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Two Trends Deserving Debate

At the NCUA’s May board meeting, one trend jumped out at me.  Not new, but accelerating and read without comment.

In the first 90 days of 2023 there were 59 NCUSIF charter cancellations.  That is a rate of almost 5 per week, one every business day.  Without exception these charters are decades old, some surviving and most thriving.   Why?

These charters are the handiwork of generations of volunteers, whose current leadership have decided to give up.  It is a morale and ethical problem.   For it undercuts the coop premise that pays forward the members’ collective legacy for which the present leaders are  now the steward.

Many will suggest that the credit unions members are in better hands.  However these hands are not the leaders they know or elected, nor the organization that created their collective reserves.  Every charter cancellation eliminates an example of economic self help, self finance and self governance.

In most cases these are locally focused institutions which created unique relationships with their communities.   Financial services may continue, but not from the same roots.   Another civic organization so essential to a vibrant democratic political economy is no more.

What Can Be Done

Regulators should put the same time and effort into requests to cancel charters that  they extend to new charters.  If a merger is the strategy, show us the plan.  If the volunteer leadership is giving up, ask members for new volunteers.  If the sponsor has moved away, then seek a new group for re-energizing the charter.

Today the regulators have endorsed an exit strategy that benefits only the senior leaders who leave the membership in the lurch.  And retiring CEO’s especially, are taking advantage by transferring their legacy to another credit union, often for just a few more silver coins.

When quitting a business or long standing effort is easier than getting in, the movement will continue to close future growth options, create higher concentrations of risk, and remove financial services away from their local connections and knowledge.

No charter should be cancelled without an effort to find others who are willing to pick up the opportunity.

A Second Trend to Be Re-energized

No brand, business or opportunity can continue without the support of the next generation of consumers.

Student run and led credit unions have been part of the educational and financial services of cooperatives from the beginning.

Yesterday I learned about a scholarship program to identify young persons often from disadvantaged backgrounds (poverty, refugees, disabled) who are given the opportunity to become part of a special education effort.

The premise is that brilliance is equally distributed in persons,  but opportunity is not.  The focus is on 15-17 years old.  This is an age when  “ideation,” the willingness to consider new ideas and become doers is formed.

This educational support is for four years.   The time frame for measuring success is in decades.  It may take ten years or more to see if those chosen in the program will become leaders in their chosen professions.

The program called Rise recognizes that leadership will be manifested in many different ways but over time.  But the investment in this generation must be made now.

The cooperative model is designed to attract this kind of self starter.  But today again, the regulatory community discourages new charters.  The application has become a compliance drill, not support for people with passion to serve a community.  The next student chartered credit union will be the first since the 1980’s.

In the meantime these young change makers are engaging their start up  fervor elsewhere sometimes in other innovative finance-related endeavors.

The Common Thread

Credit union leaders, regulators and professional staffs, have become captured by the short term focus that drives most performance reporting.   What are the latest quarterly numbers?  How will we expand the market reach of our FOM?   What Fintech partner will give us short erm lead on innovation?

All these efforts while necessary overlook the longer term outcomes.   Without  this awareness, the movement will become just another increasingly concentrated, and limited,  financial service option in ten years.  The number of active charters will be halved.

Tomorrow’s  innovative financial models will have been created by the high school and college generation outside the movement. Credit unions will be seen as  old fashioned “banking” firms just tending to their own, stand alone, self interests.

Both of these trends today are shaping what the movement will be a decade from now. There will be other cooperative solutions designed to serve consumers’ financial needs; however they may not be called credit unions.

 

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A Perspective On Credit Union Leadership & Human Nature

“It’s probably been happening in the ranks of American business since the first corner office was built, the first board was elected and the first regulatory body was created.  But the unceremonious departure of well-known chief executives is also occurring a lot more frequently in the CU movement, lately.

“These are people you know, or at least know something about.  You see them at national credit union conferences.  They are the ones who have their photos in the program book because they are on the board of the sponsoring group or are speakers.  They are the first ones to the floor microphones to challenges speakers.  They write articles and have articles written about them.  Their credit unions are also in the press a lot for innovations and achievement.

