Just spent four days in California at my granddaughter’s graduation from Claremont McKenna College (CMC). Some observations from the trip.
The governor announced that California will have the largest budget surplus of any state ever. Over $100 billion.
Air and water now cost $2 minimum
Debit versus credit. You decide. You pay the exchange fee now for card points!
The Search for Employees by recruiting customers. In addition to the signs outside firms such as Wendy’s Now Hiring, there are numerous efforts to reach out to a firm’s customers.
On the TV screen on my flight was the headline, Captain Your Career. It was an invitation to train to become a pilot for United Airlines. The website https://unitedaviate.com/ explains that: We intend to hire more than 10,000 pilots in the next decade and have the largest fleet of wide body aircraft in North America, offering you exciting opportunities to advance.
And on my fast food receipt:
The next generation’s college thesis topics. Each graduate of CMC writes a senior thesis. Here are some of the titles:
Which consumers are driving electronic vehicles; An analysis between EV adoption and individual characteristics.
Does H1-B Visa restrictions hinder American innovation?
Moral Hazard in Monetary Policy: Assessing the Impact of Federal Reserve actions on asset returns during the COVID-19 Pandemic.
The impact of merger and acquisition on the United States Video Game industry.
Potential for electoral success and the future of the Republican party.
The effects of CFO gender on earnings quality and financial risk.
And so forth for over 300 submissions. Makes one feel behind the learning curve. One topic I thought might have relevance for credit unions and their regulator: A Paradoxical relationship: US Government authority and the American people.
A green Uber option. A Tesla, EV option to reduce pollution is offered. The driver said he leased the Tesla for a week at a time for around $330 under a special Hertz-Tesla agreement. Applicants go online. When he showed up there were at least 30 other drivers waiting to pick up cars under the plan. One way to recruit more drivers (provide the auto) and create a positive public image.
60 years ago seven employees of the Philip Morris Company formed a credit union to serve their employees. It cost 25 cents to join.
What is noteworthy is that the founder’s commitment, the human motivation required by any coop startup, still drives Call Federal today.
The mission statement is “passionately local banking.” The focus is building lasting relationships and giving back to the community. That commitment is stated as follows:
Call Federal has called the banks of the James River home for more than 60 years. Our employees live here, all decisions are made here. The money we make here stays here. We’re invested in this community, because it’s our community too.
The Members’ Voice
I learned about this “passion” for member service in a video celebrating their 60-year charter milestone. The three minutes is almost entirely member interviews. The culture of member service is described through real experiences. These are situations where the credit union has made a difference in members’ lives spanning generations.
The CEO John West recalls his predecessor, Roger Ball–CEO for 36 years–saying that service is not just the words used, but how you make members feel.
West’s current senior management team brings varied career backgrounds to the organization, not limited to financial services. “We want employees to span different schools of thought to continuously enhance our member relationships.”
West’s background illustrates this prior life and work experience. In November of 2021 he was appointed to the Board of Families Forward Virginia. The press release tells how this appointment aligns with the credit union’s mission:
Families Forward Virginia is the commonwealth’s leading nonprofit organization dedicated to disrupting cycles of child abuse, neglect, and poverty. . . Working with parents and their children, the statewide nonprofit provides Home Visiting Programs, Family Support, and Education, Professional Development, Child Sexual Abuse Prevention Programs, Advocacy, Public Awareness/Public Education.
Prior to joining Call Federal in 2012, West was a senior accountant with Mary Washington Healthcare. Before that he worked for the United Way of Fredericksburg. West is a graduate of Leadership Metro Richmond and served for one year with Lead Virginia.
West commented on his appointment: “Growing up in cooperative housing for steel mill workers, I know the value and importance of a strong community. Part of our mission at Call Federal is recognizing the stress that financial burdens can create.”
A Creative Financial Wellness Program
One example of how the credit union addresses this “stress” in members lives is its creative Financial Wellness Program. The program rests on three unusual principles to help members “be more confident in their financial decisions.” The three are:
Create Self-awareness. Discover your “money personality”: the habits and attitudes that influence your financial health, for better or worse.
Understand the fundamentals of money management.
Go Beyond by taking care of your physical and mental health and by giving back to your community and the world around you.
One example of this holistic approach to member financial well-being is a free resume review. Other services include coaching, financial workshops, even for kids, and articles to help members with both financial events and career planning.
Sustaining the Movement
Speaking with West about how the credit union sustained the founder’s original passion for serving members, he replied that the effort was not merely a credit union story. Rather it is the “human story,” that is, serving each other while living in community.
The credit union’s 2021 “State of the Union” video below describes the credit union’s response during COVID. It includes two members recounting their personal circumstances, an employee’s special efforts to help staff and a community agency discussing the credit union’s steadfastness. Each person speaks with passion about their credit union connection.
