Category: NCUSIF

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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.

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A Disturbing Slide in May’s NCUA Board Meeting

If the CFO came to your May board  with a forecast that the credit union’s retained earnings margin would fall by 50% in the first six months of this year, it would get your attention.

That is what CFO Schied presented in the slide below showing a decline in the NOL from December’s 1.3% to 1.25% by the end of this June.  That would be halfway to the 1.20 NOL floor at which the NCUA must come up with a restoration plan.

As summarized in my earlier report, all of the actual credit union CAMELS data, the NCUSIF financial position and other accompanying information was good news.  Especially in the context of the first quarter banking failures and the continuing risk in interest rates.

Board members acknowledged the actual resilience of the cooperative system but then picked up the forecasted alarm.

Chairman Harper suggested the actual data was just “the calm before the storm.”

Vice Chair Hauptman opened his comments stating his objective was to protect “the taxpayers” from NCUSIF failure.

Only board member Hood attempted to get behind the numbers.  He asked how the $12 million  loss reserves expense was determined and the status of proper presentation of the 1% true up.  The answers were a polite stonewall.

Similar to a credit union’s net worth, the NCUSIF’s reserve ratio is an easy shorthand for its financial position.  The calculation is straight forward.   The ratio is simply retained earnings divided by the insured shares at the same date.

This ratio was 29.1 basis points or .291% of insured shares at December 2022.  As of March 2023 the ratio was 28.8 basis points. This .3 of one basis point minimal decline in the first 90 days is a far cry from the 5 basis points projected above.

The projected ratio in slide 8 is a made-up number. Its relevance depends on the assumptions used.  The estimated growth of insured shares to $1.75 trillion is a 7.2% twelve month increase from 2022.  The actual rate of increase as of March 2023 from the year earlier was 2.2%.

The addition to retained earnings for the quarter ending June is just $6 million versus a net income of $41.7 million in the NCUSIF’s just reported March quarter.

The final number in the numerator is the 1% deposit.  The calculation above reverts back to the six-month-old December 31, 2022 total deposits. By using this out-of-date number this invented ratio understates the actual 1% deposit total due from credit unions.  Including this six-month-old deposit liability misstates  the actual ratio and cash due.

The slide’s 1.25%  manufactured outcome became the lead in several press reports. It misinforms about the trend in the NCUSIF’s financial position. The ratio’s assumptions were not explained even though they were significantly different from actual trends through March.

Monitoring an accurate Fund equity ratio matters.

Per stature, the actual NOL is calculated at yearend to determine whether a dividend must be paid should the fund’s reserves exceed the NOL cap. The number is also the floor from which a potential premium could be assessed to increase the NOL to a maximum of 1.3% of insured shares.  Getting this NOL right is vital for every credit union.

More critically the use of a number from an earlier accounting period to compare with a current period’s insured risk total does not align with standard GAAP accounting practice.

Two Accounting Examples

There are direct accounting precedents with GAAP for how the 1% true up should be reported.  They show that the concurrent presentation of insured risk and the legally required true up of the capital deposit base is standard industry practice.

The first example is Deloitt & Touche’s audit of  ASI’s required deposit an identical structure to the NCUSIF.  From the December 2022 ASI audited financials:

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of

December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.   Deloitte & Touche, LLP April 11, 2023

And regarding the deposit requirement:

Participants’ capital contributions that are receivable or payable as of December 31, 2022 and 2021, are presented on a gross basis in the accompanying consolidated financial statements. Included in participants’ equity at December 31, 2022, is a receivable for capital contributions of Primary-insureds of $2,530,000 (no payable). The receivable and payable balances result from annual growth or shrinkage in participating credit union shares and the receivables were substantially collected subsequent to December 31, 2022.

Included in participants’ equity at December31, 2021, is a receivable for net capital contributions of Primary-insureds of $25,200,000. The receivable and payable balances result from annual growth or shrinkage in participating credit union shares and the receivables were substantially collected subsequent to December 31, 2021.  (page 13, Notes to the Consolidated Financial Statements)

The second example is the recognition in the NCUA’s Operating Fund of an “account receivable,” on the balance sheet and the income statement in its monthly statements postings.

From the January 30, 2023 NCUA Operating Funds monthly financial statements:

The cash position is considered sufficient to cover current and future budgetary obligations of the Fund through April 2023, at which time the Fund will collect the 2023 operating fees from its credit union members. . . Operating fee revenue reflects one twelfth of the 2023 Operating Fees.

A longer explanation of this accounting presentation for the expense receivable in the January 2022 statement:

Other accounts receivable, net had a month-end balance of approximately $10.5 million. Its balance increased by approximately $10.2 million from prior month primarily due to the unbilled receivable for the 2022 Operating Fee. The Operating Fee will be invoiced in March and collected in April.

In other words the Operating Fund recognizes a net receivable and records one twelfth of the total operating fee as income each month even though the fee is not invoiced till March and collected in April.

In these instances the amounts legally due are presented as receivables in ASI and NCUA’s    respective audited financial statements and monthly financial presentations.

The 1% True Up Topic Raised Again

Board member Hood asked again about the status of the external assessment of accounting options the NCUA board requested in 2021. CFO’s Schied characterized this external memo saying:  “Each option was “non-optimal.”  An unusual accounting conclusion.

NCUA has refused to publicly release this expert review under FOIA.  What options were reviewed, what data or precedents referenced, and how were the pros and cons presented?

The current practice leads users of the information astray. It potentially shortchanges credit unions’ dividends. NCUA self-interest is keeping the status quo.  The memo should be published for all to evaluate.

The credibility of NCA’s oversight of the insurance fund is a function of the legitimacy of the numbers and explanations it provides. If NCUA is not able to present the Fund’s position accurately, at a minimum it leads to misleading conversations.

How an Inaccurate Number Distorts Discussion

The fabricated 1.25 NOL ratio forecast as of the end of next month led to several illusory discussions and unfortunate public headlines.

