Author: Chip Filson

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My Favorite Headline this Week.

No, this is not from the Onion or other satirical pub.  It is from the English newspaper the Guardian.

United Airlines reminds crew not to restrain unruly passengers with duct tape

The story opens as follows:

United Airlines has asked its employees to not use duct tape to restrain unruly passengers.

In a memo sent to employees last Friday, United flight attendants were urged to “please remember that there are designated items onboard that may be used in difficult situations, and alternative measures such as tape should never be used”.

The article then lists examples of duct taping unruly passengers over the years at other airlines. Apparently the technique is not unique to United.

United then encourages its employees to use the “huddle process” instead:

In instances of disorderly behavior, United said, employees should resort to standard de-escalation measures, including using “the huddle process … which involves discussing the situation with the captain, customer service representative and ground security coordinator for evaluation and solutions”.

All I might say is that it is far better to use duct tape on passengers than for aircraft repairs.

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SECU’s Mike Lord: Two Remarkable Accomplishments

The CEO of the $50 billion State Employees’ Credit Union (SECU), Mike Lord retires at the end of this month. His career is noteworthy for two remarkable achievements:

  1. He successfully navigated 30 years of intellectual contrarianism with Jim Blaine, his boss. Jim’s motto is “often wrong, but never in doubt.” His public name-image-likeness (NIL) brand is an animal of the horse family, but typically smaller than a horse with longer ears and a braying call.
  2. Against all odds, he sustained and expanded SECU’s exceptional level of leadership and member well-being as Blaine’s successor in 2016.
    Succeeding a legend and then taking results to a new level whether in business, coaching a sport, politics or any field of public endeavor, is an incredibly rare event.

“Don’t Mess It Up”

The management consultant Peter Drucker stated, “the most common source of mistakes in management decisions is the emphasis on finding the right answer rather than the right question.”

For Lord and SECU that question has always been how to enhance member service. The mission and vision of the credit union are folksy truisms: “Send Us Your Mama” and “Do the Right Thing.”

When Lord became CEO in 2016 his stated goal was just as straight forward: “Don’t mess it up.”

In today’s individualistic culture that celebrates personal achievement, choosing a leader where the mission supersedes personal ego is a tribute both to the organization’s values as well as the leader’s character. Especially so in the second largest credit union in America.

An example of these values is SECU’s compensation practice. The credit union follows the “Mondragon model” to assure balance among all staff. There are no perks, no bonuses, no incentives and all staff receive the same benefits (health, retirement). This means that SECU CEOs are not paid the multi-million salaries prevalent at many smaller, less complex, less successful CUs.

Focus and Consistency

Several decades ago, SECU’s Board decided to “limit” SECU’s FOM to North Carolina. Those members who moved out of NC or lived in foreign countries could remain, but if they wanted loan services they were referred to a local CU. This focus on the core members who “brung us to the dance,” makes SECU a formidable force against major national banking competitors, several of whom call North Carolina home: Bank of America and Truist.

Today SECU serves 1 in 4 North Carolinians. Rather than trying to be a “national” credit union, its statewide focus has improved economic prospects for individuals and communities that are little more than an afterthought for large competitors.

Sustaining success following the iconic 30-year tenure of Blaine required an underrated leadership trait, consistency, one of Lord’s strengths. While he may have had to go outside of SECU for some expertise, Lord continued to promote from within for employee advancement. Front line staff are much more than transaction providers. Some even receive training in multiple areas of financial service, including tax preparation, life insurance and investment counseling, while earning the appropriate license for each discipline.

Traditional media advertising was shunned. The credit union relied on word of mouth and its foundation’s public philanthropy to keep the SECU name in the press. The funding of scholarships for every local education agency in the state, contributing to teacher housing, new hospice facilities and dozens of other projects projected a “brand” deeply involved in members’ communities.

A Cooperative Financial Conglomerate

Describing SECU as the second largest credit union in the US does not begin to define the scope of its member services. With the credit union at its core, the credit union also oversees the following organizations-CUSO’s:

  • SECU Life is the only CU-owned life insurance company in the US. Other CUs which offer insurance do so as an agent for an outside firm;
  • A broker dealer and investment advisor that developed a unique partnership with the low-cost Vanguard mutual fund family for members seeking off balance sheet investment options;
  • A 501(c)3 Foundation that donates over $15 million per year for community needs in North Carolina;
  • A property management company (SECU*RE) that owns and manages 1,500 properties to provide housing, and improve declining neighborhoods, sometimes even selling homes to members. This company is for-profit, taxable and was begun as SECU’s response to the 2009 housing crisis. Its purpose is to reinvest in neighborhoods, prevent bottom fishers from underpaying for foreclosed properties, and provide renters a better choice than local slum lords.

With these multiple business lines come many regulators: NCUA’s ONES and North Carolina’s Credit Union Division of the Department of Commerce, NC Department of Insurance, CFPB, FINRA/SEC, and of course the IRS for the Foundation.

Staying Local While Becoming Larger

With a branch in every county of the state, the credit union’s over 270 locations operate like small credit unions. They provide local employment, knowledge and expertise for every part of the state. Branch managers consult with local advisory boards and often make recommendations for SECU services or foundation grants for their areas.

Lending decisions are all made at the branch level. Branch personnel are intimately familiar with local economic conditions and politics, even in the smallest community. This gives SECU deeper insight into all things economic when making loan decisions and keeps charge-offs way below peer averages.

