Category: NCUA

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A Special Time of Year

Ed Callahan as both Director of the DFI in Illinois and as Chair of NCUA, had a post-Thanksgiving practice to recognize the December holiday spirit.  He would find a local radio station that  played holiday music as its full time programming through Christmas.  In  Washington the classical FM stations used to follow this practice.

He kept the volume low, but still  enough to acknowledge the special spirit and joy this time of year can bring.

But work does not go away.   December is the month that the NCUA board will make very consequential decisions on the amount of credit union funds it proposes to spend.

The budget agenda includes how much is spent, the normal operating level (NOL) for the insurance fund, the Overhead Transfer Rate (OTR) taken from the NCUSIF,  and how the full year financials for  three credit union funded operations were managed.

December’s posts will imitate Ed’s practice by presenting music of the season.   At the same time, I will preview some of the data and issues for NCUA’s upcoming budget approvals, along with other observations.

This is a season of joy and beauty, sometimes beyond our understanding.  But amid these moments of glory the real world events  of power used and misused continue.

Angels We Have Heard on High

This French Christmas hymn was translated by James Chadwick and is performed by a traditional choir.

(https://www.youtube.com/watch?v=7RlMuRYvndU)

NCUA’s Budget Creep: Growing from a Specialist to an 8-Person Office

On February 10, 2020 NCUA ‘s IG published an investigation  titled Misuse of Official Time, Illegal Drug Use, Time and Attendance Fraud.

In a March 9, 2020 post, I wrote of the personal indiscretions by Michael McKenna, NCUA General Counsel (July 2011 to November 2019) and his Deputy General Counsel Lara Daly-Sims.

The IG report detailed strip club visits and drinking while on the job from February 2017 through the beginning of the investigation in November 2019.  The General Counsel is the Agency’s senior legal officer providing interpretations and support directly to the NCUA Board and Chair.

Besides replacing the Agency’s two top lawyers, what else did the Board do about this high level leadership failure?   On April 22, 2020 NCUA announced that in a March closed meeting the Board decided to hire a “chief ethics counsel.”

Supervised by the chairman, the press release stated: “The Office of Ethics Counsel will certify the agency’s compliance with relevant federal ethics laws and regulations, promote accountability and ethical conduct, and help ensure the success of the NCUA’s ethics programs.” This responsibility had been under the General Counsel’s office.

This personnel performance failure was resolved by expanding staff, a classic bureaucratic response to a problem. This new position was necessary to inform three board members, their personal policy advisors, senior staff including the executive director and deputy, the general counsel and deputy, and the human resources office the difference between right and wrong behavior!

The real problem was actually a failure of administrative oversight, not understanding morality.  The hiring was a political act to divert responsibility from all the senior staff who worked closely with these people during the episodes described in the IG’s investigation.

But is there any downside for another pair of eyes reviewing the agency’s personnel actions.  There is. It quickly became much more than one pair of eyes.

The 2024 NCUA budget increases the Office of Ethics Counsel to 8 full time staff with an average salary of $293,000 each.  This 15.2%  increase pushes the total 2024  expenditures to $2.449 million.

Some believe that problems are solved by government  spending more.  In this episode of personal indiscretions, the solution has grown from a “chief ethics counsel” to a separate, new legal department of  8 full time employees.

This is the pattern across NCUA’s ever expanding budgets for 20 separate “Offices” and three regions.

Harper and Hood both approved this solution (McWaters was replaced by Hauptman).   Is now the time to assess this ever-growing cost to determine whether there are more efficient ways to address the Agency’s ethical climate?

If safety and soundness is the Agency’s primary purpose how does an 8-person Ethics Office contribute?  These positions are in addition to the 44- person legal department and 47 employed in human resources.  Are ethics of the NCUA staff really that big a problem?

 

 

 

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Abundance and Gratitude

The initial Thanksgiving story celebrates abundance.  The timing still coincides with the regular rhythms of bountiful harvests which have filled farmer’s storage elevators to capacity.

Times are good. The American economy grew the fastest of any major country in the third quarter.  Unemployment remains at historical lows and inflation is sinking.  Job openings still exceed available workers.