One board member commented how the Fund’s “margin was narrowing” before “taxpayers will have to pay.”  That unfortunate characterization shows the importance of knowing real numbers.  In the first 90 days of 2023 the ratio had changed by just .03 of one basis point.

Moreover the only “taxpayers” who are legally bound to support the NCUSIF are members of credit unions. Each sends 1 cent of every savings dollar in their credit union’s 1% deposit in the Fund.

The board member’s observation that “there is not a lot of room between 1.2 to 1.3 equity” unfortunately mischaracterizes the fund’s actual operating performance since 1984.  The long term insured loss rate for the fund is just over 1 basis point.   Even in the 2008-2010 the net cash losses from natural person credit unions were 3.5, 2.0 and 3.0 basis points of insured shares.  The highest cash losses in the three years was $228 million, nowhere close to the “billions” response in the meeting.

In the most recent four years (2019- 2022) which includes the Covid crisis, the economy’s total shutdown and a rising rate cycle, the highest loss from “old school failures” was .3 of one basis point.  In 2021 the Fund reported actual net cash recoveries.

An accurate presentation of past and current NCUSIF performance is important in understanding the unique design and resilience of the NCUSIF.  Because of this collaborative resource, the credit union cooperative system is much more stable than FDIC insured bank premiums.

The Fund’s relative size to insured risks remains stable in all circumstances.   The 10 basis point guardrails (the 1.20-1.30 operating ratio range) today equates to almost $1.8 billion. For comparison, the NCUSIF’s entire total insured losses from 2008 through 2022 were $1.9 billion.   The operating expenses in this same period were over $2.4 billion.

The legislative guardrails were put in for a reason.  Credit unions feared that open ended funding would just lead to unchecked spending by NCUA.  This is what has occurred through increasing the Overhead Transfer Rate allocation to shore up the agency’s ever increasing budgets.

Constantly rising expenses, not insured losses, are the Fund’s largest drain on reserves.

Everyone Can Project NCUSIF Yearend Outcome

Forecasting the NCUSIF’s yearend NOL ratio is simple.  Here is the link to a spreadsheet anyone can use. If any difficulty using, please email.

The inputs are portfolio yield, share growth, NCUSIF net income, insured loss and whatever assumptions a user believes are consistent with present trends.  The current numbers include the latest actual NCUSIF updates through March 2023. It projects a yearend NOL of 1.2917.

Tomorrow I will review one other slide that is vital to understanding the Fund’s management.

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A Commentary on  NCUA’s May Public Board Meeting

Even though NCUA’s public board meeting yesterday had a minimal agenda of two items, comments completely scripted, and outcomes pre-determined by design, there is still much to be learned from the live session.

As one NCUA Board member stated, all who are subject to the board’s authority can see if  it is carrying out its  “fiduciary duties” in a thoughtful manner.

Were the presentations documented with relevant and timely information? Were key issues raised? How knowledgeable were staff and board with the subjects?

While reports of the prepared remarks or occasional comment are helpful, there can be much more to be seen from the public “performance.”

The Context for the Meeting

The two agenda items were the quarterly NCUSIF update and a proposed change to the charitable deduction accounts (CDA’s).

However the external context was especially relevant. In addition to the continuing economic and financial uncertainty there is the current government debt ceiling political impasse.  Would the many  government employee focused credit unions  be affected by a temporary halt of payments?  This topic was not raised.

The Good News

Despite political and financial uncertainties, NCUA’s field  examiners reported the lowest percentage of code 4 and 5 rated credit unions in decades: just .29% of insured shares.

How did this happen? Are credit union leaders just better managers than their competitors? NCUA a more effective regulator? Or credit unions just lucky at this moment?  What one board member cryptically called the “calm before the storm.”

Only Hood provided an analysis for the current state of the system:

 Our public financial postings and disclosures and credit union performance highlight the unique character of the cooperative system—a system that was the basis for rejecting the FDIC premium models in years past and still in use today and designing a uniquely cooperative approach. The credit union system is a unique financial system, and our regulatory and Share Insurance Fund framework should reflect this.

Certainly the data summarized is great news in the current context. But end of story?  No.  A number of explanations and  data points offered were unexamined.  Questions would have demonstrated a better grasp of several critical areas of NCUA board oversight.

Issues Left open and Questions Not Asked

 

CFO Schied’s fund NCUSIF update was a literal reading of numbers from ten slides with no accompanying analysis.

He did point out that the number of NCUSIF insured had declined by 59 in the quarter.  In contrast the board complimented staff on granting a new charter.

However no board member spoke to  the critical question.  Is this rate of  annual decline of over 200 credit union charters acceptable?  For any industry opening 1-3 new locations a year while shutting down 200 which existed for decades, raises the question: is the system sustainable?

Some would respond that this trend is OK because these are mostly smaller mergers and total credit union members keep growing.

However from the member-owners’ perspective, these are 200 charter failures. Suggesting a chairman’s award for a new charter or two would seem a miss-focus compared to the oversight of 200 charter closures.  Reducing charter cancellations would seem to be the first priority; getting a new one is a multiyear ordeal.

The CLF and Credit Union Liquidity

 

All three members mentioned the need for  Congress to again restore the CLF’s temporary Covid era authority.  This has been supported by the assertion that over 3,000 credit unions under $250 million now lack CLF access.  A status only Congress can fix.

I believe this constant tossing the ball to Congress’ lap for CLF coverage overlooks NCUA’s primary responsibility for the situation:

  • For four decades all credit unions were CLF members under existing legislation that is still in place. It was NCUA’s actions that closed down this solution.
  • There has been no credit union borrowing from the CLF since 2009. That borrowing was via the NCUSIF for US Central and WesCorp.
  • Today smaller natural person credit unions rely on two primary sources: the corporate system and FHLB.  Even when the recent banking liquidity crisis occurred, there was no CLF effort to match the Fed’s Bank Term Funding Program (BTFP) which offered all comers loans up to one year in length.

