Author: Chip Filson

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How Are Credit Unions Different from Banks? Three Powerful Words

During a week this summer at Chautauqua Institute one of my fellow attendees asked what’s the difference between a bank and credit union?

The question was from a very successful executive who had been the senior staff director for four consecutive DC Mayors.  I felt an opening to give her the full 100-year story.

I described credit union’s progressive origins, the dramatic expansion after passage of the 1934 FCU Act, and their current role as the second largest depository system in the US.

Later, thinking back, I realized I hadn’t answered her question.

What I should Have Said

The difference between a bank and a credit union is three words:  You own it.

That distinction will mean different things to people.  For some it indicates better rates.  For others it means convenience, or trust, or serving the local community.

When one hears about a local grocery, hardware store, bar-brewpub, day care center or even a restaurant option that is a coop, we instinctively believe there is something different from  other choices. The inference is that organizers are doing more than just trying to succeed in a business.

The Other Side of the Coin

The fact that You Own It generates consumer expectations is important.  But the other responsibility of “ownership” is nurturing  opportunities to be more than a consumer.

In some situations this means taking turns serving in a daycare coop; in others it may mean patronage refunds (REI); in some grocery coops, members can sell their own baked goods.  Or it can mean voting for directors at the annual meeting.

This unique customer/owner design anticipates that coop leaders will be open to engage with members beyond transactions.  The coop advantage depends on members willingness to participate in events and other activities to realize this unique potential.

This week, Geoff Johnson became CEO for the CUSO cooperative CU*Answers.   He expressed this member-owner advantage as follows:

A cooperative will only ever be as good as its owners, and we have great ones.

To that effect, my message for credit unions is to never be afraid of wanting more from your members. The more involved they become, and the more they act like owners, not just consumers, the better off you’ll be.

At their most successful, credit unions create fans with lifetime loyalty.   Efficient, reliable transactions are important, but most institutions meet those minimum table stakes.

What makes credit unions special is their ability to transform the three words into  interactions that provide value for both the coop and the member.   You Own It is an opportunity to put this advantage front and center in every member interaction.

 

 

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Harper’s NCUA Priorities: “Fiddling While Rome Burns”

Chairman Harper’s Senate hearing for a second term confirmed his intentions for NCUA.  In his opening statement and when answering questions, he reiterated his regulatory to-do list.  Along with prior speeches and proposals these include:

  • Establishing a separate consumer examination force (he stated NCUA is working on a white paper to validate this need).
  • Eliminate all current legislative constraints on NCUSIF funding and premium assessments.
  • Seek authority for examining and supervising third party vendors serving credit unions.
  • Climate change risk must be included when evaluating safety and soundness.
  • And the need for multiple agency investments to “continue prioritizing capital and liquidity, cybersecurity, consumer financial protection, and diversity, equity, and inclusion.”

His opening Senate statement reflects his experiences as entirely within the “legislative, regulatory and policy” arena.  He sees the scope and purpose of his role as running a government agency, not facilitating the relevance, role and reach, i.e. the sustainability of the cooperative system.

Since the late 1990s, I have worked as an advisor, manager, and executive on banking, insurance, and securities legislation and regulation. These jobs have given me broad knowledge of financial services policy and a deep understanding of the many issues facing our nation’s $2 trillion credit union system. 

One Vote Short to Enact Harper’s Agenda

Sooner or later all of Harper’s desires to expand NCUA’s authority and resources will receive a second board vote.  Either by convincing a current member that “bipartisan compromise” is the correct leadership response, or due to the expiration of one of the other board member’s term.

Harper’s positions are not driven by facts, data analysis, or even trends.  He has been advocating for risk-based capital (now linked with CCULR) since 2014 despite all the factual evidence that it is both unneeded and does not work.  He persists in immediately imposing this 400+ page rule even in the face of statements such as this by former board Member McWatters at a June 2019 board meeting:

Board Member McWatters: Okay, so there’s work to be done on the rule. And I should also note that when this rule was proposed and finalized, I dissented from it. And I dissented from the rule because in my view, as a lawyer for over 37 years, the rule violates the Federal Credit Union Act. I said that twice in written dissents in some detail in some legal analysis.

Now, I understand that reasonable minds may differ. Other people, other people in this room have a different view. I respect those views, but I also think that if this delay passes, we should look at that. We should go through that analysis again. I don’t want a rule on the books that in my view as a lawyer dealing with issues like this for a long, long time simply does not comply with what Congress told us to do. So I hope that, I hope that we can do that.

The Danger of a Misguided Regulator

We all see what we want to see.

Harper has spent most of his professional life working on legislative and regulatory policy. His goal is to enhance government’s role, not sustain the cooperative movement that created the agency in the first place.

His position on issues is to promote a regulation- heavy outcome.

His lack of credit union experience, knowledge and operations is a serious blind spot.

Today the credit union movement faces growing challenges. They have nothing to do with Harper’s understanding of safety and soundness, forecasting the next recession or even competitors overwhelming the movement through innovation or scale.

There are two wildfires burning uncontrolled throughout the cooperative environment. Both were started internally, and each is continuously fed by NCUA’s actions.

Not “Mergers” but “Collective Euthanasia”

The first wildfire is the increasing use of self-interested mergers, allegedly for economies of scale by managers of sound, stable and long-standing credit unions to become part of a larger one.  The increasingly brazen appropriation of credit union members’ common wealth is exemplified by a CEO’s arranging $35 million in funding for the non-profit organization he will run after his $650 million credit union is merged.

These acts of the CEO and senior leadership cashing out via merger are not new.  But they are increasingly promoted by third parties who draw up “change of control” clauses for CEO contracts.  Then the same CEO’s go out and negotiate their own change to collect the bonus.

NCUA routinely signs off on these self-serving charter cancellations.  The problem is more than self-enrichment.  Every merger of these long serving credit unions rips out roots feeding the cooperative model. Members’ accounts, loyalty and common resources are transferred to a third party which has little to no relationship to the community which loses their decades old local financial institution.

These mergers destroy the credit union system at its roots.  Members leave and the entire basis of the credit union’s soundness, the member relationship, withers and dies.

The continuing credit union may seem strong, but that is a temporary illusion.  Loyalty, trust and confidence cannot be bought.  They are earned via long standing service relationships.

The common bond which first brought the credit union to life is now transformed into an act of  cooperative euthanasia in these merger manipulations.

The rot then shows up in the continuing credit union even when it tries to regain former member’s allegiance. The roots have been severed.  As a result  the solution is sometimes to ask its own members to approve this collective merger death ritual by the continuing credit union— the story of Xceed CU.

Using Member Reserves to Buy Banks

The second challenge is credit unions using members’ accumulated reserves to buy banks.  Often these are outside the credit union’s existing network and market influence.  The reasons are to grow faster than might otherwise occur, especially in new markets.

However, paying $1.50 to $2.00 for each $1.00 of book assets sooner or later will lead to a financial dead end.  Unlike mergers, these purchases are for cash.  There will have to be a return over years to support the premiums being paid for these assets.  The results of each purchase will not be known for some time.  Meanwhile, credit unions will have to convert new employees, customers and  products and services in a process different from the credit union’s traditional member-chosen relationships.

The jury is out as to whether these financial investments will ever payout.  But one trend is apparent.  Bank purchases to pursue growth becomes a narcotic.  It is like an opioid that a CEO and board become addicted to when their own efforts at internal expansion no longer seem enticing. Some credit unions have completed more than one bank purchase.  It is not unusual to see a credit union undertake two transactions back-to-back or in a current case, two at once.

The Common Source for these Growing Cooperative Wildfires

Both of these activities are failings of fiduciary duties.  The common characteristic in both is  credit unions have lost touch with their own members.  Their leaders believe the credit union is their personal fiefdom to do as they like, even when the decision is to ask members to commit cooperative suicide by giving up their generations-old charter.

