May 2024 – Just a Member

From the May 24th CUToday story: In a rare development, members of Hoosier Hills Credit Union have rejected a merger with Centra Credit Union. The two credit unions had announced in January their plan to combine to create a CU with more than $3 billion in assets.

The credit unions said in a joint statement that “despite extensive communication from Hoosier Hills outlining the factual details of the merger, the vote was impacted by the circulation of misinformation.”

The credit unions did not say what that misinformation consisted of. The vote tally was not released.

Why did members reject this merger? Here is a post on LinkIn by Hoosier Hills CEO Travis Markley, based on a Forbes article dated June 20, 2023 about the credit union. The merger was announced six months later.

“Amazed and humbled to be a part of this organization and everything we do for our members, and so proud of the dedicated staff that make it possible!

“Hoosier Hills Credit Union is honored to be recognized by Forbes as one of the three Best-In-State Credit Unions in Indiana for 2023, joined by our friends at Interra Credit Union and FORUM Credit Union.

“This award, the result of an independent survey conducted by Statista, was based eighty percent on feedback from 31,000 US consumers, who rated their credit unions on criteria such as trust, branch and digital services, customer service, fee transparency, and financial advice. Twenty percent of the scoring was attributed to publicly available Google Reviews from the past three years.

“We are honored to serve our members, and appreciate this special recognition, which we could not have achieved without the dedication and character of our team at all levels,” states Travis Markley, CEO at Hoosier Hills. “Our knowledgeable and caring staff is committed to carrying out our company’s mission and continues to put the needs of our members and communities at the center of every decision we make and every action we take.”

This Merger Process Seems Suspect

Very soon after this positive external recognition, the merger process started. The CEO would become the Chief Experience Officer of the new combined entity.

What is even more curious is that the merger proposal posted on NCUA’s website for comment says that Centra is merging “with and into” Hoosier Hills Credit Union, not the other way round as implied in the CUToday article. The Centra Chairperson, Jim Bickel signed the merger plan sent to members (whose?) on November 1, 2023 or five months after the Forbes “best” ranking for Hoosier Hills.

In this Centra notice to members there is an effective date of the merger of July 1, 2024. However, the credit union being merged is North Park, not Hoosier Hills.

This entire episode needs a good hard look by state and federal regulators as the documentation and explanations appear questionable. There is reference to a detailed merger plan by Centra, but it is not included in the required posting even though the letter states it is enclosed with the Notice to Members.

This example reminds me of a recent post by credit union consultant and former OCC examiner Ancin Cooley.

Mergers are Feeling “Icky”

By Ancin Cooley

Is anyone else beginning to feel a little “icky” about the current merger frenzy in the credit union industry? Something about these transactions just doesn’t sit well in my spirit. . . what do credit union members get for their capital and assets when they merge?

Here’s an excerpt from a recent merger disclosure:

“Members will have access to more branches, a 24/7 call center, industry-leading online and mobile banking services, and will still receive the personal service they enjoy from the same employees they rely on every day.”

This feels “icky” to me. The credit union I mention below is giving the acquiring credit union 7 million dollars in exchange for no board seats.

Would you give me your house in exchange for my cutting your grass?

The Game

And let me be clear: I do not think the individuals involved are bad people. The game is the game. If the cooperative movement is ever going to survive, it needs to be “guarded” by individuals who believe in its purpose. If your credit union or any cooperative has “unguarded” capital, someone will come and take it.

A Case Study

I’m reviewing the financials of a credit union set to merge as of May 1, 2024. The CEO, who has been there for over 20 years, inherited a credit union with over 16% in capital. By 2015, they ventured into indirect lending, and by 2019, it represented 60% of their total loan volume.

This credit union’s financial health started heavily declining two years ago. I’d be willing to bet that is right around when this CEO started looking for a merger partner. Indirect charge-offs were well over $600,000 last quarter. . . ending with a 7% capital ratio. This credit union was not lost due to technology, costs, or economies of scale. This was bad management and weak governance.

So, this person drives the credit union into the ground, receives a hefty retirement payout from the acquiring credit union, and retires happily. Ick… If you couldn’t earn a performance bonus payout while functioning as the CEO, getting one on the backend of a merger you brought to your Board doesn’t sit well with me.

Where are all the other voices? Where are all the credit union governance experts? Even if you disagree, please point out any errors in my logic or perspective. Don’t discuss this in small circles over dinner. Stop treating credit union capital like you invested in the organization with money out of your pocket.

What Are the Principles?

The evolving landscape of credit union mergers should invite deep personal introspection and discussion on the future of cooperative movements. Are these mergers truly beneficial for all stakeholders involved? Do they warrant a closer examination of the principles guiding such transactions?

Lastly, humans in general, often value relationships with people in close proximity to them vs. folks they don’t know. This manifests itself when directors, close to management, struggle to hold their executive teams accountable.

