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Becoming Part of a Bigger Story

(This is the second of two posts on the first and only National Examiner and Credit Union  Conference in December 1984 organized by NCUA. Part one is here.)

In March 1984 when NCUA announced its organization of the first ever National Examiners’ Conference in December in Las Vegas, much skepticism was heard.

The first concern was “You will need professional planners or you’ll never pull it off.”  But NCUA central, regional and field staff put the conference together piece by piece without hiring a single consultant.

To get the lowest possible hotel room rate, NCUA booked the MGM Grand Hotel for early December.  The critics were not optimistic.  “Credit union people will never come to Los Vegas two weeks before Christmas.”

And the ultimate quip, “You think credit unions are going to pay to meet with their regulator?”

Once the marketing started, a limit of two per credit union had to be imposed.   As one credit union explained, “I  knew it would be a sellout so I reserved 12 slots up front so I could take all my volunteers.  We’ve never been to a credit union conference  and a lot of things are coming down the line.  I thought it was extremely important for them to see what was going on.”

By October the conference limit of 2,500  had sold out.  No new registrations were possible.  A wait list was set up.

Examiners Come First

More than 900 federal and state examiners and regulators met from Monday through close of business on Tuesday.  The goal was sharing experience and expertise.   One theme of the conference was the changing economy.  America was moving into a new era transitioning from an industrial economy to an information one.

Financial transactions were about moving information for members. Credit unions were at the center of this change.  According to the most recent American Banker consumer survey, they had become America’s favorite financial institution.

Chairman Callahan opened these initial sessions saying, “Better trained examiners and better communication between federal and state regulators and credit union officials are essential in a deregulated financial environment.  This national conference is a chance to discuss current concerns and share problem solving techniques.”

Some examiners had been on the job for years; others for just months.  One commented about this joint effort:  “We’ve always been first cousins but never knew each other.  I was surpirsed to learn how much we have in common.”

One professional challenge was the increase in examiner responsibility.  NCUA had been delegating to the regions and their field staffs greater responsibility for safety and soundness.   The need as one NCUA executive stated was “to get close and stay close” to credit unions.

Case studies were presented in breakout sessions to practice analysis and problem solving approaches.   The Early Warning system of 1 to 5 ratings was reviewed.  NCUA was the first federal regulator to share its individual ratings with the institutions it supervised.  Not all agreed this was a good idea.   One regional director said some credit union managers used the ratings as a measure of personal performance and for negotiating higher salaries.

Dual chartering came up at several panels.  Private coop insurance representatives sat alongside NCUSIF examiners.   The focus on choice of charter was critical to the evolution of the credit union system.   Share insurance options were an essential component of  a meaningful dual charter choice which provided a check and balance on each system’s responsiveness.  It was pointed out that deregulation of savings accounts, field of membership options, and broader investment choices had occurred first in individual states before these were adopted in the federal system.

The Grand Convocation

On Wednesday 1,500 volunteers and professionals joined for panels, workshops,  and informal conversations.  There were over 300 speakers and 60 different breakout sessions.  While some of the sessions were repeated, the plenary sessions and many of the panel discussions were filmed, edited and then rebroadcast on the conference’s 24-hour video magazine.  These excerpts were shown over the MGM Grand’s in-house television giving attendees a chance to watch sessions they couldn’t make. The broadcasts also included live interviews and comments from attendees.

Major topics included the future of the common bond with a panel of both state and federal regulators;  how to monitor investments and find useful information; whether deregulation was beneficial for consumers and financial institutions. Breakouts covered mergers, the role and future of CUSO’s,  and changing examiner skills and new analytical data base resources.

Richard Breeden, the Vice President’s Deputy counsel for Financial Institutions, moderated the  panel Is the Regulator Obsolete?   Will technology and the speed of money transfers make it impossible to track critical changes in a timely way?

Federal Reserve Governor Martha Seeger described how deregulation had changed the role of regulators: “We must think of ourselves as business advisors, not as policemen.  To me, examiners and credit union mangers are partners in fostering depositor trust and we have just got to work together in this.”

Popular sessions at both parts of the conference were led by Rex Johnson, the president of a newly charter credit union in Illinois.  He had been deputy supervisor for the Chicago office of the DFI before taking over the cu startup.  His had provided training for NCUA examiners using actual examples of credit underwriting prior to this conference.  Rex’s unique collections of case studies generated a lot of interaction.  He noted,  “We had a lot of fun in the breakouts, but more important we learned a lot from each other”

The Bottom Line and Bigger Story

One of the guest speakers was former Marquette basketball coach Al McGuire.  He remarked: “You’re a family; you’re a team and there’s no “I” in team. Credit unions are on a fast break and have unlimited potential.  You must make the maximum effort and you must be together.”

