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Many participants see credit unions as having two operating options-either a federal license or a charter issued by one of the forty-five state authorities.  Within this second group is a small subset of approximately 100 cooperatively insured credit unions in ten states who are subject to only to their home state regulations.

Traditionally the choice of charter has been an important check and balance when a regulatory system, local or national, becomes unresponsive.   Charter conversions go both ways.  In 2023 there were 12 changes with nine state charters moving to FCU’s.

Traditionally state regulators and legislatures have been perceived as more accessible and responsive versus the federal system.  Some state FOM practices are less complex and  CUSO and other authorities more flexible.  For example, the majority of bank acquisitions have been by state-chartered credit unions.

A Multifaceted Charter Choice

But reality is not this simple binary selection. Operating options are more complex than either a state or federal charter.

In a CUSO magazine article summarizing NCUA’s yearend data, the writer pointed out several  of these other operating designations.

From the  December  2023 data summary: “NCUA reported that the number of federally insured credit unions (FICU) declined to 4,604—156 fewer than there were as of the fourth quarter of 2022.  Many of those may have come from low-income designation credit unions, whose numbers dropped by 129 from 2,612 in 2022 to 2,483 in 2023.

“Meanwhile, the number of “complex” FICUs—those with total assets over $500 million—increased by 5 to 714.”

These sub-classifications matter, as they grant additional authorities or impose different regulatory requirements.  Newly chartered credit unions have different reserving timeframes in their initial years.   NCUA will periodically update the status of Minority Depository Institutions (MDI’s) which it sees as a special class of charters.

Multiple Service Designations

In January of this year Callahans, using September 2023 data, published  a summary of three other “service designations.”   In their full analysis they showed how these operating authorities, low-income (LICU), community development (CDFI), and Juntos Avanzamos. will sometimes overlap.

CREDIT UNION DESIGNATIONS
FOR U.S. CREDIT UNIONS-DATA AS OF 09.30.23

Source:  Callahan & Associates, Peer Suite

The report states 56% of credit unions have at least one designation.  Th e most common is NCUA’s LICU held by 55% of all credit unions.  The other two designations require certifications. Hence only 9.1% of credit unions are CDFIs and just 2.7% are part of the Juntos Avanzamos network.

The LICU Advantage

The LICU status is by far the most popular and important classification. The status is assigned by NCUA to a credit union in which a majority of its membership qualifies as low-income as defined in Section 701.34 of NCUA Rules and Regulations.

The potential operational advantages include accepting non-member deposits, offering secondary capital accounts,  qualifying for exceptions from the member business lending cap, and participating in NCUA’s Community Development Revolving Loan Program.

The Callahan article points out that the 2,590 LICU’s range in size “from less than $100,000 (Holy Trinity Baptist FCU, $25,899, Philadelphia, PA) to more than $20 billion (Golden 1 Credit Union, $20.5B, Sacramento, CA).  In the $1B-$10B peer group, 60% are designated as a LICU.”

Of the 432 CDFI-certified credit unions which can access grants from the CDFI Fund, 95% are also LICU’s.

The pervasiveness of the LICU designation has been a focus for groups who oppose credit unions. One critical study by the Tax Foundation expressed the following opinion of the low income designation  in a January 30, 2024 article,   After 90 Years, It’s Time to Wean Credit Unions of Taxpayer  Subsidies:

“More than half of all credit unions have been designated “low-income” institutions, a meaningless term. This designation appears to be little more than a signaling device to allow credit unions (and NCUA) to claim they are serving underserved populations without having to provide any documentation to back it up. The Congressional Federal Credit Union, which serves members of Congress and their staff members, has been a low-income credit union since 2022. Members of Congress are “hardly low-income customers.” 

Diversity of Purpose and Operating Models

These charter variations create opportunities that a one-size-fits-all regulatory structure may not accommodate. Most credit unions were founded with a unique, and generally limited, field of membership that gave them a unique “persona.”  Over time most have moved far beyond this initial market identity.

As the evolution continues, the imperative of a unique identity becomes a challenge.  Business model and/or technical innovation are necessary but often not sufficient for competitive differentiation.

While much discussion of innovation focuses on technology or new partnerships, the option to modify a credit union’s organizational definition can be overlooked. Yet these choices may be more strategic in establishing a special market profile.  These designations are more than a brand; they are a commitment to a special expertise when serving members.

