Month: August 2021

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“The Best Damned System in the Country”

NASCUS members’ Annual State Summit meeting  begins today.  It includes a “fireside” chat with new NCUA Chair Harper.  Hopefully this dialogue will be enlightening.  For two of his recent proposals pose an existential threat to the dual chartering system.

The first would fundamentally alter the legal framework of the unique, cooperatively designed NCUSIF, by removing all the guardrails on expenditure.  Harper defends these changes by reference to the FDIC, a premium based fund that has failed repeatedly since the NCUSIF 1984 redesign.

The second Harper initiative is a new three-pronged capital structure for all NCUSIF insured credit unions.  Some credit unions would be allowed to follow the current risk based net worth (RBNW) model. Others would be required to follow the 2015 risk based capital (RBC) rule, yet to be implemented.  A third group of so-called complex credit unions could elect a new CCULR ratio that would raise their well-capitalized requirement by 43% from the current 7% to 10%.

All of these capital changes would take effect on January 1, 2022, or in five months, if Harper is able to get a second board vote.

The End of Dual Chartering

Aside from the lack of any substantive basis for these proposals, the outcome would effectively end the dual chartering system.   Risk based capital would throw a single regulatory blanket over every asset and liability decision made by an NCUSIF insured credit union.

NCUA would be the single hegemonic regulator for all coop charters. This single lens for risk evaluation would create a homogenous cooperative balance sheet.  Instead of increasing safety and soundness, if this uniform approach to risk analysis is wrong, it could lead the cooperative system over a cliff.

The One Sure Defense: Choice

This prospect of NCUA dominance was foreseen decades ago.   The following is a timely and timeless reminder of this threat in a speech by former NCUA Chair Ed Callahan in 1986.   The excerpt of these remarks to the Association of Credit Union League Executives is under three minutes. https://www.youtube.com/watch?v=cTMGvXPnVa8

“The insurer is the regulator.  The system only works when there are choices.”

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Coop Design’s Two Unmatchable Advantages

Living in a forest sometimes keeps participants from seeing the factors that create its growth.  For the credit union system, there are two areas where they should have the upper hand in the ever-changing world of financial options.

Ownership Matters

We live in a commercial, social and political world in which success is often attained by accentuating differences–through branding, sloganeering or pandering to individual fears.

Cooperatives are built on peoples’ need for community. Instead of fueling division, credit unions rely on shared effort. When people feel included, these efforts build ownership. Ownership is more than “I am a member of.” It is being a part of something bigger than oneself.

Members are choosing a financial option that promotes individual and local opportunity, trust and prosperity.  The inclusive spirit of owning integrates diverse needs and persons in mutual efforts for a better community.

The Power of Relationships

In a brief article on managment strategy author Greg Satell references a McKinsey study that points out the change in the asset composition of leading American firms and why this requires a different approach to leadership:

“In 1983, McKinsey consultant Julien Phillips published a paper in the journal, Human Resource Management, that described an “adoption penalty” for firms that didn’t adapt to changes in the marketplace quickly enough.

. . .research shows that in 1975, during the period Phillips studied, 83% of the average US corporation’s assets were tangible assets, such as plant, machinery and buildings, while by 2015, 84% of corporate assets were intangible, such as licenses, patents and research.”

By NCUA rule, credit unions’ “tangible” assets-buildings, equipment and fixed- are limited to 5% of assets or less.  The structure of loan and investment assets is self-liquidating.  As with other corporations, the most vital cooperative “assets” today are intangible, but not patents or research. It’s about people.

One of these is employee culture especially when credit unions define their competitive advantage as service.  But the most valuable and hardest to quantify is the member-owner relationship.  This is more than the total of product balances, length of membership or volume of transactions. Relationship is members’ ongoing belief that a credit union’s decisions are in their best interest.

When a credit union’s most precious advantages are intangible, effectiveness is directly connected to people — what they believe, how they think and how they act.

This strategic imperative is counter to prevailing themes that coop competitiveness is finding the best technology, skill with data analytics or AI applications, or the dominate theory that size is essential for success.  All may help to some degree, but are not unique coop advantages.

Ownership and relationship are two sides of the same coin.  Without either, the member becomes just a customer, and the credit union one option of many in the financial forest.

The Network Advantage

Satell’s article highlights another credit union system advantage, albeit not unique to coops:

“Yet there is significant evidence that suggests that networks outperform hierarchies.

Wherever we see significant change today, it tends to happen side-to-side in networks rather than top-down in hierarchies. Studies have found similar patterns in the German auto industry, among currency traders and even in Broadway plays

The truth is that today we can’t transform organizations unless we transform the people in them. . .It is no longer enough to simply communicate decisions made at the top. Rather, we need to put people at the center and empower them to succeed.

Later this week I will present the story of a CEO and credit union where these cooperative ideas are the center of every effort.  The results speak for themselves, even if the model appears traditional.

 

 

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Mergers: Can’t We Do Better than This?

At last week’s Senate Banking Committee hearing, Senator Warren challenged banking regulators about their oversight of bank mergers.

Warren told the FDIC and OCC leaders the data indicate the regulators have “no credibility” when it comes to merger supervision.