In the example of this post, if I named that CEO, I’d face more backlash than him or her for running the credit union into the ground.

Why is all this happening?

1) Because we value personal relationships over the member-owners of the cooperative movement. Some very smart and shrewd folks realized this years ago. Once the “old school” credit union folks passed away, it became a market free-for-all.

2) Where else are you gonna get 7 million dollars on a promise for better services? There’s too much money involved and not enough incentive to stop.

The only thing that could turn the tide is if some well-respected CEOs (and consultants) in the industry begin speaking up more. We may well continue to lose at least 15 credit unions per quarter for the next year or so. On my end, I’ll focus my energy on helping credit unions that want to grow, turn a profit, and keep their charters. END

Another Interpretation of Credit Unions’ Personal Deal-making

The motivation for these so-called mergers of sound credit unions may have been best summarized by the well-known American entrepreneur, Al Capone who said: “This American system of ours, call it Americanism, call it capitalism, call it what you will (cooperative mergers), gives each and every one of us a great opportunity if we only seize it with both hands and make the most of it.”

May 28, 2024May 28, 2024

An Homage: Report on Credit Unions

An independent press is essential for democratic governance, whatever the scope or responsibility of an organization or political entity.

Report on Credit Unions was in its twenty-fifth year in 1982. The editors and contributors to the monthly printed publication were a who’s who within credit unions.

The publication’s founder was Rudolph Modley who “was born in Austria and earned a Doctor of Law degree at the University of Vienna. He came to this country in 1930 and in 1937 published the first of several hooks, “How to Use Pictorial Statistics.” In 1940 he was the co‐author of a study of the American system, with Thomas R. Carskadon, entitled “U.S.A.: Measure of a Nation.”

As described in his New York Times obituary: “Mr. Modley was also interested in the credit‐union movement and in 1957 founded the monthly publication “Report on Credit Unions.”

The staff and contributors listed on the January 1982 masthead (vol. XXI no. 1) were Larry Blanchard, editor; Frank Wielga and Jo Ann Ewalt, assistant editors. The contributors J. Deane Gannon (former Administrator, Bureau of Credit Unions), Mandy Hellie, League President, Kenneth Marin (former CUNA Chair) and Harold Black, one of the first three members of the NCUA board. All had senior positions in the movement.

The News In January 1982

The lead story was the departure of Larry Connell from the NCUA board to become president and ceo of Washington Mutual Savings Bank, a $2.3 billion thrift based in Seattle. The story quotes Connell’s farewell comments, “I’ll be back” and Ed Callahan who said, “Larry had done great things with this agency during his tenure. . . he will be sorely missed.”

The six-page newsletter announced the appointment of former NCUA Board member Harold Black as an associate editor. In his first “commentary” he wrote why he opposed Senator Garn’s bill (S. 1721) which would have combined the FDIC, FSLIC and NCUSIF into a single fund. Many of his points are still relevant today as the current NCUA chair seeks to convert the NCUSIF to be more FDIC-like.

This first edition of 1982 included articles on the upcoming speakers for the CUNA and NAFCU governmental affairs conferences, updates on insurance for IRA accounts, NCUA’s “dramatic deregulation concept,” CUNA’s capitalization study, the accounting practice of ICU’s two common trust investments, how credit union owned data processor USERS “outranked the competition,” and a full page of individual credit union updates, From the Grass Roots.

The Report’s Purpose

As stated in the Harold Black appointment, “the Report has adhered to a strict policy of independent coverage, focusing on operational, legal, economic and general news for credit union volunteers and professionals. Its editors, assistant and associate editors are all drawn from the credit union community.”

The editorial standard in the Report helped to spawn an era of industry focused newsletters included CUIS (Credit Union Information Service) weekly mailed updates from the trade associations and leagues and the occasional private newsletter.

The quality of writing influenced these other publications including the monthly Credit Union Magazine and later iterations such as Callahan’s Credit Union Report.

The Report stands out for its comprehensiveness, longevity and singular focus on the industry. NCUA upgraded its own publications creating NCUA News as a monthly.

The NCUA Chair and senior staff would hold public press conferences after each board meeting to talk with reporters. Topics were open ended. For example in July 1982: how would the Agency respond to the closing of Penn Square Bank and the losses credit unions might have on CD’s over the $100,000 insurance coverage?

The Impact of Quality

The Report set the standard for relevant, in depth factual analysis and commentary for the credit union community. Its writers knew their subject matter. They had access to senior leadership when reporting on sensitive topics such as the accounting for ICU funds.

The Report is an excellent, high level chronology of key events and personalities on the credit union stage in each edition. Its success was due to the quality of its staff. It is a tribute to Larry Blanchard who maintained this approach during his tenure.

Ultimately more colorful, more timely (weekly) and ad-supported entrants, Credit Union Times and Credit Union News, pushed the monthly subscription model off center stage.

