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.


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.

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.

Important New Data from NCUA’s Recent Board Meeting

In anticipation of the NCUSIF update at last week’s board meeting I described several topics of vital importance. These included the fund’s operating stability, the investment lag from market rates, the loss reserving level and the reliability of projections of future performance.

In answering Board member Hood’s questions, there was important new data from staff.

The Fund’s Normal Operating Level is Stable and Growing

As in any enterprise with a bottom line, NCUA’s outcome is to optimize the fund’s retained earnings. Adding the 1% required credit union deposits, these two factors sustain a stable Normal Operating level.  CFO Schied responded that the actual level of the NOL ratio at June 2023 would be 1.29% if the retained earnings and required 1% trueup were recorded in the same accounting period.

Staff’s NOL projection in May had been for a 1.25% at June. This 4 basis point projection materially understated the Fund’s trends and financial stability.

Moreover, we learned that using a six month old data point to calculate the 1% trueup, overstated the reported December 2022 actual ratio.  There had been a $5 billion decline in total savings in the last half of 2022.  That resulted in  $72 million net returns of the 1% deposits from June’s 2022 total. Using this six-month old 1% datapoint resulted in a higher NOL number than if all three ratio factors were from the same accounting period.

The Fund’s Loss Reserve Equals Four Times Its Recent Loss Rate

CFO Schied reported net cash losses in the fund since the taxi medallion write offs, were just .31 basis points of insured shares.   The current loss provision ($204 million) is 3.8 times this recent experience and equals 1.2% of insured savings.

The actual net cash loss for the first six months of 2023 is only $1 million. However,  over $20 million has been added to the provision expense.  When asked why this difference, Schied replied:  “The general reserve is derived using an internal econometric model that applies estimated probability of failure and loss rates.” 

No details of this model were provided to evaluate  assumptions and whether they were validated by actual experience. This is critical detail for users to have confidence in the financial estimates provided.

The loss provision expense comes directly from retained earnings.  The current level reduces the reported NOL level  by over 1 basis point of insured savings.

The NCUSIF’s Below Market Valuation

Current short-term rates under two years are yielding over 5%.   The NCUSIF’s portfolio has a YTD yield of 1.79%.  This was due to the Fund’s continual investing out to seven years when rates were near zero.  The result was a weighted average maturity for the portfolio of almost three years.  That is the time it will take to bring the portfolio back to par once rates normalize.

The market value of the portfolio went negative in December 2021 and was $1.5 billion below book at June, 2023.   This results in revenue far below current yields.   Investment revenue is the primary driver of retained earnings.  This is the most critical management responsibility in the NCUSIF’s financial performance.

When asked about the status of the investment committee’s  policy review begun early in 2022 Schied’s response: The investment policy has not been updated.  The investment committee has identified a few modest updates and clarification, and is still considering one item.  So again, at this point the policy that is on our website remains the current investment policy.

Is there a more important priority for the board than to understand the reasons for the recent underperformance?  And then to update the NCUSIF’s interest rate risk management policy/practice to avoid this outcome in the future?

The Accuracy of Staff Projections

The June forecast for the NCUSIF’s NOL was 1.25% provided to the  board in late May.  The actual outcome was 4 basis points higher at 1.29%.

The staff gave an updated NOL projection for this December of 1.27%.   Projecting the Fund’s actual numbers at June, this would be a gain of $70 million in net income, or lower than the first six month’s bottom line.  The 12-month growth in insured shares was forecast at 4.2%.   The real growth for the first half of the year was 1.8% from the previous June.  In 2022 last two quarters there was a net outflow of $5 billion.

There was no information to support these assumptions and the NOL of 1.27.   If  share growth is zero from June, and the same net income estimate, the retained earnings ratio would rise to .2948 at yearend. This would be an increase from the actual .2922 at December ‘22.

As with the econometric model used in the loss provision expense, this NOL forecast cannot be evaluated without the underlying assumptions being transparent.

The Board Meeting Process

The board members’ comments, their Q & A with staff and staff’s responses were all scripted.  Board members read their statements, there was no effort at dialogue, there was no learning from the supposedly differing points of view represented.

