Category: NCUA

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

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

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

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

The Surplus Discussions

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

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

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

A $176 Million “Cushion”

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

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

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

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

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

Financial Cushions, Corporate Crisis, and Historical Myth Making

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

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

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

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

Corporate Myth Making

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

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

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

The State of the Corporate Resolution Today

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

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

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

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

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

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

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

 

 

 

 

 

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Experts Views on Why Risk Based Capital Fails

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

The following are the conclusions from several regulators and studies.

 

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Risk Based Capital’s Basic Flaw

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

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

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

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

The Fundamental Flaw of The RBC Concept

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

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

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

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

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

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

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

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

Risk Based Capital Is A Tool, Not A Rule

The risk based capital rule is a mistake.

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

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

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

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

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

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

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

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

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

 

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The Fallacy of Risk Based Capital

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

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

NCUA’s 424 Page Rule

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

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

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

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

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

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

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

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

A 19% RBC Ratio

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

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

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

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

 

 

 

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Are Credit Unions Being Treated Like Bananas?

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

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

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

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

Do we need to worry about banana blight?

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

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

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

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

The Fungus Problem

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

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

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

Monocultural crop

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

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

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

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

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

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

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

The Credit Union Lesson

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

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

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

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

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

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

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“The Best Damned System in the Country”

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

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

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

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

The End of Dual Chartering

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

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

The One Sure Defense: Choice

This prospect of NCUA dominance was foreseen decades ago.   The following is a timely and timeless reminder of this threat in a speech by former NCUA Chair Ed Callahan in 1986.   The excerpt of these remarks to the Association of Credit Union League Executives is under three minutes. https://www.youtube.com/watch?v=cTMGvXPnVa8

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

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Mergers: Can’t We Do Better than This?

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

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

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

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

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

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

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

Is the credit union system vulnerable to this political critique?

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

The Credit Union’s Website Promises

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

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

Member-Focused Attention Meets Diverse Banking Options

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

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

Member Ownership 

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

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

Open to Anyone — Become a Member Today!

What South Division is Telling Members Now

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

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

Voting by Proxy: A Foregone Outcome

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

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

What is Left Unsaid

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

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

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

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

A Challenge for the Credit Union System

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

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

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

When Collaboration is Most Needed

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

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

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

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

 

 

 

 

 

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What Credit Unions Can Learn from the Norwegian Women’s Beach Handball Team

While the Olympics are over, the stories of international sporting lessons are not.  These sometimes transcend individual athletic feats and tell of hard-fought life challenges.  One of these stories is about the Norwegian Women’s Beach handball team.

The team was fined $1,500 euros for wearing “improper clothing” in the sport’s Euro 2021 tournament.

The European Handball Association’s Disciplinary Commission fined the players for their protest in refusing to wear the regulation bikini-bottom to go with midriff-baring tops.  The rules require the bottoms be “a close fit and cut on an upward angle toward the top of the leg” and a maximum side width of 4 inches, according to International Handball Federation regulations.

Male players are allowed to play in tank tops and shorts no longer than 4 inches above the knee.

“It’s not [appropriate clothing for] the activity when they are playing in the sand,” stated Norwegian Handball Federation President Kåre Geir Lio.

Norway’s Ministry of Culture upon hearing of the fine said: “This is completely ridiculous! How many attitude changes are needed in the old-fashioned international patriarchy of sports?”

Old-fashioned Patriarchy

The belief that those in authority have the exclusive right to set the rules is not limited to sport.

Scholar, teacher Dr. Beatrice Bruteau (1930-2014) wrote about this human failing as follows:  The theme that explains many of our political shortcomings is domination. We see it in the way decisions are made in our families; in the way orders are given at work; in the way social life is structured in our city by gender, race, and wealth; in the way our industry or profession relates to its competitors or its market or its clientele; in the way governmental agencies function. . .

Domination is a relation that does not work the same in both directions. One commands, the other obeys. One shows respect, the other accepts it but does not return it. One gains privileges from which the other is excluded. 

Positions of power, whether elected, appointed or even earned, can distort an occupant’s assertive self-assurance.  Once in office it is easy to presume wisdom inherent with the responsibility.  The next step is exercising authority without consulting or even acknowledging the various constituencies most affected by the leader’s decisions.

Think no further than NCUA Chairman’s Harper’s recent requests for changes to the legal structure of the NCUSIF, expanded legislative authority for the CLF, or a new complex three-part capital structure for credit unions.  All were proposals drafted without consultation or even demonstrated need by those most affected.

One only hopes that the courage and spirit of the Norwegian women beach handball resides somewhere in credit union land. Otherwise, credit unions may all end up wearing the same  “close fit, cut at an upward angle, with a maximum width of 4 inches” uniform rules justified by nothing more than “old fashioned patriarchy.”

 

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Conserved Municipal CU Shows “Progress”

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 4th  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.

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NCUA Reduced Expenses $64 Million During 2020 Pandemic

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.