Other collaborative service networks besides those above have been or are being created.  These emerging organizations sponsor specialized products, virtual distribution options, innovative member services and even specialized support organizations such as Inclusiv (a CDFI) or the Global Alliance for Banking on Values.

The critical factor is choices of organizational design and networks.  The ability to draw upon many options, not just a single charter model, can help keep credit unions aligned with their member-owners changing circumstances.

 

 

 

 

In “The Prologue” to The Canterbury Tales Chaucer celebrate nature’s awakening life and, in humans, the need to once again gather together on pilgrimages.  “April” comes from the Latin aperire (to open) and apricus (sunny) as the month of the sun and growth. (Source: Jefferson Reads)

From “The Prologue” to The Canterbury Tales:

When in April the sweet showers fall

And pierce the drought of March to the root, and all

The veins are bathed in liquor of such power

As brings about the engendering of the flower,

When also Zephyrus* with his sweet breath

Exhales an air in every grove and heath

Upon the tender shoots, and the young sun

His half-course in the sign of the Ram* has run,

And the small fowl are making melody

That sleep away the night with open eye

(So nature pricks them and their heart engages)

The people long to go on pilgrimages …

Emily Dickinson’s poem of spring and the sacred:

A Light Exists in Spring

A Light exists in Spring

Not present on the Year

At any other period –

When March is scarcely here

A Color stands abroad

On Solitary Fields

That Science cannot overtake

But Human Nature feels.

It waits upon the Lawn,

It shows the furthest Tree

Upon the furthest Slope you know

It almost speaks to you.

Then as Horizons step

Or Noons report away

Without Formula of sound

It passes and we stay –

A quality of loss

Affecting our Content

As Trade had suddenly encroached

Upon a Sacrament.

Easter In Ukraine

A note from Music Mission Kiev

As Easter approaches, the joyous celebration of new life, hope, and renewal is juxtaposed against the backdrop of ongoing conflict in Ukraine. Yet despite the solemn realities of war, many still find comfort and fortitude in the timeless traditions and spiritual significance of Easter. It serves as a reminder of the enduring power of faith and the resilience of the Ukrainian people in the face of adversity. Hopefully, it will also magnify your own Easter celebration. The Orthodox Easter is celebrated on May 5th in Ukraine this year; more than a month apart from our March 31st Gregorian calendar celebration. For Christians everywhere, Easter marks the resurrection of Jesus Christ and signifies the triumph of hope over despair, light over darkness, and life over death. It’s a time when families gather, communities of faith come together, and hearts are lifted in praise. Hand-painted Easter eggs hold particular meaning in Christian symbolism. They represent the resurrection of Christ and are often adorned with traditional designs, each carrying their own significance. Triangles, for example, characterize the Holy Trinity.

 

(https://www.youtube.com/watch?v=98Qt6FJ-kz4&t=390s)

Christmas decorations at Chevy Chase Presbyterian Church

Advent wreath

Christmas flowers-Lo How Roses Ere Blooming

The tree with wrapping paper chains and  children’s decorations

Indoor wreaths

Bell choir at the ready

An empty sanctuary waiting for Christmas eve worshippers

At the National Cathedral’s nativity scene animals, shepherds, magi,  Joseph and children are ready to welcome baby Jesus and Mary on Christmas eve.

In a recent conversation with a newly chosen CEO on creditunions.com, the following was a comment on what she believed was necessary for her effectiveness:

JV: In a leadership role, it’s crucial to surround yourself with individuals who are comfortable telling you the truth. People naturally want to please the boss and tell them how great they are and might hesitate to disagree or deliver unpleasant information. It’s important to create a safe space where people feel comfortable voicing their opinions and assisting in decision-making.

Everyone has a little bit of an ego. It’s nice to hear that praise, but that can make it too easy to believe everything is going well, so you must actively seek out different perspectives.

Now that I’m in this role, I realize the importance of this kind of transparency. I knew it before, I’ve supervised hundreds of employees and billions of dollars in business, but now that I’m in the CEO role, I can see it even more clearly.

NCUA’s budget and Operating Decisions

Credit unions have both formal and informal ways to present their views to the NCUA board.  One process was the recent 2024-25 budget hearing and subsequent comments submitted.

But will this process make a difference?  Or is it just political theater in which suggestions are requested, but then the Agency proceeds to do what it intended in the first place.