But they are gone.  Not because they wanted to leave, either.  Boards asked them to resign or fired them.  Regulators asked them to sept down.  Officers of the law escorted them into custody.  Staff pressures forced them out.  Some simply couldn’t cut it any more.  Some left kicking and screaming.  Others left quietly, never to be seen or heard from again.

“It seems a shame that a long and apparently successful career ends with a headline, factual story and mug shot in the press.  It happens to corporate titans all the time. But we’re talking about credit union people here.   They’re supposed to be different, but I guess they really aren’t. . . Although the reasons for departure vary greatly, it is apparent that one more sign of the growth and maturity of the credit union industry is that the “here today and gone tomorrow” syndrome is alive and well. . .

“Collectively the moral of their stories should be to acknowledge when you are doing something that could be viewed as a questionable business practice and stop it immediately.  CU CEO’s and for that matter their boards, don’t have to be rocket scientists to understand that eventually, hefty insider loans, conflict of interest . . . transactions, or sweetheart compensation packages are going to get them in trouble and into the unemployment line at beast and the appropriate jailhouse at worst.  . .

“Who’ll be next?  I suspect some out there already know who and why, too!”

 

(Source:  by Mike Welch, Editor and Publisher, Credit Union Times, April 22, 1992, Page 6)

 

 

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Summertime: 90 Degrees Today

Second day of summer. Have to start watering the yard.  The flowers are blooming.  Lots of color.

A red poppy.

 

Peony in full bloom.

Late blooming azalea.

Blueberry bush ready to start picking. Net to keep bird freeloaders away.

A late Easter Lilly.

Phlox

Branch of a white Kousa dogwood-flowers come after leaves are out.

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The More Things Change, the More Things Stay the Same

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

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

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

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

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

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

The More Things Change  . . .

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

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

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

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

Below Market Returns Lasting Years

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

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

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

The More Things Stay the Same

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

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

The Distressing Part of NCUSIF Oversight

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

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

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

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

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

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

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

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

A Past Lesson

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

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

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

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

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A Disturbing Slide in May’s NCUA Board Meeting

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

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

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

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

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

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

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

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

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

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

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

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

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

Monitoring an accurate Fund equity ratio matters.

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

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

Two Accounting Examples

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

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

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

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

And regarding the deposit requirement:

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

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

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

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

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

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

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

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

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

The 1% True Up Topic Raised Again

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

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

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

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

How an Inaccurate Number Distorts Discussion

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

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

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

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

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

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

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

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

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

Everyone Can Project NCUSIF Yearend Outcome

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

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

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

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Memorial Day 2023-Words in War’s Time

Since the Russian invasion of Ukraine in February 2022, every day has been a “Memorial Day “ for a family somewhere in that country.

Four days ago Ukrainian President Volodymyr Zelenskyy gave a surprise commencement address to graduates of Johns Hopkins University by a live video link.

His country is in a war for its freedom.  Yet he took time to speak to 10,00 students and families of an American university’s graduating class.

The following are short excerpts from his ten minute speech in English.  They offer insight for how he views his leadership role.  These are words of discernment and character.

To the Johns Hopkins University Graduating Class of 2023:

Time is of the essence, and it is that essence that I would like to talk about today. One of the most common truisms on Earth is the advice to value, or at least not waste time. Why has it become so widespread?

Every person eventually realizes that time is the most valuable resource on the planet, not oil or uranium, not lithium or anything else, but time. Time.

The very flow of time convinces us of this. Some people realize this sooner, and these are the lucky ones. Others realize it too late when they lose someone or something. People cannot avoid it. This is just a matter of time. . .

Will you be able not to waste this time of your life? This topic seems trivial, but these are very, very difficult questions for every person. How you answer them is how you live. And while it is still possible to find new deposits of oil or lithium, and if in the future humanity can start mining resources in space, it is still purely science fiction to live longer than has been given. . .

Of course, I do not wish anyone to feel like they are in my shoes, and it’s impossible to give a manual on how to go through life so as not to waste its time.

However, one piece of advice always works. You have to know exactly why you need today and how you want your tomorrows to look like. You have to know this when you are a politician and have to achieve a certain goal for your country. You have to know this when you are a soldier and you have to defend your position so that the whole country is protected.

You have to know this when you just have to go through life. Sometimes, however, when you are young and when you are a student, you still need to waste some time. What is life without it? But only sometimes, and when no one else depends on you.