But this example of dedicated focused journalism and independent reporting is still the standard even in today’s digital era. The Report raised all credit union coverage to a higher level of excellence while becoming the “go to” source for capturing the first draft of the movement’s history.

May 24, 2024May 24, 2024

Memorial Day 2024: Answering the Call of Duty

Two events of this past week reminded me of why America celebrates Memorial Day. They are examples of persons responding to their sense of duty.

Campus Protests-A Long Tradition of Commitment

The multiple current campus occupations and graduation disruptions over the war in Gaza are not a new form of student activism. Here is a description of an earlier one.

In April 1969, Harvard University students protested the Vietnam War and other social and political issues with a two-week strike that included the occupation of University Hall. The strike began on April 9, 1969, when about 70 students entered the building, evicted administrators, and searched through files. The next day, at the request of President Nathan M. Pusey, police and state troopers forcibly evicted the students, arresting over 100 protesters for trespassing.

I was present that April working at Harvard in the financial aid office. As my colleague (a WWII veteran) and I walked through the Yard during the initial occupation, we wondered how it would end.

Ten days later I drove to Newport R.I. to begin four plus years of active duty in the US Navy. (below at Pier side, spring 1970, Yokosuka, Japan on the USS Windham Cty, LST 1170)

Do you Know a Man Named Karl Marlantes?

That was the question my grandson, Emmett, texted from college. I did not recognize the name. He thought our paths might have crossed at some point.

His Wikipedia entry: Karl Arthur Marlantes (born December 24, 1944) is an American author and Vietnam War veteran. He has written four books: Matterhorn: A Novel of the Vietnam War (2010), What It Is Like to Go to War (2011), Deep River (2019), and Cold Victory (2024).

This six minute Youtube video is a brief summary of his life as a Yale student, Rhodes Scholar and Marine Platoon leader, and his call of duty. You would never suspect from his easy manner that he was awarded a Bronze Star, two Navy Commendation Medals for valor, two Purple Hearts, and 10 Air Medals.

The military draft caused generations of men to confront early in life, often as students, what duty means. Campus protests and military service are two classic examples of how individuals answered what many knew instinctively-the call of duty.

A Moment to Decide One’s Duty

At some point in life we feel morally inclined or face circumstances where we have to pick a side.

We try to discern what we believe the right, the just and the good thing to do. Informing this decision is the example of others-family, colleagues, and community leaders-from the numerous organizations that have shaped our lives to that moment.

What is our duty to others? All of us face this human summons at some point. Today a very small percentage of citizens will join the military. I believe Memorial Day should remind all Americans of the commitments we are asked to make in a democracy. Not just those who enter the military but those who fight for peace and justice in society.

Every person will be faced, at some moment in some arena, to answer their call “to pick a side.” Memorial Day is a time to respect and honor all commitments, civilian, military and civic centered intended to help this country create a better life for all.

May 23, 2024May 23, 2024

NCUA May Board Meeting: Vice Chair Hauptman Finds His Voice. Harper Cancels June Meeting

(Note correction to spelling of board member Tanya Otsuka’s name from the initial post)

With Chairman Harper on extended medical leave, May’s board meeting was expected to be a routine quarterly review of the financial status of the NCUSIF.

Instead, Vice Chair Hauptman opened with a ten minute critique of NCUA’s new collection of NSF and OD fees from credit unions in future call reports.

Hauptman’s remarks can be heard early in the Board video. He is articulate and energized. The proposal was not discussed at any board meeting. He had not heard about the effort till January. All his suggestions for how to use the information were rejected.

Most importantly he believed the policy implications were intended to push fees downward. This regulatory action would be contrary to the federal credit union act to serve the underserved.

In his view, when a person is short on cash, there are no good options. In many instances, having the payment go through and charged a fee may be best of limited choices. He gave several personal examples of being in this situation.

In addition to adding to regulatory burdens, he believed the effort was prompted by two groups not looking out for credit unions’ best interests:

The press looking for clickbait headlines;
Political groups with an agenda.

Board member Otsuka’s response urged that the collection effort’s impact not be prejudged. Members have a right to know this information. This is about safety and soundness and consumer protection.

The Meeting’s Outcome

This is the first time Vice Chair Hauptman has been so outspoken in response to Chairman Harper’s priorities. He has loyally supported new rules, spending initiatives, and staff reports that could have been critiqued on both policy and substantive grounds.

While it is not clear why he chose this topic at this time, the response from Chair Harper absent on medical leave was immediate. He announced the cancellation of the June board meeting. This is after cancellation of the March meeting and a very “light” April agenda which the Chair attended virtually.

The power of board members comes from their participation at public board meetings and from the political process provided by the three person board oversight. This legislative change from a single administrator in 1977 was to ensure no single person had total control over the agency.