Eleven comment letters were sent to NCUA and posted on its website.  These five short excerpts reflect aspects of “truth” that these commentators believe should be considered at December’s budget approval meeting.

From VCUL:

We urge the agency to provide a more comprehensive and detailed explanation of the growing expenditures for the agency’s Modern Examination & Risk Identification Tool (MERIT). While we appreciate that a platform like MERIT is ever evolving and that its core building blocks will require ongoing maintenance and upgrades, we believe credit unions are rightly justified in demanding greater transparency regarding costs. The agency spent more than $54 million on MERIT’s development, with an additional $3 million budgeted in 2024 and 2025. It is fair to question the return on investment for both credit unions and the agency absent a more detailed explanation of program costs.

The second largest expense in the agency’s proposed 2024-2025 budget is Contracted Services.. . the actual cost for contracted services in 2024 is much higher and is estimated to be $70.1 million, but that cost is offset by the prior year’s unspent funds. If these unspent funds were not available, the total cost of these services would increase by $28.7 million, a 70% increase compared to 2023, an amount which is reflected in the proposed 2025 budget.

From OCUL:

The NCUA’s operating budget in 2010 was $201 million as compared to $382.1 million in this proposed operating budget. While the proposed 2024 operating budget is an 11% increase compared to 2023, it adds up to an overall 90% budget increase within the last fourteen years, far exceeding inflation rates over the same period. These year-over-year increases reveal an alarming pattern; a large and ongoing increase in credit union funding for ever-expanding NCUA spending.   

OCUL is concerned with the NCUA’s strategic choice to invest credit union funds for further staff expansion. . . the NCUA Board reported a mid-year surplus of $3.5 million that was subsequently used to hire additional staff; specifically, the NCUA sought to hire two (2) new Credit Union Resource Expansion (CURE) positions and four (4) new cybersecurity positions, with a projected cost of $1.6 million. Not only is the NCUA Board requesting to hire 28 positions, including 11 entirely new positions, and 13 additional consumer compliance specialists, which is an increase in examination time for consumer financial protection reviews equivalent to 11 examiners, this Budget now has to account for positions in 2023 that were hired with a budget surplus.

From ICUL:

Illinois state-chartered credit unions are subject to the Illinois Community Reinvestment Act (IL CRA) which will add a significant compliance burden and associated costs, in addition to significant examination fees. Credit unions are the original consumer advocates and already do the work to ensure its members, regardless of financial condition, have access to financial products and services at a fair price. The NCUA’s desire to add complexity to its existing consumer compliance examination is unnecessary, especially considering Illinois credit unions and many across the country are already facing additional scrutiny by its primary state regulator.

From CUNA:

The value credit unions deliver is disproportionately obvious among those who really need help. . . Today, the nation’s credit unions remain mission-focused: promoting financial wellbeing, delivering outstanding value, and providing helpful advice, especially to those of modest means.

The just-released Federal Reserve Survey of Consumer Finances, for example, shows that net worth in the consumer sector rose by a record 34 percent in the three years ending 2022. As a group, bank customer households now reflect mean net worth of $1.3 million and median net worth of $220,000; totals that are respectively 140 percent and 23 percent higher than the comparable measures within credit union member households.

From NAFCU:

The credit union industry is strong and well-capitalized. As of June 30, 2023, the industry’s net worth ratio was closing in on 11 percent and had risen over 40 basis points from a year prior. CAMELS rated 4 and 5 credit unions represented just 0.3 percent of total industry assets, a figure that is roughly half its pre-pandemic level. Thanks to strong loan growth in 2022 and rising investment yields, credit union net interest margins are up 40 basis points versus a year ago.

Will NCUA Listen and Align?

These are critical issues for Agency review. There were also two important points of context: the member mission of credit unions and the sound state of the industry.

Another observer made these comments about the underlying condition for a more responsive budget:

To change the budget, you must CHANGE the game – change the targets, the challenges must be new and raise the bar for the work.

If a group has no intentions to change the world, restart a fire, or set vision for something new, then there will not be anything new.

To change the budget, you need to inspire–put the spirit of “need better”, “deserve better” and “expect better” to ensure all segments of our industry do better.

To craft a better budget – the key is a willingness to rally the industry to want one, as the foundation for a better future and execution from top to bottom.

Only when NCUA is properly aligned with their audience,  mission and futures will all the players be working for a shared mission.