The conference was a gathering where people could translate a belief in themselves and their credit union into practical terms.   Comments included: I’d give it four stars , , , because of the enthusiasm of the people and the direct involvement of NCUA  Chairman Callahan himself.  Usually people at that level don’t become involved.  He lit one hell of a fire in Las Vegas.”

That fire was because this first National Conference of examiners, supervisors and credit unions showed that their efforts were all part of a bigger story.  Everyone contributes, no matter their credit union’s size or time on the job.  What each does individually adds to the greater purpose of the cooperative system in America.

Selected Photos

Dick Ensweiler, President of the Illinois League, Callahan and Board Member Mack.  The League presented Ed with a framed motto on his departing for NCUA, that read We Don’t Run Credit Unions.  It was in the Chairman’s office at NCUA.

Larry Blanchard then editor or Report on Credit Unions.  He worked for Austin Montgomery at NCUA, ran a credit union and has been involved with multiple credit union firms from TruStage to Callahans–still to this day.

Federal Reserve Governor Martha Seeger speaks to the full conference.

NCUA Executive Director Bucky Sebastian with regional directors Carver, Riley and Skyles.  

Texas credit union Commissioner Pete Parsons and NASCUS Chair on a panel on dual chartering.

Carmen Hyland, credit union attorney, mother of Gigi. (corrected from first description) Her daughter became counsel for a corporate credit union, NCUA board member and President of the National Credit Union Foundation.

At a reception:  Ted Bacino, NCUA Director of the Office of Administration, Laura Rossman, Senior Advisor to PA Mack, and Callahan.

There are two NCUA videos of the conference plus more than 300 more photos if someone wants to use in a more detailed report on the event.

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A Transforming Experience for the Season

Yesterday the Kiev National Orchestra and Chorus presented an hour and half performance of Handel’s Messiah.

While a common event in the West,  in the early 1990’s following Ukraine’s independence, this group was the first to perform this “religious” work in this former state under the control of the Soviet Union.

The orchestra and chorus were founded in 1993 by Roger McMurrin, a Presbyterian Choir Director and his wife as Music Mission Kiev.   Joan and I met them during the orchestra’s initial tour of the US. Its purpose was to employ out-of-work professional artists so they could earn a living in their newly independent country.

Roger and Diane eventually moved to live in Ukraine full time.  The mission was expanded to serve widows and orphans with bible study and social services.  It is now under local Ukrainian leadership.

This Performance

This YouTube recording of yesterday’s concert is a different experience than what you might enjoy in your local community.

The performance is in Ukrainian.  As we listen, we know the music, but the words are not familiar.  This causes us to listen with new intensity providing a fresh experience.   The music is gorgeous.

The camera work also communicates with its many views the full visual efforts of individual artists and the chorus as a whole.

Seeing this live performance in Kiev in the middle of an intense war for their freedom, now 1,021 days long, can be very moving.  People singing of joy, hope and faith in an era in which over 400,000 of their citizens have been killed or wounded.

This performance is dedicated to Roger who died in 2023.  There is a brief opening video from Diane.  Watch and listen for a singular and moving  experience.

(https://www.youtube.com/live/SuALTmDE1I8)

 

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40 Years Ago Today, An Epic Cooperative Event Began

On December 9th, 1984 a unique, one-of-a kind credit union event took place at the MGM Grand Hotel in Las Vegas.

The National Credit Union Examiners Conference was the inspiration of NCUA Chairman Ed Callahan.  It reflected his belief that state and federal  regulators had common purpose with the credit union community.  While each had separate responsibilities their shared goals could best be accomplished through collaboration and continuing communication.

The Operational Context

This unprecedented national initiative was accomplished while NCUA was doing its “day job” overseeing 11,000 FCU’s and monitoring 5,000 state charters with NCUSIF insurance.   The agency was in the process of completing an annual exam for all FCU’s for the third consecutive year. CLF membership, in partnership with the corporate system, included all 16,000 credit unions in its liquidity coverage.

The NCUSIF redesign was passed by Congress with complete credit union support.  This structural change from cooperative principles created the strongest of all three federally managed funds-a fact still true four decades later.