“This has turned into a check the box exercise where the outcome is predetermined,” said Warren, who plans to introduce legislation to revamp the bank merger process.

“Our regulators have a job to do and it’s our job here in Congress to make sure they do it,” Warren said.

Her observations/questions included the following as reported in the CUToday article:

“Community banks are being gobbled up. The market is being dominated by big banks. There is more concentration, higher costs for consumers, and greater systemic risk, and it is happening in plain view of the federal agencies whose job it is to keep our communities safe.”

In a question directed at the FDIC Chair McWilliams: “The FDIC has a searchable database of all merger applications received since 2013, and there have been 1,124 such applications. Out of those, how many has the FDIC denied?” The total number of denials for any reason whatsoever?”   Before McWilliams could respond, Warren said, “It’s zero.”

Is the credit union system vulnerable to this political critique?

Here is a current case.  The $52 million South Division Credit Union has called a special members’ meeting on August 30 to approve its merger with Scott Credit Union, both Illinois state charters. Is this just another “ordinary” merger announcement?

The Credit Union’s Website Promises

Since 1935 South Division Credit Union, headquartered in Cook County, IL, has been guided by these founding principles:

To meet the financial expectations and needs of the Members by providing the highest quality products and services, delivered with a sense of professionalism, friendliness, and respect for the individual Member and their common financial bond with one another. The Next Evolution in Personal Banking

Member-Focused Attention Meets Diverse Banking Options

As an open-to-the-public, not-for-profit institution, our unique focus is on you, the consumer. Our end goal is to provide service that’s customized uniquely to you, backed by offerings that address all of your banking needs.

Our credit union offers a complete array of products and services to our Members —checking, savings, debit and credit cards, vehicle and consumer loans, money market accounts and certificates of deposit, along with a variety of mortgage products. 

Member Ownership 

Unlike at a bank, you’re not just another “customer” at South Division Credit Union. You’re a Member with a say in everything that we do. And what we do is strive to add more value for our well-deserving Members. As a nonprofit, rather than pocket any profits, we pour them back into the institution to provide better rates and additional benefits for you.

SDCU is owned and democratically operated by our Members, who elect our all-volunteer Board of Directors. In turn, the Board represents our Member-owners’ interests in credit union policymaking.

Open to Anyone — Become a Member Today!

What South Division is Telling Members Now

In the July 14, 2021 Notice of Special meeting sent to members, the credit union gave the following explanation for going out of business:

The directors of the participating credit unions have concluded that the proposed merger is desirable for the following reasons: South Division Credit Union has not grown in size or membership participation for several years and has been faced with increasing operational, regulatory and compliance expenses; lack of managerial expertise, aging Board of Directors and no effective succession plans. We believe a merger would offset these trends by offering South Division Credit Union’s members access to an array of new services, more modern account management systems, improved remote electronic access for lending programs, better savings and loan rates, and additional facilities.

Voting by Proxy: A Foregone Outcome

The Notice continues: The merger must have the approval of a majority of members of the credit union who vote on the proposal. . .Illinois permits voting on merger proposals only at the meeting or by proxy. If you DO have a proxy on file at the credit union, to vote in FAVOR of the merger, you may attend and vote in person at the meeting or, do nothing and the Board of Directors will vote in favor of the merger in your stead.

To vote AGAINST the merger, you must either attend in person and vote at the meeting. . . If there is no proxy enclosed with this notice, you have a proxy on file with the credit union, and to vote NO, you must revoke that proxy by giving written notice to the board secretary. . .

What is Left Unsaid

Scott Credit Union is a $1.5 bn, strong performing credit union located in Southern Illinois.  Its main office is 240 miles, a five-hour drive from South Division’s headquarters in Evergreen Park.

Scott founded in 1943 at Scott Air Force base, sits across the Mississippi river from St. Louis.  Its multi-county southern Illinois charter is in a very different economic, social, demographic and political environment from the Cook County, Evergreen Park-based credit union.   The combination would appear to be an act of charity by Scott.  The four small branches of South Division are anything but a viable foothold in the greater Chicago market.

In addition to South Division’s board and management confession of their leadership shortcomings—aging board, no succession plan, managerial inexperience-there is the question of their fiduciary oversight.

In 2020 the credit union reported a loss of almost $2.0 million reducing the net worth from 14% to 8.4% in just one year.   The major reason for the loss was an increase of over $1.0 million in salaries and benefits above the $1.2 million of the prior year.   What were these payments for?   Was staff helping themselves to the net worth prior to announcing a merger where such payments would have to be disclosed?

A Challenge for the Credit Union System

Both the Illinois credit union supervisor and the NCUA regional director signed off on this merger.   Are they OK with the $2.0 million loss in 2020, and therefore welcome to another credit union taking this emerging problem off their hands? Were local credit unions approached and turned this “opportunity” down?   How did Scott Credit Union end up with the short straw?

Where are the other components of the credit union system as this 85-year old credit union decides to close: the league, the vendor business partners, the sponsors?  Are there no other leaders or groups in the community willing to step up to this challenge?

The promises on the credit union’s website recruited over three generations of members.  Is this legacy of failure the best option the cooperative system can devise for these members, their children and grand children?  Because of the Board’s proxy voting process, the members will have no say in this dissolution.

