Two actions of significance from today’s monthly NCUA Board meeting. 

 

First, we have the NCUA budget. Then we have the final succession planning rule. 

 

We will cover each of them with some analysis as to what credit unions should expect going forward with a new NCUA Chairman on the way in January but one who does not have a board majority as he gains the gavel.

 

LET’S TAKE A LOOK AT THE NCUA AGENCY BUDGET FOR 2025

 

When I became NCUA Chairman in 2001 one of the agency’s regional directors told me that there is always at least ten percent overfunding in any year’s NCUA budget. That regional director also told me that, even though they are career public servants, bureaucrats can read election results and defy them at their own peril.

 

Learning about today’s NCUA Board approval of the agency’s 2025 budget reminded me of both of those observations because, as if to show a new Republican chairman-to-be that they got the message, the NCUA staff proposed 2025 agency operating budget of $419.3 million was cut back today for a final board vote to $382.3 million. That is a reduction from what was proposed by staff before the election to be a 12% increase over the 2024 NCUA Budget to an increase of only 2.5% over the 2024 budget.

 

The NCUA Board unanimously approved the revised 2025 budget at the reduced $382.3 million figure.

 

How much reduction was that? Right at ten percent. Interesting.

 

A link to the NCUA budget for 2025 is provided below. Disregard their projections for the 2026 budget as that is not binding at all and is little more than a maybe-yes or maybe-no look at where the agency will be a year from now.

 

https://ncua.gov/files/agenda-items/bam-2025-2026-budget-20241217.pdf

 

The staffing request for new employees in 2025 was also cut back from a total of 1261 to 1255. While it can certainly be argued that any staffing increase is unjustifiable in an agency that is now regulating and insuring around 4700 credit unions when it was overseeing over 12,500 just twenty years ago and certainly could do some reassigning of positions, duties and assignments, this reduction in both new budget dollars and new staffing was a recognition by the NCUA Board that the election returns spoke to the need for some increased fiscal responsibility at all federal agencies.

 

Even though there is still a new position for working on climate issues in the 2025 budget as if NCUA is an adjunct of the Environmental Protection Agency, the overall increase in the agency budget showed dramatically more budget discipline than we have seen the past four years.

 

This is a credit to Vice-Chairman Kyle Hauptman, soon to become NCUA Chairman upon President-elect Trump’s inauguration, and his more fiscally responsible and free market-oriented approach to regulation.

 

But it is also a credit to the two incumbent Democrat board members (Chairman Todd Harper, soon to be replaced as chairman, and Board Member Tanya Otsuka) that they were willing to compromise on the 2025 budget recognizing that a new NCUA Chairman would have different priorities in guiding the agency in the months to come.

 

It is also a recognition that Vice-Chairman Hauptman, when he becomes Chairman Hauptman, has a term that expires in August 2025. At that time a new Trump appointed NCUA Chairman will be on his or her way. That chairman-to-come in August is almost certain to be more philosophically in tune with President Trump than even Mr. Hauptman will likely be as he has worked with his two Democrat colleagues on the board for several years and has found ways to employ the give-and-take of board politics in order to win a battle or two while he is serving as a board member from a minority party on a three-member board controlled by the majority party.

 

When a new chairman comes in, many of these positions could be done away with in either the 2026 budget or not filled in the 2025 fiscal year at NCUA because the chairman oversees the staff on behalf of the NCUA Board. Eight new positions are less of a target than would have been fourteen new positions. However, it is probably a safe bet that before the Trump term is completed the total number of NCUA employees will be less overall than it is today.

 

A little history. When I became NCUA Chairman in 2001, we elected to freeze hiring some of the positions that had been approved in the budget for that year that was prepared under my predecessor, NCUA Chairman Norman D’Amours. If the chairman is willing to use his or her chits to make the agency more efficient, a lot can be accomplished.

 

Just for a little perspective on the NCUA budget and employee growth of the last four years. The NCUA operating budget was $314.6 million for 2021, the last year that Chairman Rodney Hood oversaw the budget process. The proposed 2025 budget by staff, admittedly prepared pre-election, was $419.3 million. That is a 33% budget increase from 2021 to 2025. Even with the reduction of the 2025 operating budget to the $382.3 figure approved by the NCUA Board today, the increase om the NCUA budget has grown 22% from 2021 to 2025 for an agency regulating and insuring approximately 600 fewer credit unions than they were going into 2021.

 

What will this mean for NCUA budgets going forward?

 

Well, at least for the foreseeable future the NCUA staff that prepares the annual budget proposal and has never found a problem that could not be solved by hiring more federal employees to work at the agency will have more budget discipline in their requests. After all, Hauptman will be a less government chairman followed by undoubtedly a Trump appointed chairman that will be even less in favor of regulatory agency expansion of authority.

 

There will be no more pushing for NCUA vendor authority as a Republican NCUA Chairman will not find a receptive audience in a GOP-controlled Senate and House – even if the staff pushes the chairman to continue the unwarranted and unjustifiable request for virtually unchecked regulatory and examination authority over every type of business that interacts with a credit union.

 

More off-site exams will create more cost and personnel savings. Less duplication of CFPB consumer protection exams, fair lending exams and examiner accountability will certainly be coming – particularly since the CFPB itself will be much less activist under a Trump administration.