The 1985 agency budget had been passed in the fall.  It slashed spending by  4.9%.   This spending cut enabled a third reduction in the FCU operating fee of over 20% for a total of 64% over the three yers. Moreover, it was NCUA resources that underwrote the conference including the attendance by all its field examiners plus regional and DC staff.

The credit union system was moving forward in the market. In August the agency reported credit union loans had grown 26.2% over the 12 months ending in June 1984.  Member shares were in their third year of double digit growth following deregulation.

This year was also the 50th Anniversary of the passing of the Federal Credit Union Act, an event celebrated by the agency in many ways, including new chartering and total membership goals.

The Conference  Launch

On March 14, 1984 NCUA’s press release announced the initiative:  NCUA to Hold First Conference of Federal and State Examiners and Credit Union:  It read in part:

“This National conference is a unique opportunity to bring together credit union officials, state and federal credit union examiners and regulators and representatives of the credit union trade associations,” said Chairman Callahan.  “It will be a chance to discuss current concerns and share problem-solving techniques.  Examiners need to be exposed to a wide range of ideas and procedures that will enable them to do a better job of ensuring  the safety and soundness of credit union particularly in a deregulated environment.”

We want to make it possible for the public and private sectors to learn from each other and openly discuss the progress, and problems of the credit union movement.”

A registration card was placed in the NCUA’s 1983 Annual Report sent to every credit union in March 1984.  It showed the two sessions, the first with examiners, and then followed with all credit unions joining from December 9 through the 14th.

The May 1984 NCUA News reported why registrants said they would be coming:

Don Beall, President of NASA FCU was quoted:  I think this is a welcome relief from the  past when we had little opportunity for constructive dialogue with the regulatory. The operational types and examiners live in different worlds.

Robert Sorin, Superintendent of the Ohio Division of Credit unions wrote:  “The field staff has never had the opportunity to gather with other state or federal examinders to exchange ideas. . . we want to come away with some new friendships and many new ideas.” 

And the price was right.  NCUA secured the government room rate of $38 for all participants including spouses.   Two people who choose to share a room would pay only $19 apiece.

A registration form was included in the June newsletter.  A conference registration packet was mailed to all FCU’s that same month.

The form also announced that the agency had negotiated a substantial airline savings with United and gave a toll-free number for credit unions to call for discounts for Vegas flights.

In September the News headline read Two Per Credit Union Attendance Placed on Conference Attendance.   The explanation:  “Due to heavy demand, registration is now limited to a maximum of two persons per credit union, a move designed to allow as many credit unions as possible to participate.”

On September 28, 1984 the NCUA announced the conference was sold out.  Registrations were coming in at 100 per week and the 2,500 person room capacity limit was reached two months ahead of schedule.

“We are thrilled but not surprised by this tremendous response.  Credit unions were quick to recognize this will be the kind of learning opportunity they just can’t get anywhere else,” said Chairman Callahan.

The Conference  Speakers

The conference schedule offered over 60 different panels, workshops and case studies.  The sessions speakers included all three NCUA board members plus Federal Reserve Board Governor Martha Seger; Richard Breeden, staff director to the Vice President’s task Group on Regulations of Financial Services; former NCUA board chair Larry Connell,  former FHLB Chair Richard Pratt,  former NCUA board member Harold Black and Al  McGuire former Marquette basketball coach, and current NBC sports analyst.

When the conference agenda was finalized, more than 300 speakers and panelists were listed including federal and state regulators, leading credit union professionals and trade associations officials.

In posts later this week, I will present some of the content offered and photos.  I believe this will illustrate the unique charater and significance of this extraordinary event.

The Conference’s Significance

This National Conference was a celebration of recent success and a dialogue about the future of the cooperative system.  It was not an addition on top of NCUA’s traditional roles of examination, supervision and administration.  Rather it was a culmination of the values, practices, and common purpose for how NCUA had been involved with the credit unions since deregulation.

Chairman Callahan believed the single most critical responsibility of a leader was communication, both listening and sharing points of view.  From frequent press releases, open press conferences, board meetings on the road, transparent dialogue was the foundation for common industry efforts.

This conference was designed as an optimum opportunity for these exchanges.  It was the high point for a new relationship paradigm for NCUA with credit unions. This “tipping point” in the positive and constructive  relationships between credit unions and regulators would stay in place substantially until undone by athe Financial crisis in 2008 and thereafter.

 

 

 

 

 

 

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A Credit Union Christmas Story

The problem of debt and Christmas is a theme of literature.  Who does not know the story of Scrooge and Little Tim by Dickens?  The play is presented every year at this time at Ford’s Theater here in DC.