The CLF has been missing in action for two decades. The NCUA has not  collaborated with corporates or credit unions to design a CLF  that credit unions would see as vital and relevant. The FHLB system, a cooperative model, has done this well. The CLF’s liquidity design is not a Congressional legislative issue.  It is an NCUA leadership and management  responsibility.

The NCUSIF’s Performance

The single most critical aspect of NCUSIF performance is the management of its investment portfolio, its primary revenue source.

For the first quarter revenue grew by 49% versus the year earlier.   However the YTD yield was only 1.75% or roughly 3% below the first quarter’s overnight rate.  In November 2022 NCUA staff announced it was pausing its ladder strategy until overnight funds reached $4 billion.  There was little information how this amount was determined and why?

The critical topic is what has NCUA learned during this ongoing rate cycle that would affect how it approaches future activity. When asked about this, CFO Shied said the fund followed a SLY investment policy.  After the $4 billion level is reached it would then go back to the 10-year ladder.

When asked how long it would take the fund to achieve par value in the current rate environment, he replied three years. He listed the required cash flows of $400 million, $700 million and $1.0 billion in that period. That corresponds to the current wighted average life (WAL) of 3.0 years.

Should the current rate situation become a new normal, then  NCUSIF revenue will have recorded below market returns for over four years since the Fed began raising rates in March 2022.

Every 1% of below market yields costs credit unions $200 million annually on the NCUSIF’s $21 billion portfolio.  The current 3% under market yield results in a $500-600 million annual revenue shortfall that will continue until rates normalize and the portfolio reprices.

This revenue gap is twice NCUA’s total annual budget.  It is a performance shortcoming keeping credit unions from reaping the returns from their fund 1% underwriting.  This revenue shortfall is a safety and soundness concern that affects the system’s overall stability. It is not a design flaw, but a management responsibility.

Managing IRR risk, and related fund revenue, is the NCUSIF’s top responsibility.  It should be guided by two questions:

  1. How soon will I need the money? Ans. There is no way to know this, which means there should be a bias toward more, not less liquidity, whatever the interest rate outlook.
  2. What is the earning’s goal for the portfolio? Ans. We know from the fund’s loss history, long term rate of share growth and budgeted operating expenses, that a yield of 2.5-3.0% would  maintain a 1.3% NOL in virtually all scenarios.

Moreover in years of low losses the Fund should pay a dividend. That was the mutual commitment for credit unions to support the NCUSIF’s perpetual underwriting with a 1% deposit.

The essential NCUSIF management skill is IRR monitoring.  Compared with a  credit union’s ALM challenge of managing the two sides of a balance sheet and forecasting net interest income or the economic value of equity, the NCUSIF responsibility is a straight forward.  How should the WAL be adjusted given the two questions above and rate outlook?

The Fed’s rise in rates was announced in advance.  The speed and amount may have caught many portfolio managers flat footed, but the take away should be to enhance IRR, not revert back to a rote formula that is costing credit unions hundreds of millions in lost revenue.

To not address this critical aspect of NCUSIF performance and just accept the intent to go back to the old ways of doing things once the $4 billion goal is reached, is an oversight failure.

The CDA Proposal’s Data Omission

 

The second board item was one page long.  It was a proposal to add more eligible organizations for CDA donations beyond 501 C 3’s.  The specific suggestion was 501 C 19,  nonprofit groups serving veterans.

The proposal would seem reasonable.   However the discussion was made in a vacuum. There was no information provided about this ten year old incidental power to know the scope of the policy decision.   How many credit unions have this account?  How much do they contribute?  What data indicate this authority is actually working as intended?

The 5300 quarterly report has some data. At March 2023 there were 278 credit unions holding  $1.4 billion in CDA accounts.  Seventy-four credit unions had added this account during the past year, and thirteen had dropped it.  Total balances had increased by $85 million or 6.5%

When asking for public comment, it is important to provide  data relevant to the issue at hand. How is this authority benefitting members?

One board member stated the rule’s intent was to provide higher returns by allowing investments not authorized for the credit unions to use in their own portfolios.  The theory was that the expected higher return would allow credit unions to make donations without impacting their net income.  Is that what is happening?

In making policy recommendations there should be a data context, especially when information is easily available, so that commenters can know the impact of what is being discussed.

Next week I will return to the most important discussion that didn’t happen with the NCUSIF.

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Important Credit Union Update This Week

The on-again, off-again commentaries about whether the banking industry’s challenges are over is the context for an important NCUA board update on Thursday.

The only agenda item is the state of the NCUSIF.  As context for this report NCUA also summarizes the state of the credit union system as graded by its on site examinations.

Did the proportion of CAMELS ratings deteriorate from previous quarters?  What do these supervisory in-depth contacts report on the financial health of credit unions?  As interest rates have risen, has credit union performance gone “wobbly”?

We know from Callahan’s May 17 Trend Watch call from March 2023 data that share growth has slowed to just 2.2%. Almost all other macro indicators are positive.

Are Credit Unions Different?

In many operational respects the $2.2 trillion  cooperative system appears very similar to consumer banks.  So does the cooperative design make a difference especially when it relates to the system’s resilience?

The 100+ years of cooperative history suggests that this industry based on communal ownership, not private profit, is more stable.  There is another important difference versus banks.  The direct market oversight of all public banking companies creates incentives for financial players to “short” troubled firm’s stocks or even aspire to takeovers when market value is much below book.

Even as some transactional activities appear to be whittling away at the differences with banks, the coop model has developed a unique market ”space.”   This “space” relies on long traditions of self-help, self-finance, and self-governance.  The focus on member well-being vs institutional performance is also a powerful heritage.

Rallying the Believers

Is it possible that the cooperative credit union model is the best alternative design for resolving the obvious financial uncertainties and internal contradictions of stock-owned depository financial institutions?

The industry’s cycle of severe losses requires the FDIC to always increase premiums on the survivors following the failures of their peers.

This cyclical bout of problem losses is not the cooperative experience.  In theory and principle the motivations and incentives are different.  However coops are managed by humans, so they are not always a veil of purity.