As institutional growth and performance is prioritized over member well-being, the credit union model becomes more and more like the competitors’ it was meant to replace.

In both activities members are kept in the dark- told nothing about bank purchases. Or in mergers, members are given  a series of assertions about better products and services that omit significant information or misrepresent the entire situation—and given less than 45 days to act before voting.  Few vote, rightly sensing the system is rigged against them, which is often the case.

The solution to these two failings is as straight forward as the cause—empower members to be truly informed and engaged about their credit union’s activities.  Transparency is critical whenever members’ collective wealth is used outside the normal business model.

In mergers members are given nothing more than PR cliches.  Should ending a successful, sound charter be so much easier than what is required for a new charter in the first place?

Harper sees “consumer protection” as crossing every “T” and dotting every “I”.  That approach is  fiddling while the cooperative industry burns down.  In the meantime, members’ collective legacies are stripped away by their boards and managers.

Sound, well run credit unions are losing their cooperative roots and purpose.  No one is willing to address the situation for what it is and stop these extermination.  Unfortunately, we know how this movie ends.  The original version was called the S & L industry.

 

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A COVID Program to Assist Smaller Credit Unions That Few Know About

Note:  the numbers initially published of eligible credit unions were updated as of October 7, 2021.

Recently the former NCUA General Counsel Bob Fenner, now in private practice, asked if I was aware of the Employee Retention Credit grants provided under the Cares Act.

I had no knowledge.   He sent me a brief description:

There is a provision in the federal stimulus legislation not well publicized and not well understood that may entitle a credit union to significant federal funds.   

The criteria to qualify are:

  • the credit union averaged fewer than 500 full-time employees in 2019, and
  • the gross income in quarter 4 of 2020 declined by 20% or more when compared to quarter 4 of 2019, or
  • gross income in any quarter of 2021 declined by 20% or more when compared to the same quarter of 2019.

The reason for the decline in gross income does not matter.

The credit union is eligible for up to $7,000 per employee per qualifying quarter in federal funds, in the form of so-called Employee Retention Credits. 

Finally, if your CU has an 80% or more interest in one or more CUSO’s, you must consolidate the books for purposes of determining the number of employees and applying the gross income test.

This IRS official website gives a January 26, 2021 update on the program’s extension into this year.

Estimate of Number of Credit Unions Eligible

 

Scanning the data for credit unions with fewer than 500 employees in 2019 and declines in total revenue in one of the three applicable quarters (2020-4th, 2021-1st and 2nd) shows the following count:

For test 1 (empl <500 @ 2019, 4Q ’20 income -20%+): 782 CUs

Test 2 (excluding test 1): 350

Test 3  (excluding test 1 & 2): 135

The total of 1,267 includes mostly smaller credit unions.  However the results show that a few credit unions with over $1 billion would also qualify.

This list could be expanded if additional credit unions meet the negative 20% fall in revenue for the third and fourth quarters of 2021 versus the comparable quarter in 2019.

Next Steps

Bob is working with a colleague, Darrell Smith, CEO of Highmark Companies.  He describes their approach as follows:

There is no fee for a consultation and a determination whether a CU qualifies. There is a fee only if a CU qualifies and uses our services to obtain the credits. We don’t talk fees until we do the initial consultation.  

Our services include determining qualifying amounts, preparing the forms to be filed with Treasury, providing a pre-submission audit review from an independent accounting firm, and working with the CU and their payroll provider to submit to IRS.

He continues:  It is a complicated process unless you have studied it carefully and understand it. Sometimes credit unions who have not carefully studied the law and the IRS guidance often conclude either they are not qualified when in fact they are, or they don’t get everything they are entitled to.

Once you understand all the ins and outs of the process, it does not take long to complete the forms. It does however take anywhere from 2 to 10 months to receive the money from the Treasury Department. So while it is definitely good money that qualifying credit unions are legally entitled to, it’s not quick money.

As one example, we recently worked with a with 55 employee credit union that will obtain $1.1 million based on the first three quarters of 2021.  We will assist credit unions of any size.

Resources to Help

Bob’s contact information is  bobf1228@gmail.com and  Darrell Smith at Highmark Companies is dsmith@highmarkcompanies.com.   The only information about their program is what they have sent me.  So as with all contacts, credit unions should always perform their own due diligence, as I am sure Bob in his former General Counsel role would advise.

I am not aware of any other organizations providing credit unions assistance to access this program’s funds.   Bob’s heads up could be a valuable service especially if smaller credit unions who are likely most in need, can be easily qualified.

If readers have other information on this program that would benefit credit unions, I would be glad to offer it in future posts.

 

 

 

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A $35 Million Example of an “Emperor with No Clothes”

Hans Christian Andersen’s story about the emperor who had no clothes is familiar to most. You can read the parable here to refresh your memory. Two swindling weavers convinced the entire court and the emperor that their invisible new uniforms were perfect. They pocketed the gold and silver threads for the garments stealing them for their own use.

I have always wondered why it took a small boy in the crowd watching the king’s parade of “new” clothes to shout out, “But he hasn’t got anything on.”  What was the reason for everyone else’s silence?

  • Fear of authority when challenging the emperor’s actions?
  • Loss of a senior position if a trusted advisor should speak up?
  • Who am I to argue with the emperor’s wisest, most senior advisors?
  • Onlookers: not my problem if the emperor wants to go out naked
  • Too isolating to be a person stating an inconvenient truth?
  • Situation so far-fetched that no one believes the facts before their eyes?
  • Perhaps an example of: “you can fool all the people some of the time”

Whatever the explanation, the story raises the issue of people avoiding uncomfortable realities that no one else wants to acknowledge. In the merger situation below, a single thoughtful and brave member decided to call out what no one else would, even though the facts were presented in plain sight.

The Merger of Financial Center and Valley Strong Credit Unions

On May 31, 2021, Michael Duffy, CEO of the $643 million, 65-year old Financial Center Credit Union(FCCU) announced the intent to merge with the $ 2.4  billion Valley Strong:

The phrase ‘Growing Together,’ is a perfect adage, as this merger represents a strategic partnership between two financially healthy, future focused credit unions committed to providing unparalleled branch access, digital access, and amazing service for the Members and the communities they serve,” says Michael P. Duffy, president/CEO of Financial Center. “In a financial services sector that is constantly evolving, this merger is a true embodiment of the credit union industry’s cooperative mind-set. At its core our partnership with Valley Strong represents us selecting the best credit union partner to help us achieve our goals faster than we could duplicate on our own.

“As the CEO of Financial Center Credit Union for the past 21 years, my perspective on mergers has evolved just as much as our industry has in that same time period,” Duffy continued. “As credit unions built by select employee groups (SEGs) increasingly partner with community credit unions, I have marveled at what credit unions of today’s scale can accomplish when they join forces with their Member-owners and communities chiefly in mind.”

The 86% member approval in the merger vote was announced in a September 27 Valley Strong press release which included this statement by CEO Duffy explaining the rationale:

“In a financial services sector that is constantly evolving, this merger is a true embodiment of the credit union industry’s cooperative mindset. At its core, this is about a collective mindset that allows us to achieve our goals faster than we could duplicate on our own.”

When asked what it means to Members to achieve these goals faster, Duffy added, “We recognize merger critics may point to our healthy capital and ask why we didn’t just opt to go it alone. That was of course the first consideration. But the reality is, we do the same things for the same reasons so why not eliminate redundancy and grow faster and better together. On our own, it would take years to develop and implement while still having the challenges scale, so why not give members more and build the organization for the next decade at the same time.” Duffy continued, “We took our national search for a partner seriously. Together with Valley Strong, it’s a win-win, because members are the focus, and we will be able to serve even more people throughout San Joaquin and the state of California.”