That passion is the difference that never grows old, no matter a credit union’s charter date.
(https://youtu.be/K4REjbxV68A)
60 years ago seven employees of the Philip Morris company formed a credit union to serve their employees. It cost 25 cents to join.
What is noteworthy is that the drive and commitment, the human capital required by any coop startup, still motivates Call Federal today.
The mission statement is “passionately local banking.” The focus is building lasting relationships and giving back to the community. That commitment reads as follows:
Call Federal has called the banks of the James River home for more than 60 years. Our employees live here, all decisions are made here. The money we make here stays here. We’re invested in this community, because it’s our community too.
The Members’ Voice
I learned about this “passion” for member service in a video celebrating this 60-year charter milestone. The three minutes is almost entirely member interviews. The culture of member service is described through real experiences. These are examples where the credit union has made a difference in relationships that span multiple generations.
The CEO John West recalls his predecessor, Roger Ball who was CEO for 36 years, saying that service is not the words used, but how you make members feel.
West’s current senior management team brings varied career backgrounds to the organization, not just financial services. “We want employees to span different schools of thought to continuously create value in our relationships.”
West’s background illustrates this prior life and work experience. In November of 2021 he was appointed to the Board of Families Forward Virginia. The press release tells how this appointment coincides with the credit union’s mission:
Families Forward Virginia is the commonwealth’s leading nonprofit organization dedicated to disrupting cycles of child abuse, neglect, and poverty. . . Working with parents and their children, the statewide nonprofit provides Home Visiting Programs, Family Support, and Education, Professional Development, Child Sexual Abuse Prevention Programs, Advocacy, Public Awareness/Public Education.
Prior to joining Call Federal in 2012, West was a senior accountant with Mary Washington Healthcare. Before that he worked for the United Way of Fredericksburg. West is a graduate of Leadership Metro Richmond and served for one year with Lead Virginia.
West commented on his appointment: “Growing up in cooperative housing for steel mill workers, I know the value and importance of a strong community. Part of our mission at Call Federal is recognizing the stress that financial burdens can create.”
A Creative Financial Wellness Program
One example of how the credit union addresses this “stress” in members lives is its creative Financial Wellness Program. The program rests on three unusual principles in their efforts to help members “be more confident in their financial decisions.” The three are:
Create Self-awareness. Discover your “money personality”: the habits and attitudes that influence your financial health, for better or worse.
Understand the fundamentals of money management.
Go Beyond by taking care of your physical and mental health and by giving back to your community and the world around you.
An example of this holistic approach to member financial well-being is a free resume review. Coaching, financial workshops, even for kids, and articles help members with both financial events and career planning.
Sustaining the Movement
Speaking with John about how the credit union sustained the founder’s original passion for serving members, he replied that the effort was not merely a credit union story. Rather it is the “human story” of providing service to each other living in community.
The credit union’s 2021 “state of the union” video shows how the credit union responded during COVID in this five minute video. It includes two members recounting their personal circumstances, an employee’s special help for staff and a community agency discussing the credit union’s steadfastness. Each speaker communicates passion about their credit union connection.
That is the difference that never grows old no matter a credit union’s charter date.
Reverse Robin Hood: Bank Purchases by credit unions
A response to my comments in a recent conference call: Your points that really resonated were lack of transparency and accountability inherent in the cooperative governance structure. Also the fact that the bank acquisitions are taking money from CU members to line the pockets of bank shareholders, truly a reverse Robin Hood situation.
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“If My Words Can Convince One Credit Union”
I think CEOs just get tired. I think boards can get tired, too. And they think if our current CEO can’t make this place grow, who can? They see the simple solution is to merge out.
I am telling small credit unions that is a mistake; at least look for someone. I have had conversations with a number of CEOs who are retiring from small credit unions and they’re not even considering looking for somebody. They aren’t doing anything. They are not telling their boards to look for somebody. In fact, they’re telling the board the opposite—nobody can do this job at my pay.”
That type of thinking, and an unwillingness to “fight,” is hurting the movement.
“If my words can convince one credit union…if one credit union decides not to give up and says at least I will look for a replacement for the retiring CEO, I will feel good. I hope more small credit unions will follow what we are doing here.” (source: David Sawin, CEO, MN Catholic Credit Union, interview in CU Today)
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What’s Missing?
“I am starting to think that credit unions are a waste of my time.
. . . as best I am able to ascertain, CUs are essentially just nonprofit banks – institutions that exist first and foremost to keep their employees employed and to keep the regulators happy. The trappings of cooperation – invocations of principles, mechanisms for elections of board members, etc. – are either ignored or treated as empty formalities.