Only Hood engaged the staff on what the NCUSIF numbers mean.  Chair Harper followed his ever present “MO” of hyping future risks after acknowledging the fund’s sound condition.  Hauptman talked about how interest rates are set by buyers and sellers of money, but did not apply his observation to the current outlook for rates.  And how this might affect future decisions.

Hood’s questions brought out some very important aspects of the NCUSIF’s management.  New information from Schied included a positive  forecast of $12 million in further recoveries from US Central’s AME.

The Q&A highlighted the shortcoming of current accounting presentations and  investment practices.  These can mislead users of the financials statement.

The Fund’s below market investment performance will cause lower revenue for the fund and its credit union owners by hundreds of millions of dollars.

Moreover the investment position compromises the two primary goals stated for the investment committee’s performance.  These are liquidity (never borrowing to meet the fund’s obligations) and meeting all operating expenses, plus dividend.  These two outcomes should be a walk in the park in current conditions.

If the fund were earning 5% on its portfolio, total revenue would be over $1 billion, a result that would pay real dividends to credit unions for their underwriting commitment.

There is great potential for the cooperative structure of the NCUSIF to be a positive contributor to the credit union system.  It will be up to the board to ensure this outcome is indeed realized.

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

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

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

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

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

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

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

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

What NCUA Staff Manages: Retained Earnings

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

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

Dec ‘20:  .3179%

Dec ’21:  .2942%

Dec ’22:  .2922%

Mar ’23; .2883%

Jun  ‘23:  .2908%

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

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

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

Managing the Retained Earnings Outcome

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

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

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

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

The Single Revenue Driver

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

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

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

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

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

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

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

What about Share Growth?

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

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

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

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

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

The 1% True up Calculation

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

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

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

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

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

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

The NCUSIF is a Cooperative Advantage

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

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

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

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





Mid Year Numbers for NCUA

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

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

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

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

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

 NCUA’s June 2023 Operating Expense Trends

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

         Operating Expenses   ($ millions)

Fund    YTD June ’22   YTD June ’23     % change

CLF          $       521          $     1,051                  98 %

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

NCUSIF   $101,164        $115,010               13.7%

TOTAL     $162,840       $185,131                14.1%

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

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

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

The Board Action with a Budget Surplus

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

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

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

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

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

FDIC Reports $12 Billion Fund Decline for First Quarter;  NCUSIF Stable and Growing

On June 23, the FDIC released its quarterly financial update as of March 2023. The Fund had fallen by $12.1 billion to $116.7 billion, or a ratio 1.11% of insured savings.

The largest factor in this decline was an increase of $16.7 billion for the loss provision expense for the two bank failures and potential shortfall on the resolution of First Republic.

The Fund’s revenue was primarily from quarterly premium assessments of $3.3 billion (83% of total).  Earnings from investments were only $661 million.   In addition to the loss provision and operating expenses of $508 million, the fund realized a loss of $1.7 billion on sale of investments.

The FDIC’s Assessment Practice

The quarterly premiums are calculated on average consolidated total assets minus tangible equity, not insured savings.   This assessment base is $20.7 trillion or twice the $10.5 trillion of insured deposits at the end of March.

These quarterly fees are not a single rate for all banks.   Rather for the first quarter they are based on CAMELS score and balance sheet complexity.   The range from a low of 2.5 to 42 basis points of each bank’s assessment base.  The annualized total premium for the entire banking system using the first quarter total is approximately 6.4 basis points.

The FDIC presents no other information about the quarter such as a standard balance sheet, income statement and cash flow reports.   So it is not possible to track other performance indicators such as the total loss provisions and management of the FDIC’s investment portfolio.

The March quarter was the first significant bank failure in at least the past eight years as shown in the historical table II-C.

The FDIC’s conclusion about its financial situation is that it will return to its statutory minimum reserve ratio of 1.35% under the DIF Restoration Plan approved on September 2020 by the required time frame of September 2028.  What is unstated is how high the quarterly premiums will be will have to be to make this goal.

The NCUSIF’s Status

NCUA posts the NCUSIF’s monthly financial statements for public review.  The latest is for May 2023 and shows a stable fund  with positive earnings $70.2 million which is an increase versus the prior year’s $67.2 million.

