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The Good, the Bad, & the Beautiful for the Week of April  7, 2024

The Good: 125% Risk Based Capital Ratio for a $6.6 Billion Credit Union

If you were ever curious about the difference between a state and federal credit union regulatory environment, the open public meeting of the North Carolina Credit Union Commission the past Tuesday, April 9, is an eye-opener. (It was online).

In 90 minutes a  listener received comprehensive, transparent. and timely information from multiple presenters. The topics covered state and national legislative priorities by a League representative and a thorough state-of-the industry review for all 29 state charters (ratios with and without SECU) by the Commissioner.   There were updates on the status of the state system: sixteen credit unions have the low income designation and one pending merger.

Administrative briefings on the Commissioner’s office including an examination update (one done, six in process, and 22 to go), examiner training and staff openings.

At the agenda’s completion, the chair solicited comments from the attendees. Credit union members presented concerns about the Administrator’s oversight of SECU bylaw changes. One questioned the Administrator’ support for House Bill 410 to change the  operating authority for North Carolina state charters.

The meeting showed the accessibility and transparency of the state’s regulatory environment.  All were welcome. It was an open town hall with democratic participation and citizen oversight.

An Up-to-the-Minute Market Update

One of the most interesting reports for me was  by Fred Eisel, CEO of Vizo  Financial Corporate which serves the Carolina market and credit unions in 40 other states.  His information was timely, positive, and specific.  Several of his points:  liquidity is growing in credit unions with corporate shares up and borrowing by members down.  Vizo’s financial results are strong enabling increasing returns for members. Credit union operations are stable.

However,  the number that struck me was Vizo’s Risk Based Capital Ratio at  March end of 125%–that is not a typo.

Vizo financials through February are posted on their website.   It has extensive disclosures of balance sheet and income statement details, shows total available liquidity of $6.5 billion, and includes nine measures of capital adequacy.

Fred sent me the March 2024 numbers showing  the 125% RBC ratio.

Vizo’s Multiple Capital Calculations

The NCUA’s RBC requirement for well-capitalized corporates is 10%. Vizo’s ratio is twelve times that standard. Moreover, the corporate’s total capital   exceeds 10% of assets.

Vizo CEO’s presentation of March’s final data just seven working days after month end, is extraordinary. It is a disclosure practice documented with web posting, that every credit union might model for their members. The timeliness is a tribute to the credit union’s management. It is also a standard NCUA should emulate in its reporting of the three funds it manages for credit unions.

The Bad: 

Coffee hit a 30-month high today. The commodity is up 16% so far this year. One of the reasons is a heat wave in Vietnam.

Cocoa has been soaring due to weather problems in Africa. Cocoa is up 150% so far in 2024.   (source:  stocks at Night by CNBC Pro April 11, 2024)

The Beautiful:  Eclipse Pictures

From my driveway by Luis  Escalante who was repaneling my workroom in Bethesda, MD.  Luis used my eclipse glasses to cover his camera lens.

From the shores of Lake Ontario by Scott Patterson,  CEO Credit Union Student Choice.

His commentary on being in the moment:  Clouds didn’t cooperate to see the sun much, but we did get total darkness for a few minutes. Very eerie.  The expansive lake view let us watch the darkness line approaching across the water and then see the full daylight on land in the far distance.  A thrilling experience.

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Fraud Alert-A Learning Shared for Everyone

I recently received a copy of a CEO’s description of a fraud/robbery event at the credit union.

The CEO’s summary was sent to all employees for two reasons:

  1. To fully serve and assure any members whose accounts might have been affected by the event.
  2. To convert the incident to a learning experience for  the entire staff.

Here’s why the CEO believes full transparency matters:

“Whenever we take a loss I consider it a tuition payment.  The least we can do is become smarter as a result of making that payment.  We’ve already taken all actions to mitigate/manage the risk. Hopefully others can become smarter as well.” 

In that spirit, here is his summary description of this very well-planned theft used with permission.

ITM Defalcation

Everyone should be up to date on the robbery that occurred in early March . Perpetrators placed skimmers on two of our ITMs in mid-February and removed them just over a week later. They captured the magnetic stripe data of all cards used during that timeframe, re-encoded vanilla gift cards and drained our ITM’s on a  Sunday morning in mid March.