The vignette that follows shows this reality for members still exists today.  The story as told by a credit union employee:

I’ve Been There

Yesterday I had a member call in asking to refinance her auto with us to get a better rate. I let her know about our interest rate reduction product and made her aware there is a $100 fee associated with this. After speaking with her and getting to know her circumstances, I learned she is a single mother with two kids. She is working multiple jobs.

She has several credit cards that she is struggling with and really trying to get these under control so she can one day purchase a home.  The cards had 0% interest rates because her husband was active military. But they got divorced and now the interest rates are extremely high and she is stuck with all the debt.

 She also told me she couldn’t afford gifts for her girls for Christmas. I told her it sounds like she doesn’t have the $100 right now to even do the interest rate reduction.  So let’s start with a Trinity referral and get her debt under control and hopefully put her in a better financial situation.

 I also referred her to my church which does a Christmas store at which I volunteer.  I told her we could get her kids some Christmas presents. She was beyond grateful.

I said I could relate with her as I’ve been there, and we at Day Air will help her through this. Our short term goal is to get her debt down to raise her credit score. Then she can get a better rate on her auto loan. Our long-term goal is to eventually get her and her girls in a home they own.

The Opportunity for Goodwill

How will your credit union help debt burdened members who are struggling and feel anything but cheer this time of year?

 

 

 

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The Next NCUA Chair: Someone Who Cares About Us

Recently I asked a person who has worked with credit unions in the past four decades, what she would like to see in the next NCUA Chair.

Her response: “Someone who cares about us.”

That simple statement felt profound.  I circled back to ask how she might know if someone met this criteria.

In her words, the person would not be an outsider.  Rather someone who has worked in or with credit unions.  An example she cited are those CEO’s today who began their careers as tellers or branch managers to become leading CEO’s.   They know the operations and culture that create success from the ground up.

Communications

This person, she said, would reach out and talk with, and more importantly listen to, credit unions.

Credit unions would be included as regulatory policy and priorities are developed. Communication would be ongoing and open.  The industry would not be preached to.  Rather the system’s success would be celebrated especially with examples that make members’ lives better.

Mutual respect would characterize interactions.  The Chair would recognize that not all credit unions perform at the same level. For that is how life works.  The multiple legacies of personal time, cooperative resources and member loyalties that are the foundation of today’s cooperative system would be recognized.

What to Avoid

I believe most would agree with these characteristics.  But her concern was if the Chair was “an outsider with an agenda.”  That can lead to a tendency is to see credit unions as an “enemy” especially when in difficulty, rather than being part of a common cause.

This person reflected “how can you regulate if you keep credit unions at arm’s length?”  Or if the appointee has never managed an organization, how can they be expected to do something they have never done before? Put simply, how can you regulate something you know nothing about?”

A Public Conversation on NCUA Leadership Now

The most consequential action by the incoming administration on credit unions will be the appointment of the next NCUA Chair.  Hauptman’s term ends in August 2025.

It is easy to speculate how the broader Trump agenda might impact NCUA.  There could be spillover from these efforts.  However, the opportunity now is to articulate the factors that would characterize a successful NCUA leadership selection.  One that would move the cooperative system forward in its special role addressing the needs of members and local communities.

This dialogue should include identifying potential candidates whose backgrounds suggest both experience and competence in leading an organization that has made a difference during their  tenure.

Now is the time for those who believe in the cooperative model, to speak up and ask their affiliated organizations to do likewise. Bring forth  names of persons who would bring insight and demonstrated competence to the Chair’s role.

For if credit unions and their affiliated organizations fail to express their views, how can  the incoming administration see this appointment as anything other than a job for a loyalist?

If credit unions demonstrate their strong interest in this role, that enhances the chances of a meaningful choice for the next four years.  And a more productive relationship between NCUA and all its constituents.

 

 

 

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Member-Owner Breakthrough! They Will Receive 12.2% on all Savings for Total Merger Payout of $76 Million

Pending member approval, the 51, 590 members of $805 million Thrivent FCU will receive all their credit union’s  reserves plus a dividend upon merging.  The bonus will approximate a 12.2% additional return on the members’ $628 million total savings as of June 28, 2024.  The total payments will be $76 million.

An example: if a member had $5,000 in total deposits on June 28, 2024, their estimated payout would be $610.  Plus they have full access to their savings if they do not wish to keep them with the merger partner, Thrivent Bank.

