshold from 7% to 10%, a 43% increase, in less than six months;
• Establish three separate, different capital rules and provide NCUA the power to override a credit union’s choice;
• Require credit unions that choose the new 10% option to hold $24 billion more in required regulatory net worth than under the Risk Based version passed in 2015;
• Set 60 days only for comment with implementation of the Board’s decision by Jan. 1, 2022

If approved, the result would significantly undermine credit unions’ ability to serve their members and the system’s financial soundness.

Three Capital Standards

NCUA’s proposal introduces a whole new capital standard alongside RBC. The RBC rule from 2015 has yet to be implemented. There is no actual credit union experience with either RBC or this second higher minimum capital standard called CCULR, or Complex Credit Union Leverage Ratio.

The accelerated, short time frame for this far-reaching change is unnecessary and unwise. In the 8 years since NCUA proposed RBC, banking regulators evaluated their experience and dropped it as a requirement. Now NCUA retains RBC and adds another banking creation without any analysis or data for either option.

The most cogent reaction to this proposal was by Board Member Hood who opened his questions by saying: “Mr. Chairman, after serious study and consideration, my preference would be to table the risk-based capital rule indefinitely—or even repeal it—and fine-tune the risk-based net worth rule as needed.”

The Most Restrictive Rule Since Deregulation

This race to alter credit unions’ proven capital framework will severely lesson the system’s strength and resilience. Both options constrain the most important decisions a CEO and board make about their business model: how much and where to invest in member value versus how much to keep in reserves.

RBC is a regulatory tax on every asset transaction made by a credit union. To avoid this regulatory capital tax credit unions can use CCULR, the new “simpler” option. This would increases a credit union’s restricted earnings by 43% versus the current 7% capital requirement.

The most important operational judgments for members are no longer a credit union’s to determine. Rather, NCUA defines a single definition of balance sheet risks, weighs them, and then sets the minimum capital using an untried formula.

All credit union’s transactions are treated identically for the same asset risk whether located New York, Peoria, or Charleston. This one size fits all denies the objective reality that every credit union’s operating environment is different.

NCUA then reserves the authority to change a credit union’s decision or to modify its weightings, definitions and the required capital minimum at any time. Just as it does in the current proposal!

Existing Capital Approach Has Stabilized Credit Unions for 110 years—Risk Based Net Worth Approved by GAO

The proposition that credit union’s minimum capital standards have not been sufficient is false. NCUA provided not a single example, data or historical event to suggest otherwise.

In 1998 the well-capitalized threshold was raised from 6% to 7% as a political compromise to the suggestion that credit unions expense their 1% underwriting in the NCUSIF. There was no accounting or factual basis for this change.

In 2004, GAO reviewed NCUA’s implementation of this new PCA risk based net worth concept and concluded:

We are aware that NCUA is constructing a more detailed risk-based capital proposal . . .and that any proposal should be based on the premise that risk-based capital be used to augment, but not replace, the current net worth requirement for credit unions. The system of PCA implemented for credit unions is comparable with the PCA system that bank and thrift regulators have used for over a decade. and

. . . available information indicates no compelling need. . . to make other significant changes to PCA as it has been implemented for credit unions.

Credit unions start with no reserve capital. The cooperative approach of reserving from earnings has been sufficient to sustain the industry through both macro events and decades of financial innovation including:

• Introducing share drafts, mortgage lending, member business loans, credit/debit cards;
• Building out distribution capabilities including branches, call centers, Internet Retail services and shared ATM and branch networks;
• Investing in CUSO’s to bring scale and collaborative solutions for member value;
• Incorporating the latest financial tools including ALM risk modeling, derivatives and hedges, and off balance sheet servicing to manage risk;
• Building capital to navigate deregulation and open competition, the FSLIC crisis and ultimate industry shutdown, two FDIC insolvencies, numerous recessions, the Great Recession 2008-2009, and the recent COVID economic shutdown and recovery,

Credit unions have demonstrated the ability to establish appropriate capital levels to meet every risk itemized in the RBC rule plus dozens of other events and changes that no model could incorporate.