Now while physically on leave, Harper is trying to retain his political control by canceling normal board functioning. With a two-person board, both members have to agree on the board’s agenda and concur for any motion to pass. The check and balance still exists.

However Harper’s cancellation of public board meetings stakes away the most important power and venue board members have. He is undermining the Board’s oversight responsibilities and other agency priorities.

Leadership Uncertainties

Harper’s efforts to hold onto his authority while absent raises critical questions for credit unions and NCUA. For credit unions, the reputation and political standing of the Agency is at risk. Who speaks for NCUA? Who is leading the staff? Who sets priorities? With no public meetings, how are the multiple constituencies to which the agency is accountable, supposed to know what is going on?

For NCUA staff, do they respond to queries raised by board members concerning internal and external events-policy and otherwise or just ignore? Does the newly created Office of Business Ethics or the IG have a role in this exercise of absentee leadership? The cancellation of board meetings? The lack of the Chair’s public presence and accountability?

Hauptman may have thought he was just providing an alternate perspective on an Agency data collection effort. But his critique, and Harper’s response, raises a whole new set of consequential issues about the board members’ role in a time of Chair vacancy.

In recent years within NCUA and the broader federal government. when there have defaults of leadership (vacancies and personal management failures) it has been individuals dedicated to their Agency’s mission and the proper exercise of authority that have stepped into the vacuums. Did Hauptman just start this process for NCUA?

May 22, 2024May 22, 2024

Alternatives to the Credit Union System

The traditional view of market competition is that it is a zero-sum game. There are winners and losers. Acquirers and the acquired. A credit union gains member deposits, or they go somewhere else.

But endgames do not always happen with clear winners and losers going out of business. Sometimes the losers just limp off the field in irrelevance.

Substitutes slowly absorb earlier organizational efforts with new ones. In credit unions this evolution is already occurring. Two updates from these alternatives were recently announced.

The Federal Home Loan Bank System

This week, the members of the Board of Directors and Executive teams from the Federal Home Loan Banks and the Office of Finance are in Washington DC for their annual conference.

For some time, they have been the primary source of liquidity for the credit union system. Their self-description:

The FHLBanks are 11 regionally based, wholesale suppliers of lendable funds to financial institutions of all sizes and many types, including community banks, credit unions, commercial and savings banks, insurance companies, and community development financial institutions. The FHLBanks are cooperatively owned by member financial institutions in all 50 states and U.S. territories.

The Banks’ regulator the FHFA issued a report last year on their mission and is following up with a request for comments. The primary issue is how well the Banks are fulfilling their mission of increasing affordable housing options in America.

At the conference, the Council announced the Banks anticipate “a record-breaking $1 billion in support for affordable housing and community development initiatives in 2024. This significant commitment reflects our unwavering dedication to our mission and promoting access to safe, affordable housing.”

The chart below shows the membership of the banks by state at December 31, 2023. The system serves roughly 6,500 members nationwide with a regional, custom approach from FHLBanks in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, and Topeka.

Since the 2008/2009 financial crisis, the FHLB cooperatives have effectively replaced the lending functions the CLF and corporates were designed to provide the credit union system. Corporates still serve critical payment and short-term liquidity roles. However, the FHLBs have taken over almost all term lending. They do this using a cooperative design.

New Public Banking Legislation

The digital web site Next City has reported on multiple efforts to create publicly owned banks following the model of the North Dakota State Bank. Here is their latest update:

At Next City, we’ve covered efforts to create city-owned banks in Philadelphia, New York, Los Angeles, San Francisco and the East Bay. We’ve also covered efforts to create state-owned banks in California, Massachusetts and New Mexico. Sometimes, as in the case of New York or California, state legislation has been proposed (and passed in California) to authorize local governments to create their own banks — but none of those efforts have yet reached the point of obtaining a bank charter, accepting deposits and making loans as envisioned.

This month in New York, there’s a new iteration: state legislation that, if passed, would create the Bank of Rochester, a bank that would be controlled by the local governments of Rochester and the encompassing Monroe County.

Technically, the bank would still need to apply successfully for a bank charter from the state’s Department of Financial Services, just like a private-sector bank, before it could accept deposits. Per the legislation, the bank would serve “the public purposes of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities.”

It would not be a bank that accepts deposits directly from members of the public. As laid out in the bill, the Bank of Rochester would be modeled largely after the century-old state-owned Bank of North Dakota. Nearly 90% of the Bank of North Dakota’s deposits come from the state government, which is required by law to use the Bank of North Dakota as its primary bank.

Similarly, the Bank of Rochester would only be authorized to take deposits from government bodies, including local or state government as well as federal offices. It would be restricted from retail banking and raising deposits from individuals and businesses.