The payout is an important precedent.  For in the current system member-owners receive nothing in ownership acquisitions except rhetoric and future promises.

More vital, could this example encourage more banks to seek acquisitions by offering members a fair deal-a missing factor in today’s intra-industry private cooperative merger games?

Thrivent Bank, is a newly state-chartered Utah based FDIC insured institution.  It is indirectly wholly owned by Thrivent, a Fortune 500 company with over $114,000,000,000 in total assets at the end of 2023.

The Valuation-What is a Successful  Credit Union’s Actual Market Value?

From the member Notice:  A valuation performed by RP Financial, LC in 2021 established the merger value of TFCU to be $76,000,000. The TFCU Board of Directors has determined that in conjunction with the Merger, the members will receive a total distribution in the amount equal to the full valuation of $76,000,000. 

At June 2021, the credit union reported a book value (net worth) of $69 million.   So members are receiving more than the book value at this valuation date.  At September 2024, the net worth had declined to $59 million which included  the potential write down (FASB 115 valuation) of $21 million in underwater investments.

This is a fundamental data point that every credit union member-owner should be given in a transaction.  Today members are never told the market value of their credit union and the potential for a premium.   This has created a false market when a merger transfers operational control to an independent  party and the owners receive nothing.  Such a valuation should be part of all merger proposal going forward.

Who is Thrivent CU?

Chartered in 2012 the credit union’s mission is to help people achieve financial clarity by providing access to banking products and services that help bring balance to spending, purpose to saving, and intention to managing debt. We strive to put you at the center of everything we do, providing impeccable service and competitive rates, so you can make financial choices aligned with your values and priorities.

Why the Merger with Thrivent Bank?

The following is from the FAQ’s for the merger:

Just as TCU is different from other banks and credit unions, Thrivent intends that the Bank will continue our shared mission of helping people achieve financial clarity so they can live full and purposeful lives. It intends to build a simple and transparent full-service product suite, create easy-to-access digital experiences, and provide direct access to human support, with competitive rates.

Thrivent believes that a purpose-driven bank is differentiated in part by fewer, simpler and more transparent products. This will be manifested in simple, fair, and transparent fee structures, and experienced through behavior-influencing digital experiences that offer contextual and actionable insights and guidance that help customers advance on their path to better financial clarity and wellness.

Post merger:  All current accounts will retain their rates, function and features.  And,  the rates and substantive terms of members’ existing loans and savings products will not change as a result of the Merger 

Any Special Payments for Staff?

In many credit union acquisitions of other credit unions, the primary payouts are to the CEO’s and senior executives who set up the merger.   The same disclosure is required for this transaction.  Here are the details:

Merger-Related Financial Arrangements:

No senior executive officers of TFCU will receive an increase in salary as a result of the Merger.

On October 1, 2021, the TFCU Board of Directors voted to retain current board member Ronald S. Orrick, Sr. as the interim President and Chief Executive Officer of TFCU. A portion of Mr. Orrick’s compensation for his services as interim President and Chief Executive Officer, in the amount of $50,000, is conditional on TFCU successfully merging with and into Thrivent Bank. 

There are no change in compensation for staff.  The second fact in this disclosure is that this transaction has been underway for over three years.

The Voting Process

The proposal must  receive votes from 20% of the total members eligible to vote (47,872). At the time we reach the threshold, regardless if members are voting For or Against the recommended merger, TCU will donate $20,000 to a charitable organization.

Of the votes received, a majority must vote in favor of the merger for the vote to pass. 

Online voting will begin on  January 7, 2025 through February 5, 2025.  A mail ballot will be sent to all members that have not selected electronic communication.

Why the Merger if Nothing is Changing

A video explaining the merger and links to the member letter, official meeting Notice and FAQ’s can be found here.

There are two themes as to why this change is sought, even though the member experience may not be different in the short run.

The dominant motive is access to greater capital:  TFCU has a fraction of the capital that Thrivent Bank will enjoy. Thrivent Bank’s capital together with the existing assets of TFCU will permit Thrivent Bank to make investments in improved technology, products, and services.

The second aspect is broader growth potential:  As we look to the future, we’ve recognized the need and opportunity to grow and further our mission to serve more people with our differentiated approach to banking 

The expected merger outcome:  Thrivent Bank will offer a simple and transparent full-service banking product suite, delivered through easy-to-access digital experiences and direct access to human support, with competitive rates and fees. Ultimately, Thrivent Bank will help people achieve financial clarity, enabling lives full of meaning and gratitude.