And I’m certain you, as your forefathers, will continue to lead the free world. And this century will be our century, a century where freedom, innovation, and democratic values reign. A century where tyrannies that repress their own and seek to enslave their neighbors will vanish from us once and for all.

But all of our tomorrows, and the tomorrows of our children and grandchildren, depend on each of our todays. On each of our todays.”  END of speech.

A Prophecy

From the Book of Haggai:  “The glory of this latter house  shall be greater than of the former. . .and in this place will I give peace.”

We  can pray that this is Ukraine’s destiny on this day of memories of lives lost in past and present wars.  Dona Nobis Pacem

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

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A Commentary on  NCUA’s May Public Board Meeting

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

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

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

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

The Context for the Meeting

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

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

The Good News

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

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

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

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

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

Issues Left open and Questions Not Asked

 

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

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

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

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

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

The CLF and Credit Union Liquidity

 

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

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

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

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

The NCUSIF’s Performance

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

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

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

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

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

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

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

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

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

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

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

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

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

The CDA Proposal’s Data Omission

 

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

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

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

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

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

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

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

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Credit Union Leaders and Bravery-A Rare Combination

What does it mean to be brave?   Many people consider bravery an act of courage, often in the face of physical  danger.

At some point almost all credit union leaders will confront financial, personnel and political challenges.  Facing up to these, in most cases, is just part of the job.  Cooperative bravery I believe entails a very different character.

Aristotle believed that bravery was the highest of all virtues because it guaranteed all the others.  “I count him braver who overcomes his desires than him who conquers his enemies; for the hardest victory is over self. You will never do anything in this world without courage.”

Following the “Path of Least Resistance”

Bravery is rarely cited in conjunction with credit union activities.  For cooperative culture is based on  relationships.  Differences of opinion, whether major or minor, are resolved by following the path of least resistance.

That path in awkward situations may entail quietly resigning from  a position of responsibility.  Other times one may voice dissent but not formally oppose in deference to the “majority” view.

In cooperatives, it just makes life easier to get along, by going along.

Two Examples of Bravery

Courage can be especially important at critical decision points in an organization’s direction.  It is a “call” that can motivate after one’s formal professional role has ended.  A person responds, drawing from their life’s experiences and values, to a summons that others do not feel.

Two individuals of unusual bravery are retired CEO’s that took public and extended efforts to oppose the decisions of their successors.

These two people are David Keffer who retired from Cornerstone FCU in 2014  and Steve Post who retired from Vermont State Employees (VSE) in 2013.  In their executive roles. Dave was CEO for thirty-three years and Steve for twenty-four.

Their successor CEO’s were in their responsibility for two and six years respectively before initiating actions with their boards to end their credit unions’ independence.

Both retired CEO’s sought out family, former directors and officers, longtime members and community organizations to oppose the effort to cancel their credit unions’ charters.  Both organizations had served and earned the loyalty of over  three generations of members

The Vermont State Employees example is described in several posts written at the end of 2022.  The first describes the closest vote ever in a merger contest.  The follow up stories highlight the issues involved.

Votes Counted: Closes Election Ever

The Tragedy of the Commons: The End of a Movement?

If George Bailey were a Credit Union Member

The VSE Merger:  Will “Potters” Take Over the Movement?

 

The outcome of the Cornerstone merger contest in 2017 can be read here: Credit Unions As  a “Cornerstone” Of Freedom

This blog includes a link to The Committee for Cornerstone Indpendence, a Facebook page which contains a running record including videos from members opposing the merger. The vote took place  less than four weeks from the mailing of the member notice following NCUA rules at that time.

Both men and many of their supporters had devoted decades of their personal and professional lives to these local cooperatives.  The institutions successfully served their members through multiple economic cycles and business innovations.  As noted in the articles, both institutions were leaders in their communities achieving financial success whatever measure of performance one used.

What Bravery Looks Like

Both former CEO’s efforts to prevent the mergers by urging members to vote NO, lost.  One on a margin of less than 1% of votes cast.  At Cornerstone, the mail in ballots were in favor even though over two-thirds of members voted against at the required members’ meeting.

Why single out these retired individuals  as “brave” in openly opposing the merger plans of their immediate successors?