The new CEO of the CU on whose supervisory committee I serve told me that members simply don’t give a damn about that stuff; they just want convenience.
From my perspective, if CUs are just going to do exactly what the local banks are do, then I might as well just move my accounts over to banks. What am I missing? (name withheld by request)
An uncomfortable change in the conversation (with regulators) will require incredible bravery. I’ve been kicking around CU’s all my life. My parents were members of a Teachers and a Manufacturing credit union. I have been on Boards and now a CEO.
I have studied the history of the movement and the credo’s doled out as battle cries. We were “choice”, we were “people helping people” – those goals were always color and socioeconomically blind as we emerged fighting against banking practices that were not–think redlining.
But we forgot one credo recently – “not for profit, not for charity, but for service.” Since this credo does not make a singular virtue of EQUITY, can we no longer espouse it?
The conversation change needs to be about DOI – Diversity, OPPORTUNITY, and Inclusion. We were born out of opportunity and we are still built on it. Will we be brave enough to say it? We don’t need to be admonished with a new recitation.
We just need to remember our founding principles – which are both relevant and powerful. (David. A. Jezewski, President/CEO, CommStar Credit Union)
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Dear readers do not despair. Tomorrow, Friday the 13th, is good news. I will tell the story of a credit union that believes in the power of cooperative design.
This is the rest of CEO Joy Peterson’s concerns with the regulatory environment and six suggested changes.
Part I can be read here.
Pivoting from COVID to DEI
The pandemic saw record sums of COVID inspired money pouring into banks and credit unions. Global fear and confusion were rampant. Businesses were shuttered-some temporarily and some forever. The global economy began a free fall.
There were reports of billions lost to PPP and unemployment fraud. Where was NCUA? One would expect nearly daily guidance regarding concentration risk and fraud prevention and best practices regarding NACHA rules.
Instead, the talking heads at NCUA started scolding credit unions about Diversity, Equity and Inclusion. Rather than real concern for our members-the salt-of-the-earth member/owners of our financial institutions who feel a common bond to a financial institution with their co-workers or their community-NCUA decided we are evidently racist and somehow elitist.
Our color chart no longer satisfies their hunger for diversity. They alone are responsible for how our charters read but, in hindsight, they have decided we are perhaps too white or not serving enough underserved?!
In reality it doesn’t matter what color or gender our members are. It doesn’t matter whether they are rich or poor or anywhere in between. If we spend all of our time and most of our income trying to satisfy NCUA’s constantly changing view of what makes credit unions valuable to our members, we are no longer serving our members at all.
If we aren’t provided with the leverage to protect their money and their identity and their financial privacy, we are no longer good stewards of the faith 129.6 million people have placed in us.
The Most Needed Change: Respect for Credit Unions
Small credit unions are wounded and struggling to maintain our relevance and profitability in today’s economy. From one CEO to the CEOs of the thousands of smaller Federally insured credit unions, the next time you are notified that your examiner is due to arrive, make sure you look carefully behind their back as you usher them in. There could be a bayonet that will be driven firmly into your back as they write up yet another list of tail-chasing requirements to be deemed “safe and sound”.
I think it’s time all of us ask our regulators to be more constructive in their approach to the industry.
Here’s how NCUA can demonstrate respect for our efforts to serve members, the reason why we exist:
Recognize that small credit unions are, in fact, different from large ones. Their capabilities are not the same, but our service to members can still be extraordinary, needed and valued.
NCUA should support credit unions instead of fighting them. Statements by NCUA spokespersons often include comments critical of credit unions. Our members decide whether we are “good enough”.
Stop labeling our members. NCUA likes to call them marginalized, disadvantaged, underserved and low-income. They refer to “minority communities” and recently “Other Targeted Populations or OTPs”. While we happily serve ALL members of our community, these terms give the impression that only people who are “less than” or “other than” belong to credit unions. They are just people.
There needs to be more transparency from NCUA regarding its own management. Losses to the Share Insurance fund caused by thefts went on for years without raising any red flags to NCUA examiners. Were there any adjustments to NCUA examinations to address these limitations? NCUA should also be expected to manage their own investments at least as well as they expect us to manage ours. Our credit union members pay for NCUA’s management failures.
NCUA shouldn’t expect more of small credit unions than they expect of themselves. NCUA “recommended” that credit unions allow no-cost loan payment deferments and the waiving of overdraft fees during the pandemic. My credit union gave up more than $15,000 in income to help our members. What did NCUA do?
So many mixed messages. Don’t tell credit unions we need to do more lending to people with lower credit scores and then criticize us because our delinquency goes up. Don’t take away our ability to earn non-interest income from overdraft fees and interchange income and then wonder why we aren’t more profitable. Part of the reason for all the mergers is the demanding, overbearing NCUA requirements as well as the utter lack of support from our regulators.