What This Example Could Mean for the Cooperative system

In addition to a process that reveals the market value of a credit union in an acquisition, there is  potentially a more consequential outcome.

It is this:   If credit unions can buy banks an increasingly common growth strategy,  why can’t a bank with a mission, purpose and abundant capital take Thrivent’s model to other credit unions around the country.  This would open up true market options that are now not sought out in today’s rigged merger transactions. The members then have a real choice.  They can receive full value for their loyalty, choose to stay with the acquirer  or  take their relationships elsewhere if not pleased.

Today credit unions are readily paying 1.5X to 2.0X book value to acquire a bank.   But member-owners are rarely offered anything in such mergers for their ownership and years of loyalty.

Credit union professionals have been taking advantage of members in the current merger-driven, CEO’s private deal making process.   It’s time real market options are required for the members’ benefit.  Thrivent FCU’s disclosures and payments should be an example required in all future coop acquisitions.   Then members can hope to receive a fair deal.

 

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NCUSIF 3Q Public Update:  How to Enhance the Board’s Stewardship (Part 2 of 2)

My earlier analysis, part 1,  of the NCUSIF’s financial performance in 2024’s first three quarters, highlighted the fund’s soundness.  It concluded with Board member Otsuka’s statement about the board’s role to be good “stewards” of the fund.  This post shows how that oversight role could be improved.

The Benefit of Public Board Meetings

The board’s quarterly discussion of the fund’s performance is an important responsibility.  It demonstrates each board member’s “grasp” of the subject matter, their preparation and their reasoning for any conclusions.  Just like a credit union board’s role, their judgment is critical in overseeing staff’s recommendation.

It is in the board’s particular roles in this quarterly review, that the public learns each member’s understanding of general policy, especially the role of America’s cooperative financial alternative.

Additionally, NCUA’s monthly publication of the NCUSIF’s performance provides the fund’s cooperative owners the opportunity to monitor how their 1% deposits are managed by following critical financial indicators.  This monthly update was a condition for the open-ended funding model of the 1% deposit by credit unions.  If the trends are in the wrong direction, then credit unions have the facts to speak up.

Critical NCUSIF Financial Issues

The fund’s finances have one primary revenue driver, the yield on the investment portfolio.  This was by design.  It was a dramatic change from the premium based approach of the FSLIC and the FDIC which was also followed for the first 15 years of the NCUSIF’s operations.  That premium model proved fundamentally flawed. That history is described at the end of this post.

The NCUSIF’s Investment Underperformance

Slides from the September financials in November meeting clearly demonstrates the agency’s continuing shortcomings  in managing the Fund’s interest rate risk.

The first tracks how the fund’s yield (blue line) began trailing its market indicators as of mid-2021.

The next shows that the NCUSIF portfolio has been “underwater,” that is below market in value and return, since December 2021.

The first consequence of this portfolio strategy is that the fund’s primary revenue source is  shortchanging the fund and credit unions. The second is that the majority of the fund’s investments are not readily liquid in the event needed without either borrowing or selling investments at a loss.

Below is the latest investment report provided to the board in the quarterly review.

It shows an overnight yield of 4.79% on 24% of the portfolio; 1.74% on the remaining 76%; and a weighted average YTD yield of only 2.48%.  This below market return is  due to the fixed rate bonds purchased following a robotic investment ladder out to over seven years independent of any ongoing IRR assessments.

At September 2024, every investment maturity bucket except overnights, and recent investments for seven years, are below market value.

This update shows one investment action during the third quarter: $1.1 billion of bonds purchased on August 15, 2024  at “various” yields of 3.5% to 3.85%.  Following are the other yield-investment  options that same day from the Department of the Treasury.

Date 8/15/2024
1 Mo 5.53
2 Mo 5.4
3 Mo 5.34
4 Mo 5.22
6 Mo 5.04
1 Yr 4.52
2 Yr 4.08
3 Yr 3.9
5 Yr 3.79
7 Yr 3.83
10 Yr 3.92
20 Yr 4.28
30 Yr 4.18

This August investment decision  yields less than all other Treasury options with maturities less than three years-shown in blue.  It extends the interest rate risk as measured by the fund’s weighted average life (WAL). It follows the same pattern of activity that resulted in the fund’s past three plus years of underperformance. 

With the portfolio’s current WAL, this revenue-yield shortfall could extend for another 2.5 years.  Have no lessons been learned from this latest interest rate cycle?