This harvest holiday combines services of Thanksgiving with opportunities to share  with those in need in our communities.  Locally, families who may participate in an early morning turkey trot race can then go to a food kitchen to serve others  in the afternoon.

It is important for our future together as Americans to see our society from a perspective of abundance, rather than an economy of scarcity.  Even when our consumer driven culture constantly tells  us we need more.

Perspective Matters

Abundance does not mean prosperity is equally or equitably shared.  But without a sense of our own well being, serving others easily becomes secondary.

Recently Callahans Trend Watch presented a 60+ set of data slides with commentary on the state of credit unions as of the third quarter.

The message repeated throughout was that the industry is sound and that trends are normalizing from the exaggerated levels due to COVID.

However not all listeners had the same interpretation.  The headline in one credit union report about the call was Callahan Shows Sharp Drop in Q3 Earnings for Credit Unions.   This news story of the one hour briefing included multiple use of the words down, fell or fell sharply, far below and lower.  The overall tone was one of angst:

Credit union’s loan balances grew. . . but the growth rate was down. . . One way credit unions have coped with tighter liquidity is through borrowing, which has tripled in the past two years. It still accounts for a small portion of assets, but that portion is growing.

This was  the opposite interpretation the presenters gave.  Here are some of the headlines from the data slides:

The loan to share ratio is returning to prepandemic highs

Credit union market share is growing in key areas

Share draft account penetration climbs steadily

Quarterly loan originations are on a par with previous levels

Repricing drives record increasing total revenue

Capital ratios improve from slower asset growth

Operational efficiency improves. . . etc.

“Never Enough”

There is a belief created by America’s market driven, consumer led economy that one can never have enough.  Consumerism in its extreme forms becomes an addiction where spending becomes a way to cope with all of life’s shortcomings.

It unfortunately  appears to be the logic of NCUA as it prepares its budgets for its role with credit unions.  In the NCUSIF board  update dialogue last week, the fact that the actual losses are less than $1.0 million, fund reserves at a level of four to five times the last five years actual total losses, made no difference.   Board members observed the CAMELS trends are negative and Black Swan events could be just around the corner.

The NCUA’s budget for the next two years shows increases of double digit spending.  It is driven by the belief that there are never enough resources even with a declining number of charters.  Spending, like consumerism, becomes an addiction not a response to reality.

A Story of Gratitude

How does one respond in a society whose marketplace messages are constant efforts to make one dissatisfied with their current situation, whether personal or with an organization’s future outcomes?

In February 1982 my family and I moved to Bethesda, MD from Illinois to serve at NCUA alongside Bucky Sebastian and Ed Callahan.

At that time one of Bethesda’s local residents was called the “bag lady.”  She walked pushing her shopping cart filled with plastic grocery bags, cardboard and  personal possessions throughout the downtown area.

When the weather was cold, raining or she just need to stay indoors for a night, she would somehow find a way into a church, right next to her downtown journeys.

Our family could walk to this local Bethesda Presbyterian church, where I sang in the choir on Sundays.  The bag lady’s frequent overnight visits were a topic of conversation about the church’s security.  The questions was, how did she always find another way to get in?  Weren’t we locking all the doors?

One Sunday morning as I came early for choir rehearsal, the minister was in the sanctuary placing the offering plates on the alter for the service.  I noticed as he put the top plate to one side of the cross he took something out and put it in his suit coat pocket.  I asked. “Oh did somebody forget to take the offering?”

I will never forget his response:  “No, that’s just the bag lady.  Every time she stays here she puts something in the offering plate. She has left hairpins, political campaign pins and even clothing buttons.”

This lady had little to none of the world’s possessions. However she still had one of the greatest gifts anyone can ever receive: gratitude.

When we celebrate the varied and numerous  blessings which we all enjoy, may we experience the gratefulness this person knew and shared.

 

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Timeless Wisdom: Reverting Back and a State Contrast

After listening to yesterday’s NCUA board meeting, I recall this observation from a credit union leader who was a keen observer and co-op philosopher:

“The relationship between credit unions and the regulatory agency is one founded on mutual self-respect and the realization that both sides share equally in the responsibility for the survival and future development  of credit unions.

“It seemed as though we would never escape the attitude that the regulator knows best.  But a dramatic change has taken place in the last few years.  We now have a federal regulatory agency which openly concedes that credit union people know more about running credit unions than the agency does.