Respect for members is what makes us different. That is also what makes us sound. It doesn’t work the same, the other way around.
Ten days ago I received a positive comment on a post. I asked what aspect spoke to the writer.
In return the CEO Joy Peterson of Bessemer System FCU, Grenville, PA sent an article written earlier that she hoped to publish in the credit union press.
I read it. Her voice is authentic; her coop commitment lifelong; and her frustration with the regulatory environment, clear.
In her lament, I hear echoes that concern many about leaders in Washington, especially those in positions of authority.
I suggested she add recommendations to her critique. She did. They are in the second part of this blog to be presented tomorrow. Here is part I.
From Joy Peterson:
As a lifelong accountant, my Dad had a sign hanging in his office that said “Auditors are the ones who come in after the war to bayonet the wounded”. His clients would all chuckle at the sign and nod in agreement. As a child, I didn’t quite understand the meaning. As the CEO of a small credit union, I understand completely. Our regulator, NCUA can be thought of as the auditor in the equation. It’s quite possible that FDIC and CFPB are members of the same group although I don’t have enough direct contact with them to speak to them specifically.
Membership Growing, Credit Unions Declining
At the end of 2013, there were 6,554 Federally insured credit unions in the U.S according to ncua.gov statistics. By the end of 2021, the number had declined by an astounding 1,612 to 4,942. During that same time period, the number of credit union members actually increased from 96.3 million members to in 2013 to 129.6 million members in 2021. Since the membership numbers grew, it seems evident that the decline in the number of credit unions is not due to consumer dissatisfaction.
What then, does explain the loss of so many credit unions at a time when Americans are searching for value and safety in the financial industries? Even with fewer credit unions to choose from, 129.6 million Americans still seem to find solace in member-owned financial services. Evidently, they still believe in the prospect of pooling their money for the good of all of the members that make up their charter. Based on results, our regulator doesn’t hold that same high opinion of Federally insured credit unions and their mission of service.
Serving NCUA, Not Members
I’ve been a lifelong member of my credit union and an employee since 2001. In that time, I’ve seen substantial regulatory changes in my credit union as well as the industry as a whole but none as significant and harmful as the ones I’ve noted from 2013-2022. Our members are not being served by their credit unions. Instead, our credit unions are serving NCUA.
Based on the numbers, many have been unable to continue to do so successfully. Some have been dissolved involuntarily and many others have been “encouraged” to merge in order to fulfill NCUA’s crushing requirements for what is deemed to be “safety and soundness.”
It seems NCUA would much rather provide oversight to a few giant credit unions than have to provide guidance and oversight to thousands of us little guys. Is that really what the millions of members of both small and large credit unions want? Do our members really understand that there will come a time when belonging to a credit union is no different than being an account holder with Bank of America or Wells Fargo as their individual control over their financial institution is being diluted at a record pace?
The Compliance Burden: Boards as Scapegoats
Today, trying to comply with NCUA’s ever growing list of compliance requirements is like trying to herd cats. Are those requirements making credit unions safer and more productive and efficient? Based on the numbers, the answer is a very clear and unequivocal NO.
Each NCUA audit results in additional requirements for volunteer board members and supervisory committee members. These completely uncompensated volunteers are now expected to review employees’ accounts, verify the vault, balance the checking account, review corporate accounts, attend meetings and training on Bank Secrecy and on and on and on.
When volunteers resign in frustration, NCUA demands they be replaced. Replacing volunteers encumbered with such overwhelming responsibility is becoming nearly impossible. Not only are they not compensated, they frequently aren’t even able to receive some of the benefits the rest of the membership are granted like the waiving of fees for an incidental overdraft or a request for a stop payment.
They are reminded with every NCUA contact of their culpability for any insider fraud or failure to mitigate risk appropriately. Rather than volunteers, they are becoming potential scape goats for NCUA. In order to rope in replacements, we have to overstate the “service to your community” aspect and seriously understate the actual responsibility of it all.
The Big Three DP Monopoly
Beginning around 2014, NCUA started a nearly constant drumbeat regarding “Vendor Due Diligence”. We are cautioned on the growing threat of losses caused by the numerous outside vendors we use for everything from data processing to corporate account services to network security.
We chase our tails trying to verify these vendors are properly insured and sustainable and are abiding by regulatory requirements in terms of security. We make lists and check boxes and retrieve SOC I and II reports. We even hire other vendors to help us keep track of us monitoring our vendors. We spend thousands upon thousands of dollars and hundreds and hundreds of hours trying to make sure our vendors are safe.