The Member-Owners’ Notice of the Merger

As required by NCUA rule, FCCU provided members the reasons for the merger. These general descriptions included “consolidation of energy and resources, to better serve members through competitive pricing and services, additional products, enhanced convenience and account access and continued employee and volunteer representation.”

The member Notice then listed seven categories of benefit with a little more detail.  For example, Duffy will become Chief Advocacy Officer for Valley Strong and be “actively involved in the day-to-day operations.”  In addition, the Notice described two contributions to a non-profit charitable foundation FCCU2.  More on this community outreach initiative later.

Share Adjustments and Golden Handshakes

At midyear 2021, FCCU had net worth of 16% totaling $107 million or twice the ratio of Valley Strong. The Notice included a special dividend distribution of almost $15 million based on two factors.

  1. Each member will receive $100 for every five years of membership to be capped at $1,000 for members who joined in the oldest tier 1946-1976.
  2. A dividend of .869% on the 12-month average balance for “Base” shares with a $500,000 ceiling on the maximum shares included.

Each member’s pro rata share of the net worth at the merger vote is $3,620.  However, the credit union will pay only an average of $505  per member just 14% of their common wealth.  To equalize FCCU’s with Valley Strong’s per member net worth, each member should have received an average of $1,800.

The four golden handshakes, that is additional compensation over and above what employees would have earned without the merger, will be paid to:

  • Nora Stroh EVP for $150,000 if she stays with the new credit union for 30 days following the merger;
  • Steve Leiga, VP Finance of $150,000 for staying 30 days after merger completion;
  • Amanda Verstl, VP HR $257,352  for retention, severance opportunity, accrued sick and leave payout;
  • David Rainwater VP Information for $244,000 for staying through the system conversion.

These special payments are similar to other merger transactions although the special dividend structure is unusual and recognizes the generations of member loyalty.

Two questions arise from these disclosures in the Notice:

  1. Why would a $643 million credit union with over 16% net worth and $521 million in investments believe it is unable to provide competitive member services and pricing into the future?
  2. And why did CEO Duffy not receive any merger payment? The Notice further notes that he and the VP finance would not receive anything from the one-time bonus dividend.

Some Context

Michael Duffy joined the credit union in October 1993 and has been President for over two decades.   The EVP and COO, Norah Stroh, has been with the credit union for almost 32 years. She joined as HR, benefits and personnel manager in February of 1990.  In January 2001, she was promoted to her current number two role.

Michael and Norah are brother and sister.

Steve Leiga, VP Finance, joined the credit union in January 2002.  Amanda Verstl’s employment at FCCU exceeds 13 years.  David Rainwater’s connection began as a summer intern in 2011.

For an experienced team to suddenly decide merger is the best course for members after three decades seems somewhat unusual no matter the rationale. Why are the senior leaders of this credit taking their severance bonuses and closing up shop? Where is the succession planning, or was merger a predetermined strategy?

One FCCU trend seems especially puzzling. Why is there no Lending VP? Who had this responsibility for this most critical role in every credit union?   The loan to asset ratio has declined in the last five years from 39% to 16.9% at June 2021. The $107 million in reserves equals the net amount in outstanding loans, for a risk based net worth ratio of 100%.  All the $521 million investments are in cash or government and GSE securities.

When reviewing the two last available 990 IRS filings for the credit union, a dramatic change occurs.

In 2017, the three most senior employees were paid a total of $1.4 million or 21% of total salaries and benefits.  In 2018 the three were paid $3.1 million, or 46.5% of total salaries. The 121% increase is in just one year.  In both years the CEO is a member of the five-person board which approved these compensation packages.

No IRS 990’s are yet available for 2019 and 2020 to know if this trend continues.  It would certainly be useful for the credit union to post public copies of these required filings in light of the merger decision.

A Million Dollar Public Contribution-Conflating Personal and Professional Roles

 

As the credit union’s lending portfolio continued to decline and member numbers fell from a peak of 32,382 in 2017 to 29,101 today, the credit union made a very public contribution to the city of Stockton.

In April, 2020 Michael Duffy presented a $1.0 million check to a COVID relief effort, the 209 Stockton Strong fund. The  subsequent  press release described the effort as follows: “This donation represents a continued commitment from the entire FCCU team. They are donating, together, out of the care and concern for others in their local community. . . Duffy presented this opportunity to the FCCU team as a way to help their community and received immediate support with a resounding yes.”

Even though the announcement states the $1 million donation is from “the entire FCCU” team and the Michael Duffy Family Fund, there is no information of how much came from each source.   The only public reference to the Duffy Family Fund is as one of several donor advised funds managed by the Community Foundation of San Joaquin.

The mayor’s office prepared for Facebook an 11 minute video of this donation featuring Duffy and a six foot enlarged check with the credit union’s name. And here is this brief excerpt on the KRCA evening news.

Philanthropy can certainly be positive.  Donor advised funds are an easy way for individuals to manage the timing of their contributions.  But it can also be self-interested.  This $1.0 million single “gift” is one of the highest donations I can recall associated with a credit union during this time of COVID, or any other time.

The credit union or Duffy could certainly have donated the money to the identified charities directly.  Why Duffy would combine his personal philanthropy with whatever the employees donated for this appeal is unclear.

One might suggest this conflation of professional and personal activity is a PR effort to promote the credit union, not just Duffy.

However, the IRS 990’s  show credit union funds given to a wide number of political campaigns.  There were 17 donations totaling $60,250 in 2018, including a second $10,000 contribution to the current CA governor, and donations to Stockton’s mayor.  Is this credit union money to political campaigns in the members’ best interests, or to promote the public influence of Duffy?

Why the Merger?  Why did the CEO do this?

FCCU has been a closely-run, family operation for almost three decades.   The CEO is a member of the five-person board. The credit union is more than financially sound, with its very liquid balance sheet and net worth two and a half times the well capitalized 7% standard and twice Valley Strong’s ratio of 8.7%.

Why would the entire leadership of the credit union give up their 66-year history of relationships at the peak of financial capability?  Motivations can be hard to discern.  But on August 26, 2021, a member posted his analysis for opposing the merger on NCUA’s website for comments:

Vote NO on the proposed merger until the provision to transfer $10 million of member assets to a non-profit foundation for “Community Outreach” is eliminated from the proposal. Member financial assets of any amount, especially $10 million, should not be given away for any purpose. If Financial Center Credit Union is so flush with cash that it wants to give away $10 million, then that amount should be distributed to members. I’ve written to FCCU twice asking for the rationale for giving away $10 million. They have failed to answer me, obviously because there is no rational reason for giving away $10 million from its member-owners.

Given that FCCU’s current CEO Patrick Duffy is being given the unexplained job of “Chief Advocacy Officer” in the Continuing Credit Union, it’s easy to guess that Duffy’s only job duties will be running the new foundation doling out the $10 million to his favorite groups and his own large compensation. The so-called “FCCU 2 Foundation” was created less than two months ago for setting up Duffy in his new give-away-our-assets role. In any case, FCCU’s failure to explain to members any rationale for GIVING AWAY $10 MILLION OF MEMBER ASSETS is insulting and outrageous. Vote NO on the merger until the $10 million giveaway of our assets is eliminated from the merger proposal.

The FCCU2 Foundation was set up on June 25, 2021.  The two persons listed with the registration are Manuel Lopez, the credit union’s chair, as the Foundation’s CEO; Michael Duffy is the agent for service.  The organization is described only as a domestic non-profit.  Its address is the same as the credit union’s main office in Stockton.  As stated in one other public notice: The company has one principal on record: The principal is Michael P Duffy from Stockton CA.