Since 2008, the fund’s data shows that a portfolio return between 2.5% and 3.0%  is more than sufficient to maintain an NOL of 1.3%.  Returns above that breakeven range would give credit unions a dividend to recognize their open-ended underwriting commitment. More importantly, it rewards their collective risk management.

The Fund does not need more assets relative to risk, as some board members have stated.  It needs more effective management of the portfolio investments it already receives.

The Chairman of the investment committee and two of its four members were at November board table responding to questions.   This would have been the perfect time for a dialogue about whether alternative investment options were considered.  This one day’s investments in August increased IRR risk, reduced liquidity  and returned a lower yield than multiple other options.

Instead of explaining this decision, the board continues to put its head in the sand.  It glosses over performance charts that would not get past questioning by the newest examiner should a credit union report this outcome and unexamined policy.

In the meantime, credit unions are on the hook for NCUA’s mismanagement of the fund’s return, not just the industry’s potential insurance risks.

The Lack of Transparency

There are a several calculations used in the final numbers that are vital to understanding their reliability.  At times in the past these assumptions and data are shown in detail at briefings. This time only a final number is given so that it is impossible to validate the results presented.

The classic example of a lack of transparency was that until February of 2024, the staff had provided its calculation of the modeling data used for recommending the normal operating level (NOL) for the fund’s coming year. This cap determines when a dividend must be paid from net income.   In February however, the board continued the 1.33% with no underlying data or assumptions presented to justify a cap higher than the long time, traditional 1.30%.

That 1.30 was exactly the actual NOL reported for December 2023.  The financial model was working exactly as designed, yet the staff and board just rolled over the old higher level with no factual justification.  The fund’s own performance belied the need for an NOL above the historic cap.

In the prior two years of staff’s 1.33% NOL recommendation, the underlying data were provided.  But when modeled out this information did not support their recommendation.  Rather it showed that the historic 1.3% cap would have covered all the forecasted model’s contingencies in the next five years.  Is that why no details were given for 2024’s NOL setting?

One board member commented in the Q&A for 2024’s NOL that he did not know what the right number should be.  Moreover he didn’t think it would make a difference for credit unions whether the cap was 1.3% of 1.33%.  As of September 30, the fund’s equity ratio was .303% and headed higher by year end.  Should the December 2024 exceed 1.3% that decision will matter greatly, causing credit unions to forego tens of millions in NCUSIF dividends.

The question is not, what is the right cap on the NOL;  rather, it is what is the appropriate range for the fund’s equity so that credit unions can share in the success when all goes well.  That judgment is no different from managing a credit union’s capital ratio, a decision and responsibility familiar to every credit union board member and CEO.

Other Missing Details

Another disclosure shortcoming was the  investment report.  Instead of listing the individual investment purchases as in past reports,  “various” maturities and a range of yields  (3.8 to 3.85%) were given.  This suggests the individual securities were for at least 7 years.  This investment choice was at a time when the yield curve offered multiple higher returns on all options with maturities less than three years.

These shorter investments would reduce liquidity risk, improve yield immediately and enhance portfolio flexibility—but no board member questioned these August 15 investment decisions.

Undocumented Projections

The 2024 year end NOL projection by staff was given in a footnote as 1.28% in the last slide.  In  previous  December year end forecasts, the staff has presented a full NOL calculation in a single slide. The data included projected retained earnings,  insured share totals  and the resulting NOL outcome.

Insured shares grew only .46%  in  the third quarter.  If that growth pattern continues in Q4, then the NOL could be much higher than the 1.303 at September. Why present such an important forecast result (1.28%), which is below the current actual level with no substantiating numbers or assumptions?

Yet no board member commented on this lack of disclosure—and its implications for credit unions.

An Increase in Allowance Account and No Losses

Another critical number is the loss expense which is used to increase, or sometimes lower, the total dollars in the reserve account.   For the quarter the additional expanse was $21.7 million raising the total allowance to $232 million or 1.32 basis points of September 2024 insured shares.  So far in 2024 the total actual insured losses are near zero.

Th allowance ratio is greater than the NCUSIF’s average annual loss experience since 2008. In the most recent five years there have been no major losses.  Yet the reserve continues to grow in both dollars and relative to insured risk.

The formula being used for this reserving should be disclosed.  This expense comes right out of retained earnings and thus reduces the NOL number. Just as when presenting an NOL forecast, the underlying assumptions and data should be open for board, public, and credit union scrutiny.

