Scott Garrett is in a bind.
Garrett, CEO of the $163 million-asset Freedom Northwest Federal Credit Union in Kamiah, Idaho, has developed a profitable niche making nonconforming mortgages throughout the state. The program has helped Freedom Northwest double its residential book since the end of 2016, to $102 million, with credit quality remaining solid.
But Freedom Northwest wants to bring in more longer-duration deposits to pair with the mortgages on its balance sheet. That’s why Garrett said his institution would benefit from a proposal that would dramatically increase the amount of nonmember deposits credit unions could hold.
“We can only get short-term money from consumers,” Garrett said in an interview. On the other hand, “there are plenty of institutional investors,” such as highly liquid credit unions and banks, that are happy to park excess funds in longer-duration CDs.
The National Credit Union Administration recently unveiled proposed changes to its regulation governing nonmember deposits that would increase the threshold from 20% of total shares to about 50%. A spike of that size could have a dramatic impact.
Nonmember deposit capacity at Freedom Northwest, for instance, would jump from about $28 million to $70 million. The credit union had $12.7 million of nonmember deposits at the end of the first quarter.
Banking groups are unhappy about the potential for increased competition for municipal and other government deposits.
“This proposal undermines one of the founding principles behind credit unions, the cooperative notion that the resources for credit union lending come from their members and that they serve people of modest means who share a common bond,” Ken Clayton, chief counsel and executive vice president for legislative affairs the American Bankers Association, said in a prepared statement.
“It would allow credit unions to take even more deposits from outside their traditional membership base, further accelerating their growth at a time when NCUA is already struggling to oversee the industry and putting taxpayers at risk,” Clayton added.
The NCUA’s board gave preliminary approval to the revised regulation on May 23, opening a 60-day comment period. It has yet to receive any letters.
Freedom Northwest is struggling with capital as it makes more mortgages. Its net worth ratio was 8.93% on March 31, down from 11.79% at the end of 2016, even though its earnings rose 75% from 2016 to 2018 and are on record-setting pace so far this year.
Garrett initially planned to address Freedom Northwest’s capital issues with an infusion of secondary capital, but he said NCUA officials turned a cold shoulder to that idea. That result left Garrett seething, since the agency recently approved an Orange, Calif., credit union’s plan to raise $4 million, even though its net worth ratio is below 5%.
“The secondary capital program is there for credit unions like us,” Garrett said. “We’re operating in an underserved area in rural Idaho. … The allocation of capital should be left to the capital markets.”
Freedom Northwest “is serving folks in small towns and taking on risks that big banks and even bigger credit unions won’t take,” said Brett Christensen, the chief executive of CU Lending Advice, a consulting firm in Euless, Texas. “What [Garrett] has done at that little credit union is a great story.”
An NCUA spokesman did not respond to a request for comment.
Garrett was incensed enough with the NCUA’s stance to comment in a critical article by an Idaho-based blogger. He is also seeking support from the state legislature and members of Idaho’s congressional delegation.
Still, he’s reluctant to go nose-to-nose with the NCUA, especially when the nonmember deposit proposal holds the promise of solving other problems.
“Ideally, I’d like to have both” secondary capital and nonmember deposits, Garrett said. “With that, I’d be off to the races.”