All affected member accounts were immediately made whole, and all cards were blocked and re-issued. We identified all member cards that were compromised and are almost through the process of blocking and re-issuing all of them.

The Secret Service and FBI joined local law enforcement and we are assisting their efforts as much as we can. A bond claim is being filed so we remain uncertain as to what net loss we’ll incur. 

What’s Important

Several configuration and procedural changes were implemented immediately, a few more in the days that followed, with still other changes under consideration. What’s important is that no credit union system was compromised at all, we know exactly how the perpetrators did what they did, and are actively taking steps to mitigate any future loss exposure. The perpetrators did not obtain any personal identifiable information (PII) such as name, address, account number, social security number, driver’s license number, etc.

Rapid action was taken to both replace any funds taken from member accounts and to prevent a repeat of this in the future. Everyone in the financial centers and contact center did a great job interacting with impacting members.

Everyone a Risk Manager

The incident was not a “local” gang. This theft was perpetrated by professional thieves who move quickly from state to state. Collaboration is a credit union advantage especially when a CEO is shares his “learning experiences” with his peers.   Thank you.

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Nature: an Artistic Resource and Renewer of the Soul

Photo by Cody Doherty

The Giant Cactus of Arizona

by Harriet Monroe (1914)

The cactus in the desert stands
Like time’s inviolate sentinel,
Watching the sun-washed waste of sands
Lest they their ancient secrets tell.
And the lost lore of mournful lands
It knows alone and guards too well.

Wiser than Sphynx or pyramid,
It points a stark hand at the sky,
And all the stars alight or hid
It counts as they go rolling by;
And mysteries the gods forbid
Darken its heavy memory.

I asked how old the world was—yea,
And why yon ruddy mountain grew
Out of hell’s fire. By night nor day
It answered not, though all it knew,
But lifted, as it stopped my way,
Its wrinkled fingers toward the blue

Inscrutable and stern and still
It waits the everlasting doom.
Races and years may do their will—
Lo, it will rise above their tomb,
Till the drugged earth has drunk her fill
Of light, and falls asleep in gloom.

Note from Poem-a-day:  Harriet Monroe, born on December 23, 1860, in Chicago, was a poet, critic, and editor best known as the founding publisher and editor of Poetry magazine.

 

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State Regulators and Credit Union Oversight

Who do members turn to when they believe their credit union is not responsive to requests for greater transparency or accountability?  These situations can arise around bylaw interpretation, board oversight, and election conduct.

Following are two examples of members’ interacting with their state regulator when they believe accountability is lacking in credit union conduct.

A Live Hearing-NOW

The first is a hearing of the North Carolina Credit Union Commission at 10:00 AM EDT today.  Several members have sought clarification of the regulator’s approval for bylaw changes, especially those that affect the board election process.  The toll free call in number is 1 (984)-204-1487.  The access code757767261#.

There are thirteen items on the agenda, but the primary one is an update by the state administrator, Kristina Ray, on all areas of her responsibility.   The ability to listen to a live state update is an important opportunity not just for North Carolina charters, but for all credit unions who are interested in the state and federal oversight process.

A Member Complains- the Regulator Responds

A reader sent me a March 18, 2024 article form the Lost Coast Outpost titled:

Coast Central Credit Union Releases Vote Counts From Recent Board Elections Following Complaint to State Regulators

The story is a press release from one of the candidates for Coast Central’s board.  She filed a complaint with the California Department of Financial protection over the credit union’s failure to release vote tallies for the 2024 board elections.

As a result the credit union posted the vote totals for all candidates for the most recen two years with the Chairman’s reply:

“In response to members requests at the annual meeting and in the spirit of enhanced transparency and goodwill, we have taken the additional step of posting the vote totals from the previous year on our website. We hope this action demonstrates our commitment to transparency and our dedication to addressing the concerns of our members.”

Prior requests to the CEO for details of the vote had been turned down.