 

Change is coming on the NCUA front. This compromise on the 2025 budget is evidence that the staff is getting in line with the new leadership reality at NCUA. Chairman-to-be Hauptman and his two Democrat colleagues have shown they can work together and find that ten percent extra that is unneeded in every agency budget.

 

For credit unions that is a good thing. In fact, the NCUA operating fee for federal credit unions is now going to be 1.2% lower than it would have been under the staff’s proposed 2025 NCUA budget.

 

Hopefully, this budget discipline will continue and the NCUA’s stakeholders will benefit from a regulatory and insurance agency more focused on safety and soundness and less on examining vendors, overreaching CUSO reviews, subjective lending exams in the name of consumer protection, eliminating overdraft programs that members like and opt into and creating a climate czar department at a federal financial regulatory agency. 

 

The 2025 revised NCUA budget is a good early sign. Hauptman, Harper and Otsuka deserve some kudos for the compromise they agreed upon that significantly reduced the NCUA staff’s wish-list initial budget submission.

 

HOW ABOUT THE SUCCESSION PLANNING RULE?

 

A federal rule that puts NCUA in the middle of a fiduciary decision that should be left to the elected boards of directors at federally insured credit unions is certainly overreach.

 

Succession planning is a fiduciary responsibility, and credit unions should have a plan of some type that fits their individual institutions, personalities, histories, fields of membership, size and complexity.

 

But having a one-size-fits-all approach to succession plans is not good policy. Yet, with the strong support of Chairman Harper and Board Member Otsuka, the NCUA Board today moved forward – even though they came together on a much more reasonable 2025 budget – to flick the nose of the incoming administration and next chairman by approving a federal rule requiring every federally insured credit union to have a written succession plan that meets NCUA expectations, requirements and examiner scrutiny.

 

Supposedly based on the fact that many small credit unions choose to merge rather than go through the cost and process to seek a new CEO when their incumbent retires or resigns, the NCUA Board has determined that if the NCUA Board itself and the agency’s examiners burden them with the compliance requirement of adopting a written plan as to how they will handle a vacancy those small, struggling credit unions will be able to be saved.

 

In actuality and ironically, the reason most smaller credit unions elect to merge has nothing to do with whether they want to go through a CEO search. The reasons are market, scale and compliance based. 

 

A new NCUA requirement on succession planning will not bring about more succession planning that prevents mergers.  This rule will add to the compliance burden of smaller credit unions and drive even more of them to merger, from our experience.

 

If you want less credit unions throwing in the towel through merger, lessen the regulatory burden. Don’t increase it.

 

This succession planning rule is the classic example of regulatory overreach and unintended consequences.

 

We have worked with hundreds of credit unions to help them draft their succession plans. Inevitably, those plans are driven by the uniqueness of each credit union (thus making a one-size-fits-all template rule virtually worthless or else strangling to their individuality) and the fiduciary role the boards see themselves playing if and when vacancies are planned or occur unplanned. 

 

Succession plans should never be written by an examiner. They should be a product of board fiduciary evaluation. 

 

A federal rule mandating every federally insured credit union to have a succession plan is unnecessary overreach and will not prevent a single merger. In fact, it may drive some mergers when the boards try to adopt a succession plan that meets their examiner requirements only to find that they cannot live up to their own plan if they adopt it.

 

The succession plan rule, which was proposed earlier this year on a 2-1 NCUA Board vote with Vice-Chairman Hauptman voting not, was approved today on a unanimous vote. 

 

There may have been some swap out on the board in an attempt to get a unanimous vote on both the 2025 budget and the succession rule approved. We will never know. 

 

However, Vice-Chairman Hauptman was successful in getting a 24-month requirement for boards to review their succession plans (one year longer than the 12 month requirement in the proposed rule) and a three-year automatic repeal clause in the rule which will essentially require it to be re-approved by the NCUA Board in 2028.

 

Our prediction is that the rule will not be renewed in three years if the determining factor is whether it slows down mergers. The driving factors in mergers, again, are marketplace competitive issues, lack of scale and excessive regulatory compliance burden. 

 

This rule does not help with any of those factors and makes the last one worse.

 

Hopefully, the NCUA under Chairman Hauptman (who seems somewhat skeptical of the succession planning rule despite his vote in favor) and his successor in August will oversee and direct through the Executive Director who works for the chairman that the agency’s examiner corps approach evaluating credit union succession plans in a way that provides flexibility, individuality and minimalism in succession plans at credit unions as they examine them. 

 

NCUA does not need to be in the middle of CEO and executive hiring decisions, pay plans and benefit packages. The ability to approve or disapprove a credit union’s succession plan can put the agency right there. That is not good regulatory or business policy.

 

Likewise, NCUA does not need to get involved in forcing credit unions to select board members in a certain way or from a certain pool of qualified candidates in the view of the examiners. Credit unions are democratically controlled financial cooperatives. That structure is not well served by regulatory mandates on the basics of elected governance.

 

A link to the succession planning rule is provided below:

 

https://ncua.gov/files/agenda-items/succession-planning-final-rule-20241217.pdf

 

We will continue to monitor both issues for you and provide insider insight wherever we can. Have a Merry Christmas and hope you are poised for another great credit union year in 2025!

 

Until next time.

Dennis Dollar