All of the odds for defeating the merger were stacked against them.  The current credit union rulers control all the financial resources, the members’ media channels and enticed employees  with future promises to support their plans.  They even claim to have received the regulator’s blessing.

The time to mobilize opposition before Cornerstone’s vote was very limited. In VSE’s situation the debate extended over several months.  The merger opponents had only their personal not institutional resources to draw upon.

Still working professional colleagues would stay distant at best, or be critical of their taking a stand abut the credit union “in retirement.”

So what motivated them to  to speak out, to organize and ask their fellow members reject these proposals?

Both men strongly believed the merger’s rhetorical statements misled members about any possible future benefits.  From their professional perspective, they understood that ending the charters was not in the members’ best interests.

The members received no merger benefit.  Their generations of loyalty and accumulated resources passed totally to the control of a firm with a different business plan and leaders with no connection to the existing credit union.  Or even a role in creating the accumulated wealth.

They saw the trust and goodwill of the members being taken advantage of. There was no immediate gain except for the leaders, who initiated the change.

Bravery: a Latent Capability

In life we will sooner or later encounter a situation where bravery is required.  We may risk reputation and resources to do what we believe is right.

These moments are rarely scripted, let alone anticipated.  There may not even be time to think about all the implications of taking a stand. Reaction can be as much intuitive as logical.

This “call” can arise from a lifetime of practiced belief. Or from witnessing the bravery of others responding to another of life’s ever unfolding equity challenges.

The motivation  emerges from one’s deepest beliefs, spoken or not.  It is the feeling that, “while ships are safe when in harbor, that is not why they were built.”

These two men took a stand when they perceived the values of the credit union members they served to be at a moment of maximum danger.  They were right.

Their point of view was formed from serving  members honorably for decades, not for just the length of a first employment contract.

Success In a Loss?

But they lost, so what kind of a “brave” example is this?   By circumstance bravery often requires confronting  superior power, a majority public opinion or even accepted protocols of behavior.

By opposing the merger plans, these individuals pointed to values much more vital than arguments for scale.  They believed that members’ best interests should be criteria for all decisions. Management’s ambitions are not the purpose of a credit union—that is the cooperative difference versus for profit options.

There is growing awareness that events such as these mergers are compromising the future of the movement and members’ trust.

These examples of principled opposition will inspire others.  Those who are now silent in the face of happenings with which they do not agree may take a stand: directors, employees, retirees or even those in regulatory roles.

What is the advantage of a cooperative charter if its supporters are not willing to pursue their democratic duty to speak up?

This capability is a learned skill, not one found in any person’s position description.

David Keffer and Steve Post retired from their jobs, not their principles.

Their standing up for their life’s work by opposing these mergers may be the cooperative example for which they will be most honored in years to come.

 

 

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Do Credit Union Names Matter?

“What’s in a name? That which we call a rose, by any other word would smell as sweet.” Juliet compares Romeo to a rose saying that if he were not named Romeo he would still be handsome and be Juliet’s love.

Shakespeare’s metaphor might not work as well today.  For there are  numerous varieties of ornamental rose that produce little or no fragrance.

And so it is with credit union names.  Some are closely linked with the founding charter: State Employees, Stanford, American Airlines, Utility Employees.  Some reflect an enhanced market ambition:  Affinity, Summit, Community, or even Global.

Finally there are some that are just plain head scratchers–made up words meant to convey an impression or feeling that is not immediately clear.

Names can inform and enhance a credit union’s legacy relationships; or they can signal an effort to begin a new future, unbounded by previous limitations.  Two examples follow.

A Credit Union Name But No Charter

 

The headline caught my attention:  $5 million Naming Rights Deal Signed by Oakland University Credit Union (Credit Union Times, April 21, 2023)

Oakland University is real with 15,000 students.  The agreement gives the credit union branding exposure with the newly christened OU Credit Union Arena.

OUCU has a website with pictures of the campus branch. It announces that so far in 2023 “we’ve saved our members $10.2 million in loan interest by refinancing their high-rate loans from other institutions to OU Credit Union.”

Despite these visual cues, OU is not a credit union.  Rather it is a trade name created in 2013 by  the $7.3 billion MSU FCU.    The OU web site continues with this dual personality.  The About Us link goes directly to MSU’s home page.  The OU Credit Union Community shows pictures and events focusing on campus life.