The complaint was filed by Carrie Peyton-Dahlberg who wrote the press release for the local paper.   The posted results showed she had come in fifth place just 172 votes behind the fourth place elected candidate in the 2024 election:

  • Matt Wakefield: 1,641 votes (73.1%), elected to a 3-year term
  • Terry Anne Meierding: 1,600 votes (71.3%), elected to a 3-year term
  • Ron Rudebock: 1,520 votes (67.7%), elected to a 3-year term
  • Dane Valadao: 1,346 votes (60.0%), elected to a 1-year term for the remainder of a 2023 retiree’s term
  • Carrie Peyton-Dahlberg: 1,174 votes (52.3%), not elected

In her commentary “she urged Coast Central member-owners to use their comment cards to ask for further progress, such as publicly announcing board vacancies, revising board election rules so they don’t hinder election outreach, and changing the board appointment process so that future vacancies can be filled in a way that is more representative of community demographics.”

“Coast Central is moving in a good direction, including releasing these numbers, putting 2024 election reminders in each branch and making sure that its ballots were sent in clearly labeled envelopes. All of these are big improvements over the January 2023 election, and I hope this is starting a new trend.”

 “Bit by bit, if member-owners stay involved, we can encourage Coast Central to move further down this path of listening to the people who own it.” 

Democracy Takes Work

Releasing the actual votes in a member election would seem to be a fundamental requirement, a no-brainer.   The California regulator seems to agree that members are entitled to know the actual votes cast in an election.  That may seem like a small step,  but is still not followed in all credit union merger and board elections-whether for state or federal charters.

This California precedent matters.   Democracy can be a contagious activity.   It is also a participant activity, not a spectator sport.  Carrie Peyton-Dahlberg has done every member-owner a service by raising this issue of election transparency in her credit union.  Hopefully, all regulators will soon see this fundamental accountability for a democratic process the same way.

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NCUSIF Investments: Repeating the Practice that Caused the Current Underperformance

I’m afraid I must rant again about NCUA’s management of the NCUSIF investment portfolio.

From the most recent posted financials as of February 2024, the Investment Committee appears to have learned nothing from the past two years of Fed Reserve short term rate increases.

The Committee bought a $650 million Treasury bond yielding 4.26% with a final maturity of 6 years and three months on February 15.

The investment extended the NCUSIF’s duration, increased the portfolio’s interest rate (IRR) risk, and reduced short term  liquidity. The term portfolio (75% of the $22.5 billion total) is underwater by $1.3 billion and yields just 1.44%.  the Fund’s overnight position in contrast earned an average yield of 5.41% in February.

This new term investment reduces income versus rates available at the short end of the curve by at least 1% or $6.5 million per year until the Fed decides to change course.  Here are the Treasury rates as of Wednesday April 3, 2024 from CNBC  Pro, Stocks at Night:

Bond Yields Above 5%

  • The U.S. 1-month Treasury bill is now yielding 5.36%.
  • The U.S. 2-month T-bill is also now at 5.36%.
  • The U.S. 3-month T-bill is at 5.35%.
  • The U.S. 6-month T-bill is at 5.31%.
  • The U.S. 1-year T-bill yield is now back above 5%, hitting 5.044%.
  • The U.S. 2-year Treasury note is yielding 4.67%.

Ignoring Investment Fundamentals

This decision ignores the IRR lessons from the more than two years of Fed rate increases. The negative consequences of this investment pattern on the earnings and liquidity of the portfolio during this time have been enormous.  Moreover, in recent Board updates, staff said they made no change in their investment policy.

Those policy assumptions fail to adjust to not only  events of the past two and one half years creating this ongoing underperformance; it is oblivious to the history of the Federal Funds rate.

Here is  an analyst’s review of this rate experience in a recent update by a longtime observer and consultant to financial service firms:

Since the inception of the Fed Funds Overnight rate in 1954, the average and median have been in the 4-4.5% range. (https://fred.stlouisfed.org/series/fedfunds)

If you entered the industry after 2009 then you probably didn’t know this.  Your “normal” was a Fed Funds rate in the 0-2% range and you probably think the sky is falling with the current rate at 5.33%.   

The implication of a low Fed Funds rate since 2009 was that you could only survive by making loans because there was very little spread to be had between deposit cost and investment yields.