That is where NCUA’s role comes in.   This Thursday we will hear NCUA’s report of its examiner evaluations.  Hopefully it will be a rallying cry for the industry during a time of multiple economic and national uncertainties.

Will it demonstrate the power of member ownership and coop uniqueness?  Will it highlight the NCUSIF’s special design to give back to its credit union underwriters their share of collective success at a time when banks see only increasing premiums?

The board meeting report can be an affirmation of the future of the cooperative model based on NCUA’s experience and expert field exams, not just the quarterly 5300 trends.

It  will hopefully deliver a message that rallies all observers to see clearly again the credit union difference.  In performance, in consumer focus and most importantly in leaders’ belief that the most critical competitive advantage is cooperative uniqueness.

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The Dangerous Goal of “Parity”

As pundits, regulators and congress have looked at what should be changed in the wake of the three recent large bank failures,  one focus is how FDIC  insurance is  structured.

A precipitating event was mass withdrawals by uninsured customers,  prompted by social media alarms. Using their Dodd-Frank “systemic risk authority,” the FDIC took over the banks and covered all depositor balances while it worked to find a least cost resolution.

This customer behavior has prompted suggestions for changing FDIC coverages to reduce this risk potential.  CUNA and NCUA have publicly stated that the NCUSIF should have “parity” in any changes to FDIC insurance.

Here is one trade’s position: Credit unions must receive parity with banks in any deposit reform legislation, CUNA wrote to House Financial Services and Senate Banking, Housing, and Urban Affairs Committee leadership Monday. Congress and the Federal Reserve have indicated interest in deposit insurance reform in the wake of recent high-profile bank collapses.

“Our primary concern regarding any deposit insurance reform legislation passed by Congress is to ensure that credit unions receive parity, fair treatment, and equal protection with banks,” stated CUNA President Jim Nussle in his letter to Congress.

I believe this public posturing is dangerous to the future of the NCUSIF and to credit unions separate financial system.  Here is why.

  1. Credit union CEO’s and industry leaders have rushed to assure their members, the public and Congress that credit unions do not have the problems that caused the banking failures. They are more financially resilient.

The first proof of this basic difference is that 92% of credit union savings are covered by NCUSIF, whereas only 44% of bank deposits were FDIC insured. This point was  presented in Callahan’s Trend Watch analysis this week in the following graph.

The obvious Congressional question is why do credit unions need whatever changes FDIC might make if the balance sheet structures of  cooperatives are fundamentally different from the banking industry?

  1. Politically it would seem unwise to request parity before any legislation has even been introduced.  For in drafting any change Congress can easily respond to credit unions’ request with a simple bipartisan solution.  They could  mandate there be only one federally managed deposit insurance fund, the FDIC.  That would be true parity.  For the FDIC already merged the separate S&L FSLIC fund.
  1. The factual response to this Congressional possibility is that the NCUSIF is different in both structure and purpose from the FDIC.

Since the NCUSIF’s  financial redesign in 1984 into a cooperatively-funded deposit model, credit union insurance has not required federal backing, even during the corporate crisis.   By legislative intent, the NCUSIF is backed entirely by members sending 1% of every savings dollar to the fund.  This capital base grows along with insured risk.  This base provides sufficient revenue so that  premiums are rare. That revenue option is a last resort and can be used only when  Congressionally established financial levels are reached.

As a cooperative, the fund is required to pay  dividends when reserves exceed the Normal Operating Level, historically 1.3%.  The FDIC’s structure gives it only one means to cover increased risk—charge ever higher premiums on an expanded asset, not just the insured savings base.

  1. The two federally managed “insurance” funds have fundamentally different roles which reflect the character of the institutions they cover.  The credit union model is a not-for-profit, member-owned  consumer focused coop. This system has a much different purpose than the for-profit commercial banking model.  The NCUSIF is also a source of temporary recapitalization to sustain a coop hit by uncontrollable financial events.  In banking, the FDIC cannot provide assistance to private owners.
  2. CUNA and other credit union support for “parity “ with the FDIC could unfortunately be used to buttress Chairman Harper’s stated intent, from his first day on the NCUA board, to build a larger fund. His proposals would abandon legislative guardrails and add premiums as a regular option to expand the fund’s size relative to credit union risk.

There is nothing in the NCUSIF history that would support this desire for a larger fund.  The Fund has performed though multiple economic cycles and financial crises that forced the FDIC to resort to multiple special premiums.  The FDIC has no cap on how large its fund can be relative to its insured risk.

The downside of the NCUSIF’s financial success is that it has become a “piggy bank” from which NCUA draws increasing amounts to pay for its expanding operating budgets.  Instead of paying for insurance losses, the majority of fund revenue is used for NCUA’s operating expense.  This overhead transfer rate is currently 62.4 %, even though federally chartered credit unions are only 50%  of insured risk.

The legislative constraints that are a part of the redesign passed in 1984 were to address credit unions’ fundamental concerns with an open-ended perpetual deposit underwriting commitment.  The apprehension was: “If we just keep sending 1% of deposit to NCUA every year, what prevents them from just spending it.”

  1. If Congress were to change how FDIC insurance coverage is based, it won’t be a single action. Legislation will come with additional rules and regs, increased financials tests, and stronger regulatory powers for examiners and supervisors to mandate changes when deemed necessary.   There will be a significant regulatory quid pro quo if coverage is changed.

Credit unions, who in their own analysis, say they are unlike banks, would become a part of this new regulatory avalanche.  One need only think back to 1998 when bank PCA was mandated by the Credit Union Membership Access Act which had nothing to do with the Act’s primary FOM issue.  But it was included, saddling credit unions with PCA (RBC/CCULR) requirements  in 2022  that NCUA cloned from the banking regulator’s rules.