When Collaboration is Most Needed

The credit union system was founded and built by collaboration.  No credit union would exist today without sponsor support, volunteer effort, member loyalty and system provided solutions.   But when it comes to ending a charter, collaboration seems nonexistent.   Without all-hands-on-deck  participation in these decisions, the ability of members to trust and respect their credit union’s choice to dissolve, is suspect.  Leaders at every level of the system are abandoning this charter at a most critical time.

This merger is based on a guilty plea of incompetence.   The 2020 salary payouts raise a question of integrity.  The process is devoid of “any respect for the individual Member and their common financial bond with one another.” (web site purpose statement)

Mergers in circumstances like this undermine the cooperative system’s reputation for acting in the member’s interest.  These credibility stains cannot be washed away no matter how competent or well-meaning the continuing credit union’s intent.

One more credit union charter gone, one more hole in the cooperative boat.  Will the sinking ever end?  How will Senator Warren or other members of the committee react when they see this example of a cooperative merger?

 

 

 

 

 

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What Credit Unions Can Learn from the Norwegian Women’s Beach Handball Team

While the Olympics are over, the stories of international sporting lessons are not.  These sometimes transcend individual athletic feats and tell of hard-fought life challenges.  One of these stories is about the Norwegian Women’s Beach handball team.

The team was fined $1,500 euros for wearing “improper clothing” in the sport’s Euro 2021 tournament.

The European Handball Association’s Disciplinary Commission fined the players for their protest in refusing to wear the regulation bikini-bottom to go with midriff-baring tops.  The rules require the bottoms be “a close fit and cut on an upward angle toward the top of the leg” and a maximum side width of 4 inches, according to International Handball Federation regulations.

Male players are allowed to play in tank tops and shorts no longer than 4 inches above the knee.

“It’s not [appropriate clothing for] the activity when they are playing in the sand,” stated Norwegian Handball Federation President Kåre Geir Lio.

Norway’s Ministry of Culture upon hearing of the fine said: “This is completely ridiculous! How many attitude changes are needed in the old-fashioned international patriarchy of sports?”

Old-fashioned Patriarchy

The belief that those in authority have the exclusive right to set the rules is not limited to sport.

Scholar, teacher Dr. Beatrice Bruteau (1930-2014) wrote about this human failing as follows:  The theme that explains many of our political shortcomings is domination. We see it in the way decisions are made in our families; in the way orders are given at work; in the way social life is structured in our city by gender, race, and wealth; in the way our industry or profession relates to its competitors or its market or its clientele; in the way governmental agencies function. . .

Domination is a relation that does not work the same in both directions. One commands, the other obeys. One shows respect, the other accepts it but does not return it. One gains privileges from which the other is excluded. 

Positions of power, whether elected, appointed or even earned, can distort an occupant’s assertive self-assurance.  Once in office it is easy to presume wisdom inherent with the responsibility.  The next step is exercising authority without consulting or even acknowledging the various constituencies most affected by the leader’s decisions.

Think no further than NCUA Chairman’s Harper’s recent requests for changes to the legal structure of the NCUSIF, expanded legislative authority for the CLF, or a new complex three-part capital structure for credit unions.  All were proposals drafted without consultation or even demonstrated need by those most affected.

One only hopes that the courage and spirit of the Norwegian women beach handball resides somewhere in credit union land. Otherwise, credit unions may all end up wearing the same  “close fit, cut at an upward angle, with a maximum width of 4 inches” uniform rules justified by nothing more than “old fashioned patriarchy.”

 

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Conserved Municipal CU Shows “Progress”

Surely the biggest human failure is not learning from failure. 

The turnaround of Municipal Credit Union, which NCUA took over two years ago, continues with a six-month ROA of 3.65%.  This strong bottom line raised the net worth from 4.42% to 6.32% over the past year, even while total shares grew 14.2%.

Kyle Markland is the third CEO NCUA has put in the credit union since appointed conservator  by the  New York regulator in May 2019.  He is the only interim leader with a previous credit union CEO track record.

NCUA’s Conservatorship Actions in 2019

On May 17, 2019 NCUA conserved Municipal shortly after it reported a first quarter net worth ratio of 7.6%, delinquency of .77%, and an allowance account funded at 150% of total delinquencies, positive ROA—and no taxi medallion loans.

Just 45 days later in the June 2019 call report, the newly arrived NCUA conservator reported a $123 million YTD loss reducing the net worth to 3.41%.  No reasons were provided.

By the end of 2019 the credit union had undergone a miraculous turnaround.  It reported a $30 million net gain in the 4th  quarter alone and a total improvement of over $40 million since the  June 2019, $123 million loss.

The June 2021 Results in Context

NCUA’s third CEO selection arrived in mid 2020. The recovery remains steady.   So how did this extraordinary performance in the first six months of 2021 compare with earlier activity?

The credit union has grown to $4.2 billion in assets at June 2021, continues to add new members, and has over 50% of its assets in investments with ¾ less than one year maturity.  Loans are flat and delinquency continues to decline to .54%.

Two other numbers suggest a slightly more modest assessment.   For 63% of the net income is due to significant changes in expenses from the prior year. The provision for loan loss shows a net reduction of $12.6 million for a total reversal of $22.8 from the expense reported the prior year’s first six months. Miscellaneous expense also shows a recovery of $15.4 million a $24.5 million reversal versus the expense of the prior year.  Perhaps a bond claim payment?