Change is the Lifeblood of a Market Economy

These evolutions of financial service providers may seem to nibble only at the margins of the credit union system. However, the relatively recent CDFI option (September 1994) is both a wholesale and consumer response to unmet local borrowing needs for communities throughout the country. Its creation was inspired by Cliff Rosenthal, a credit union and cooperative advocate. Today some CDFI’s are established financial charters; others are stand-alone lending organizations.

The strategic implications for credit unions remains constant: to differentiate their business and service models by focusing on the members they seek to serve. When credit unions look and sound like all other options in a market, members and customers will just look for the best deal, not an owner relationship.

Credit unions have learned the art of tapping member and organizational funds to create large balance sheets. That same skill and funding attracts fintech startups and encourages multiple efforts at public banking.

Raising funds is just the beginning-how those resources are used thereafter is what matters. Is it to make a profit or to serve a community? When community needs are not being met, newcomers will find a way to create options for those underserved. That is what the FHLB and the public banking models are trying to do-serve where others have failed to do so.

May 21, 2024May 21, 2024

Deciding on a Merger Partner Shouldn’t Be Like a Blind Date

Edited excerpts from this Second Quarter 2017 column in The NCUA Report provide a perspective on current merger discussions.

Scientific brainteaser of the month: “This man-made creation is defying the normal rules of science by both expanding and contracting at the same time.” The final Jeopardy answer is: The U.S. credit union system.

In a streak now extending for decades, the number of credit unions in American continues to shrink while credit union membership and assets continue to expand. . . no other issue is as perennial as the discussion of consolidation within the credit union system. Many bemoan the erosion of the small credit union fraternity, while others cite the ever- increasing tide of financial services competition for making the erosion inevitable.

Protecting Member Interests

Whatever your perspective, climate change in the credit unions system is real. . . our focus is on ensuring member interests are protected, through the regulatory process and that the merged entlty meets safety and sourndess requirements.

The value proposition of mergers is, as it properly should be, left to the members of those institutions to weigh and then decide. . .

Really Acquisitions

But, while the term “merger” has a distinctively collaborative ring to it, make no mistake many mergers are really acquisitions. For some credit unions, their growth strategy is defined by pursing acquisitions. On the surface there is nothing inherently wrong with such an approach by either the acquirer or the acquired as long as sunlight permeates the pathway from boardroom to membership.

Transparency: a Cornerstone Principle

Throughout my tenure, transparency in governance has been a cornerstone principle my colleagues and I have committed to build upon. As we are constantly reminded, “every dollar is ultimately a credit union member dollar.” . . .it is equally valid and important to remember that the same responsibility falls upon boards to be open and forthright with their member-owners when it comes to the merger process.

While many mergers germinate from the ability of the acquired credit union, generally a smaller institution, to adequately serve its members, some voluntary mergers have involved medium to very larger credit unions with relatively strong balance sheets. In such instances, boards of director should be comprehensive in their disclosures to their members.

If an acquiring institution is tapping the net worth of an acquired credit union to pay for the acquirer’s’ cost of the merger, that reduction in net worth should be transparently, completely and fully disclosed to the members of the acquired institution before they vote on the proposed merger.

Certain disclosures of executive compensation and boards of directors’ benefits are already required under some circumstances, but the threshold for disclosure many not be adequate to provide true transparency to members.

Many board directors initiate the marriage dance long before the merger nuptials are finalized. Pay and benefit enhancements for the acquired credit union’s leadership are sometimes finalized prior to triggering the current window of disclosures. Members also may not be given adequate opportunity to digest the information before the final merger vote. . .

Merger Windows and Frosted Glass

In the final analysis, it will, and should be, the members who will rightly make the ultimate decision, not the NCUA. But, as members peer through the merger window, it is imperative their view not be obscured by frosted glass.

By Rick Metsger, NCUA Board Member

May 20, 2024May 20, 2024

Former Oracles of Alexandria Offer a New Prophecy

(Note: This is an updated post to reflect an error in my initial post where Vice Chair Hauptman’s name was mistakenly used instead of Chairman Harper’s)

On May 11, 2024 four former NCUA chairs sent a cosigned letter to the majority and minority leaders of the House Financial Services Committee.

In this unique, unprecedented and “bipartisan” communication they urged that NCUA be given new power and expanded authority to examine/supervise “third parties” who do business with credit unions.

The four signers with their dates as chair were Mike Fryzel (2008-2009), Debbie Matz (2009-2016), Rick Metzger (2016-2017) and Mark McWatters (2017-2019).

These former chairs presided over situations involving the largest projected losses ever recorded by the NCUA in its oversight of credit unions. Their joint prophecy of future catastrophe if the federal credit union act is not changed, would therefore appear to merit some consideration.

Their Records at Predictions as Chairs

The first of the two largest losses ever recorded by the credit unions was the forced liquidation of five corporates in 2010 with combined projected write offs and additional premiums of up $16.2 billion all paid by credit unions.

