Month: June 2020

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Two Observations on Personal Relationships

A credit union CEO during the current pandemic:

I continue to be amazed at how our employees prove to be the best and brightest financial experts in the industry. Our 800-plus employees have been diligent while standing ready to serve and offer smart solutions. I can’t thank them enough and appreciate everything they are doing.

From a Data Processor Executive:

It’s far easier for a community bank to catch up on five years of technical innovation than it is for a neobank (fintech) to catch up on 50 years of hard earned customer loyalty.

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Schools Out: Virtual Summer Internships

The summer job market for students out of high school and college is more uncertain than usual. Employment in traditional roles in day camps, athletic leagues, and even retail stores are much fewer.

But remote capabilities, developed to serve members, may also be a way to employ interns in value enhancing projects. Many of these students have spent not just the last semester, but much of their educational experience living in the virtual world.

An Example: The Library of Congress

The Library of Congress is employing 40 undergraduate and graduate students in its 29-year Junior Fellows summer intern program.

The program’s goal is to “enable expanded access to and promote broader awareness of Library resources among members of Congress and researchers, including scholars, students, teachers and the general public.”

All work will be virtual. The ten-week program includes 27 projects across all divisions of the Library.

These range from archiving assets from 20 years of past National Book Festivals, exploring the history of African American business and entrepreneurship, visualizing and mapping collections of literary artists from the Caribbean, Latin America, Iberia and Hispanic or Lusophone cultures, and measuring how different light sources affect the visual aging of inks and papers.

The Junior Fellows also participate in virtual professional-development opportunities including assessments, tours, courses and special events intended to increase engagement with the Library.

In the final week each intern will present their most significant discoveries in a virtual display day.

Virtual Interns

This past Sunday a high school student talked about her frustration when she was unable to join the demonstrations in DC due to a summer rainstorm. The next day, Saturday, she decided to organize her own protest for three days later. Working long days and nights with friends she identified the site an empty municipal library parking lot, notified officials, arranged speakers and asked people to come. She thought several hundred might show up. Nearly one thousand did.

Over the past several weeks, many young people have participated in calls for change. Can we provide this generation opportunities to explore credit unions as one option for their energy, creativity, engagement and commitment? Ten weeks only? And perhaps enable change leaders?

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The Choice of Words

The headline seemed newsworthy: Bank Credit Union Merger News

The problem: it was not accurate. Credit unions and banks cannot and do not merge. The brief story did state that a credit union had completed its acquisition of a bank. But then the story continued the fiction by stating “this is the seventh merger of a bank into a credit union this year.”

Why the Misstatement?

Writers have a point of view. In this case the post was to promote the idea that banks and credit unions are much alike. So much so that bank/credit union mergers are not that different from the several hundred merger transactions occurring between credit unions annually.

However, these transactions are purchases in which credit unions pay cash to the owners of the bank in order to acquire the selling bank’s assets and liabilities. They are whole bank acquisitions. These sales are negotiated, often with the help of brokers, accountants, lawyers and other third-party experts to navigate both the business details and the regulatory approvals.

The documentation is very distinct from credit union mergers. The agreements will include representations, warranties, covenants and possibly non-compete and/or employment clauses on top of the detailed financial commitments. By contrast, the NCUA approves real mergers with a template, two paragraph, half-page general statement about transference of assets and liabilities to the surviving credit union.

Normalizing the Abnormal

The effort to portray credit union acquisitions of banks as just another kind of “merger” is supported by a host of intermediaries who benefit financially from the transaction It also provides a thin veneer of “normality” to those credit union leaders who use the accumulated reserves of members to buy out competitors or to enhance institutional size.

These are not, as one NCUA board member characterized them, just market-based transactions. For there is no market accountability before or after the event as there would be in a publicly traded stock. The deals are negotiated in secret, not in an open process. The members have no say; rarely would the transaction provide them any direct benefit. And if the deal does not work out, the owners of the credit union, unlike a bank’s shareholders, have no course of action.