The member merger Notice states the total funding committed for this new foundation is $35 million.  There is the initial grant of $10 million from the members’ reserves at FCCU. The Valley Strong members are committed to donate $2.5 million per year of their  funds for the next ten years for the remaining $25 million.

The purpose of the non-profit in the merger Notice is:  “community outreach-charitable and educational activities to benefit the greater Stockton area.”  No further rationale is provided why this entirely new organization created and run by Duffy should be given $35 million of members’ money.

A lone member, Frederick Butterworth who in August posted on NCUA’s comments page makes the obvious point: this emperor has no clothes.

The Duty of Care and the Duty of Loyalty

But the situation is more serious than the action of establishing a $35 million fund as a personal sinecure for CEO Duffy as he transfers leadership of the credit union to another board.

In a widely publicized court sentencing hearing last week of a former credit union CEO the following statements were made in court:

U.S. Attorney Audrey Strauss: The (CEO) shirked his duty to act in the best interests of the credit union and its account holders, exploiting his position for personal gain.

Federal prosecutors said the CEO viewed the credit union as his personal fiefdom, repeatedly betraying his fiduciary duties to the institution and its members.

“This was a family-run business,” Judge Kaplan said of the credit union. . . “If you ran a delicatessen you could do what you want. But this was a federally insured credit union and you were oblivious to that fact.”

The fiduciary duty of directors and managers is more than avoiding criminal conduct.    NCUA’s legal suits against selected corporate directors and management were based on violations of their fiduciary duties of Care and of Loyalty.

Were the boards and managers following these standards when committing $35 million of member money to the FCCU2 Foundation to fund the work of the Chief Advocacy Officer Duffy?   Is this two-month-old foundation just a means of providing future compensation to the former CEO? Was this ten-year funding commitment from Valley Strong a requirement of the merger?

Whatever word one uses to describe this setup -a bonus, a buy-out, or a quid pro quo/kickback-it appears to be a betrayal of fiduciary duty to the members of both credit union by their respective CEO’s and directors.

In March NCUA conserved the $ 106  million Edinburg Teachers Credit Union with a 22% net worth ratio and a loan to share of 14.6%.   The only public information suggested by the  media for the action, given the strong financials,  was the average compensation of $189,000 per employee and the CEO’s compensation in excess of $8.7 million over the past eleven years.   The Texas Commissioner explained the conservatorship as “to ensure the businesses in these industries. . .are entitled to the public’s confidence.”

All NCUA participants from the field examiner to the highest levels in DC admired the clothes this emperor said he was wearing.  NCUA’s RD and assistant RD, the supervisory examiner, CURE which posted the Notice and member comment, and the California Department of Financial Institutions, liked what they saw.

All were bystanders to this event without asking why a 66-year-old credit union, overly-liquid and over-capitalized with a declining loan portfolio and inbred leadership could not continue to be run as an independent credit union for the benefit of its member-owners.  But perhaps that has not been the case for years. The CEO just took the logical next step.

The Hans Christian Andersen parable above ends as follows:

“Did you ever hear such innocent prattle?” said its father. And one person whispered to another what the child had said, “He hasn’t anything on. A child says he hasn’t anything on.”

“But he hasn’t got anything on!” the whole town cried out at last.

The Emperor shivered, for he suspected they were right. But he thought, “This procession has got to go on.” So he walked more proudly than ever, as his noblemen held high the train that wasn’t there at all.

Is NCUA playing the emperor in this modern version and just walking on by? Are other credit unions the crowd? Might the “whole town” be today’s public press and Congress?

One vigilant and thoughtful credit union member proclaimed the truth about this situation.  He gave a shout out to everyone.  Is anyone listening? Or do we continue to live in a fantasy land complying with regulations that don’t protect the members who credit unions were designed to serve?

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 Be Like Mike

Mike Dickersonby Jim Blaine

Mike Dickerson recently retired, after 41 years, as the CEO of Oxford Credit Union. Under Mike’s leadership, the Credit Union has grown year over year – every year for 40 years! During Mike’s tenure the Credit Union increased in assets ten-fold to over $20 million; but funny, no member ever asked Mike “how big” the CU was. Oxford Credit Union was not about size; it was far more valuable than that. Oxford CU focused on service.  Mike Dickerson was one of the finest leaders in our community. In case you didn’t know that, I wanted to let you know why.

Folks usually have an opinion about CEOs – mostly not that favorable. CEO-types often appear a bit too self-important, are not known for humility, and seem to have spent way too much time in front of a mirror. Mike Dickerson was not that kind of leader. He thought common sense was better than an executive coach; he never tried to buy a bank; and he didn’t need a corporate jet to prove he was a leader – because he was the real thing. Mike never took himself too seriously as a CEO, but he was deadly serious about his responsibility to serve the best interests of his members, his staff, and his community. As with all strong leaders, Mike was also called upon to lead in his church, in our electric co-op, and in business and civic organizations.  Mike Dickerson believed life was about serving others. He spent a lifetime doing just that. It was as simple as that.

As leader of the Oxford Credit Union, Mike Dickerson worked hard to help local folks succeed – staff and members alike. He felt that every position at the Credit Union was important; he pushed his staff to discover who they were; he expected everyone to lead. Mike knew that fine folks come from all backgrounds and in all shapes, sizes and colors. The package really didn’t matter; it was what was inside your heart that counted. People knew Mike cared about them. And best of all, he would listen to them! It was as simple as that.   

Small, community-focused credit unions are home grown financial cooperatives – owned by the members who use their services. Access to credit is important to most folks in a small town, because “making ends meet” can be a struggle, there is never enough money to go around, and rich uncles are few and far between. As opposed to other financial institutions, credit unions operate on a non-profit basis and try hard to find ways to leave money in local folks’ pockets. Oxford Credit Union did just that; it practiced what it preached. So did Mike Dickerson – “frugal” was Mike’s middle name. Mike Dickerson took good care of “his stuff” – who else waxes their lawnmower? – and took even better care of his members.  Great leaders always seem to “take it personally”. It was as simple as that.

Mike Dickerson has spent his entire life in Granville County, N.C. and knew his members well. They were his friends, his neighbors, his family. In fact, Mike Dickerson was kin to over a third of his members, over half of them if you counted “by marriage”  – and all of them if you counted their second marriages! That’s the way it is in a small town.  Mike well-understood that when applying for a loan some folks “don’t always look good on paper”, because life can be messy, people make mistakes, things sometimes get out of control. Mike knew how to say “No”, but always sought for a way to say, “Yes”. In lending, “They’ve always done right by us “, was better than a credit score and character was more important than collateral. Mike Dickerson always kept his promises and he expected you to keep yours. If you broke your promise, there were consequences. When funds were short, folks always paid “Mr. Mike”. It was as simple as that.

Mike Dickerson was committed to the folks in our community for over 40 years and worked hard to make our lives better. Mike Dickerson went about his work in a quiet, humble manner. He was faithful in his stewardship as a leader. Mike Dickerson charted a sound path for the Oxford Credit Union; he never lost his way.He probably thought we didn’t notice, – but we did.  Mike Dickerson trusted his members and we trusted him. It was as simple as that.

Credit unions: It should be as simple as that.

 

 

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Time to Be Weirdos Again: A Cooperator Reflects on Leading a Cooperative

Today, Randy Karnes passes the CU*Answers CEO’s reins to Geoff Johnson after twenty-seven years as the cooperative’s leader. The CUSO has reached new heights by every performance criteria in these three decades. Most importantly it has created a novel network business model combining the unique advantages of cooperative design with the strategic opportunities enabled by technology.

This interview is part of a longer conversation in CUSO Magazine, which I encourage you to read in full. Randy’s insights, beliefs, contrarian style, and enthusiasm are all captured in this dialogue.