The State of the Board’s Stewardship

As for Otsuka’s call out of the board’s stewardship of the NCUSIF, the examples above are some of the specific opportunities to enhance this responsibility. And we haven’t even gotten to the backward looking calculation of the NOL, but that issue is for another day.

Endnote: Brief History of NCUSIF Redesign

The new NCUSIF financial design in 1984 was based on a study of insurance alternatives and the fund’s initial 15 year trends.  The traditional premium approach in the first years of the 1980’s required double premiums assessed by NCUA.  But even then, the fund made no headway toward the statutory goal of 1% of insured shares.

There were two major reports of this in-depth reassessment.   One was a 100 page study sent to Congress on April 15, 1983 by Chairman Callahan.   The report addressed specific congressional questions, provided a history of cooperative stabilization and share insurance funds, and gave recommendations for change.  It also included extensive comments from credit union leaders.

When the new design, A Better Way, was established by Congress in 1984 the background analysis for a new model was explained in the video below.  It was sent to all credit unions outlining this unique collaborative effort and its benefits for credit unions. For without the credit union support, there would have been no congressional action to authorize this unique cooperative approach to NCUA’s share insurance model.

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

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Great Third Quarter NCUSIF Report! (part 1 of 2)

I missed the November 21 NCUA board’s NCUSIF update so went back and listened to the 30 minute discussion via video.  The report was incredibly positive.  About both the financial performance of the fund and credit union industry trends.

There were several data “blanks” and areas that were not covered that I will discuss tomorrow.

The slides used to update the NCUSIF can be found here.  YTD net is over $226 million which raised the Fund’s total retained earnings to $5.4 billion.  This is .3033% of total insured shares ($1.767 trillion) at September 30, thus exceeding the .30% historical NOL cap.

Total insured losses for the year are negative, that is, recoveries of $2.0 million on prior losses have offset current writedowns of just $1.1 million.  Nonetheless, NCUA has increased the loss allowance reserve to $232 million, or 1.3 basis points of insured shares in addition to the .3033 in retained earnings.

Since 2014 the NCUSIF has recorded actual net cash losses that exceeded 1 basis point of insured shares in only one year, 2018.  That year the Fund wrote down the value of its portfolio of taxi medallion loans.  In 2020 it sold this portfolio  to a New York distressed asset fund manager (Marblegate) which benefitted from the full recovery in portfolio value as credit unions took all the write downs via the NCUSIF.

The CAMEL Trends

Even the CAMEL trends are positive.  Kelly Lay Director of Examination  and Supervision was at the table.  The % of credit union assets classified as Code 4 & 5 declined from the June quarter.   When asked about the change, Lay said it was because of improvements in specific credit union’s liquidity positions-a trend validated in Callahan’s third quarter TrendWatch analysis presented on November 12, 2024, nine days prior to the board meeting.

These two slides from that presentation show these changes in system liquidity:

She further stated that any large credit union that is downgraded in rating or with a 4/5 CAMEL ratings is examined at least annually.   When pressed by a board member about potential exposure in commercial real estate loans, she replied that “there was nothing very concerning.”

External Third Quarter Data Analysis Positive

Several times board members referred to second quarter data, one citing an increase in delinquency and lower ROA at June 2024.

However both the macro-analysis in Callahan’s 3Q Trend Watch Video and the large, individual credit union performance comparisons by Jim DuPlessis of Credit Union Times all show marked improvement in the third quarter.

Two excellent data analysis by Jim DuPlessis include graphs that do not support this observation from older data:

Analysis of five most recent quarters through Q3 ’24 of industry loan production, published on November 4.

Top Ten Credit Union’s Earnings Still Improving on November 1,  using the most recent five quarters through Q 3, 2024.

Two of TrendWatch slides:

And if the macro trends  in credit unions was not convincing by itself, the final TrendWatch slide showed this perfpr,amce comparison with competitors thru June as later data is not yet released:

Stewards of the NCUSIF

In her opening statement board member Otsuka commented:  Being stewards of the National Credit Union Share Insurance Fund is one of NCUA’s primary jobs—a critical component of our duty to protect members’ shares at credit unions. Thus, I continue to be encouraged by the strong performance of the Share Insurance Fund.

Tomorrow I will cover areas where the data was lacking compared to prior updates and the one primary performance topic that the board failed to address.

In future updates, the presentations could be improved if more timely data were used, so the board members have the benefit of the latest information when asking questions or making comments.  Or even when testifying before Congressional committees.