  1. Should credit unions individually or in certain circumstances believe additional share insurance coverage is desirable, options already exist. In Massachusetts, state charters must cover 100% of their savings.  Amounts above the NCUSIF are insured by MSIC.                                                                            In multiple other states,  American Share Insurance offers additional coverage above the NCUSIF which credit unions can purchase.  These are options credit unions can design to  fit their own circumstances.  NCUSIF insurance coverage is based on the principle that one size fits all.
  2. If the recent banking failures cause a change to FDIC coverage, one of the factors is the market accountability publicly traded banks face. Market short sales can convert temporary problems into more serious runs.   Credit unions do not have this market accountability.  They also are not required to have the same public transparency required in SEC 10-Q and other filings for shareholders.

An Opportunity to Demonstrate the Cooperative Difference

For credit unions the debate on insurance coverage should be an opportunity to substantiate the differences and soundness of the NCUSIF,  and its extraordinary record of success since 1984.   Before that time, the NCUSIF did follow the FDIC model.   As an FDIC financial twin over two decades, the NCUSIF never came close to achieving the legislative goal of a 1% fund.  This was even after using double premiums, the only option available, for several years.

A major risk to credit unions is a NCUSIF-managed Fund without an awareness by leaders of its differences and why these matter.   The changes requested by Chairman Harper not only abandon the explicit legislative guarantees made to credit unions in return for their perpetual 1% underwriting in 1984. It would most certainly entail more FDIC look alike regulations.

Here is Chairman Harper’s request to Congress this week:

If Congress does decide to act in this area, the NCUA has two requests. The first is to maintain parity between the share insurance provided by the NCUA and the deposit insurance provided by the FDIC. Share and deposit insurance parity ensures that consumers receive the same level of protection against losses regardless of their financial institution’s charter type.

And second, if coverage levels are adjusted in any way, there will be costs associated with those adjustments, such as the need to increase reserves. Accordingly, the NCUA requests additional flexibility for administering the Share 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.25

Together, these amendments would bring the NCUA’s statutory authority over the Share Insurance Fund more in line with the FDIC’s authority as it relates to administering the Deposit Insurance Fund. These amendments would also better enable the NCUA Board to proactively manage the Share Insurance Fund by building reserves during economic upturns so that sufficient money is available during economic downturns.

In sum, insurance parity is a false objective based on contradictory logic and a failure to understand the cooperative financial model.  Credit unions should be careful what they wish for.

As one former NCUA Chair observed, the greatest threat to credit unions is parity.

Never Ending Challenge

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What Solid Cooperative Performance Looks Like

Recent bank failures, growing liquidity pressures, interest rate uncertainty and falling consumer savings have created uncertainty about  credit unions’ financial outlook.

The first quarter 2023 call reports are in.  There are a range of results, as usual.  Below is Wright-Patt’s CEO Tim Mislansky’s summary of the numbers for his team.  He opens with a one sentence conclusion.

Solid Performance

“We ended the first quarter with solid financial results.

Loans to members were up a whopping $70.7MM from February, were up $724.9MM from a year ago and are $177.8MM above our budget.

Member deposits jumped a big $182.8MM from February (due to the month end on a Friday payday), were up $445.7MM from a year ago and are $70.8MM over budget.

While both are results to be excited about, it is important to remember that we fund our loan growth with deposits. Continuing a pace where loan growth is significantly higher than deposit growth is not sustainable.

Net income for March was $8.7MM and year-to-date is $25.3MM. This is $6.5MM above our budget, but $2.2MM behind last year.”

He proceeds to review key items for the month and changes year-over-year including net interest income, non interest income, loan loss provisions and operating expenses versus budget.  He concludes: “We remain pleased with our early progress in financial results.”

How Were These Results Achieved?

The important issue is not what the results are, but how they were accomplished amidst so much  macro economic uncertainty.

To understand these financial outcomes, one must  look at the other parts of  CEO Mislanksy’s monthly report.  He opens with two recognitions.

The first honors a 47-year retiring employee, Kathy Denniston, in the Member Help Center. The credit union was chartered in 1932.  This employee has been serving members for more than half the credit union’s existence, and arguably during the most difficult  competitive time frame.  Sold performance starts with culture, the commitment of the employees.

The second comment relates a story which Tim calls Moments of Impact.  They are brief descriptions of exceptional responses by employees (partners), in this case the  Enterprise Risk Manager:

I often say that it is everyone’s job to take care of members and Corey did just that recently. Corey is a part of the security team that deals with incident reports – which are commonly sent through if a member or Partner has an accident, gets hurt in one of our centers, or if there is erratic behavior.

A couple of weeks ago, an MHC Partner submitted an incident report because a member who was declined for a mortgage started making some comments about depression and wanting to end his life. When Corey saw this, he replied to the larger group and asked what we typically do in these situations, because he wanted to help. Honestly, we do not have a standard protocol for this situation.

Rather than let it go, Corey took it upon himself to call the member to see if he was okay. He made sure the member had some resources and contacts that he could call for help. Taking that extra step just showed how much Corey cared and the type of people we have here at WPCU.”

The Performance that Really Counts

While financial numbers are one way of tracking performance, for Wright-Patt the focus is not on growing assets, loans or deposits. Growth results from doing the right things. Rather the credit union starts with impact, what it can do for its  members, potential members and  employees.

While over 90% of its deposit are insured, its share stability is due to member loyalty, not insurance. The credit union is trusted by members.  Their loyalty underwrites the credit union’s ongoing success that started  91 years ago and continues to expand quarter by solid quarter. member by member.

(I thank Tim for allowing me to use this example from his monthly report to his team)

 

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Warren Buffett’s Annual Meeting and Wisdom for Credit Unions (Part I of II)

Last Saturday was the annual meeting of Berkshire Hathaway (BRK) in Omaha, NB.  The event, called the “Woodstock of Capitalism” was attended by over 40,000 shareholders and broadcast live on MSNBC.

I believe there are valuable observations for credit unions.

Prior to the formal annual meeting agenda Warren Buffett (age 92) and Charlie Munger (age 99) answered questions from online and in-person shareholders for over five hours separated only by a short lunch break. Their goal was to take at least 60 questions.