“The nature of the federal bureaucracy, being what it is, there will be a great amount of inertia to cause it to revert to a less creative and less cooperative approach to regulating credit unions.  I would not like to see this happen.”

Source: Frank Wielga, CEO Pennsylvania State Employees Credit Union, NCUA 1984 Annual Report, page 14.

An Alternative to NCUA

A state charter option is  an alternative to the ever increasing federal burden.

This is the description and public leadership of the Texas Credit Union Commission (CUD).  It supervises 160 state charters and $57 billion of assets:

The Credit Union Department (CUD) is the state agency that regulates and supervises credit unions chartered by the State of Texas. The Department is professionally accredited by the National Association of State Credit Union Supervisors (NASCUS) certifying that CUD maintains the highest standards and practices in state credit union supervision.

Our Mission is to safeguard the public interest, protect the interests of credit union members and promote public confidence in credit unions.

Credit Union Commission

The Commission is the policy making body for CUD. The Commission is a board of private citizens appointed by and responsible to the Governor of Texas. Members: Jim Minge, Chair Elizabeth L. “Liz” Bayless David Bleazard Karyn C. Brownlee Beckie Stockstill Cobb David F. Shurtz Kay Rankin-Swan.

Following is the Commission’s November 2023 guidance on consumer compliance.  It is a very different tone and approach from the debate of this topic at NCUA’s budget hearing yesterday.

Cultivating a Culture of Compliance and Service

As consumer-focused financial institutions, compliance with consumer protection laws sets minimum standards for member service. Developing a culture of compliance means paying attention to compliance and member service at all levels, from the front-line teller to the C-suites of your credit union.

At the Credit Union Department, one of our functions is to process member complaints related to their credit unions. Many of these complaints could have been avoided with a culture of compliance and member service.

Last year we processed 515 complaints, and of those, 156 (over 25%), involved disputes related to fraud or billing errors, by far our largest segment. A robust, member focused, dispute resolution process as required by Regulation E (debit cards, ACH) and Z (credit cards) would have prevented many of these complaints.

Another area of common member complaints surrounds vehicle loans. Many disputes involve the member being pressured by the car dealer to purchase a more expensive vehicle or add-ons such as warranties and insurance without adequate time to consider the costs and need for the products.

Credit Unions should be aware of implications of consumer protection holder rules, where loans originated by a dealer, subsequently assigned to credit unions, are subject to being offset by claims of the borrower against the dealer. See Holder in Due Course Rule | Federal Trade Commission (ftc.gov).

Understanding the requirements of consumer protection rules related to serving credit union members goes a long way, not only in preventing complaints, but limiting losses.

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

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

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

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

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

Corporate America and Expense Control After the COVID Bounty

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

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

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

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

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

The Federal Government ‘s Institutional Spending Predisposition

 

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

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

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

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

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

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

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

How the Cost Savings Were Achieved

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

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

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

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

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

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

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

NCUA’s 2024/5 Budget Hearing on Thursday

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

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

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

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

 

 

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The Onboarding Process of a Credit Union Leader

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

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

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

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

What Makes an Effective Executive Onboarding?

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

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

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

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

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

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

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

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

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

Important Steps in an NCUA Board Member’s Onboarding

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

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

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

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

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

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

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

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

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

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

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Future Forecasts: Who to Believe?

 

From Bloomberg News, November 4, 2023:

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

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

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

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

Warning Signs

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

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

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

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

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

 

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The Latest Cooperative Score:  3 Wins and 107 Losses

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

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

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

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

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

Is Anyone Accountable?

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

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

NCUA’s Prior History of Charter Support

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

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

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

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

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

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

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

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

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

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

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

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

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

Are we the Future?

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

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

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

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

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Wisdom: On Regulation

 

Share Insurance & Regulatory Choice

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

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

 

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

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Government and Investment Portfolio Management

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

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

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

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

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

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

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

The NCUSIF Analogy

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

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

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

Time for Credit Unions to Be Alert

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

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

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

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

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

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

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

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

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

A second organizer:

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

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

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

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

A Long Journey

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

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

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

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

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

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

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

Credit Unions’ Future as Credit Unions

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

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

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

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

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