Is there leadership that will pick up the torch for others to follow-within NCUA or credit unions- on this ever-expanding use of credit union funds?

 

 

On Capital

“The ultimate safety and soundness is not the level of capital but how well the institution is attuned to the market. If it is not tuned well, it is going to fail no matter its level of capital.  If it is tuned well, it will retain and attract members and will be healthy.” (pg 54)

Note: From the Coach’s Playbook, a collection of the thoughts of Ed Callahan’s observations  on key credit union issues.

Chansons Innocentes II 

by E. E. Cummings

hist     whist
little ghostthings
tip-toe
twinkle-toe

little twitchy
witches and tingling
goblins
hob-a-nob     hob-a-nob

little hoppy happy
toad in tweeds
tweeds
little itchy mousies

with scuttling
eyes     rustle and run     and
hidehidehide
whisk

whisk     look out for the old woman
with the wart on her nose
what she’ll do to yer
nobody knows

for she knows the devil     ooch
the devil     ouch
the devil
ach     the great

green
dancing
devil
devil

devil
devil
     wheeEEE

Note: The poem “celebrates country folk superstitions of All Hallow’s Eve or All Soul’s Day, when ‘witches and tingling / goblins,’ ‘little ghostthings,’ and other spirits of the dead make their appearance. The poem is written as a child feels in the midst of these ideas, stories, and legends of old age, death, and the supernatural; much of the diction is in child language. [. . .] [L]little creatures from another world are ‘scuttling,’ running, and hiding, creatures that are strange and fearful to a child, yet also described as childlike in character. [. . .]

Cummings never lets us feel too sad about death. The suggestion is that we should do as children do: feel old age and death in our midst for only a brief moment, and then go back to playing. Cummings reaffirms the joy of life that is always in process, and even imagines the spirits of the dead continuing this fun, the way a child might imagine it, for, after all, it is a green, innocent devil that is depicted dancing.”

Source:  R. A. Buck, professor of English at Eastern Illinois University published  in Spring: The Journal of the E. E. Cummings Society, no. 18 (October, 2011)

In a Disused Graveyard

by Robert Frost

The living come with grassy tread
To read the gravestones on the hill;
The graveyard draws the living still,
But never any more the dead.

The verses in it say and say:
“The ones who living come today
To read the stones and go away
Tomorrow dead will come to stay.”

So sure of death the marbles rhyme,
Yet can’t help marking all the time
How no one dead will seem to come.
What is it men are shrinking from?

It would be easy to be clever
And tell the stones: Men hate to die
And have stopped dying now forever.
I think they would believe the lie.

Note: Sandra L. Katz, professor emerita of English at the University of Hartford, writes, “The speaker decides to tell the stones that the reasons why the graveyard is ‘disused’ is that ‘Men hate to die / And have stopped dying now forever.’ The persona is playing a joke on the stone, but one that we—perhaps foolishly—wish were true.”

Memory can be the key to understanding events. It provides vital perspective for the present and context for future plans.

Last Friday  October  13^th was an important event in NCUA and credit union history from 13 years ago.

It was the anniversary of the payoff of the most recent loan made by the CLF.   It may in fact become the last loan the Facility ever extends.  Reviewing this event illustrates why this public-private cooperative partnership has failed to play any meaningful role since in the credit union system.

Here are excerpts from NCUA’s Media Advisory of October 13, 2010  with the headline:

NCUA Repays $10 Billion in Corporate Loans

Using proceeds from selling performing assets of two formerly conserved corporate credit unions, the NCUA yesterday repaid $10 billion plus interest to the Department of the Treasury.

NCUA raised the $10 billion by selling select assets from US Central and WesCorp . . .(including) securities backed by performing residential and commercial mortgages, credit card receivables, student loans and auto loans.

The proceeds allowed NCUA to repay a $10 billion loan from the Treasury to NCUA’s Central Liquidity Facility  which in 2009 transferred the $10 billion to the NCUSIF in order to lend $5 billion to each corporate. . . while they were in conservatorship.

Paying off the $10 billion in loans clears the balance sheets of both the CLF and the Share Insurance Fund,” said NCUA Charmain Debbie Matz.

The Significance of This Event

Since that October 13the payoff, the CLF has made no loans. Or even offered a lending initiative.

When putting US Central and four other corporates into liquidation in September, NCUA eliminated the joint plan that gave all credit unions access to the Facility.