They covered all aspects of company operations, long term strategy, and recent decisions (eg. selling TSMC stock after holding only two months) as well as questions on Fed fiscal policy, international relations and life’s most important decisions.

The full sessions and excerpts can be found from Saturday’s edition of Buffett@response.cnbc.com, the Warren Buffett Watch.

Three Important Lessons for Coops

Here are my top three takeaways with significance for credit unions.

  1. Respect for shareholders. Buffett: “For fifty-eight years we have regarded shareholders as the reason for our existence.”  The open-ended questions at the meeting came from young and old including families that had owned stock for generations.  No subjects were off limits.   The entire event was a celebration of the firm’s various businesses and designed to be both informative and a good time.

This model of dialogue with shareholders is one that can be emulated by credit unions.  It would increase cooperative transparency, confidence and good governance.  In Buffett’s words: “Management has an obligation to explain to shareholders everything. . .to say what they think is right.  We want owners to understand what they own. . .We are working for the people in this room, not a quarterly operating target from Wall Street.”

This question and answer with ordinary people from all over the country (and other countries) was direct and straight forward.  No talking down or 10-Q explanations.  No discounted cash flows or present value kinds of reasoning; only plain answers to hard questions.

  1. The entire US banking model is under review. After the runs caused the closures of three major banks, the two most frequent proposals have been to make deposit insurance unlimited in coverage or to eliminate short selling of public bank stocks.  Future uncertainty in the current environment seems probable.   Unlimited deposit insurance would make all deposit liabilities of shareholder owned banks an issue of federal government backing.  The second reform would reduce market discipline in the pricing of bank stock performance.

At another point in discussing property-casualty insurance (a market which operates on a margin of only 4%), Buffett noted his strongest competitor was one which created the last significant innovation: State Farm a mutual, not a stock company.  Here is his analysis from the 2019 Annual meeting:

“If you go to business school, you’re taught that it’s only because you have incentives and compensation, all kinds of things, that businesses can be successful. [But] Nobody really got rich outside of State Farm. They sat there, and they are the biggest insurance company,” he claimed.

“When Leo Goodwin started GEICO 80 years ago, he probably wanted to get rich,” he said, referring to GEICO’s founder. “And probably at Progressive, I know people wanted to get rich. And at Travelers and Aetna. You can name them, dozens and dozens of companies.

“And who wins? A mutual company,” Buffett concluded.

“In terms of presence, size, they are still the biggest company. If you omit Berkshire, they have the highest net worth by far. They have $140 billion or something in net worth,” Buffett said, speculating that Progressive’s net worth is about one-sixth that of State Farm.

“We’re spending $2 billion a year telling people the same thing we’ve been telling them for 70 or 80 years.” But when all is said and done, “State Farm still does more business than anyone else, and that shouldn’t exist under capitalism.”

“If you [had] a plan to start a state farm today and had to compete with Progressive, which would bring the capital [for] a mutual society from which you are not going to withdraw the profits? It makes no sense at all,” he said.

With the market driven banking model increasingly under question, and the example of State Farm’s mutual success, is it possible that  the cooperative credit union model is the best alternative design for resolving the uncertainties and internal contradictions of stock-owned depository financial institutions?

  1. How his insurance model benefits all BRK businesses. And why it suggests the FDIC is a flawed insurance model.

Insurance is a paid-in-advance business.  This gives a firm the ability to earn on the capital and invest the float before paying out claims expense.

As an example, last year BRK was earning 4 basis points on its $125 billion  cash, or about $50 million per year.   Recently the company bought a Treasury bill at 5.92%.  The company will earn about $500 billion this year on its cash.  This float from the insurance doesn’t cost anything. Capital stock is very expensive. Debt has to be repaid like deposits.  Importantly BRK has multiple options for investing its float.

The FDIC has no capital base.  Its primary revenue is from premiums.  The combined losses of an estimated $35 billion on the bank failures so far this year will be paid by the banking community. FDIC has not been able to accumulate earnings from its capital base to cover its risk.

The NCUSIF has a 1% capital base that matches-grows or declines-with the level of total insured shares. The earnings on this capital and additional retained earnings of .2-.3% of insured shares are sufficient to cover even the most extreme risk scenarios.  So long as the investment portfolio is well managed.  The NCUSIF’s breakeven earnings level is between 2.5%-3.0%.  That outcome should be the measure of NCUA’s management effectiveness.

The three areas above are a trifecta for credit union optimism:  the  public example of shareholder-owner engagement, the questions around the US banking model, and the sounder NCUSIF financial structure.  All three are inherent in cooperative design.

Tomorrow I will share some of Buffett and Mungers’ comments that have direct relevance for credit unions’ businesses.  As well as some of his wisdom about life.

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A Prophetic Voice

Last week I asked if credit unions today needed a prophet’s wisdom.   I was motivated by one of C-Span programs which presents recordings of historical speeches by leaders at important moments in American history.

Hearing the original voices of leaders summoning their listeners to action still inspires today. The experience is both fruitful and edifying.

The reason is that the truths contained within these appeals transcend time. They are not merely words that endure in time, they are words that are beyond time.   Their underlying truths do not change with circumstance, nor are they changed by it.

The actions called forth do not merely meet the challenge at a moment in  time; they are the standard by which time itself is tested.

The paradox is that the timeless is always timely. If it is timeless and, if it’s always true, it is always relevant.

The Context for Chairman Callahan’s 1984 GAC Address

The 1980-1982 economic crisis was over.  Interest rates and inflation were in back to single digits.  Deregulation was well underway.  Credit union growth and financial performance led all financial institutions.

The NCUA’s DC bureaucracy had been reorganized to reduce central office roles and put the six regional directors in positions of administrative leadership.   The CLF had been capitalized in partnership with the corporate network so that every credit union had access.

There was a common commitment by the cooperative system to support expanding credit unions services to all Americans through new charters and increased FOM options on the 50th anniversary of the Federal Credit Union Act.

But there was one institutional innovation still needed to solidify an independent and sound cooperative system.  This was the primary topic of Chairman Callahan’s 1984 GAC presentation.