Together these two “reversals” contributed 63% of the bottom line.  Without these, the ROA would have been 1.3% still excellent, but not as spectacular.

When Transparency is Lacking, Credibility is Forfeited

Since NCUA’s conservatorship in May 2019, Municipal has reported operating results ranging from the sublime to the ridiculous.  These include a quarterly loss of almost $130 million to a $30 million positive net two quarters later.  The two expense “reversals” totaling $47 million in 2021 are not as spectacular, but raise questions about how such dramatic change happens.

Without clear public explanations the impression is that the performance numbers are either entirely uncertain, or subject to great variation not seen in any other credit union this size.  Either option raises the issue of what is the credit union’s real operating capability versus seemingly arbitrary changes in accounting valuations.

So the good news is that Municipal is on the way back.  The unfortunate news, no one knows how or why. If we cannot learn from failure, one thing is highly probable, there will continue to be more failures.

When the causes of problems are hidden then the possibility of others making similar mistakes becomes greater.

Is Municipal’s turnaround the result of skillful management interventions?  Or just adjustments to exaggerated loss estimates?  Was conservatorship a means to cover up years of ineffective supervision?   Is the current CEO, Kyle Markland, free to make long term decisions to position the credit union, or are all his leadership decisions subject to NCUA approval?

The inability to learn from failure is a human shortcoming.  But NCUA’s lack of institutional transparency is a defect undermining confidence in its oversight and judgments.  Municipal is just the latest of a long series in which NCUA hides behind a practice of not commenting on problem cases.

That silence harms the credibility for NCUA’s actions; but more importantly it undermines the regulator’s reputation for the safety and soundness of the cooperative system with members and the public.

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NCUA Reduced Expenses $64 Million During 2020 Pandemic

During the 2020 virtual exam and work-from-home administration, NCUA reduced its total NCUSIF and Operating expenses by over $64 million. This result certainly deserves a shout out to the NCUA board which oversaw this.

The million dollar question is whether these efficiencies and exam oversight improvements will be sustained? Or might the instinct to make up for “lost expenditures” take over?

The Numbers Total $64 million

The agency’s operating expenses, after OTR transfer, fell by $3.2 million from 2019. However, the $116.3 million total was still $40.6 million, or 54% higher, from five years earlier. At least for one year this inexorable upward trend was reversed.

The greater savings were in the NCUSIF. Administrative expenses fell by over $10 million to $181 million which is the lowest level since 2014.

The largest amount was in the net cash losses (payments less recoveries) for credit union failures. Net cash losses are a more accurate reflection of real performance as the provision expense has shown little or no correlation to actual losses for the past 13 years.

In 2019 the NCUSIF reported net cash losses of $41 million. In 2020 there was a net recovery of $10 million, the first time this has occurred in the past 13 years. This positive recovery was in a year of the worst economic downturn since the Great Recession.

These NCUSIF savings due to a $51 million loss turnaround, plus $10 million in administrative expense reduction added to the $3 million in lower operating costs, together total $64 million.

Sustaining Success by Incorporating Lessons Learned

These numbers are a tribute to credit union resilience and the ability of all segments of the cooperative system to pivot to virtual management. The critical test is whether these virtual gains can be incorporated as ongoing activities so they are maintained when the COVID adjustments are over. Doing so would mean lessons learned that can bring benefits for years to come, even from a crisis. $64 million is a solid achievement not to be lost.

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Three Credit Union Airplane Stories

PenFed’s 2020 Annual Report is a wealth of detail especially in the auditor’s report. Page 53 footnote 9 lists the $542 million net, of property and equipment purchases owned by the credit union.

Two items stand out. Of the over $400 million spent for computer equipment and software, 80% is for software. This affirms the maxim that managing a credit union’s in-house technology solutions entails a never-ending cycle of reinvestment.

But it was a new item listed in 2020 that caught my eye. A total of $10.5 millions for “aircraft equipment” which I assume means an airplane. That amount could buy a lot of plane. Similar to other technology investments, ownership is just part of the cost. There is maintenance, pilot’s salaries and operating costs.

Not sure why a credit union should have its own plane. Perhaps it could be used to survey the credit union’s national field of membership acquired in its merger with Progressive Credit Union.

This purchase reminded me of two prior credit union airplane stories.

Ed Speed, CEO, Texas DOW Employees’ Story

“On Friday afternoon (9/2/2005) Texas DOW Employees CU in Lake Jackson, Texas, received an urgent cell phone call from Jeff Hendrickson, the CEO of DOW Louisiana FCU in Baton Rouge, Louisiana.

“The hundreds of thousands of refugees from the New Orleans and coastal areas who were arriving in the Baton Rouge area had immediately started overloading the entire financial services capacity of Baton Rouge. One area of critical need was cash-regular cash money.

“Although much of Baton Rouge was operational, the entire telephone grid was either damaged or overloaded with attempted calls. As a result, POS terminals, credit card terminals, and ATMs-the great majority of which use dial-up connections-were rendered useless. Because of this, merchants, restaurants, motels, grocery stores, pharmacies began requiring cold hard cash.