The Need for Leadership

As NCUA staff repeats its past misjudgments, one would hope the board had the abiity to ask relevant questions and more importantly, documented policy plans and goals.   This is what any examiner would require of a credit union with this continuing record of a $17 billion investment portfolio yielding 1.44%.

The current practice/policy increases the portfolio’s interest rate risk,  provides  no weighted duration goal based on the earnings requirements of the fund, and shortchanges the credit unions who should be receiving dividends from their performance during these last five years of minimal insurance losses.

Reviewing the NCUSIF history since 2009 shows that a portfolio yield of 2.5-3.00% would provide a stable NOL after all costs and growth assumptions.  Returns above that would give credit unions a return on their collective investment—a public commitment when the NCUSIF was redesigned with industry support.

Here for example, is the published forecast from the August 1985 NCUA News (page 3) the year following the Fund redesign:

An estimated 6.8% dividend has been projected for the federally insured credit union deposits  in the NCUSIF based on the Fund’s performance as of June.

The estimated dividend is part of an overall program of reporting to the NCUA Board and to credit unions on the Fund’s activities.  The dividend forecast is updated each month.  Office of Program Director D. Michael Riley noted that he expects the fiscal year dividend to be in the 6.5% to 7% range.

No Muscle or Memory

The core problem is that the board and staff have lost all the “muscle-memory” demonstrated by prior Agency leadership when projecting dividends.   The dividend was and is the key success factor that separates the NCUSIF from all other federally managed deposit funds.

A 5%  portfolio yield would result in total NCUSIF revenue of over $1.0 billion and a substantial return for credit unions.   Current NCUSIF investment policy and practice shortchanges credit unions and mismanages the most important asset under NCUA’s administration.

The only advantage of this six year and three month investment is for the three board members, Their terms will all have expired.  So they won’t have to explain how making the same oversight error increased NCUSIF’s portfolio risk while reducing its earnings for credit unions.   In short, this NCUA board has no memory let alone muscle when it comes to overseeing the NCUSIF.  Perhaps that’s why there was no Board meeting in March.

 

 

 

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The Revolution Credit Unions Are Missing

During my college days five decades ago, the primary work-study jobs were dorm crew, dining hall or checking out library books.  Students receiving financial aid were expected to work at least 10 hours per week.

As the decade of the 1960’s progressed, the college campus atmosphere inspired by the Camelot years of President Kennedy gave way to the increasingly anti-Vietnam war and civil rights movements.

New protest groups were spawned across campuses.  These included SNCC, Black Panthers, SDS and multiple other efforts to support social and political change.

In a partial final year on campus waiting for my date with Uncle Sam, I  saw a three-day occupation of University Hall and attended a student meeting where one of the participants placed a gun on the table to demonstrate his radical intentions.

Part of this campus mood was anti-business—all kinds, not just the protests against Dow Chemical or other business seen as supporters of war. Capitalist society was deemed responsible for the multiple wrongs protestors wanted to change in US public policy and social inequity.  No one saw business, or entrepreneurship worthy of academic attention or support.

Still, students would occasionally use their university setting to develop start up ideas.  One that became very popular in the ’60’s was Operation Match, a paper based computer analysis of questionnaires to provide participants names of potential dating partners. It was noteworthy, because it was an innovation that filled an ever- present social need.

Today’s Campus Environment

For the past decade there has been a revolution in both attitude and support for students in higher education who wish to create new business startups.

All of the top universities now have on-campus organized support, including courses for students and faculty who want to start new businesses.

A February 24, 2024 article lists the 14 Best University Accelerators and Incubators for 2024.

Every listing is a top academic institution including Harvard, Duke, UT Austin to USC and UC Berkley.

Here is a description of MIT’s multi-option effort which is headlined with its $100k Pitch:

  • MIT delta v: An accelerator program that runs from June-Sept for MIT students with the ability to receive up to $20,000 in equity-free milestone funding.
  • MIT NYC Startup Studio: A startup studio in NYC for MIT students and alums with the ability to receive up to $20,000 in grant funding.
  • MIT Fuse: A 3-week micro accelerator for teams with at least one MIT student as a founder.
  • The MIT Entrepreneurship Club: A community that wants to help MIT students start companies and connect them with startup jobs. Watch my interview with them.