The second largest was the loss of approximately $750 million recorded in the sale of taxi medallion loan portfolios to a New York City “vulture fund” Marblegate Asset Management LLC in 2020.

In both cases these future loss estimates proved highly inaccurate. Instead of collective writedowns and assessments in the billions, credit unions and the NCUSIF have recorded recoveries and payouts to corporate shareholders in the billions of dollars.

In the taxi medallion resolution, the fund that purchased the medallions has seen a four-to-five-fold increase in guaranteed value to $250,000 for New York medallions. NCUA refused multiple FOIA requests about sale details, but public estimates were these medallion-secured loans were sold by NCUA for under $50,000 in this liquidation. Credit unions took the entire loss and a third party got the windfall.

Moreover, in their traditional oversight of natural person credit unions in the 2009-2010 financial crisis, the NCUSIF expensed estimated loss provisions of $1.362 billion. Actual net cash losses in the same two years were only $373 million or 27% of the amount projected.

Two observations from the tenures of these four former NCUA chairpersons when estimating future losses from their time on the job are:

The estimates they provided for both natural person losses (or projected recoveries) and corporates 2009-2020 were wildly inaccurate. In the case of the taxi medallions the cash liquidation sale provided all the upside recovery to a third party, not to the credit unions’ borrowers or the NCUSIF.
In none of the problem cases were third party vendor difficulties ever cited as a factor in these largest cases of potential or realized losses.

New Oracles about the Future

So what is the basis for these four former oracles now calling for greater NCUA regulatory powers given their track records. They refer to none of their prior events as Chair as a basis for their position. They cite no reference to any studies, factual analysis or actual examples from any regulatory experience. There is no insight from their post chairman responsibilities or even reference to recent bank failures.

Without actual evidence, their plea presents a dystopian prediction about how future bad actors could harm the credit union system.

“Many credit unions have large concentrations of members that could be of high value to our nation’s foreign adversaries. These fields of membership are tied to military installations, the state department, agencies of the United States Intelligence Community, Congressional staff and others.

“A cyber incident could create devastating consequences for these very sensitive populations.

“It is not hyperbolic to say that the safety and soundness of the credit union system is at risk due to the potential for operational failures, cybersecurity breaches and compliance violations by third party vendors.

“Credit unions in many cases unknowingly expose themselves to financial losses, reputational damage and regulatory enforcement actions because of vendors who fail to meet regulatory requirements or adequately manage risks.

It is all hyperbole however, a verbal waving of the bloody flag to create fear and uncertainty absent any factual evidence. And in the ultimate logical flip flop to support this open-ended expansion of authority, they claim it will actually be a form of regulatory relief:

“Additionally, this statutory authority would translate to significant regulatory relief for many small and mid-size credit unions who, in many cases, do not have the requisite experience, or resources to conduct due diligence on vendors who are vital to their survival.”

The Four Horseman of the Apocalypse

The content of this letter is an embarrassment to credit unions and the signers’ reputations as knowledgeable about cooperative financial services and the credit union system.

Their own track records is one of misleading catastrophic future predictions of losses around the core business they should be most expert. The NCUA had examiners on site full time at WesCorp and US Central before their conservatorships on March 20, 2009. Every month’s financial results and investment actions were sent to NCUA’s head office for review.

Similarly, the taxi medallion problems had been in NCUA’s crosshairs for decades. The agency actually stopped credit unions from issuing new loans years before the conservatorship of $1.3 billion Melrose in February 2017.

Despite these records of oversight failures, the four authors proclaim that “Without proper (NCUA) oversight of these service providers, credit unions may be exposed to greater chances of operational disruptions, financial losses, etc,etc”

The core problem from past failures is not NCUA authority, but the Agency’s effectiveness in problem resolution. Individual downturns and occasional failure are inevitable in a market economy. Rules and regs do not prevent bad decisions by credit unions just as good policy does not guarantee NCUA performance.

Credit unions survive and thrive not because they are better at conquering fear and danger, but rather because they embrace the human spirit of hope and betterment. That spirit has sustained them for over 100 years as the country and cooperative institutions have gone through periods of change and challenge.

What caused these chairs to sign on to this political act, obliviously designed by NCUA’s current chair Harper (correction to original post which mistakenly used Vice Chair Hauptman’s name), is unknown. They create a caricature of informed and experienced regulatory wisdom. Their desperate reasoning makes them appear like the four horsemen of the apocalypse, the biblical figures in the Book of Revelation that represent the end of times. Instead of the challenges of conquest, war, famine, and death their prophecy is about the end of the cooperative system.

Their collective letter reminds one of the first rule of leadership by Richard Feynman: “The first principle is that you must not fool yourself — and you are the easiest person to fool.”

Let’s not let these four prophets of doom fool credit unions or Congress.

May 17, 2024May 17, 2024

The Role of the NCUA Board: Past and Present

It is a cliché, but true. The well-being of any organization depends on the quality of board leadership.