“This even became a problem for people who had money in accounts, and many more, including refugees who were being issued paper checks.

“DOW Louisiana FCU was becoming desperately short on cash. They wanted to stay open throughout the Labor Day weekend, but repeated calls for cash deliveries never arrived and none were expected until this coming Wednesday. Local banks started shutting down early Friday as they ran out of cash.

“Jeff Hendrickson, DOW Louisiana FCU’s chief executive, was determined to stay in service. Jeff called us at 1:56 p.m. on Friday asking us to sell them desperately needed cash. Jeff said that without more cash, people coming to his credit union would not be able to get food, shelter, clothing, and medicine. Jeff said he would do whatever it took-even drive to Lake Jackson if we could find cash for him. He said that $500,000 to $600,000 would hold them until cash shipments arrived on Tuesday.

“I marshaled our senior staff and within 15 minutes had a full count of cash on hand from all branches. Lance Wortham, our commercial vice presidents, called his contact at 1st National Bank and got a commitment of $200,000 if we needed more.

“Less than 25 minutes after Jeff had called we were able to call him back with a commitment to deliver $600,000 in cash immediately. My thanks to Steph, Vickey and Kay for their help.

“Within 90 minutes the needed cash ($600,000) had been brought in, counted and bagged. (It was now 3:30 p.m. Friday).

“The problem was going to be the delivery.

“First, we could tell from their voices that they were bone tired and in no shape to drive anywhere. Our driving the cash to Baton Rouge was going to be problematic because Janice Arizmendi, our chief of staff, had contacted the Texas DPS and had been told that individual relief efforts were being turned away at the state border. Without special permission we would be turned back and never get the cash to the credit union.

“That left one viable solution: fly the cash to them.

“I made the decision that I would fly my plane to Baton Rouge that afternoon. Lance Wortham would go with me.

“By 4:00 p.m., less than 2 hours after the initial call, we had the plane loaded. We had to wait about an hour for some local weather to clear. We were able to go “wheels up” right at 5:00 p.m.

“The flight to Baton Rouge took about two hours. When the FAA Houston Control Center handed us off to Baton Rough Approach Control we immediately heard the frenzied air traffic control communications.

“We came to find out that the Baton Rouge airport had become the staging area for all aviation rescue and relief efforts. This was the major staging and refueling point for all of the helicopters you have seen on TV and all of the large supply aircraft. In addition, the airport was the staging area for relief supplies coming in and for flying out refugees who were arriving on buses. We actually saw refugees being off-loaded from buses onto aircraft.

“As we approached the Baton Rouge airport our air traffic controllers told us to expect ‘extended vectors for sequencing.’ I knew we were in for some delays getting in. The controllers eventually brought us in, but only after about 45 minutes of practicing 360 degree holding turns. (Lance was very impressed!!)

“Until the day I die I will never forget the words of the Baton Rouge tower controller: ‘November-Eight-Four-Three-Five Foxtrot (N8435F), you are cleared to land Runway Four-Right (4R), straight in approach… and Three Five Foxtrot, I need you to go as fast as you can!'”

“My response was: ‘Roger, three-five-foxtrot is cleared to land, straight in approach, runway three-five-right, full power, full speed!'”

“We touched done about 8:00 p.m.; six hours after the initial call.

“We were met by the CEO Jeff Hendrickson, his chief operating officer, Todd Zirkle, and armed security from the local sheriff’s department who came out to the plane to meet us.

“We ‘convoyed’ the $600,000 to the DOW Louisiana FCU main branch where the vault staff was waiting to take the cash. In one of the attached pictures one can see that the clock in the vault reads about 8:30 p.m. Six and a half hours start to finish.

“We exchanged the cash for a check, had a quick meal and were escorted back to the airport.

“Lance and I touched down back in Lake Jackson about 1:45 a.m., tired but exhilarated. [We treated ourselves to some comfort food at IHOP!]

“If there is a hero here it has to be Jeff Hendrickson, chief executive of DOW Louisiana FCU. He was determined that his credit union would not, under any circumstances, fail people in need. And, in a way that really humbled me. Jeff said: ‘I knew if I called upon another credit union, if I relied on our Movement, I knew someone would come through for us. I just knew it. This is who we are. This is what we do.'”

“When faced with that type of leadership, determination and faith, I knew we here at TDECU had to deliver for him. Our TDECU team came through and my airplane performed well.

“It all came together.”

Read more: The Great Credit Union Cash Airlift | Credit Unions https://www.creditunions.com/articles/the-great-credit-union-cash-airlift/#ixzz72aHcpDsI

A Charismatic CUNA President and His Airplane

Herb Wegner was CUNA President/CEO 1971-1979. He was responsible for helping credit unions develop many services currently taken for granted today, as well as traditional trade association activities. Among the national programs that started during Wegner’s tenure were:

  • Mortgage loans (CUNA Mortgage Corp)
  • Share drafts (Chase payable thru program)
  • Credit Cards (CSG Card Services)
  • Corporate CUs (US Central)
  • Share Certificates
  • IRAs (CSG IRA Administration)
  • ATMs & Shared Branching
  • Gov Securities Program (ICU GSP)
  • Joint Advertising (CUNA National Advertising Program)

Wegner was elected Vice Chair of the Commission on Electronic Funds Transfer (EFT) in 1975, raising the visibility of credit unions as important players in modern technology programs for the first time in history.