Avoiding the Real Issues

An event may not be illegal, but that does not mean it is wise. Credit unions’ whole bank purchases raise important questions about the role of tax-exempt cooperatives. Should their tax-free accumulation of reserves enable them to buy tax paying banks? How do such transactions promote the unique role of cooperatives in financial services? What are the benefits to existing members? How transparent should the transactions be to members and the public to ensure accountability?

Banks are chartered to make money for their owners. The owners sell when they see it in their personal interests to cash out and reinvest elsewhere or spend their funds for individual purpose. Credit unions are founded on the principle of paying forward the wealth created by generations of members to be used for future members. It is common wealth, not private.

By blurring the lines by using terms like “bank credit union mergers,” the interests of a host of vendors is enhanced and the public perception of credit unions as no different from banks is promoted.

It also enables lazy strategy on the part of credit union CEOs. Organic growth requires innovation, constant focus on enhancing member value and an understanding of the competitive advantages of cooperative design. Buying out competitors may work in the open markets; that is not why cooperatives were formed.

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Credit Union CEOs Speak Up

America is confronting three difficult problems: a health pandemic, economic downturn and systemic racism.

After George Floyd’s death many felt the call of conscience to state clearly our values–personal and institutional.

Two veteran CEOs have provided thoughtful perspectives. The first message reinforces the vital role credit unions have to ameliorate systemic inequalities and provide hope. The second is a call to action by the CEO to his partner teammates.

These have been edited with permission of the writers. Their full statements can be read at the link following each excerpt.

What Protests Teach Us –Local Government FCU/CIVIC FCU CEO Maurice Smith:

The recent protests taking place around the country over the death of George Floyd is an opportunity to learn important lessons.

Protesting is an American right.

Protests awaken in all of us a reaction that should be addressed. First, we observe and learn about the underlying issues that brought about the protests in the first place. Second, we are forced to look at our world and develop an opinion on sides, morality and messages. Finally, we must decide what action we should take. Even if we choose to not react, inaction is a decision.

What is clear about protests, nobody is happy. Everyone has a motivation to find solutions.

Credit unions were invented to address a social problem. Let’s not be dismissive to the real mission of credit unions. To reduce the role of credit unions to mere commodity peddlers is missing the point. The reason we offer financial services is to remedy social conditions.

There is a connection between social determinants of poverty and the protests we see around the nations.

Financial wellness, literacy and education empowers households to be good consumers. Community wealth draws stable neighborhoods, retail outlets, access to healthcare and better schools. These opportunities build hope and a positive outlook for the future.

Now imagine a community that lacks the basic ingredients for financial enablement. Credit unions came along to fill this gap.

Credit unions use their cooperative principles of member empowerment to supercharge community involvement. We offer viable solutions. We give members choices. The most important benefit we give a community is a sense of hope.

Social unrest is an opportunity for us to meet a real need for productive change. Let’s show the world what credit unions really stand for.

https://www.cuinsight.com/what-protests-teach-us.html

Taking Action -Wright-Patt Credit Union CEO Doug Fecher

Partners, 

I want to acknowledge on behalf of myself and our credit union the pain that many in our community are feeling. And I want us to do something about it. America is better than this. America must be better than this. I know America can be better than this.

To make WPCU’s position clear, earlier this week I authorized the release of a statement via social media:

Wright-Patt Credit Union was built on the fabric of people helping people. This means all people. We are committed to an inclusive environment and respect people of all backgrounds and experiences. We acknowledge the impact of racism and unequal treatment of African Americans which has gone on for far too long in our country.

We condemn all acts of racism, injustice, hatred and violence. More importantly, we recognize that it is not enough to just voice these words – we must back them with positive actions that seek to understand, heal, and grow towards an inclusive society for all. The undeniable truth is that all people are created equal and deserve to be treated with dignity and respect, in a world free from injustice and hate.

We recognize that there is a long way to go in the quest for justice for all people of our community. The first step is to stand up and be counted: Injustice in all its forms must end today. Wright-Patt Credit Union is committed to promoting equity and inclusion throughout the communities we serve.

People are the strength of Wright-Patt Credit Union. We embrace the diversity of the world around us and seek justice for all. This is our promise to all.