In reality, small credit unions have very little choice of vendors and almost no control of their behavior, particularly in regard to information security. The Big Three data processors have become so big and so powerful. They have not only access but also control of every bit of our members’ financial information.
They refuse to provide security audit information on the pretense that doing so would compromise their own security. They refuse to return our data without hundreds of thousands of our members’ hard-earned dollars in “de-conversion fees” if we attempt to cut ties with them. They hold our data hostage and simply refuse to allow our exit until we meet their demands. Rather than a contract termination, our dissatisfaction is relegated to a hostage negotiation scenario.
Does NCUA intervene on our behalf as we attempt to comply with their demands surrounding vendors? Absolutely not. In whispers they admit that they have no oversight of these giants either.
Yet small and large credit unions alike are expected to demonstrate that we are overseeing these bullies. The really large credit unions at least have the benefit of the substantial sums they pay to these vendors to use their leverage to obtain Service Level Agreements when signing contracts.
Small credit unions like mine have no such advantage. The Big Three don’t care what I demand in terms of service on behalf of my members. When their shoddy security practices put my members’ information at risk, they shrug their shoulders and basically dare me to find an alternative.
Rather than contrition and embarrassment regarding their failure to maintain adequate security against current threats, these Fortune 500 companies threaten legal action for disclosing their rookie mistakes. They aren’t sorry they failed to use their superior security resources to provide superior security. They are only sorry we found out about it and demanded that we deserve better.
End part I.
Part II tomorrow, includes a recent additional concern and six recommendations for improving the regulatory relationship.
In America the press is often called the “Fourth Estate.” The term places the press’s role as critical as the three branches of government: legislative, executive and judicial. It signals the watchdog role of the press, so vital to a functioning democracy.
What is the state of press coverage of credit unions? Especially now that coops are the second largest depository system in the economy, serving over 100 million members and managing $2.2 trillion assets.
A Brief Credit Union Press History
Today’s independent coverage of the credit union system evolved from newsletters that emerged in the 1970’s and 1980’s as the credit union system become more coherent with national ambitions and organizations.
These startups included CUIS, Report on Credit Unions, NCUA Watch. These newsletters relied on subscriptions versus the free in-house updates from league and trade associations.
In 1986 ASI established the first printed newspaper format called Credit Union Week. Shortly thereafter Mike Welsh, former CUES President, launched Credit Union Times offering original reporting and commentary. In following years Credit Union News and Credit Union Journal were launched as competitors. All used a combination of advertising and subscriptions to support their free-spirited reporting.
Today the independent credit union news media is largely virtual, publishing daily online summaries relying extensively on press releases from the industry.
More than Aggregators
With small staffs, limited budgets and daily posts, opportunities for original reporting or even investigative efforts are limited.
But there are periodic examples of the traditional press role of speaking “truth to power.” Power refers both to the actions of NCUA and other government agencies, as well as events within credit unions and trade organizations.
Peter Strozniak of the Credit Union Times has a talent for tracking legal proceedings involving credit unions. His articles have provided valuable insight into NCUA’s regulatory shortcomings, as revealed in court records. A recent example is his story of a credit union’s suing NCUA for failure to prudently manage its interest in taxi loan participations. The opening paragraph:
The $390 million Nassau Financial Federal Credit Union is suing the NCUA for nearly $1 million for allegedly breaching an agreement to settle defaulted taxi medallion loans for a mere fraction of what they were worth.
Many observers questioned NCUA’s disposition of the taxi medallion loans sold to a hedge fund in February 2020. The agency refused multiple FOIA requests for details. This example further adds to the impression of an NCUA coverup in its actions in the $750 million sale of loan participations to a Wall Street hedge fund.
The Members’ Interests: Sunlight as a Disinfectant
CU Today has published a series of original articles about member’s efforts to participate more openly in their credit union’s governance.
One series discussed the efforts of four members of Virginia State Employees Credit Union to seek nomination for open board seats. Their efforts were totally ignored. The credit union elected the board’s self-selected candidates including the current chair with no outside nominees permitted.
More recently CU Today has followed the efforts of former directors and CEO to challenge the announcement of Vermont State Employees to merge their very successful credit union into the larger New England FCU.
CU today publisher Frank Diekmann editorialized about his goal of “pulling back the curtains.” He explained why reporting the merger information provided members when charters are ended and the payouts to management that sometimes accompany such efforts matters. It read in part:
We also got to see how many CUs opted to return net worth to the people who own it (in some cases, obviously, there was little to reserve from the reserves). We further got a peek into which were not offering any payout, with a few citing odd reasons such as the acquiring CU has more branches or, bafflingly, offers Apple Pay and Google Pay. Eh?
One CU did announce it would be paying out some of the excess capital, but in this case only to savers, with more than $2 million being distributed in all. I’m not suggesting the members of the board all had savings/CDs at the credit union and that few if any were borrowers. I’m just saying.