Here is what Paul Thompson said about Herb in his book, Development of the Modern U.S. Credit Union Movement: 1970-2010:

“Shortly after, CUNA gained new leadership by naming Herbert G. Wegner managing director in 1971. Herb Wegner had spent seven years as head of CUNA International’s Latin America division. A former Navy pilot, he was a flamboyant, charismatic leader devoted to modern management techniques such as “management by objectives.”

Wegner reorganized CUNA, and under his guidance it added services to assist credit unions through an increasingly turbulent time. It was an interesting period to be in credit union work, not only because of the fast-changing financial landscape but because credit unionists still saw themselves as a world-changing force.

As Wegner put it: “The exciting thing is not financial, it’s social – the phenomenon of a people’s organization. This is a delightful place to be in an increasingly monolithic world.” 

On the way home from attending Herb’s funeral in Washington D.C. in 1987, Chuck Siebold, Tony Schumacher and Brad Murphy brainstormed how to keep Herb’s memory and accomplishments alive. They suggested an award be granted annually in his name by the fledgling CUNA Foundation. The foundation agreed. The Herb Wegner awards became the centerpiece of the Foundation’s formal gala at each year’s CUNA GAC.

How Herb Lost His Job

A former league President describers Herb Wegner as special. “What he did for us is amazing. An example is when we all feared the emerging cashless checkless society, the US Congress put together a commission to study electronic payments. We were all afraid that credit unions would be frozen out by bank influence. George Mitchell, Vice Chairman of the Federal Reserve Board, was appointed to head the Commission. Herb listened to our fears, flew to Washington DC to meet with George Mitchell, and emerged as Vice Chairman of the commission!”

He describes the CUNA Board meeting in which Wegner lost his job:

“Herb did bring a style that some questioned. Jeans and open collared shirt a lot on the job. He wanted a fireplace in his office when they were building the complex that is now CUNA and Cuna Mutual headquarters in Madison. (The board said NO.) He hired a few Peace Corps individuals who some thought should be people with credit union backgrounds. So there was a small cadre who did not understand what all he brought to the table.

Herb had an airplane. He had a deal with CUNA that he would be reimbursed the equivalent of 1st class airfare if he flew his plane. He would also be reimbursed regular class airfare for others that would fly with him if CUNA was paying their expenses.

Fred Krause was Treasurer of CUNA. He surprised all (or at least most) of us at a board meeting when he gave his Treasurer’s Report and concluded by saying he was tired of fighting Herb about airplane expenses. He then made a motion to fire Herb. John Adams seconded it. Everyone was stunned, but no one fought back. The vote passed. Herb was in disbelief!

Herb was a fabulous leader, well liked, and immensely respected. Most of us thought the CUNA board was short sighted and made a big mistake.”

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Before NCUA’s “Regulatory Backlash”

In my Credit Union Museum video, I described NCUA’s approach to credit unions since 2009 as an era of “regulatory backlash.”  The term summarizes the unilateral imposition of rules, premiums and new examination tests after the Great Recession crisis. The agency repeatedly asserted it was an “independent” ruler and  treated credit unions as their subjects.

One example is the creation of the 424-page risk based capital rule which is so burdensome that it has been postponed for almost 8 years.  Meanwhile the FDIC has dropped this as a required calculation.

One reader disagreed.  He said the backlash began in 1998 with the imposition of PCA on credit union net worth assessments as part of the Credit Union Membership Access Act.  (CUMAA)

However NCUA’s record suggest this is not the case.   When the Supreme Court ruled 5 to 4 in 1998 that the field of membership of a federal credit union could only be a single group, a substantial portion of new members added by FCU’s would have been thrown out if CUMAA not been passed.  It was Treasury, not NCUA, that imposed the PCA, in return for their not opposing this legislative change.

NCUA’s Support for the Credit Union System

The following are brief highlights from NCUA’s 2000 and 2001 Annual Reports demonstrating multiple ways the agency continued to support the credit union system beyond its traditional examination and supervision roles after PCA.

This cooperation began in the deregulation era of the 1980’s.  This early effort culminated in the passage of Congressional legislation redesigning the NCUSIF along cooperative principles in 1984.

Chairman Ed Callahan described this Great Victory in this 1.5 minute NCUA Video Network excerpt from 1984.  His central point is how everyone contributed to achieving this unique result.

The Key Themes of a Cooperative Regulatory Approach

The Annual Report excerpts that follow demonstrate the agency’s efforts at cost control, financial transparency, joint assistance programs, and an overt willingness to support cooperative expansion.   NCUA  recognizes and supports the diverse and unique nature of all credit unions, large and small.

They acknowledge their accountability to the credit union system (stakeholders) in their communication efforts and their stewardship of credit union resources.

This was the culture developed in the three decades following deregulation. These are only a few of many mutual efforts that had characterized this most critical cooperative system relationship in this period.

That mutual respect  is what was lost during the Great Recession and is missing in NCUA’s approach to its role today.