He called on credit unions to “Finish the Job.”  Here is a recording of that request which which is 12 minutes following CUNA President, Joe Cugini’s brief introduction.

https://www.youtube.com/watch?v=1UcXPyUMtic&list=PLfsu0zcct30-jB6oqaROWiXhaJ6xTBuLd&index=2

(https://www.youtube.com/watch?v=1UcXPyUMtic&list=PLfsu0zcct30-jB6oqaROWiXhaJ6xTBuLd&index=2)

The call was answered. Today the NCUSIF is still the example of insurance that has stood the test of time.

 

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What Can Be Done about the Drought of New Credit Union Charters?

There are financial deserts in towns and cities across America; there is also an absence of new credit union charters.

Since December of 2016, the number of federally insured credit unions has fallen from 5,785 to 4.780, at yearend 2022.  This is a decline of over 165 charters per year.  In this same six years, 14 new charters were granted.

Expanding FOM’s to “underserved areas” or opening an out of area credit union branch, is not the same solution as a locally inspired and managed charter.

Obtaining a new charter has never been more difficult for interested groups. Through its insurance approval, NCUA has final say on all new applications whether for a federal or state charter.

Today, credit union startups are as rare as __________ (you fill in the blank).

At this week’s GAC convention an NCUA board member announced the agency’s latest new chartering enhancement: the provisional charter phase.  This approach does not address the fundamental charter barriers.

Could an example from the movement’s history suggest a solution?

The Chartering Record of the First Federal Regulator

Looking at the record of Claude Orchard  demonstrates what is possible for an individual government leader.   He was the first federal administrator/regulator managing a new bureau within the Farm Credit Administration to create a federal credit union system.  He was recruited for this startup role by Roy Bergengren, who along with Edward Filene, founded the credit union movement.

The story of how and why he was chosen is told here.   Bergengren nominated Orchard because he had “the proper credit union spirit.” This had been demonstrated by his efforts to charter over 70 de novo state credit unions for his employer Amour.

Orchard accepted this government role in the middle of the depression using borrowed FCA staff.  The state chartered system was the only model of how to create a federal option.  That experience and belief in the mission is what  Orchard brought to this new role.

Unlike the banking and S&L industry there was no insurance fund for credit union shares/savings.   The coop model was based on self-help, self-financing and self-governance.  Self-starters provided the human and social (trust) capital; no minimum financial capital was needed.  Credit unions tapped into the quintessential American entrepreneurial spirit to help others.

Orchard’s critical tenure as the first federal regulator is described  in a special NCUA 50th Anniversary Report published in 1984:

“He emphasized organizing as much as supervision. ‘I think in general we tried in the beginning to avoid paperwork because it seemed to me like that was a waster of effort.  After all what we were out for was to get some charters and get some organizational work done.’

When Mr. Orchard stepped down in in 1953, federal credit unions numbered over 6,500.   During his 19 year he espoused a passionate belief in the ideals of creditunionism.  ‘It seems to me that we have here a tool. If it can be made to really be responsive and to really be, in the end, under the control of the members, it can teach people in this country something about democracy which could be taught in no other way.‘

Deane Gannon, his successor at the Bureau of Federal Credit Unions said to Mr. Orchard on the 30th anniversary of the Federal Credit Union Act, ‘If it hadn’t been for you none of us would be here to celebrate anything.‘”

That last observation echoes today.   How many charters will be left to celebrate the 100th anniversary of the FCU Act in 2034?

Alternatives  Are  Springing Up

For the credit union movement to remain relevant it will require modern day Claude Orchards. These are leaders who believe in creditunionism.  And possess the passion to encourage new entrants to join the movement.

Regulatory process or policy improvements may help.  But the real shortfall is leadership committed to expanding credit union options.

To address the continuing financial inequities throughout American communities, alternative solutions are being created.  Many of these startups are outside the purview of banking regulators.

These community focused lenders are listed in  Inclusiv’s 2022 CDFI Program Aware Book.  The firm introduces its role with these words:

Access to affordable financial products and services is a staple of economically sound communities. Yet at least one quarter of American households do not have bank accounts or rely on costly payday lenders and check-cashing outlets.

In recent years, the lack of access to capital investments for small businesses and other critical community development projects has also led to increased need for alternative and reliable sources of financing.

Mission-driven organizations called Community Development Financial Institutions–or CDFIs–fill these gaps by offering affordable financial products and services that meet the unique needs of economically underserved communities.

Through awards and trainings, the Community Development Financial Institutions Program (CDFI Program) invests in and builds the capacity of CDFIs, empowering them to grow, achieve organizational sustainability, and contribute to the revitalization of their communities.

Of the total $199.4 million awarded to 435 organizations, only 176 or 40% were to credit unions.  The rest of the field included 213 local loan funds, 43  banks and 3 venture capital firms.

Without credit union charters, alternative organizations will be created to serve individuals and their communities.   These lenders may not put credit unions out of business, but will  attract the entrepreneurs that would have  added critical momentum to the cooperative system.

Credit unions can qualify for CDFI status and grants.   But Inclusiv has a much broader vision for implementing Claude Orchard’s  playbook.

In their listing of 2022 total awards and grants, every amount of over $1.0 million went to an organization that was not a credit union.  A few were banks, but most were de novo local community lenders or venture capital firms.

Without credit union options, civic motivated entrepreneurs will seek other solutions, and slowly replace credit union’s role.

Today it is Inclusiv carrying out Orchard’s vision.

Should NCUA delegate its chartering function to those who have “the proper spirit” to secure credit unions’ future?

It will also result in “teaching people in this country something about democracy which could be taught in no other way.”

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Two Positive Updates & a Disheartening Decision

Callahan’s Trend Watch industry analysis on February 15 was a very informative event. It was timely and comprehensive.

Here is the industry summary slide:

The numbers I believe most important in the presentation are the 3.4% share growth, the 20% on balance sheet loan growth and the ROA of .89.

The full 66 slide deck with the opening economic assessment and credit union case study can be found here.