‍Amazon web services (AWS) now sponsors a nationwide competition for university based startups:   “It’s no secret that some of the most successful startups were founded by members of the university community: from Ava Labs to Anyscale and InsightFinder, to name a few. At Amazon Web Services (AWS), we believe this is because students and faculty are often creative thinkers who are willing to take risks and collaborate with their peers—all essential qualities in a founder.”

“For current Harvard students, the Venture Incubation Program (VIP) within Harvard’s Innovation Lab fund is a 12-week program with mentoring and resources. Harvard’s Innovation Lab also hosts the President’s Innovation Challenge, where students can win funding money of up to $75,000 for a great idea. Judging criteria includes viability, empathy, rigor, ingenuity, traction, economics, and impact.”

The George Washington New Venture Competition (NVC)

Here in D.C. George Washington University sponsors an annual competition inviting students, faculty and their supporters to present business proposals and collect cash prizes and other forms of startup support and counsel.

Three finalists compete in one of four startup categories:

Consumer Goods & Services

Business Goods & Services

Social Innovation

Health Care & Life Sciences

Each finalist prepares a one-minute video of their business proposal.  There are immediate cash prizes plus additional consulting and funding support:

  • First place winners selected from these tracks will each win $10,000
  • 2nd place cash prize $7,500/track
  • 3rd place cash prize $5,000/track

Companies have one year to register as an LLC to claim the money.

To see these young entrepreneurs’ ingenuity, passion, and commitment I would encourage you to sample one or all of the 12 finalists’ sixty second  pitches which you can find here.   Several that were intriguing were Siyeh Tech’s entry to accelerate the “Speed of Peace” after conflict, In-Locater, and Goal Plus.

All of these business ideas are either conceptually complete, if not already in beta.   George Washington’s New Venture Competition is one of many in the higher education community.   This is not only an “educational” institution responding to students’ interests; in some the university benefits from partnering as startups go to scale backed with venture capital.

These competitions are not standalone events such as a campus springtime arts festival.   These programs are supported by courses, different “labs,” seminars and lectures on the art of pitch preparation and visits by university alumni speaking on their business success.

These educational innovations are helping to spark an ever-renewing stream of new business ideas with support systems intended to foster success. Students are encouraged to jump into the capitalist world and perhaps reap fame and fortune.

Simultaneously a parallel change for venturing has developed for college athletes. They can now receive income from their Name, Image and Likeness (NIL) endorsements by private businesses.  Caitlin Clark is not only Iowa’s leading basketball player, but she also appears in commercials while her games are being broadcast.  She may be the first million dollar undergrad student-athlete.

And Credit Unions?

Unlike my era in college, higher education is an active participant in American enterprise.   What does this have to do with credit unions?

Cooperatives are missing in action.  Students are not learning about personal finance from credit unions.   Credit unions which have students in their FOM’s often see them as a secondary market opportunity.

Every company, professional sport franchise, consumer product, auto manufacturer etc. must resell its brand to the next generation of users.  Or face the prospect of going out of business. Product loyalty, like religious observance,  is not easily passed down in a family in today’s society of instant access and social media.

If credit unions miss this generation of college students, will they ever catch up as they move on in their careers and families?

In the 1980’s, NCUA played a very active role supporting new student led credit unions as described in this post.  That effort is missing today.

Credit union’s absence from college and university campuses feels like a missed opportunity for attracting this generation of self-help innovators and strivers.  How do coops become part of  this new enterprise engagement by student entrepreneurs?

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Diversity in Credit Union Charter Options Matters

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.

 

 

 

 

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A Valuable Source for Your Morning Economic Briefing

I recently subscribed to Reuters’ free daily Morning Bid U.S.  

It is a succinct summary of key rates, economic announcements for the day and selected articles about important events.  Today’s is the JOLTS report.

You can sign up here. It is one of 18 Reuters briefings.   The latest market updates are short and the commentaries accompanied by clear graphs.   Today also looks ahead tp Friday’s nonfarm payroll report for March.

A useful 60 second brief before reviewing the financial priorities in your credit union.