From the 2000 Annual Report

Student Internship Program

The OCDCU 2000 College Student Summer Internship Program was the most successful to date. The program creates partnerships between low-income designated and other credit unions (large or small) and college juniors and seniors to train and develop a pool of potential future credit union managers. The students selected are business, finance or marketing majors.

With technical assistance grant stipends, the 2000 summer intern program matched 29 college student interns with 58 different credit unions. Stipends provided the interns totaled $72,500 in 2000 compared with $67,500 in 1999 for 27 students.  Pg 16

National Small Credit Union Program

The NCUA Board adopted the National Small Credit Union Program (NSCUP) in March 1999. The NSCUP exists to:

  • Promote credit union service to people of modest means;
  • Increase access to credit unions for individuals in underserved communities by fostering a regulatory environment where small, newly-chartered and low-income designated credit unions can provide appropriate and needed services to members;
  • Promote successful, financially healthy small credit unions through appropriate technical and financial assistance; and,
  • Facilitate a regulatory environment that empowers small credit unions.

Nearly 500 credit unions voluntarily participate in the program. The NCUA has committed 74 field staff — 13 economic development specialists (EDS) and 61 small credit union program specialists (SCUPS) — located throughout the nation to carrying out the NSCUP objectives.

These specialists focus on increasing access to credit unions and credit union management development through training and mentor relationships. Recognizing the uniqueness of small credit unions and the necessity to maintain an informed staff, OCDCU conducted two EDS/SCUP training workshops during 2000. The workshops focused on increasing access to credit unions, business development, information technologies and alternative capital sources.

Reducing the Operating Fund’s Balance

The 2000 budget projected a $7.4 million net loss to the Operating Fund as the agency continues efforts to reduce the fund balance. However, because of budget savings from vacant staff positions, the net loss for 2000 was approximately $4.1 million. As a result, the Fund balance at year-end 2000 was $2.2 million.  Pg  31 (note: it was $136.3 million at December 2020)

From the 2001 Annual Report

The Board itself demonstrated its commitment to more responsive accountability for agency operations and finances by conducting NCUA’s first ever Public Forum and Budget Briefing, which resulted in stakeholders having a better understanding of the agency’s budget and operations.

Likewise, the NCUA initiated an internal Accountability in Management self-study, which presented opportunities to streamline operations, reallocate resources and improve the overall efficiency of the agency. These important initiatives are being implemented and will remain a high agency priority in 2002.  Pg 5

As part of NCUA’s strategic planning and as requested by Chairman Dennis Dollar, via his Accountability in Management (AIM) initiative, all areas of agency operation are being reviewed to determine efficiency and effectiveness. NCUA’s 2002 budget incorporated many recommendations attributed to that purpose and one result was the consolidation of several central offices.

Consolidation coupled with regional staff reductions, due in large part to the new flexible examination schedule, results in a projected 3.4 percent reduction in staff by the end of 2002 and positions the agency to achieve at least a 4 percent staff reduction by the end of 2003.

Just as the credit unions NCUA regulates and insures continually plan for the future, we will continue to review both the central and regional office structure with an eye toward boosting efficiency and saving cost. We expect many cost saving changes in 2002 — risk-focused examinations, flexible examination scheduling for qualifying credit unions and accountability in management initiatives — will result in an improved examination program and continued good stewardship of agency resources. Pg 8.

In the Future

During my first year as executive director, we made a commitment to establish open, frequent lines of communication with NCUA’s stakeholders. Chairman Dennis Dollar’s groundbreaking idea to conduct NCUA’s first open budget briefing and public forum provided an excellent opportunity for timely, direct input from our key stakeholders. Due to the success of this approach, you can be assured that NCUA will remain committed to providing open forums for gleaning input, which allows for an optimal decision-making environment

NCUA News was produced by PACA and sent to more than 10,000 credit unions and related organizations. NCUA News is often the voice of NCUA for credit union officers and volunteers, those who need to know what is happening in and around the agency. Responding to media inquiries, issuing press releases, advancing media contacts, writing the NCUA News and Inside NCUA, an internal newsletter for NCUA staff, monitoring and updating the NCUA web site and producing the annual report comprise the core public affairs responsibilities of PACA.  Pg 11

Small Credit Union Program

The Small Credit Union Program (SCUP), which is monitored by OCUD, is operated by the regions to promote successful, financially healthy small credit unions (those under $5 million in assets; in operation less than 10 years with under $10 million in assets; or low-income designated credit unions). This is accomplished through appropriate use of technical and financial assistance (e.g., on-site contacts and workshops).

The NCUA Board has committed 78 specialists —17 economic development specialists and 61 small credit union program specialists—to this program. There are 4,381 credit unions that fall within the SCUP criteria that are eligible to participate in the program. At December 31, 2001, there were 721 credit unions participating in the program. During 2001, the regional specialists performed 705 on-site visits providing one on one, on-the-job training.

Another aspect of SCUP is group training, where germane topics are addressed with program credit union officials and staff members. Outreach was in high gear during 2001, with the regions completing 43 workshops. More than 2,100 credit union officials attended these workshops.  Pg 16

 

 

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An Era of “Regulatory Backlash”

America’s credit union museum has begun an oral history series of recordings about critical events in the 110 years of the movement.