The Agency had no backup proposal.   A brief history of this period and the Agency’s effort to mandate liquidity via regulation versus a shared cooperative option is described here.

The Current Liquidity Borrowings by Credit Unions

In the first six months of 2023 credit unions increased total borrowings by $75.6 billion to a total of $120.4 billion at June 30.   The two major sources for these funds were the FHLB system which increased loans by $46 billion and the Federal Reserve, a $29 billion lending expansion.

Even natural person credit unions increased deposits in other credit unions by $650 million via brokered non-member deposit programs.

The CLF with almost $900 million in capital and $20 billion in borrowing authority is missing in action.

This absence is not because no need exists or a shortage of resources.   Rather it is an inability to work cooperatively with credit unions.  The Federal Reserve announced  its new Bank Term Funding Program on March 12 or in days following the Silicon Valley bank failure.

NCUA does not lack statuary authority as suggested by board members to serve credit unions.    It lacks collaborative leadership.

The Lesson from the Last CLF Loan

But credit unions took an important  lesson from this CLF loan payoff. The  borrowing was designed by NCUA to provide for NCUSIF’s liquidity not the corporate credit union’s well being.   Immediately after the two corporates were in liquidation, NCUA  sold the best performing assets versus  using their earnings to  minimize losses to the fund.

The borrowings were to support NCUA’s regulatory priority, not to assist with a corporate’s liquidity management.

When put into  liquidation, three of the corporates reported positive capital including US Central, Southwest and United.  The CLF was paid off.   The Agency funded the subsequent liquidations of all  five corporates by going to Wall Street to issue  NCUA guaranteed notes to fund the ongoing asset recoveries.    These new borrowings were at rates many  times higher than the cost of short term deposits and the rate on CLF borrowings.

Credit unions saw that the CLF was not a resource for their use.  It  was only a  means for NCUA to manage the NCUSIF’s cash flows for its obligations to the insured corporates’ members.  CLF’s borrowings were not  for sustaining the corporates operations. In Matz’s characterization the loan payoffs: “clears the balance sheets of both the CLF and NCUSIF,” but at the expense of the corporate members.

Mandating Membership

In  a recent interview  before the NAFCU caucus Chair Harper reinforced this view that the  CLF is only an NCUA tool, not a shared responsibility. He said staff had been requested to review lowering the current $250 million asset threshold for credit unions required to have a federally backed liquidity source (the Federal Reserve or the CLF).  That is to force more credit unions by rule to join the CLF.

When given a choice, credit unions have overwhelming decided to belong to the Federal Reserve rather than the CLF, which has only 390 regular credit union members.  The CLF is seen as simply an arm of the regulator, not a resource for credit unions.

As outlined in an earlier analysis, credit unions no longer view the CLF as a reliable  partner in times of balance sheet stress

This 13^th anniversary of the last loan payment is another milestone.  It marks a year of no progress in making the CLF relevant for the credit union system.   Rather, it has just become another funding source for growing a bureaucracy with no obvious role.

Editor’s note:  Here is how one corporate recommended the CLF be changed in a 2011 comment on NCUA’s proposed liquidity regulation:

Alloya was among approximately 62 organizations commenting on the proposed regulation. The corporate’s comments centered around continuing the CLF, but making it closer in capital structure and operational nature to the Discount Window (immediate availability, little or no capital requirement), maintaining corporates as the agents for the CLF, allowing corporates to borrow from the CLF, CLF Board representation by credit unions and better investment returns on CLF stock through longer term investing.

The majority of credit union and corporate comments were similar and found value in continuing the CLF, but suggested that the structure (either capital or operational or both) be changed to preserve value. Another large portion of the comments were in reference to allowing the FHLB to act as a source of emergency liquidity.

None of these suggestions were adopted in the final rule or in CLF operations.

Most commentary on rates focuses on when will the Fed stop raising, pause and then lower rates.   And what will be the new normal?  Will the markets ever see another ZIRP, zero interest rate policy?   What ever happened to Modern Economic Theory that deficits don’t matter?

Here is a recent observation from Michael Higgins a consultant for banks and credit unions:

Since the inception of Fed Funds Rate in 1954, the average is 4.60% and median is 4.16%. Today it’s 5.33% (Source: St Louis FRED). The recent decade was a statistical outlier. If you entered the industry after iPhone was introduced, this is how things used to be. As one expert noted to me, it’s going to be “normal” for longer.