Board and management have managed their individual capital levels to correspond to their business plans and the local economy in which they compete. Now NCUA wants to override that proven practice with a rule that treats each asset’s risk the same wherever and however the credit union operates.

Tomorrow’s blog will document the proposal’s unprecedented financial and regulatory burdens.

What if an NCUA proposal could reduce your credit union’s ROA from 3 to 8 basis points per year in perpetuity.  Would you care?  Would you even respond to NCUA’s proposal that had that implication?

This could be an outcome should credit unions fail to reply to NCUA’s request for comments on the policy process for changing the NCUSIF’s Normal Operating Level (NOL).  The continuation of NCUA’s NOL financial modeling incantations and Chairman Harper’s desire to remove NCUSIF premium limits have one goal: collecting more credit union funds.

Comments due by July 26 can be filed here. Or mailed to: Melane Conyers-Ausbrooks, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428

Three Urgent Points in Response

In previous articles I have documented how multiple NCUA decisions managing the fund have shortchanged credit unions.  To return NCUA’s oversight of the fund to the best version of itself, three critical changes are needed.

1. Convert all NCUSIF accounting to private GAAP from federal accounting principles. This should require the recognition of the full 1% deposit credit union contribution payable simultaneously with the reporting of insured shares when calculating the NOL. Also, all assets under management in AME’s should be audited and their financial data included.
2. Discontinue NCUSIF financial decisions based on artificial models using hypothetical assumptions entirely disconnected from actual economic data and NCUSIF performance, which are then “projected” years into the future.
3. Develop better management tools to forecast the current yearend NCUSIF outlook based on actual numbers and estimates from real events. The goal should be to manage the NOL in the normal range of 1.2 to 1.3.

Dividends should be paid when the fund exceeds 1.3.  If unusual events such as a period of historically low interest rates necessitate a premium, that should be temporary to remain within the normal NOL range.

Credit unions should oppose NCUA’s current financial conjuring process for the NCUSIF’s NOL. Manage to the normal range. There are no objective facts supporting a change to the longstanding legal guardrails on the NCUSIF structure.

The Origins of the NOL Change

The questions in the Board’s May request show NCUA’s intent to continue modifying the Normal Operating Level cap in place since 1984. This first change was made in 2017.  That board decision was based on financial fairy tales.  The purported models used neither actual economic events nor 33 years of audited NCUSIF performance outcomes to change the longstanding 1.3 upper limit.

This 2017 decision occurred in the eighth consecutive year of positive economic growth and credit union stable performance. It was simply an opportunistic money grab to avoid the political embarrassment of a premium.

NCUA fabricated numbers to approve a 1.39 NOL four years ago so that the NCUSIF could keep more of the $2.6 bn surplus when merging the TCCUSF.  If not raised above 1.3, additional dividends would have to be paid as required by the FCU Act.

Both board members publicly stated their approval was intended to retain these extra funds to avoid assessing a premium for the planned liquidation of the taxi medallion conserved credit unions.  Most credit unions objected to the proposal, but NCUA did not modify a single number.

Another proof of this financial artifice is that prior NCUA boards saw no reason to modify this normal limit during or immediately after the 2008-10 Great Recession.  The reason is simple, the NCUSIF worked as designed.

Carrying Forward a Fabrication

NCUA suggests continuing this financial fabrication process indefinitely.

The request for comments specifically lists criteria to “invent”  moderate/severe recession scenarios with characteristics based on NCUA’s judgment, using “qualitative” factors, and extending these assumptions out five years, more or less. The most important factor of the fund’s financial “drivers” is omitted –the agency’s operating expenses from the Overhead Transfer Rate.  In the past 13 years these expenses exceeded insured losses by $272 million.

This parody of a  financial model was used at the December 2020 board meeting to justify retaining a 1.38 NOL. That staff presentation projected a decline (loss) in the NOL of 16 basis points in a “moderate” recession.