The following selections reflect these qualities. I believe his observations are relevant for all credit unions today and as far into the future as we can hope.

What Drew You to CU*Answers?

What really drew me was that CU*Answers was a manufacturer—of software, of copyrights, of solutions, et cetera— and as a manufacturer, we have a different perspective than a retailer. Now I don’t have a problem with retailers. Walmart’s an excellent retailer, but when you go over to Walmart, you’re selling somebody else’s bubblegum. Being a manufacturer and having that creative opportunity was big to me. And that was exciting here. I’m not sure I would have come if it was a co-op and just a retailer. Retail is a very valuable business, but that’s not at the core of who I am.

 What have you enjoyed the most about being CEO at CU*Answers?

Well, I would have to say the collaboration and the cooperation to have a customer-owned business and the chance to make that concrete and real. Because the truth of the matter is being a cooperative is such a subjective thing. What is a customer-owned business? How does a customer-owned business work differently than a traditional business? What does it mean to be so transparent that you would tell your client everything? What does it mean to really worry about the client’s agenda as your own?

Co-ops are not just about building a business to sell things to people. They’re also about building a business with people who buy your things. In a co-op the concept is you share everything. You don’t hide any of your pimples, any of your wrinkles, any of those kinds of things—both sides work together just to improve. Most of the time businesses avoid inconvenient truths. Our business model is to share inconvenient truths as much as we share happy truths.

So, the constant evolution in a cooperative environment was such a challenging business problem. To me, it became the most rewarding thing we worked on. There are tactics and there are strategies. Anyone can be good at designing a platform or technical solutions. Anyone can do that or sell that. The missing ingredient is when you say you’re going to build a cooperative with your customer. And not just market it, but make it real—that’s a daunting challenge.

You’ve seen a lot during your tenure–what has surprised you the most about the path our industry has taken?

I’m truly surprised by how easy our industry has given up its differential. Today’s credit unions are wonderful. They’re doing great things and they have a lot of capability. But I feel that they’ve lost sight of their uniqueness and the way we do things. We’ve allowed our vocabulary to merge with banking. We’ve allowed our way of motivating consumers to be too close to how banks motivate consumers. The world is just merging wonderful differences into a gray blob, and I thought that some of the credit unions out there would have fought that with all their might.

So how do you think credit unions should go about fixing that, to keep from becoming one big, homogenous blob?

We have to start focusing and searching on what needs to be truly different, not just truly successful. Let’s say someone says to me, “You’re different, but you’re never going to be a success.” Well, if I’m different, maybe I’m already a success. I’m not just doing it like the next person, I’m not just giving into status quo, I’m not becoming part of the lowest possible denominator. I’ve got a spark. I’ve got something new.

We need a bigger focus on saying we’re different, and not just saying it, but proving it. You can’t just say you really love people. Everybody loves people. You can’t say you give good service. Everybody gives good service. We’re going to have to find a unique differential. Many of the places that I eventually got invited in to, they invited me because I was a weirdo and I spoke differently. Maybe it’s time for credit unions to be weirdos again.

His comments about future plans and more truisms are in the complete interview. You can access it in today’s issue of CUSO Magazine.

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Harper’s Senate Confirmation Hearing:  What will his tenure mean for credit unions?

Probably no prior Senate confirmation hearing for an NCUA Chair has had a candidate with as documented a track record of actions and beliefs about credit unions, agency priorities and the cooperative system’s role versus banks as Todd Harper.

Readers can view the nomination hearing tomorrow, September 30, starting at 10 a.m. on the Senate Banking, Housing, and Urban Affairs Committee’s website at https://www.banking.senate.gov//

Harper’s direct NCUA experience extends from February 2011 through January 2017 when he served as Director of Public and Congressional Affairs and Senior Policy Advisor to both Chairs Debbie Matz and Rick Metsger.  He was nominated by President Trump to serve on the NCUA board in February 2019 and sworn in on April 8, 2019.  President Biden designated him as NCUA chair on January 20, 2021.

The following are excerpts from speeches, writings and events during his time at NCUA as senior policy advisor and NCUA board member.

Harper’s desire to emulate the practices of the FDIC and banking regulators is clear.   He believes credit unions should be on a “level playing field” with banks.

His policy positions show a questionable grasp of cooperative purpose, their institutions and credit union history.

His  leadership priorities are based on dystopian forecasts creating the need for ever expanding governmental regulation  and oversight.

On Confidence in the Credit Union System’s Future

At June 2019 board meeting:   With the recent inversion of the yield curve, we know that a recession is coming, we just don’t know exactly when and how severe.

December 2019 OpEd in CuToday:

We know that a recession is coming. We just don’t know when and how severe it will be. That’s why we should fix the roof before it rains by implementing this rule (RBC) at the start of 2020. 

February 2021 speech to the DCUC after becoming chair:

As the COVID-19 pandemic rages on, we must smartly, pragmatically, and expeditiously address the economic fallout within the credit union system. To that end, when I first became Chairman, I issued my Commander’s Call to the agency.”

August 2021 DCUC speech:

But, I must caution everyone that we are not out of the woods just yet. Credit union performance will continue to be shaped by the fallout from the pandemic and its financial and economic disruptions. With pandemic-relief efforts like supplemental unemployment benefits, foreclosure prevention programs, and eviction moratoriums coming to an end, many households could face financial stress in the coming weeks and months. This could lead to higher delinquency and charge-off rates and potential losses for credit unions — and even failures.

September 2021 Board meeting:  But, nevertheless, we ultimately should expect delinquencies and charge-offs to rise in the months ahead, and all credit unions should pay careful attention to their capital, asset quality, earnings, and liquidity. To protect the Share Insurance Fund — and, ultimately, taxpayers — against losses, the NCUA needs to stay on top of these emerging risks and problems in the credit union system.

Harper’s modus operandi when presenting the credit union’s system’s outlook is to focus on risk, uncertainty and fear.

His continual dour forecasts remind one of economists who have successfully predicted ten of the past two recessions.

Harper’s view of the system’s resilience to economic change is so overtly negative, it leads one to ask if he has any confidence in credit unions or the agency’s supervision competencies.

Planting a Risk Story with the WSJ

Credit Unions Ramp Up Risk

Lenders Loosen Lending Standards, Increase Exposure to Longer-Term Assets  By Ryan Tracy June 5, 2014

This article in the Journal was revealed as an NCUA sourced effort by a credit union blogger who obtained a copy of an internal NCUA email celebrating its online publishing.

This PR misinformation effort occurred at the same time NCUA had to withdraw and rethink its first risk-based capital RBC rule proposal.  Over 2,050 comment letters (the most ever on a rule) were submitted, all with substantive criticism.

As a result, the agency backed off and said it would make significant changes in what became the RBC-2 proposal.

Forecasting a future of doom and gloom or hyping a present crisis is unfortunately an all-too-frequent regulatory temptation. Predicting negativity creates an aura of expertise.   It elevates the power of the regulator.  Crises enable overreach of authority.

There is no downside to predictions of future problems  by regulators.  If nothing happens, then the warning worked.  Everything turns our OK and no-harm-no foul for an erroneous judgment.  If there is a down trend, then one can claim prescience and proven expertise about the future.

This regulatory “banging the drum” PR effort with the WSJ was when Harper was in charge of NCUA’s Public and Congressional Affairs office.

On the NCUSIF’s Financial Sufficiency

Harper’s August 2021 letter to Congress recommending legislative changes to the fund’s design included:

  • Increase the Share Insurance Fund’s capacity by removing the 1.50 percent statutory ceiling on its capitalization.
  • Remove the limitation on assessing premiums when the equity ratio exceeds 1.30 percent, granting the NCUA Board more discretion on the assessment of premiums; and
  • Institute a risk-based premium system.