We take very seriously the idea that “without action, words are just words.”

The only way meaningful change will happen is for good people to stand up and say “enough”.

There is a lot we can do. we have been working on a broad plan to address diversity & inclusion at WPCU. Our work in that area now takes on even greater meaning and urgency.

America is a great country, but not a perfect one. It is up to us to make it a place that serves everybody on the same terms.

We are all in this together, and together we can all make a difference. We are nothing if we are not a force for good … we help people through life.

 https://www.facebook.com/WrightPattCreditUnion

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Tracking Members in Transition in this Crisis

 Keeping an Eye Out for Our Members

 In a recent post I suggested that data analytics could be a powerful tool to identify members going through an economic transition in the pandemic. https://chipfilson.com/2020/05/a-critical-new-data-tracking-need/

Today’s 13.3% unemployment rate for May highlights the importance of tracking this trend at the member level.

Following is a series of graphs with commentary,  showing one credit union’s real time data. With total assets of $150 million, these graphs demonstrate both their ability to focus on the most urgent member situations, and to show regulators  competency to manage the risks, if any, from their special programs.

Credit Union’s Member Unemployment Curve

While we are tracking # of members receiving UE each week – this shows the # of unique members receiving Unemployment on a weekly & monthly trend.

The # of member numbers receiving weekly UE benefits continues to rise with a decline the last week of the May. Definitely something we will continue to monitor.

Monthly View:

Quick math showing # Members that received an Unemployment ACH vs Overall Members w/ a Direct Deposit in a month.

Mbrs w/ UE Deposit Overall Unique Depositors UE Rate
Jan 22 7281 0.30%
Feb 23 7357 0.31%
Mar 71 7391 0.96%
Apr 337 7500 4.49%
May 471 6894* 6.83%

*May is showing fewer depositors due to at time of pulling data – Soc Security had not deposited yet (we have been posting early in prev. months)

Keeping an Eye Out for our Members

We recently compiled some data to reach out to members that have made or requested loan adjustments – here is some data:

# Mbrs w/ UE Deposit UE Mbrs w/ Loan UE Mbrs w/ Loan that Skipped Payment
Apr 337 171 (50.7%) 32 (18.7%)
May 471 218 (46.3%) 41 (18.8%)

April and May were consistent. Approx. 50% of the members that received an Unemployment Benefit have a loan with us.

Further – of the 50% that have a loan, 18% of those members performed a Skip-A-Pay. (Lower than expected). This is something we will continue to monitor to see if a trend appears.

Reshaping the ACH Deposits:

We divided our ACH Deposits into 5 categories:

Tax Refunds, Govt Benefits, Unemployment, P2P Transactions, and Payroll/Other

Here is a March vs May comparison of Incoming ACH Deposits by Category

March 2020:

May 2020

Takeaway:

Unemployment ACH has gone from nearly non-existent in March ($60,000) to 8% ($1,620,000) of our ACH deposits in May.

Average Deposit Amounts

As we know, the Government has provided additional assistance to the Unemployment Benefits. That can be reflected in the data here:

And for the Payroll category the average deposit has decreased as expected.

Plenty more where this came from:

We can use Tool 232 – Common Bonds to analyze this group further. This will give us a complete breakdown of the 471 members that received Unemployment during the month of May – it’s an excellent resource.

Where this dataset is now built we can update this information pretty easily going forward as well.

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Crossing Red Lines

“We crossed a lot of red lines.” That is how Federal Reserve Chairman Jerome Powell described the host of actions by the central bank responding to the COVID economic shutdown.

Actions included lowering interest rates to near zero, conducting unlimited bond purchases, implementing emergency lending programs to business, state and large city governments.

There are more steps planned, novel in scope and speed. These include the main street credit program to make at-risk loans to medium-sized businesses, buying corporate bonds and the debt of states and large cities.

The purchase of non-investment grade debt held by Exchange Traded funds was perhaps the most controversial. Included in the initial $1.3 billion purchases were bonds issued by Hertz, J.C. Penny, Neiman Marcus and Whiting Petroleum all of which have filed for bankruptcy. The US Treasury has been allocated up to $75 billion to cover potential losses on these non-bank, lending initiatives.