Episode 16, my contribution, is in two parts.   Part 1 tells the story of deregulation.   I described this approach as a pragmatic response to the disruptive economic and political forces changing many areas of American enterprise in the late 1970’s:

“Deregulation was not a political ideology, strategic blueprint or onetime response to a changing economy.

In credit unions it was nothing less than building a better system of “cooperative credit in the United States.” It turned upside down the practice of government making everyday business decisions for credit unions.

Rather that responsibility was now in the hands of those closest to the members-management and boards.”

Callahan’s Calling Card

In part 2, I recall the reasons Ed Callahan gave when asked why he was leaving the NCUA Chair with over two years remaining on his term. One was to help credit unions take advantage of the opportunities provided by deregulation.

In founding Callahans, the firm’s first effort was to establish a database of all US credit unions.  In 1986 this became the source for the first and only annual Credit Union Directory. Volume 36 was released this past quarter.

This data resource became the multifaceted Peer-to-Peer database and software that is the go-to, most advanced analytical tool for understanding the industry today.

The Ending of an ERA

Part 2 discusses the ending of this fourth chapter of credit union history–deregulation–in 2009 as the Great Recession financial crisis occurs.  Each of these four ERA’s is approximately a generation long.

While the following 25 years have yet to be fully lived, I suggest the initial decade’s dominate activity could be described as a time of “regulatory backlash.”  The mutual regulatory-industry approach to change and response to disruptions was ended.  NCUA emphasized its “independence” from the credit unions and undertook a series of unilateral regulatory initiatives to re-regulate and impose greater restrictions on multiple areas of activity.

When an NCUA Chair today testifies before Congress that his oversight North Star is FIRE, the cooperative system has been put on notice.  The Chair is just one board vote shy from throwing credit  unions into the pit of regulatory damnation.

The presentation is 22 minutes.   I refer to both recent history and current topics such as mergers, the idolization of size, and the ever-present temptation to become “bank-lite.”

Whatever name sticks when the current 25-year chapter is closed, I trust reviewing these initial years of NCUA activity in the light of prior ERA’s experiences will be educational.

 

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Are App Platforms the Future of Financial Services?

COVID  accelerated the online movement  for all aspects of social and economic life.  In credit unions, some assert the transition away from the branch-based model of financial services to an all virtual one is now inevitable.

One example of this total virtual embrace is the former United Airlines, now Alliant CU with $14 billion in assets. It has no branches and is the ninth largest credit union in the country.  In contrast the $8 billion Wings Financial whose initial sponsors were also airlines, still has 30 branch operations in airports as well as in the communities surrounding its home office of Minneapolis-St Paul.

The Startups

Multiple startup financial providers, relying solely on virtual platform services, are attracting venture capital and IPO attention.   As described by Ron Lieber of the New York Times, What’s in a First Name for the New Money Apps:

The start-ups’ interfaces are indeed generally slicker and simpler, very much a welcome change.

And if you resent all of the overdraft and other fees the big brother banks so often charge — and you do, there’s little doubt — Dave and friends look even better. They tack away from old-fashioned bankery, with a suite of offerings like advance access to your paycheck, overdraft fee avoidance and assistance building credit.

Their brand’s “personalization” is communicated with  first names like Dave, Marcus, Albert or Bella.  Or sometimes with a disruptive promise like Aspiration and Revolut.   One online offering called Simple was just that, and has already closed.

The Enduring Advantage

While distribution options and transaction volumes migrate to virtual self-service, that does not mean branches will go away.  They may decline in traditional teller transactions but become more vital for other service interactions

Credit unions are organized around a “community” of people versus organizations built with venture capital.  Their cooperative advantage is relationships which are also the core of their organization’s purpose.

The value of human touch is often lost in AI automated interfaces, text messages, self- service applications and video demonstrations.   “People seeking financial service” as one consultant expressed, “do not visit branches, they visit bankers.”

Moments of Impact

Times’ writer Ron Lieber ends his review of virtual financial apps with the following story:

Davy Stevenson, the vice president of engineering at Hasura, which helps software developers more easily build applications using data, was an early neobank adopter herself. She experimented with the first versions of Simple, which no longer exists.

Today, she banks with her humble credit union. Though she pines a bit for the technical wizardry that her software developer brain knows the institution could deploy, she’s also happy with the way the people there treat her.

One CEO in his monthly staff updates includes examples of this member service advantage.  Here is a member comment from the July newsletter:

Dear (CEO’s name:)  (employees and cu name omitted)

Customers probably contact you when you when something goes wrong. Not this time. I wanted to let you know when your customers are given the best customer service, which is just what I received from the CU recently.

Two ladies I dealt with recently are the epitome of the great people on your staff. The first was J., and I apologize that I didn’t get her full name. J. was extremely knowledgeable in helping us transfer money to a friend living in England. She insisted on staying on the phone as I processed the transfer. She was so polite, helpful, and extremely efficient and I wanted you to know that!

Then, around the same time we were also processing a loan for an RV we were buying. M. B.  processed our loan so professionally and politely that I felt you needed to hear about her also. She instantly took care of everything and two old people are now ready to hit the road! Another great CU employee!

The Humble Credit Union

As long as members remain the mission, the future is secure.  Even when that future is increasingly enabled with Internet Retailing.