These recommended changes, if enacted, would allow the NCUA Board to build, over time, enough retained earnings capacity in the Share Insurance Fund to effectively manage a significant insurance loss without impairing credit unions’ contributed capital deposits in the Share Insurance Fund, thus avoiding situations like the one that led to the creation of the Corporate Stabilization Fund during the last financial crisis. Moreover, these changes would generally bring the NCUA’s statutory authority over the Share Insurance Fund more in line with the statutory authority over the operations of the FDIC’s Deposit Insurance Fund.

In this June 2019 board meeting exchange with Larry Fazio, Harper conflates FDIC’s premium-based insurance system with the credit union’s 1% cooperative deposit underwriting model.  One doesn’t have to read between the lines to see where Harper would like to go with this 1% deposit asset:

Board Member Harper: Great. What percentage of the Deposit Insurance Fund can banks count as an asset on their books?

Larry Fazio: None.

Board Member Harper: None. So banks don’t count it. They have to write their premiums off as soon as they pay them, correct?

Larry Fazio: Yes.

Board Member Harper: In comparison, are credit unions allowed to consider any part of their assessments as an asset on the books?

Larry Fazio: Assessments, no.

Board Member Harper: How about their Share Insurance Fund?

Larry Fazio: So when they make a contribution to true-up the 1 percent deposit of insured shares, they count that as an asset.

Board Member Harper: But wouldn’t they keep 1 percent on their books and we technically only have 0.38 percent these days?

Larry Fazio: The 1 percent is the deposit and then –

Board Member Harper: So they keep some on their books and don’t have to charge it off, Larry, is the point I’m getting to.

Larry Fazio: Yes, but we don’t call those assessments.

On a Level Playing Field with Banks

In addition to seeking FDIC-like options for the unique NCUSIF, Harper frequently references bank regulation as the basis for similar credit union rules.  When commenting on a proposed combination rule to clarify the process for credit unions buying banks he stated:

The National Credit Union Administration Board recently proposed a rule that would guide credit union purchases of bank assets and liabilities. The proposed combination transaction rule is an important proposal and worthy of consideration. However, it exposes an important gap in the supervision of credit unions — former consumers of the acquired banks will not have the same level of consumer financial protection oversight in their new credit union. 

The Federal Deposit Insurance Corporation supervises many of the banks that are part of these deals for consumer compliance. That agency has a consumer compliance program that is more robust than the NCUA’s program.

Harper’s core defense of the agency’s RBC rule is because the banks did it–although they subsequently dropped the requirement.  Here is his plea for a level playing field:

Why should it take complex, federally insured credit unions with $500 million or more in assets seven or eight years longer to implement their comparable risk-based capital rule than it took for banks and thrifts to implement theirs? That’s an uneven regulatory playing field.

The risk-based capital rule brings us under BASEL, and provides comparability with other federal regulators as required by Federal Credit Union Membership Access Act.  And,

If banks didn’t get their RBC rules delayed, I have to ask myself why should credit unions? 

On Small Credit Unions

In December 2013 the NCUA Board passed in a 2 -1 vote a rule that would prohibit credit unions operating from homes.  Harper was Chairman Matz Senior Policy Advisor at this time.

The regulation’s stated goal: “the proposed rule intends to ensure all FCUs operate in a manner consistent with modern-day expectations for insured financial institutions.” The term “modern-day” was not otherwise defined.

Chairman Matz told the Credit Union Times in an April 7, 2014, article: “Times have changed, and financial institutions have changed as well and if you are stuck in the past, that means you are not growing, and you are not serving your members well and they would probably receive better services from a different credit union.”

The rule’s premise was based on inaccurate and misleading facts as noted in this critique: “NCUA asserts home-based credit unions are “stuck in the past,” but the fact these credit unions have an average charter length of 55 years and have survived the Great Depression, World War II, the Vietnam War, and the Great Recession tells a more meaningful story.”

On Transparency and Credit Union Input

Prior to the July 2015  House banking subcommittee hearing on NCUA,  CUNA noted: “it’s been six years since the last time NCUA held a hearing on its budget.”

In questions to the NCUA Chair, a committee member described the agency’s duplicity in providing information to the committee, misuse of FOIA to redact documents and failure to post the agency budget for public review.

Chairman Matz deflects all these “mistakes” to staff. When asked if it might be helpful to have direct credit union input and communication on the Agency’s budget, Matz replied, “it would not be effective.”

Excerpts of the hearing can be seen here with senior policy advisor Harper sitting behind  chairman Matz.

On Exaggerating Past Crises 

People tell stories about the past for the present in order to influence the future.  NCUA is especially good at creating these historical re-interpretations.

In the March 2021 NCUA board meeting staff provided “background context” to the 2008-2009  corporate crisis.  Presenters opened by stating there was a $50 billion difference between the book and market value of corporate investments at one point in the Great Recession. They proclaimed that if the agency had let those corporates fail, then this “loss” would have caused thousands of credit unions to also liquidate.

That possibility was never an option, but a wonderful hypothetical to justify any and all subsequent actions. In fact the agency’s auditor estimated the collective corporate TCCUSF potential deficit at yearend 2009 as $6.9 Bn in the opinion released in early 2010.  That proved to be much too high as well.

By dramatically magnifying risks of prior events, NCUA avoids addressing its mutual supervision and examination responsibility for these situations. By hyping potential prior losses, the need for more regulatory resources and unilateral action  is re-justified.

Harper continued with this fictional recreation in the September 2021 board meeting by making the potential disaster even greater:

As I recall, during the last financial crisis, had Congress not acted to create the Temporary Corporate Credit Union Stabilization Fund, we would have had to immediately write down 69 basis points of the one-percent capital deposit. That write-down could have led to a cascade of losses as credit unions trued up their capital deposits with the Share Insurance Fund only to have other credit unions getting into trouble and another true-up occurring.

Although publicly supported in an open board meeting, the NCUA has done nothing to review the corporate resolution: its actual causes, options considered and actions taken upon their liquidation.   In 2010 NCUA estimated the corporate resolution costs to credit unions between $13-16 billion.  To date over $6.2 billion in surplus has been earned by the five corporate liquidated estates (AME’s).

Rhetorical banging on past and future  “risk drums” is an unfortunately tempting political tactic.  It helps concentrate power in a democracy or in an independent regulatory agency.   When those in authority say things are either bad now or bound to get worse in the future, it legitimizes the exercise of arbitrary power, new authority and assessments for more resources. Due process and public comment is often forgotten.

On Financial Regulators and Climate Change

Todd Harper said “financial regulators, like the NCUA, have a responsibility to foster resiliency to all material risks to financial institutions, including those related to climate change. By measuring, monitoring, and mitigating such risks, the NCUA can fulfill its core obligations of maintaining the safety and soundness of credit unions, protecting consumers, and safeguarding the Share Insurance Fund.”

Temperament and Leadership

Changing one’s opinion when presented with conflicting evidence is one of the most valuable skills of the 21st century.  This is not an attribute demonstrated in Harper’s NCUA roles.

A useful example of Harper’s personal style and argumentative logic is from the June 20, 2019 board meeting when he interrogated NCUA staff about the agency proposal to extend the implementation of the RBC rule until January 1, 2021.

The full 120 minute board meeting can be viewed here.  Harper’s questioning begins at approximately 50 minutes in and lasts almost 70 minutes to the end.

The entire discussion of RBC is very helpful, but more relevant now is seeing Harper’s posturing as a minority board member.   He challenges and is condescending to staff.   He uses all of the bank comparisons referenced above to support his position.   If the answer to a question doesn’t fit his thesis about the urgency and impact of RBC, then he moves on, ignoring the answer.

If this is his approach as a minority board member, what will his manner be as Chair?  Will he compel staff to suborn their professional judgments to present hypothetical future failures or align with  policy views which lack factual foundation?