The Opportunity of a Crisis

But THE red line crossed that preceded all of these central bank actions was changing the internal mind set of the Federal bureaucracy. “We don’t do this. Where is the authority? We’ve never done this before. How will it work? What if we fail?”

With over one in four workers laid off, unemployment is expected to exceed 20% for May. Powell justified his innovative approach partly by the fact that the burdens of job loss are falling on those least able to afford it. They are lower paid service workers whose ranks are disproportionately women and minorities.

But changing long standing, institutional economic realities is hard. All governmental leaders find bureaucracies reluctant to move in innovative ways or at the pace of events. The easiest thing is keep doing what you have always done. The result, no real change occurs. The status quo remains.

The opportunities for transformational change can be fleeting. Public moods move quickly. Political and vested interests rise up. New approaches can be lost if not seized “in the moment” as Chairman Powell did.

He courageously decided to “cross all the institutional red lines.” Without taking that risk, the whole recovery momentum would be much more difficult.

NCUA’s Withdrawal from the Cooperative System

This crisis is an opportunity for NCUA to reverse the past decade’s pattern of unilateral, isolated and often self-serving regulatory responses in its relationships with credit unions.

Among all financial institutions, the cooperative model uniquely depends on collaboration. It is not just the basis for initial chartering, but also a singular operational advantage.

All elements of the system have a mutual responsibility for safety and soundness. Since the NCUA’s 2009 takeover of the corporate network followed by liquidation of four of the five largest corporates, it has failed to seek solutions cooperatively with credit unions and in members’ best interests.

The disruptions to financial performance by the crisis should be a turning point in this relationship. No regulatory rule or waiver, or congressional legislation, can “de-risk” the consequences of the financial toxicity caused by the pandemic and national economic shutdown.

The regulatory impulse to get rid of problems through mergers and selling member-owners to someone else when the going gets tough is a slow-moving death spiral for the industry.

Cooperative workouts are not presumed to be fast, especially when relying on retained earnings. They take time – sometimes years. They are messy. Each is unique, personal in the details. They require sweat equity and occasionally, 208/NCUSIF assistance.

The purpose of the 1% NCUSIF redesign was to keep credit unions and the system whole. Since the 2009 crisis NCUA has used the resources of this unique cooperative fund to broker problems away and avoid leadership accountability.

Crossing Red Lines to Avoid Red Ink

Jerome Powell has acted fast to help troubled industries, individual business, states and cities work their way through catastrophic revenue shortfalls and unknowable future trends. To keep the cooperative system whole while transitioning this crisis, NCUA must do the same.

The Board should establish an expectation that no credit union charter should be lost because of the current pandemic. Credit unions who work with their member-owners in this transition should expect no less than 100% support from their regulator.

This is not a legal, but a commonsense judgment. Similar to the Fed, the full range of credit union resources should be available whether this be 208 waivers and/or direct NCUSIF capital contributions.

This is a moment for NCUA to highlight the cooperative model in all its member focused uniqueness. It will require NCUA staff to grasp the opportunity for innovation by working with credit union leaders in the trenches. If that bureaucratic “red line” or mindset can be crossed, then the outcome should be a lot less red ink when this is over.

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Local Loyalty: A Meaningful Cooperative Advantage

From Farm to Table

The words community, communication, communion and the phrase common good share similar linguistic roots. Our community, literally common unity, depends on the relationships with those around us.

This shared experience was, and still is, the foundation of a cooperative. Knowing our neighbors, learning their stories, and supporting individual ambitions.

Crises enhance how these “normal” interactions expand to reinforce connections and shared purpose.

Summoning Local Spirit

This cooperative spirit was again called forth in this message from Patelco Credit Union:

Support your local businesses and non-profits

If you’ve already paid your bills, have an emergency fund, and taken care of your immediate needs, consider how you can use the rest of your stimulus payment to benefit your local community.