Sunlight may indeed be the best disinfectant, but not if no one never opens the curtains. CUToday.info has made a commitment to reporting on all the merger disclosure forms sent to NCUA, meaning we will continue to give the curtains a pull.
Needed: A Pulitzer for Credit Union Reporting
At last week the White House Correspondent’s dinner the comedian Trevor Noah’s public roast of many public figures ended with this close about the never-ending importance of a free press.
While the international press coverage of the war in Ukraine was top of mind that night, a domestic event happened the following day proving Noah’s thesis.
The national press released a draft of a Supreme Court decision that would reverse the Roe vs Wade fifty-year precedent giving women the right to an abortion. The coverage took the debate from behind the hermetically sealed Supreme Court process, to the public sphere.
If credit unions are to fulfill their purpose of bringing more economic democracy to their members and greater choice for all consumers, one of the most important ways to monitor this role is an independent press. One that reports its successes and exposes its failures.
In addition to Herb Wegner awards honoring credit unions leaders who exemplify the best in cooperative commitment, I believe an equally important moment would be to award “Coop Pulitzers” to press coverage of credit unions.
These would recognize the writers and stories from within and without the industry who take the risks and invest the time to hold those in positions of leadership to public scrutiny. Especially for those with public authority. For unlike the White House Press, in credit union land there is only one estate, the NCUA.
The post describing NCUA examiner’s arbitrary imposition of IRR tests causing a credit union loss of $10 million resulted in other readers sharing their experiences.
Their long-standing frustrations suggest the need for a more balanced, common sense, exam process.
Story 1: LOC’s and Liquidity
“I remember conversations about our investments during the time of your most recent article. Fortunately, the vast majority of our investments was in CDs so there was very little to even talk about in terms of unrealized losses. We did have one or two securities, but they were near maturity so even unrealized losses were minimal.
“This was around the same time that the examiners demanded we establish some kind of borrowing capacity in case liquidity suffered. I set up a LOC with our corporate and “borrowed” just to be sure everything was set up correctly. When the examiner saw the tiny bit of interest I paid for this test, the furrowed brows and disapproving scowl came out. Why would I do such a thing? It appeared as though our liquidity was fine so why did I use our LOC?
“I said it was a new product and I wanted to make sure it would function correctly in the event we ever needed it. The only way to prove that was to actually test it. All this ruckus over a charge of less than $100 interest for the less than 30 days we had the money. In the process, I wrote up specifically how to borrow from it, how to book the GL entries, how to pay the money back, etc. so that if the line ever had to be accessed, we would know how to do it. We have never used it. Not once.
“During my last exam NCUA recommended we increase the limit on it. GRRRR. Keep in mind, our last exam was at the height of the pandemic when we literally had liquidity dripping from every corner of the credit union and they were recommending we increase our LOC. I can’t imagine being the credit union that lost millions because of misguided “guidance”.
“I’m afraid I would have spontaneously combusted. Credit to them for staying in the industry because those are the kinds of things that cause us to lose some of our best advocates.”
Story 2: Ending a Profitable Business
“A related horror story about examiners making short-sighted decisions… A credit union right after the great recession was told by their regional examiner that their expense to asset ratio was too high and they must shut down their insurance division to get things in line.
“The insurance division was profitable. It was throwing off $360k of profit a year – profit with no strain on net worth – and profit from any perspective (GAAP, Free Cash Flow, Cash Basis). There was no funny business in the numbers. It was showing steady growth in earnings as it was finally hitting its stride.
“What the examiner failed to understand was the fastest way to restore capital is with an income source that requires no regulatory capital to begin with.
“I told the CEO he needs to die on that hill and fight hard. He complied however, and shut down the insurance operation.
The Moral of Stories
Sharing stories, good or not so good, is how credit unions learn from each other’s experiences. This is one way change for the better can occur in NCUA’s interactions with the industry.
As interest rates continue their upward cycle to reduce inflation, credit unions will manage this year-long transition process with multiple tactics and product adjustments.
There is no one operational formula to be universally applied because every credit union’s balance sheet and market standing is different.
But a simple model was the core of NCUA’s response in 2013 and 2014 when Fed Chairman Ben Bernanke announced a policy change to reduce support for the recovery after the Great Recession. The reaction to his June 2013 announcement was an abrupt rise in rates, referred by some writers as a “market tantrum.”
The following is one credit union’s experience as NCUA pursued its own regulatory tantrum as recalled by the current CEO.
A Case Study from a Prior Period of Increasing Rates
Today’s rapidly increasing interest rate environment is very reminiscent of the 2013-2014 period when Federal Reserve Chair Ben Bernanke’s “Taper Tantrum” led to a great deal of market volatility. While Bernanke’s comments in May of 2013 touched off the increase in rates, it really took until the next year for the full effect to be felt.