The Theme of Tighter Liquidity

A theme woven throughout the five-part financial analysis was tighter liquidity and the increased competition for savings.   Slides documented the rising loan-to-share ratio, the drawdown of investments and cash, the increase of FHLB borrowings, and the continuing high level of loan originations, but lower secondary market sales.

These are all valid points.   However liquidity constraints are rarely fatal.  It most often just means slower than normal balance sheet growth. That is the intent of the Federal Reserve’s policy of raising  rates.

Credit Unions’ Advantage

I think the most important response to this tightening liquidity is slide no. 24 which shows the share composition of the industry.  Core deposits of regular shares and share drafts are 58.3% of funding.  When money market savings are added the total is 80%.

This local, consumer-based funding strategy is credit unions’ most important strategic advantage versus larger institutions.  Those firms rely on wholesale funds, large commercial or municipal deposits and regularly  move between funding options to maintain net interest margins.  These firms are at the mercy of market rates because they lack local franchises.

In contrast, most credit unions have average core deposit lives from ALM modeling of over ten years. The rates paid on these relationship based deposits rise more slowly and shield institutions from the extreme impacts of rapid rate increases.   In fact the industry’s net interest margin rose in the final quarter to 2.86% (slide 56) and is now higher than the average operating expense ratio.

Rates are likely to continue to rise.  There will be competition at the margin for large balances especially as money market mutual funds are now paying 4.5% or more.  If credit unions take care of their core members, they will take care of the credit union.

The February NCUA Board Meeting

The NCUA Board had three topics:  NCUSIF update, a proposed FOM rule change, and a new rule for reporting certain cyber incidents to NCUA within 72 hours of the event.  The NCUSIF’s status affects every credit union so I will focus on that briefing.

We learned the fund set a new goal of holding at least $4.0 billion in overnights which it is projected to reach by summer.  Currently that treasury account pays 4.6%.  With several more Fed increases on the way the earnings on this $4.0 billion amount alone (20% of total investments) would potentially cover almost all of the fund’s 2023 operating expenses.

Hopefully this change presages a different  approach to  managing NCUSIF.  Managing  investments using weighted average maturity (WAM, currently 3.25 years) to meet all revenue needs, versus a static ladder approach, means results are not dependent on the vagaries of the market.

At the moment the NCUSIF portfolio shows a decline from book value of $1.7 billion.  This will reduce future earnings versus current market rates until the fund’s investments mature, a process that could take over three years at current rate levels.

Other information that came out in the board’s dialogue with staff:

  • Nine of the past thirteen liquidations are due to fraud. Fraud is a factor in about 75% of failures;
  • More corporate AME recoveries are on the way. Credit unions have been individually notified. The total will be near $220 million;
  • If the NOL 1% deposit true up were aligned with the insured deposit total, yearend NOL would be about .003 of lower at 1.297% versus the reported 1.3%. Share declines in the second half of the year will result in net refunds of the 1% deposits of $63 million from the total held as of June;
  • Staff will present an analysis next month of how to better align the NOL ratio with actual events;
  • The E&I director presented multiple reasons for NCUSIF’s not relying on borrowings during a crisis, but instead keeping its funds liquid;
  • The E&I director also commented that the increase in CAMELS codes 3, 4, 5 was only partly due to liquidity; rather the downgrades reflected credit and broader risk management shortfalls;
  • NCUSIF’s 2022 $208 million in operating expenses were $18 million below authorized amounts;
  • The funds allowance account ($185 million) equals 1.1 basis points of insured shares. The actual insured loss for the past five years has been less the .4 of a basis point.

Both the Callahans Trend Watch industry report and NCUA’s  insured fund update with the latest CAMELS distributions suggest a very stable, sound and well performing cooperative system.

A Disappointing NCUA Response

Against this positive news, is a February 15  release from the Dakota Credit Union Association.   It stated NCUA had denied claims of 28 North Dakota credit unions for their $13.8 million of US Central recoveries from their corporate’s  PIC and MCA capital accounts.

These credit unions were the owners of Midwest  Corporate which placed these member funds in the US Central’s equity accounts, a legal requirement for membership.   The NCUA claimed that the owners of Midwest Corporate had no rightful claim, even though a claim certificate for these assets was provided by NCUA.

Nothing in this certificate says that the claim is no longer valid if a corporate voluntarily liquidates.

Under the corporate stabilization program corporate owners were forced to choose between recapitalizing after writing off millions in capital losses in 2009, merge with another corporate, or voluntarily liquidate.

Both the Iowa  and Dakota corporates chose to voluntarily liquidate versus facing the prospect of further corporate capital calls.

The NCUA oversaw the liquidation of both Corporates in 2011. The NCUA’s liquidating agent knew  that claim certificates were issued, that there was no wording that voluntary liquidation would negate future recoveries for the corporates’ owners and that NCUA’s legal obligation is to return recoveries to the credit union’s owners, whether in voluntary or involuntary liquidation.

The claim receipt specifically states: “No further action is required on your part to file or activate a liquidation claim.”  Yet that is just the opposite of what NCUA is now saying the credit unions must do.

For example NCUA continues to pay recoveries to the owners of the four corporates who were conserved and involuntarily liquidated by the agency.

According to Dakota League President Olson, NCUA has failed even to inform the league  in what accounts these funds are now held.  Are they being distributed to all other US Central owners? To the NCUSIF? Or held in escrow?

“This is a clear case of obstruction through bureaucratic hurdles and complicated language where the process is the punishment, and does not provide justice,” stated Olson.

These funds  ultimately belong to the member-owners of these credit unions  The NCUSIF is in good shape.  This is not a legal issue.  It is common sense.

NCUA controlled all the options for every corporate through through its stabilization plan. It took total responsibility for returning funds-no further action required. No one will critique returning members’ money.  But failure to do so undermines trust in the Board ‘s judgment, its leadership of staff, and its fiduciary responsibility for credit union member funds.

The NCUA board should do the “right thing” for these credit unions and their members.