Two questions highlight this hectoring style. He asked staff if RBC would have lessened the impact of losses to the NCUSIF during the Great Recession, not including the corporate problem.  Fazio replies any impact would have been marginal. Harper ignores the undermining of his position.

A second issue which he brings up repeatedly are the insurance costs from credit unions liquidated due to taxi medallion losses.  Here are just two examples:

Board Member Harper: Great. And how effective was the current risk-based net worth rule in mitigating losses at the taxi medallion credit unions that recently failed?

Larry Fazio: So the answer to that question is that the risk-based net worth requirement, while it would require those institutions to hold more capital than the leverage ratio, those institutions held levels of capital well in excess of that requirement. And even with those high levels of capital still failed.  And again,

Board Member Harper: Sure. Did the current rule, the one that’s in place right now, provide adequate protection against losses at the taxi medallion credit unions?

Larry Fazio: It’s a judgment call. I think that’s a case of they – again, they held – so I mean, let’s put a little context around that. It was a situation where the value of the collateral declined precipitously and in a material way; I think a 90 percent decline in value from the peak. The cash-flows of the revenues that the borrowers could generate was materially affected by changes in the marketplace. And so when you had that confluence of events, even an institution with as much as almost 50 percent capital – net worth – couldn’t survive that. So –

Board Member Harper: You’re essentially describing an asset bubble, correct?

Larry Fazio: An asset bubble combined with a disruption in a market. And so, yeah…

There is much irony in Harper’s repeated use of the taxi losses to argue for immediate RBC implementation.   During the entire period of the taxi medallion disruption, Harper was the senior policy advisor to the two chairman who led the agency as  these credit union portfolios declined in value.

His repeated efforts tying this episode to the RBC discussion could be seen as a way to disassociate from his responsibility at the agency when these failures developed.  Was the wolf at Harper’s door as this $765 million loss developed and he failed to notice?

As a policy priority, Harper’s singular emphasis on capital in this June 2019 inquisition as the sine quo non for credit union soundness is extremely myopic.

There will always be failures.  That’s why there is a regulator and insurance-recapitalization fund. The only way to stop failure with 100% certainty is to make things so restrictive that NCUA regulates players out of existence, which some claim is occurring now.  Credit unions manage risk, not avoid it.  It’s too costly to avoid it 100% of the time.

Harper asserts in the meeting that a handful of outliers (5)  require a policy the masses must adopt.  A policy to address the outliers would be a more effective tool, a point Fazio makes several times.

Moreover, lessons were learned during the Great Recession and credit union underwriting has changed.  History is not repeating itself today. Risk today is more tied to collateral  than concentration.

There is current industry data from over two decades that reinforce why 7% is more than adequate as a minimum standard for well capitalized.  Outliers should be supervised with “outlier expertise;” the overwhelming majority of the industry has shown it can operate at a level that has stood the test of time.

Where Will Harper’s Positions Lead NCUA and Credit Unions?

This 70-minute harangue from the June 2019 board meeting shows Harper’s authoritative, even badgering manner.   His confuses historical facts and shows no recognition of the most basic differences between cooperatives and banks.

For example, credit union equity-capital is only from retained earnings.  Whereas bank capital includes numerous options including various categories of stock, qualifying subordinated debt plus retained earnings.  Even with this differences, Harper asserts the two system’s capital comparisons must be the same.

His confusion about the different financial systems, equating the cooperative credit union model’s  purpose with banking is an analytical and factual failing that leads to policy positions completely at odds with credit union history.   His frequent use of bank/FDIC examples unmoor his regulatory priorities from the world of cooperatives.

One result is that he is completely silent on critical issues confronting the system today.  These include the absence of democratic governance by members, the self-serving mergers of well capitalized credit unions, the hidden terms negotiated when credit unions buy bank assets, the complete absence of new charters, and the lack of any joint agency-industry efforts to develop new approaches for the CLF, to support MDI’s and to respond to new technology.

His focus is solely on the power, resources and authority of the agency.  When over 97% of credit unions are rated CAMEL codes 1 and 2 and capable of providing innovative solutions to strengthen the cooperative system, the agency is absent from this dialogue.

Credit unions have successfully navigated two of the country’ worst economic downturns over the past dozen years. Industry analysis suggests that the system is overcapitalized.

What is missing is regulatory leadership willing to encourage and celebrate the self-help role and financial independence many Americans seek from their member-owned cooperative.

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Best Answers for Your New Job Interview

Covid has created a backlog of people stymied in seeking new opportunities.  Companies are finding it harder to hire and retain employees.  Hiring bonuses are rising.  Every day it seems a major company announces a higher minimum hourly wage it is willing to pay to attract applicants.

The vaccines promise to break this logjam for job seekers. Especially with organizations paying up and willing to offer flexible work environments.

Providing insight into this situation is a recent article by writer Jeffrey Harvey about how interviewees might to respond to five common interview questions.

He describes the challenge as follows:

You likely stride into your subsequent interview with a belly full of fire, and a brain stuffed full of all the right words to say, and the right ways to say them. You’ve carefully crafted your pitch so as to embody the can’t miss candidate; the person who will blend seamlessly into the corporate culture from day one.

And then you never hear back.

Five Likely Interview FAQ’s and Unforgettable Answers

 

His essay then describes how a job seeker should handle these questions so as to be memorable.   I will not spoil his insights by sharing his advice which is both humorous and spot on.  Question number 2 is a sample of his approach that is sure to  land your application on the top of the resume pile.

Even if you have no interest in seeking another job, this advice will enlighten your day!

Question #2: “Where do you see yourself in five years?”Answer: “Well, the parole ends in three, so provided we’ve survived the zombie apocalypse…”  And the explanation. . .

This question has torpedoed more first dates than The Rules, and it’s even worse in a job interview. In a world where companies and entire industries are changing moment to moment, not to mention the looming threat of the flesh-eating undead, it’s presumptuous to assume that the human race will still be solvent in five years, let alone a mobility aggregation start-up in Hoboken.

What you really want to convey is that you envision an upward trajectory for yourself, and anticipate the type of personal growth that will make you a greater asset to the company as time passes. Re-gaining the ability to travel out of state is a concrete example of how the attainment of a tangible personal goal will also make you a more valuable employee.

Your somber acknowledgment of the zombie apocalypse will demonstrate your willingness to grapple with unpleasant possibilities — an inevitability in every business. As the old saying goes, hope for the best, prepare for the worst, and stock up on canned meats and fish antibiotics for impending Armageddon.

Or they’ll think you’re joking and remember you for your irreverent sense of humor. At least until a zombie is munching their cerebral cortex.

The other four Q & A’s are just as irreverent.

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New 2020 Census Data for Market Analysis and Planning

The US Census Bureau has just released a map with updated boundaries for the country’s 392 metropolitan statistical areas (MSA’s) and 547 micropolitan areas using the 2020 census.

These areas are the geographic marketing segments that companies and most other organizations use when tracking and analyzing consumer behavior.

America is the third most populous country in the world with over 333 million persons living in 20,000 towns and cities.  These statistical divisions separate this national market into city and regional clusters for local analysis.

This latest Census Bureau map is presented and analyzed in an article from Visual Capitalist, a firm that specializes in translating all forms of data into graphs, pictures and dynamic charts.

The article presents the ten largest MSA’s and links to the full list of 392 in descending population size.  It also shows the percent change in population in each MSA over the past decade.  An MSA is determined by having one population center of at least 50,000.

The article describes the smaller micropolitan regions as “the smallest areas measured on the map generally located further away from large cities, have at least one urban core area of at least 10,000 but fewer than 50,000 people.”  These micro segments may be more relevant for identifying credit union opportunities than the larger MSA’s.