NCUA’s response to this period of rising rates was nothing short of a panic. Any credit union holding bonds whose value declined due to the increase in market yields was heavily criticized for having too much interest rate risk. This critique was despite the fact that most natural person credit union had more than adequate liquidity to hold the bonds.
The use of static stress tests, which showed dire results from up 300, 400 or 500 basis points, was used as a reason to force credit unions to sell some of their holdings turning unrealized losses, with no operational reason to act, into realized ones. These forced sales unnecessarily depleted capital, the very thing that an insurer/regulator should be trying to preserve.
Things got so heated at our credit union that the Regional Director called a special meeting. Only our Board of Directors could attend; management was forbidden to be there. NCUA lectured them about the evils of excessive interest rate risk. This sent many of them and our CEO into a full-scale panic.
We sought advice from outside experts but finally settled on the dubious strategy of selling bonds at losses as well as borrowing funds from the FHLB that we did not need. These were done to bring the results of these static stress tests in line with the NCUA’s modeled projections. We calculated these actions caused us unnecessary losses of over $10 million before we stopped counting. These came from both the realized losses, the added expense of unneeded borrowings, and the lost revenue on assets sold.
In the aftermath of that debacle, the credit unions senior management and two board members travelled to Alexandria, Virginia to meet a top NCUA regulator to explain our frustration at the loss. After waiting for hours for our scheduled appointment, he heard us out. We never heard back; however, the Regional Director soon departed. Perhaps our message had at least been partially received.
The Problem with Static Tests
Fast forward to today. We find ourselves in the “extreme risk” rating at the end of the first quarter due to the rapid rise in rates. The glaring problem with static stress tests is that non-maturity deposits (which make up a large part of most natural person credit unions’ share liabilities) are limited to a one year average life.
Several third-party studies document our share’s average life to be in excess of ten years. Despite this, the asset side of the balance sheet is written down while the long-standing member relationships, on which most credit unions’ balance sheets are built, doesn’t get much credit at all. For example, if a two-year average life on savings and checking accounts were used, the results of the static test wouldn’t even put us in the high interest rate risk category.
Closing Thoughts
While we have authorization to utilize derivatives (something we didn’t have back in 2014), this could help lower the costs of compliance if we are forced to take action. However, I’m adamant against doing illogical things just to pass a static stress test this time around.
I’ve wondered how it’s OK for the NCUSIF to hold similarly long-term bonds in their portfolios without any concern during periods of volatility like this. We have the strength of our core share relationships and capital positions to withstand periods of rising rates. NCUA just keeps reporting growing unrealized losses transferring their IRR risk to credit unions to make up any operating shortfalls.
I also believe that NCUA should really be much more worried about very low interest rate environments. These periods of very narrow yield curve pickups are actually much worse for financial intermediaries to navigate than periods like the one we’re now in. Overall the industry’s net margin should generally benefit from rising rates, shouldn’t it?
Two Observations
1. One expert’s view of the situation today: As you know, but people often forget, there is no ‘unrealized loss’ if a bond or loan is held to maturity. There is an interest rate risk component that needs to be managed. But if I am holding some 4% mortgages 10 years from now, and the overnight rate is 4%, then I am not upside-down. I just have some of my assets earning the minimum rate of return.
This is why I prefer net income simulation over IRR shock. We don’t live in a static world, it’s a dynamic one.
2. During the November 2021 Board meeting the following interaction took place on the agency’s management of the NCUSIF portfolio and stress tests:
Board Member Hood: Thank you, Myra. And again, I do have another question and this is for the record. Do we all have an interest rate risk shock test to the fund (NCUSIF) like we do for our credit unions under our supervision rule? And also, do we do a cash flow forecast on a regular basis as well?
Eugene Schied: This is Eugene Schied, and I’ll take that question Mr. Hood. Yes, we shock the – we do perform a shock test and perform cash flow analysis for the share insurance fund. These are both reviewed by the investment committee on at least a quarterly basis. The investment committee looks at the monthly cash flow projections for the upcoming 12 months as part of this regular analysis. That concludes my answer, sir.
Board Member Hood: Great. Thank you, Eugene. I would just say that as I consider our investment strategy, we should note that examining portfolios and managing investments in the portfolio are two separate and distinct skillsets. The NCUA today has over $20 billion, with a capital B, in investments under management; so I think we should have an even greater focus on this during our upcoming Share Insurance Fund updates.
Tomorrow the Federal Reserve will announce an increase in its overnight Fed Funds target rate by at least 50 basis points. This will be the second in a series of raises to “normalize” the yield curve. The goal is to curb inflation by increasing rates so that the “real” cost of borrowing exceeds the rate of inflation.