Boards select the executive team and, depending on the organization’s bylaws, exercise ongoing monitoring of performance and strategic guidance. In the case of a public board, politically appointed, the board becomes the primary face of the organization to its various constituencies.

Board leadership is a critical skill. Some boards become so dependent on either the CEO (staff) or the chair that their performance is perfunctory, just follow the leader. At other times in the same organization, boards are dynamic, bringing expertise, insight and critical mission debate.

Following is the front page of the January 2008 NCUA News. The lead article is about minority board member Gigi Hyland’s testimony to Congress on the need for flexible and responsive mortgage loan modification options.

The topic was certainly timely in light of the subsequent financial crisis. But what is even more interesting, is that she represented NCUA’s position. The Chairman and vice chair were republican appointees JoAnn Johnson and Rodney Hood. Both also had short articles in this edition about their activities. But the lead story is Hyland’s testimony for NCUA..

The Changing Role of NCUA Board Members

Since the 2008-2009 financial crisis, the role of the NCUA board has changed. Sometimes new members have very limited, or no, first-hand experience of credit unions or regulation.

Members have interpreted their responsibilities in different ways. Some have viewed it as merely “policy making” with limited or no staff oversight. Some view the job as a part time time responsibility. It does not even require in-office attendance except on public board meetings which can now be done virtually.

The result of these various understandings, is the Chair can influence board member’s substance and roles in very narrow or expansive ways.

The example above shows a board fully engaged in different responsibilities and communicating with its constituencies in a full and open manner. This NCUA publication no longer exists. Board members now just post individual statements, and sometimes speeches, on NCUA’s web site.

With Chairman Harper on an extended medical leave, the NCUA board’s role becomes more problematic. The message is still the same however. The quality of any organization depends on the board’s leadership.

This comparison from the communication of 2008 suggests the current Board has a lot of ground to make up. Perhaps a first step would be to restore the NCUA News in which each member has an opportunity to discuss what they are focused on.

May 16, 2024May 16, 2024

Credit Union Mergers: The Final Solution?

(This post was composed by Jim Blaine and reprinted with permission)

Credit unions are changing…

… and disappearing.

Badin Employees Federal Credit Union used to be tucked up against the Uwharrie Mountains on the banks of the Yadkin River, about 40 miles east of Charlotte – the hometown of banking giants Bank of America,Wells Fargo and Truist.

The Uwharries are thought to be the oldest mountains in the U.S. These mountains are well-worn and rounded; the Rockies they ain’t! Uwharrie is an old Indian word. It’s a bit tricky to pronounce, much like La Jolla, Yakima, Albuquerque, and Butte. “Yew-whar-eee” is correct; “you’re hairy” is not.

Been searching for years for the original Indian meaning of that name. Recently, a friend told me he knew the origin. He said, it’s in the dictionary: “Uwharrie” means “unknown”. Really? Asked him for a copy of that reference for my files. Sure enough, the following week, in came a copy of the dictionary definition. It said: “Uwharrie – adj., probably from an ancient tribal name; meaning unknown.” Perhaps I just need to pick better friends….

Badin is a company town. In 1917, Alcoa dammed the Yadkin River to generate hydroelectric power for a new aluminum ingot plant. The lake and town which sprang from those efforts are quietly picturesque – but, all things revolved around the plant. Driving into town, down Falls Road, under an unwashed denim sky, is a journey home, a journey back in time The town is just two blocks long, but makes the most of it.

“Downtown” the candy-striped awnings and improvised handicap ramp of Badin Town Hall and Police Department adjoin the Masonic Lodge #637. Then comes the post office with its single window, fleet of post office boxes, and well-used community bulletin board. Shading the post office is Memorial Park, flanked by a cedar tree honor guard for the seven Badin soldiers who died in World War II. And, out of sight up a short dirt road, is the best named roadhouse on the planet: The Bottom of the Barrel Disco and Cafe; now vacant, having recently burned to the ground. Bet that last party was a great one. Sorry to have missed it!

But, the center of attraction in town was the Badin Employees Federal Credit Union. The Credit Union was housed in a one story, red brick building with blue shuttered windows and a bright, “no-way-to-miss-it”, burgundy door. The Credit Union always closed for lunch from 12:30 to 1:30 pm, but you could sneak a look into the office through the partially drawn, real-wood Venetian blinds. It was a comfortable, inviting looking place. The kind of place you could sit a while, have a cup of coffee, talk to the manager, y’know think it through a bit.

Badin Employees Federal Credit Union was prosperous with assets reaching $4 million, capital 18%, loans available to all, delinquency negligible. Everyone in town was a member; no local banks remained. Badin Employees FCU had achieved “market dominance” without ever spending a penny on “engagement, member experience, or passions of self-importance”. The “word around town” took care of all that. Yep, folks in Badin had a strong opinion about their Credit Union. They were the kind of folks – as you might suspect – who didn’t need “thought leaders”, “X”, or talk radio in order to form an opinion!