This result is due to the $50 million increase in revenue from the rising yield on investments.  This offset a $14 million increase(16.5%) in operating expenses and a $10 million higher loss provision expense compared to the first five months of 2022.

The fund’s retained earnings as a percentage of insured shares has stayed stable throughout the first five months at .297. Adding the 1% required deposit gives a normal operating level of almost 1.3%.

The most challenging part of the NCUSIF’s management is the investment portfolio which reports a YTD return of 1.76%.   The overnight portfolio shows a yield of 5.23% for May but the remaining $18.4 billion earned only 1.4%.

The investment portfolio’s market value is $1.4 billion below book.  This fall equates to 27.7% of the NCUSIF’s retained earnings.    As the fund continues to add to its overnight total, the average duration has slowly declined to 2.86 years at the end of May.

Learning By Comparison

The FDIC’s premiums will continue to be an open-ended fee paid quarterly to build back the FDIC, a process that will continue for the next five years.

The NCUSIF is at the traditional NOL of 1.3%.  As it adjusts the management of its investments, the Fund’s primary source of income, this should result in credit unions looking for a premium from their cooperatively designed fund in the years to come.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Legislative Requests

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

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

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



A Milestone, or Turning Point, from the Past

The Lead: Almost all CU savings are now insured

“More than 99% of the total savings at CUs are now insured by either NCUA or a state share insurance fund, according to the 1983 State Share Insurance Yearbook.  That translates into about $75.5 billion.

“By mid-1983, the yearbook says, only about 200 CU’s in the entire U.S. will be without share insurance.  Only 319 of the almost 20,000 CUs in operation at the end of last year were not insured.  That number will decline this year as share insurance becomes mandatory in Indiana, Nebraska, and New Jersey.   Insurance  is now required of state CUs in 44 states and Puerto Rico. 

“NCUA insurance covered  all FCUs in 1982 (11,631 active charters)  and 5,036 state CUs, while 17 state insurance plans were provided for 3,121 state CUs  in 21 states and Puerto Rico.(Total all insured credit unions 19,788)

Source:  Credit Union Magazine, June 1983, pg. 18.

An advertisement for one of the 17 state-chartered insurance funds.

Milestone or Turning Point?

Today, the NCUSIF is an insurance monopoly for all but a few state chartered credit unions.

The  insurer has become the regulator.   NCUA leaders routinely pronounce  their number one priority-“North Star”- is to protect the fund.

The NCUSIF approval is now the biggest entry barrier for new charters.

This prioritization of insurance  has changed the focus of many credit union leaders.   Instead of a social movement designing alternatives for members’ financial needs, credit unions have become me-too financial providers.

Credit unions are now fully entitled members of America’s financial system with access to governmental and market options similar to most banks.

Some continue to prioritize member well-being and their challenges of financial equity.   Others embrace the open-ended opportunities to pursue the market ambitions of their competitors.

A number of credit union leaders and academics have interpreted the insurance requirement (primarily NCUA) as the most important factor in the evolution of the cooperative financial system-for good or otherwise.

I will look at these assessments in later blogs.

The More Things Change, the More Things Stay the Same

The NCUA’s May board meeting’s most important item was the NCUSIF update.  One slide  highlights why many credit unions are skeptical of the agency’s ability to evaluate its actions as circumstances change.

This  slide states that the Agency’s investment policy will go back to the same 10-year ladder in effect before the current banking and liquidity crises.

Since the March 2022 Federal Reserve  rate increases to counter inflation. many portfolio managers reported large declines in  the market value of  longer term investments.

In most cases, credit unions can  choose to “wait out the cycle” rather than sell and realize an investment loss.  This is because credit unions have multiple balance sheet options to ameliorate the impact on net interest income from holding assets with below market earnings.

However, over this last 18 months of rate increases, many portfolio managers have reviewed their policy assumptions that led to this illiquid situation. When cash flows again generate excess investable funds, I know of no one going back to what they were doing before this cycle began. Lessons are being learned.

This latest interest rate cycle has overturned many market assumptions drawn from the historically low rates in the post 2008-9 financial and then covid crises.  One expected outcome is a higher “normal”yield curve than experienced over the past decade.