Bond prices have anticipated some of this increase. Headlines reported the “rout” in bonds as market values fell and yields rose in the first quarter. Yesterday’s lead story in the WSJ was “Bond Yield Rise Steepest since ’09.”
Interest rate cycle increases are not new. In 1994 Fed Chairman Greenspan raised overnight rates from 3% to 6% in six 50 basis point jumps to cool an Internet driven economy.
Even though interest rate cycles are an ever-present factor in a market economy, for some leaders of credit unions this will be their first time navigating a cycle. Learning from past events, can help with this process.
“Never say Never”
In late 1978, the US economy was entering a period of increasing inflation with short term rates rising close to 10%. This increase was leading to some disintermediation to the newly created money market mutual funds. But another credit union concern was the 12% usury ceiling on loan rates which was incorporated in most enabling statues.
In our discussions at the Illinois Department of Financial Institutions, I told Ed Callahan that 12% was like a law of nature. Rates would never get above that level as we had fifty years of precedent to prove my point. Ed’s response was “never say never.”
Short term rates went above 14% in December of 1979, by which time the Illinois Credit Union Act had been re-codified to remove the 12% ceiling. “Never” had taken place.
A Visit to NCUA by the ICU Funds
Short term and long-term rates continued to spike into 1980. Chairman Volcker was committed to stopping the double-digit inflation resulting in short term rates of nearly 20% in June of 1981.
In early 1982, I had a visit from two senior executives from Madison to discuss the circumstances this had created for the two ICU investment funds managed by CUNA Mutual. Examination and supervision policy fell under the Office of Programs which I held.
I can’t recall all the details. The two funds had investments from several thousand credit unions, many of whom were small. The market value of the two funds had declined dramatically. The question they asked, would NCUA force the credit unions take a loss by writing down their investments to the current market value?
They had taken steps to minimize withdrawals and believed that the decline would prove temporary.
I discussed the request with Ed who was now chairman of NCUA and Bucky the General Counsel. There were many issues confronting the agency and credit unions. A number of large credit unions had invested in GNMA 8’s, that were far underwater. Their solvency was in questions and 208 NCUSIF guarantees were keeping some of them operating. Shares were leaving credit unions as members withdrew funds for the double-digit yields offered by mutual funds.
Federal credit union share rates had not been deregulated as we had been able to do for Illinois credit unions. Jim Williams President of CUNA told Ed before his February 1982 speech to CUNA’s Governmental Affairs Conference that credit unions had only one issue on their minds, “survival.”
As we looked at the situation I can remember Ed’s comment in response to whether NCUA would require a write down of the ICU investments. His words: “Leave it alone.” Credit unions and the agency had more than enough concerns without adding to the moment. Interest rates will change and today’s circumstances will not be tomorrow’s.
The ICU funds did recover their value. By then the corporate credit unions had evolved into an option where they could meet the investment needs of credit unions. The ICU funds were eventually closed later in the decade.
Bernanke’s Taper Tantrum
In 2013 Fed Chairman Ben Bernanke announced that the central bank would begin pulling back its stimulus efforts by reducing bond purchases. As summarized in a CNBC article in June:
Mr. Bernanke continued the theme into his press conference, stating again that if economic conditions continue to improve, the Fed will begin tapering its bond purchases at the end of the year.
He did put a little more flesh on the bond tapering plan: “may gradually reduce purchases later this year…will continue to reduce purchases through next year…may end in the middle of next year…will end purchases when unemployment is near seven percent.”
But time and again he emphasized the pace was data dependent: if conditions improve faster than expected, reduction in bond purchases can accelerate. If conditions worsen, purchases could even increase.
Why is the bond market over-reacting? Because they believe diminished tapering means higher yields. I agree, but to what extent?
NCUA Reacts
The taper tantrum carried over into the broader market as yields rose, bond prices fell. The NCUA took up the issue. It imposed its internal interest rate shock and NEV tests on credit unions believing that this event presaged an ever-increasing interest rate cycle.
NCUA examiners created DOR’s on credit unions from by their models. They required the sale of longer-term fixed rate loans and investments at a loss and borrowings from the FHLB, when the cash was unneeded, in order to comply with the model’s forecasts.
Tomorrow I will share one credit union’s story of how these modeling-induced DOR’s resulted in a loss of over $10 million. The model’s assumptions were wrong.
This precedent is important because, unlike 2013 and 2014, inflation is here and the Fed is committed to raising rates until the trend is reversed.
The issue is whether NCUA will allow credit unions to manage their transitions through this cycle using their experience and operational options, or impose their modeling judgments on them?