Non-profits are being called on to do more than ever before, so consider donating to them. We continue to partner with food banks throughout the Bay Area and Sacramento area, many of whom need extra donations right now.

Anchor Institutions

In economies dominated by large national firms who source from global supply chains, the importance of local anchor institutions is magnified in this crisis. Cooperatives along with hospitals, colleges, churches and myriad local businesses create self-supporting “eco-systems.” These institutions can leverage their assets and revenues to promote local development by:

  • Directing their purchasing power toward local vendors.
  • Hiring their workforce locally.
  • Providing skills training for people in the community.
  • Incubating the development of new businesses.
  • Serving as community leaders and network builders.
  • Financing development to promote local retail, employer-assisted housing, and community land usage.

Credit unions are an essential anchor for long term community sustainability.

The 100% Local Pledge

When the sweeping small business closures were ordered throughout California in March, the publication Inside Sacramento was concerned about the many small business owners who serve the area’s neighborhoods who were featured in their publications.

The COVID crisis heightened the many challenges small businesses face every day. So as a community champion, the publication began a city-wide effort to urgently support local firms with The 100% Local Pledge. This campaign included yard signs, social media messages, filmed TV spots and the support of local elected officials.

The first business partner to sign on was Safe Credit Union providing funds and marketing support. (https://www.cutoday.info/Fresh-Today/SAFE-News-California-CU-Signs-On-With-100-Local-Pledge-Campaign) CEO Dave Roughtan explained his credit union’s action: “. . . we can make a difference – but we have to work together. Things may have felt a little out of control. But we – together – can take back the future of our region. . .”

Relearning in a Crisis

The COVID crisis reinforces basic facts about the American economy.

One lesson is that consumers have figured out that food does not come from grocery stores. As farmers destroyed crops, livestock and dumped milk due to disrupted supply chains, local farmer’s markets show us the importance of a direct farm-to-table option.

While the pandemic crisis is national, even global in scope, the health care response must be local.

Another recognition of the vital role of “local” is the bipartisan Payment Protection Program (PPP). The purpose was to support local enterprise. One estimate is that 80% of credit union PPP advances went to firms with fewer than 10 employees.

In good times and crises, cooperatives are anchors.

Our actions around inequality, wealth, and power create alternatives in society which empower individuals via collective efforts. These cooperative, group-centered solutions help underwrite local choices necessary for meaningful lives.

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Up To $3.0 Billion Credit Union Capital Sitting Idle During Crisis

Recently NCUA released the December 30, 2019 financial updates for the five corporate AMEs liquidated in September 2010.

The projected repayments to the shareholders of the five corporates are as follows:

  • US Central Shareholders: $1.667 B or 100% of membership capital shares
  • Members United Shareholders: $588 M or 100% of membership and paid in capital shares plus a liquidating dividend
  • Southwest Shareholders: $703 M or 100% of membership shares plus a $300 million liquidating dividend
  • Constitution Shareholders: $36 M or 54% of member share balances
  • WesCorp Shareholders: $0

Avoiding Regulatory Double Jeopardy

The above amounts are a $90 million gain since the September 2019 numbers were released. With interest rates at all-time lows, the securities used to underwrite the NGN program, have undoubtedly gained additional value since December.

The NGN program ends in 2021, one year away. But the ability to return these funds now could significantly help both the 11 corporates and the thousands of credit union shareholders of the three corporates right now. Knowing that these repayments would be added immediately to capital would empower receiving credit unions to make more informed decisions about current member assistance programs. Every corporate and natural person credit union was sent a receiver’s certificate for their share balance. Now is the time to cash these out.

Three years ago NCUA figured out how to end the TCCUSF early and then subsequently closed several NGN trusts before maturity. These almost $3.0 billion  credit union repayments are sitting idle.

The coincidence that these surplus funds from the Great Recession over ten years ago could help in this latest economic crisis is at best ironical. But what would be worse is if the funds accumulated due to serious misjudgments about the actual condition of four of the corporates in the earlier crisis, should once again be unavailable when most needed.

That would indeed be an act of “double jeopardy” by NCUA.