Context for Strategy

This information can be vital for credit unions who want to understand the environment in which they are currently operating or might target for future expansion.   Some information such as the annual HMDA filings for all mortgage applications already provide data by MSA.

As both credit unions and banks report their branch locations (and local deposits) at least once per year, that information could also be assigned to these census bureau categories.  One could then determine which micro markets are less well served by existing institutions.

The challenge will be to find a firm which will incorporate these most recent population trends with branch and deposit data, HMDA reports and other federal statistics into their databases of credit union information.  Then convert this data into visual maps for use, ideally with a point and click capability information pop out per area.  Unfortunately, the Census Bureau map does not provide this mapping dynamic.  A pdf of the map can be seen here.

 

 

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Good News from NCUA’s Board Meeting & an Overlooked Update

NCUA’s September board discussions provided much positive information about the state of the industry and the funds credit unions provide to manage the agency.

  • Credit unions are performing very well with net income running far ahead of 2020 and delinquencies/charge-offs at very low levels.
  • Code 4/5 credit unions continue to decline and account for just .5% of total credit union assets. Code 1/2 CAMEL-rated credit unions are 97.1% of assets.
  • There is a projected yearend operating surplus of $28.6 million from both this year’s budget ($15 million) and amounts unspent from 2020 ($14 million).
  • Staff projects a yearend NOL for the NCUSIF of 1.28% primarily due to a slowing of insured share growth and low losses.
  • Staff will publish the NCUSIF’s investment policy which is how the board oversees the $20 billion fund and its primary revenue driver, the portfolio’s yield.
  • Three agenda items were added to the October through December agendas to finalize open proposals.

However, a significant update was overlooked.  A result that benefits every credit union is the latest corporate AME financials posted on September 15.   Those numbers show a payout to credit unions of $3.158 billion, an increase of $33 million from the March update, or more than the just revealed 2021 operating fund surplus.  More details are provided below.

The Surplus Discussions

What will happened to the $28.6 operating fund surplus?  Part is being “reprogrammed” i.e. spent.  Seven new staff positions were approved which will have a full year’s impact of $1.9 million or $271,000 per position.

Of more significance, three of the positions are to enhance cybersecurity capability and three for the Office of Ethics counsel.  One might conclude that the agency sees the vulnerability from its internal ethics issues as equivalent to risks from cybersecurity bad actors.

The NCUSIF’s June NOL calculation of 1.23% continues to significantly understate the actual ratio.  As of July 2021 the NCUSIF’s retained earnings are $4.739 billion and insured shares at June 30 are $1.579 trillion. Dividing the two gives an equity ratio of .30 plus the 1% deposit true up required of all credit unions resulting in an NOL ratio of 1.30%. This continued underreporting of the NOL misleads both users and the public about the actual condition and trends in the NCUSIF.

A $176 Million “Cushion”

In several of the financial dialogues the word “cushion” was used to describe the accumulation of funds beyond those needed for operations.

Cushions are nice to have.  They bring comfort to hard surfaces or strict budget limits.   But credit unions have always worried that once their members’ money was sent to NCUA, it might not come back in NCUSIF dividends  or be managed wisely.

At the end of July, the NCUA’s operating fund had a cash balance of $176 million and total fund equity of $139 million. This equity is at the highest level ever.   The cash on hand is almost twice the annual operating expenses.   Both are the result of NCUA assessing federal credit union operating fees in excess of actual expenses in every year since 2015 when the fund equity was just $38 million.

The $176 million operating fund cash earns minimal interest on its Treasury deposits. If this surplus was held in credit unions, members and the system would have a much higher return.

NCUA has chosen to roll over surpluses instead of returning funds to credit unions, reducing the OTR charged the NCUSIF, or lowering the operating fee to the actual projected net cash outlays.  They have become a cushion for management undercutting effective control of both expenses and capital outlays.

Financial Cushions, Corporate Crisis, and Historical Myth Making

The NCUSIF’s current NOL cushion is even larger.   Because 80% of the NCUSIF assets are from the 1% credit union deposit, the primary responsibility for NCUA staff is managing the fund’s equity ratio of .2% to .3%.  This equity was originally caped at .3%.  This was a legal constraint so that NCUA would not spend unconstrained the money credit unions provided in their open-ended, perpetual underwriting role.  Amounts above the NOL cap must be returned as a dividend to credit unions.

CUMAA in 1998 gave the Board discretion to set a cap from 1.2% to 1.5%.  In 2017 the NCUA Board, for the first time ever, raised the cap to accumulate excess funds above 1.3% from the merger of the TCCUSF.  This was after the fund had expensed $748 million from the TCCUSF merger surplus to add to the NCUSIF’s loss reserve to liquidate two taxi medallion credit unions in 2018.

NCUA’s reasons for raising the NOL cap to 1.39% after this loss expense transfer were at best dubious and at worst, just made up.  Multiple commentators pointed out these flaws in their comment letters about the TCCUSF merger.

Today each basis point in the NCUSIF is worth $160 million.   The 13-year actual loss rate (2008-2020) per insured share is 1.51 basis points.   In every year since 2014 the actual cash loss in the NCUSIF has been under .5 basis points except for the taxi medallion liquidations paid in 2018.

Corporate Myth Making

The only push back against this actual loss record is referencing the Corporate debacle in 2009-2010.  Chairman Harper again used this recurring trope at Thursday’s meeting.  He stated that if Congress had not bailed out the NCUSIF, credit unions would have to write down their 1% deposit by 69 basis points causing a cascading problem in the industry.

Like myth makers in other areas of politics and society today, this fable continues even as facts completely contradict this historical story telling. Today the surplus  from the corporate “legacy” assets exceed $6.2 billion and counting. The histrionic 2009 loss projections, made decades into the future, were completely at odds with the external TCCUSF audit results at that time.

The exaggerations reflected the fear and the uncertainty rampant during the crisis, not a considered analysis of options or actual performance.  They were the result of “modeling myopia” arising from a complete misdiagnosis of the situation.

The State of the Corporate Resolution Today

Fortunately we know the outcome versus these hyperbolic forecasts. On September 15, 2021, NCUA posted the latest quarterly updates for the five corporate AME’s.   It shows total projected recoveries to shareholders of four corporates of $3.158 billion, an increase of $33 million from the March quarter.   As of June 30, $2.619 billion of the recoveries were still to be paid.

What is the cost of NCUA’s oversight of the AME’s?   The answer: $4.825 billion to manage the P&A’s and all other expenses from the NGN refinancing.  Subtracting the legal expenses charged each AME still leaves a total of $3.567 billion the agency expended administering the NGN’s and AME operations. In other words the net legal recoveries would just pay for NCUA’s liquidation expenses.

For comparison the total operating expenses for the NCUSIF from 2008-2020 were only $1.9 billion or half those of the corporate resolution program.

The TCCUSF surplus and fees paid into the NCUSIF over $3.0 billion and the $ 3.2 billion projected payments to shareholders, all come from the legacy assets.

The TCCUSF legislation provided no capital for credit unions.  It provided only temporary liquidity draws, all of which credit unions were obligated to repay. The TCCUSF merely set up a separate fund for tracking the corporate resolution and moving the accounting out of the NCUSIF.   However, all of the funding for any corporate losses and loan repayments came from a single source: credit unions.

Financial cushions  can encourage misjudgments in difficult situations. The challenge today is not the adequacy of the historically validated NCUSIF structure and an NOL of 1.3.  The real issue is the ability of NCUA to work mutually with credit unions when problems arise to resolve them in the most cost-effective manner.

The typical government instinct is that money can solve any problem.  Without effective constraints on spending, NCUA’s solution will be to liquidate  problems.  Unrestricted spending is the real lesson from the corporate resolution.  The results were catastrophic. How many more times must it be learned?