This “forecast” was given in the same year as the worst one quarter fall of GDP ever recorded due to the COVID economic shutdown in 2020.  Despite this severe economic shock, the real NCUSIF outcome was that net cash recoveries exceeded insured losses by $10 million this past year. The “model” shown in December forecasted that the opposite should have happened—a big loss not a gain.

During the Great Recession years of 2008-2010, the NCUSIF’s cumulative loss rate on insured shares was only 2.8 basis points, a fraction of the 16 bps loss projection shown in December’s board presentation.

Every question listed in the NCUA’s request has an implied assumption that a larger and more frequent adjustment of the NOL outside the traditional 1.2-1.3 range from 1984-2017 is necessary. The 36 years of actual NCUSIF performance shows that managing within this NOL range is more than adequate for all economic cycles.

Financial Reporting Erodes Trust and Transparency

What makes the request even more problematic is NCUA’s use of misleading data to obscure the NCUSIF’s financial condition.  NCUA states that NOL at 2020 yearend was 1.26%.  The actual audited reserves to insured shares ratio was 1.318%.  NCUA’s number fails to include the true-up of the 1% deposit on yearend insured shares–an accounting practice followed until 2001.

NCUA’s conversion to Federal GAAP standards in 2010 further confused the fund’s financial reporting.  The NCUSIF’s “federal” accounting presentation of operating results is today converted by staff into a private GAAP income statement format for public reporting. The “federal” balance sheet includes unrealized investment gains and losses in the Cumulative Results of Operations (aka reserves) and omits all “fiduciary” assets in the AME’s including the billions in the corporate estates.

Federal accounting standards are inappropriate for a cooperative fund owned by credit unions.

The NCUSIF must return to private GAAP accounting principles for transparency, the same practice required for all credit unions.  It is the standard used for NCUA’s other three funds: the Operating Fund, the CLF and Community Development Revolving Loan fund

The 36 years of actual NCUSIF performance shows this cooperative design works in all economic cycles and industry conditions.

Not a Resource Challenge

This ongoing effort to permanently change the fund’s long proven NOL structure inverts the real challenge facing the NCUSIF model; the shortfall is not financial resources, but how the fund’s problems and capital are managed.

The largest natural person losses are not the result of a macro economic cycle.  The losses from the $239 million St Paul Croatian and the $40 million member shortfall in CBS Employees FCU were frauds carried out over many years, or decades.

The NCUSIF $750 million expense to resolve the taxi medallion conservatorships is an example of a fire sale to be rid of problems versus creating more cost-effective resolution options.  Why expense $750 million to end its responsibility for taxi medallion borrowers when its own conservators reported shortfalls of only $250 million in the credit union’s final call reports?

Write Now to Sustain NCUSIF’s Financial Soundness

For four years, NCUA has kept this NOL pantomine alive.  Meantime, the arc of NCUSIF performance continues creating a significant cooperative advantage for the system versus the FDIC’s model.

So far the only posted comment is from Mid Oregon CEO Kevin Cole.  He states the key issue clearly in his close:

For many credit unions, participation in the NCUSIF is the biggest, largely unmanageable risk they face. . .Because this risk is tied to actions of the NCUA Board and ultimately, other credit unions, individual credit unions have limited tools to manage the risk. . 

 The NCUSIF through the actions of the NCUA Board has the authority to assess credit unions’ premiums as needed to restore the fund’s equity ratio as needed. For this reason, it is not necessary or desirable for the NOL to be any higher than it absolutely needs to. Share insurance fund reports indicate that most credit unions are well capitalized and pose little risk to the NCUSIF. The credit unions with higher risk levels to the NCUSIF appear to be properly identified and working towards resolution, as evidenced by the low number of failures that cost the fund.

 For the simple reason that the NCUSIF has the authority and the ability to assess credit unions as needed, and credit unions have the means to pay, it makes no sense for the NCUSIF to hold more equity than legally required, except for identified probable losses. The capital belongs to credit union members and should be allowed to be deployed as those members wish.

Please add your voice to Kevin’s.