The beauty of Credit Unions used to be something you couldn’t easily wrap, bottle, or “spin”. Badin FCU is no longer there to make a difference – gone the way of merger. There are no longer any banks or credit unions in Badin. The aluminum plant, too, is gone.

… are we getting close to the Bottom of the Barrel on a lot of important things in our Country, including credit unions?

May 15, 2024May 15, 2024

Chairman Harper’s Medical Leave and Agency Leadership

In Monday’s public letter to the NCUA staff, Chairman Harper announced he was “stepping away from daily duties” for back surgery. He expects to return to “my full duties in July.”

His only reference to how the Agency would be led was that “I know the NCUA team will not miss a beat” and “will continue executing the Agency’s mission.”

The extended withdrawal by a Chair from his daily duties for an open-ended period is unprecedented. The statement left unclear what, if any role, Harper will play while on leave.

The Critical Questions

The uncertainty about this unusual self-managed absence raises many questions about the Agency’s leadership.

The demands on any senior executive are tough. Some organizations build in predetermined sabbaticals for top officials to recharge and reflect. It Is critical that senior, public officials be proactive as Harper states in “addressing their physical and mental health needs.”

It is important however that the Agency has ongoing decision making and clear responsibility assigned for critical roles, such as:

Who will determine the board schedule and meeting agendas?

Who will represent the Agency in testimony before Congress? On the FSOC and other interagency roles?

How will programs, projects and priorities be overseen in the absence of the Chair?

What is the process for taking supervisory actions that require board approval?

NCUA has had a two-person board several times in the past. Chair McWaters and board member Metzger is the most recent example. They made several momentous decisions including the merger of the TCCUSF with the NCUSIF. This resulted in raising the NCUSIF’s NOL above 1.3% for the first time in its history to accommodate the new surplus funds.

The question is not about function, but how important internal decisions (personnel, spending, organizational alignment) and external responsibilities are being carried out.

An Opportunity for “Team” Members

For some time, the role of the NCUA board has been downplayed. In February, the board for the first time since 2017 ignored past policy and practice to set an NOL above 1.30% without any supporting documentation or modeling. This was a commitment that Chairman McWaters said future NCUA boards should follow after the 2017 merger of the TCCUSF when raising the NOL.

The 2024 March board meeting was cancelled. The 30-minute April public meeting had only one item, a proposed rule, which Chair Harper attended virtually.

When the CEO is absent in any organization, there should be a continuing chain of command and authority. This role initially falls to Vice Chair Hauptman and member Otsuka. May’s Board will be the first demonstration of their response and how they see their expanded responsibilities.

One approach would be to have more public reports on the many areas that fulfill the Agency’s core safety and soundness functions. They could request staff to present timely reports on the financial status of the NCUSIF and the Operating Fund (March data is still not available on the web).

There could be updates on the state of the examination program, the single most important Agency function monitoring credit union performance. Will an annual exam be completed for all FCU’s over $1.0 billion? How do onsite results compare with quarterly filings?

There could be a discussion of the effect on culture and performance of the Agency’s policy requiring in-office attendance only two days per pay period.

In short, the two board members could take the lead in showing how they are “watching the store” and that staff continues to complete essential responsibilities in a timely manner. Moreover, it would give both board members a platform to state their views and request input from credit unions on other issues.

A Vacuum of Power and Accountability

Harper’s absence leaves a vacuum at NCUA. The Chair is the primary spokesperson for the multiple constituencies to which NCUA is accountable. The Senate banking committee approves all board members and, with the House, provides periodic oversight hearings. The Administration nominates all NCUA board members and establishes policy priorities.

Most importantly over 100 million member-owners through their 4,600 credit union organizations depend on clear rules of the road and assurance the money they send to the agency is used wisely. Credit union professionals are constantly reacting to market changes. Is NCUA paying attention to their concerns about meeting member needs?

Harper’s communication to NCUA staff addressed none of these accountabilities. A leadership vacuum may tempt some to exercise long sought ambitions. For others, it will be an excuse to do nothing, to just get by, while waiting for the boss to come back.

Others will see an opportunity “for the next man up.” That is the phrase used when a teammate is injured and unable to play; or in conflict when the assigned leaders go down. This challenge happens for many in everyday life. When a spouse (breadwinner or homemaker) leaves or dies-the family must learn new responsibilities.

Harper’s statement left all options open for stepped up Agency leadership. Who will take on new roles? How do credit unions monitor and to whom do they communicate their concerns during this time of NCUA uncertainty?

The essence of cooperatives, is that we are all in this together. How will this unique credit union capacity for cooperation show up in this new circumstance?

Month: May 2024

Three Observations on Sound Credit Union Mergers