The name and marketing examples in the website certainly communicate a commitment to this segment.  MSU also operates two generic digital only brands, Collegiate and AlumniFi, to serve other college groups with “white label” (non-MSU) names.

The OU trade name would seem to be an effective way to focus on a specific group, one that would seem very similar to MSU’s institutional experience.  One could suggest this dba is similar to a co-branded credit card from an airline or other retailer.  It is not the airline doing the financing, but just providing a marketing introduction to its consumers for the bank which is responsible for all the underlying transactions.

With its 10-year, $5 million sponsorship and on site services, MSU is certainly investing in this partnership.  The only rub might come if a OU member decides to exercise some of the other aspects of  member-ownership such as run for the board or express a concern about an aspect of the credit union’s service.

Can the dba marketing model lead to member misimpressions about their role or credit union relationship?  This example of branding has worked well for almost a decade.   It is still hard to avoid the feeling that this is not the “full credit union monty” even with the linked disclosures on the website.

A Promise to Keep the Name

Another example is retaining the name, even after a merger, to respect the power of member loyalty.  It also suggests an ongoing commitment to preserve the best aspects and local responsiveness despite the merger which transfers full control and resources to another credit union.

In March 2021 I described the proposed merger of Maine’s oldest credit union, chartered in 1921 as Telephone Workers, renamed Infinity, with Deere Employees in Moline, IL.

Describing the reason for merging the $341 million credit with almost 10% capital, CEO Elizabeth Hayes gave the following logic and commitments in a January 31, 2021 Credit Union Times interview:

Hayes said when local credit unions merge there is often “overlap” that can reduce the effectiveness of the combination.

“Merging with a credit union out-of-state gives you advantages,”  Hayes stated. “One is the increase in intellectual capital. I can’t stress that enough.”

Hayes said with the out-of-state combination there is going to be no reduction in offices, no reduction in staff, and the chance for her existing 90-person team to be part of a larger organization with greater opportunities to grow and remain with the credit union.

Infinity FCU will keep its name and local control. Hayes will stay on as Maine market president.

Hayes said keeping the credit union’s name was important to Infinity. “We can keep our brand, which is important. There are a lot of members who feel very vested in their credit union and they will continue to feel vested with Infinity.”  

Recently several Maine credit unions sent an update on the merger regarding the name, local control and feeling vested.

Hayes tenure as the Maine market president lasted about one year.   There has been much employee turnover and Deere staff has moved from Moline to help Infinity fulfill its ambition to serve all “Maine-kind,” as stated on Infinity’s website.

However this spring brings a more consequential update especially when compared with the original justifications for the merger.  Infinity and its Deere parent are changing to use a common name and brand: EMPEOPLE.

From the website:As we look forward, we have a vision for growth that builds on this legacy with an even stronger focus on financial empowerment for our members. It is important that our brand reflects our path forward. One that honors our history and represents a strong future. With a legacy of service and a vision for growth, our focus is on creating a path to financial health for our members, their families, and the communities we serve.

It would appear that the Infinity’s merger commitments of an independent operation, “keeping its name and local control,” and respecting “members who feel vested in this credit union” is now gone.

“Keeping the credit union’s name was important to Infinity,” said former President Hayes in her interview.

Given all the Infinity-Deere’s post-merger actions, it would certainly be reasonable for members to question these new rhetorical statements and rebranding.  One wonders what happens if the EMPEOPLE member-owners became skeptical of all this verbosity and simply walk away.

The End of Romeo and Juliet

Credit union names matter.  Both case studies are examples that can be found throughout credit union land.

In the first case, the credit union is investing in creating a brand to build relationships with a community partner.  In the second the credit union is walking away from its past into a future with a name that causes one to ask, what were they thinking?

In Shakespeare’s play Romeo and Juliet die.  While the families reconcile, it has a price as the Prince states:  “For never was a story of more woe / Than this of Juliet and her Romeo.”

What’s in a name? Contrary to Juliet’s poetic assertion, they matter, for better or worse.

 

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Important Credit Union Update This Week

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

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

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

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

Are Credit Unions Different?

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

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

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

Rallying the Believers

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

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

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

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

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

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

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