The More Things Change  . . .

In the May NCUSIF update, the data show that the NCUSIF’s portfolio has a market loss in each  tranche of its investment ladder. This includes even the very short term amounts under one year.

Yet, as stated in the policy above, the intent is never to have to borrow or sell at a loss.   A difficult goal with ten year investments, a period which will likely experience several interest rate cycles.

The Fund’s  yield for the March quarter is 1.75% or approximately 3% below the overnight rates in the same quarter.

Every 1% below market yield results in an annual revenue loss to the fund of $200 million. NCUA’s only change in its portfolio ladder strategy was announced last fall.  It  paused term investments until the overnights reached $4 billion.  How this amount was determined was not explained.  Nor its impact on overall return or weighted average life.

Below Market Returns Lasting Years

In the May meeting, no board member commented on the Fund’s below market returns and unrealized losses. Board member Hood asked how long it would take for the portfolio to return to par value if the current rate structure became the new normal.  The response was three years, which is the portfolio’s current weighted average life.

Whatever the time frame for a new normal to settle in,  the NCUSIF and its credit union owners are facing below market returns for many more months, if not years.  The portfolio yield is the Fund’s principal, and in most years, only revenue source. The portfolio’s positioning hurts both fund performance and credit union potential dividends.

The only IRR/ALM analysis the NCUSIF provides in its monthly updates is the total portfolio gain or loss versus the current market.  Since December 2021, this indicator has been negative reaching a peak of  $1.8 billion in 2022.  At March 2023 the valuation loss was still $1.4 billion.  Why this very  obvious trend did not cause an assessment of the strategy before the pause in late 2022, is not clear.

The More Things Stay the Same

So what is the staff and board changing as a result of this eighteen months of  NCUSIF’s declines in portfolio value and below market yield returns?

The answer in the Slide is clear: “Once overnight target ($4.0 billion) is met, plan to return to slow buildout of (ten-yer) ladder.”   No board member questioned this approach.  By remaining silent, the board members consented to going back to the same practice that is leading to years of underperformance.

The Distressing Part of NCUSIF Oversight

The dilemma is more than hundreds of millions of lost annual revenue  from a below par portfolio. Those numbers are large and do matter to the Fund’s soundness.

But there is  a much larger challenge: no one is accountable for NCUSIF performance.

Even though CFO Schied presents the numbers he  references other offices when giving specific responses:  the economist for share growth estimates; E&I for the loss expense numbers using an undisclosed model; and legal for lack of clarity for true up options, etc.

The NCUA board  speaks with different views on the fund’s situation.  The Chair says he learned in school that when interest rates rise, bond prices fall. Therefore the Fund’s decline is just what we should expect.  That remark overlooks the whole IRR  risk management responsibility.

Vice Chair Hauptman characterizes any change to the ladder strategy as “trying to time the market.”  Hood’s questions are more targeted, but their import often seems lost on staff.  Example: why the true up mattes.

The distressing aspect is that any real changes to this extended underperformance seem to be fading off into the sunset. In contrast,  the entire industry is actively evaluating its ALM investment assumptions and policies.

Within NCUA committees are formed, policies reviewed, expert and even sometimes cu opinion sought, but there is no person sitting where the buck stops. It’s how bureaucracy functions.  When staff doesn’t know what to do, or the Board can’t agree, nothing changes.

If May’s NCUSIF update is  the best NCUA can do, credit unions should worry about the future of their Fund.

A Past Lesson

After the recapitalization in 1984 there was one practice that may resolve the current status quo approach. One person was responsible for the monthly update and explaining all expenses, reserves and future outlooks.  That person was not the CFO or the head of E&I, but Mike Riley,  He had total performance accountability even when it involved recognizing losses from problem cases.

Today the ideal solution would be for the Executive Director to provide the NCUSIF update. Regardless of how inputs are gathered the process needs a single point of responsibility.

Now no one is accountable.   By dividing NCSIF inputs  into multiple reporting sources, the CFO update  is merely a reporting role.  There is no  responsibility assumed even for accounting issues.

Appointing a single person for Fund accountability is the most critical change the Board could make.  Then the numbers might have real coherence.