A Simple Product Profile

The primary purpose of each SECU product is to help members become financially stronger. The credit union’s primary product for helping members build wealth is a variable rate home loan to encourage home ownership. Its loan portfolio is 74% first mortgages.

For over a quarter of a century SECU has made 100% mortgage loans with negligible losses to help lower income and young folks achieve home ownership. Underwriting was based on the common-sense idea that if members pay rent reliably they can be counted on to pay the same amount on a mortgage to own their home. These mortgage loans also invested billions in communities throughout North Carolina’s economy, not just in wealthier big cities.

There is no risk-based loan pricing: each product has a single rate whether a credit card, auto or other lending need. Each loan is based on individual underwriting, not credit scores. SECU’s Salary Advance loan has made billions in payday loans to members at APRs less than 15%. The program, which also has a savings component, fights for-profit payday lenders who prey upon the least advantaged in the economy.

In addition to traditional savings and share drafts, the credit union has $170 million in a 529 college savings plan, $67 million in HSA accounts, and $ 4 billion in IRA/Keogh retirement savings. SECU’s 529 plan is a financial “safer option” for all participants in North Carolina’s college savings program, not just SECU members. That selection says much about the confidence in SECU within the state.

As with loan pricing, there are no savings tiers based on account balances–all 2.6 million members receive the same rate on each product.

Serving the Cooperative System

SECU’s influence extends far beyond its 2.6 million members. Within North Carolina’s cooperative system, the credit union supports others who might reach out for mergers to offer mentoring and resources so they might continue their independent journeys. These operational alliances continue today with Local Government FCU, Latino Community CU, North Carolina Press Association Federal Credit Union and Greater Kinston Community Credit Union.

Greater Kinston is the last survivor of 55 credit unions chartered by the black community during the Jim Crow era when financial services were not open to them. SECU was also a leading fundraiser for the Martin Luther King memorial in Washington, DC.

At a time when many peers proclaim institutional growth as the critical performance objective, not members’ financial well-being, SECU adamantly asserts this is a false dichotomy. Members are the credit union.

As many leaders focus on innovation and the allure of the self-service virtual future, SECU continues the traditional embrace of a face-to-face relationships– for all ages from the newborn to the retiree.

The bedrock of its strategy is the cooperative model with all its inherent design advantages versus other firms. Member-ownership is the unmatchable competitive difference. It implements what writer Ken Wilber calls “good power” in which organizations protect the many who are often at the mercy of the firms they use. He contrasts this “good power” with the instinct of “dominant” organizations that use their position primarily to protect, maintain and promote their success at the expense of others.

SECU proves that size does not dilute cooperative values or purpose. It is a powerful example of the ability to achieve mission and counter the prevailing tendencies of credit unions to become more and more bank-like.

SECU demonstrates that economic, social and political influence can be accomplished by implementing and innovating traditional cooperative principles. Its success validates the credit union system’s contribution for both its members’ financial health and for co-ops as an essential part of the American economy.

Sitting in the Same Place Where He First Began

SECU has been developing system leaders, not only by hiring at the entry level and promoting from within, but also by sending leaders to over 30 other credit unions. Some–Tom Dorety, Terry West, Maurice Smith, and Tom Feindt– ran billion-dollar shops while others migrated to smaller but no less vital firms.

Lord’s career exemplifies this leadership development capacity. In a 2016 interview after becoming CEO, Lord pointed out his office was at the same location where he first began his career 46 years earlier. Albeit in a very different building. Lord’s career exemplifies a critical life lesson, awareness of one’s “true home.”

In a poem called “Little Gidding,” T.S. Eliot ends his quartet by writing:

We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.

Lord is the rare exception to Eliot’s observation of human nature. For without exploring, he knew the place he belonged, from the very first time he arrived.

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A CEO’s Current Analysis—and How to Respond

As I write this, we’re deep into preparations for our 2022 business plan and budget. We’re in the mood to look forward and say, “yesterday’s numbers are yesterday’s numbers.” And, as of June 30, yesterday’s numbers are spectacular.

I could wax on about all of the effort, the good luck, and the wonderful contributions of everyone involved. Credit unions put forward the capital and embrace our alliance; we go about our day-to-day business; and the results are great.

But I have a nagging feeling about the future. We all have the sense that we’re making money by hunkering down, by avoiding aggressive investment, by just riding the wave of a national COVID approach that will leave us hanging in the future.

American citizens will all have to wake up and face the day after all the free money expires. As American businesses, that means we are going to wake up to consumers being resentful about how hard life is, the day after the COVID relief funding ends.

I wonder what a marketplace of resentful consumers means to credit unions. I wish I had a crystal ball and could tell you exactly what it means, but I don’t. I can only tell you what we’re planning for 2022 and how we hope that will pay off in the coming years.

    • We’ll have to be more aggressive about investment and think hard about what we’re committed to as a community of credit union operations. We need to fuel the future with investment. The hunkering down is over.
    • While we have a bit more time to analyze business trends related to the COVID pause, we’ll have to quickly identify the game-changers that will last, versus the over-reactions and over-estimates of how things like remote work will affect our future. We can’t throw out the baby with the wash based on an interruption in economic models. What will we count on? What will we bet on? What will we make work? I’m not sure it’s going to be as radical in the next two years as most people think. We have options if we’re patient. We have a future if we don’t shoot ourselves in the foot.
    • We’ll have to avoid being disappointed by the fact that COVID might not end as cleanly as we all hoped. We’re making progress, but that progress may not be without some setbacks. Things like vaccines, wearing a mask, and social distancing might not just end, never to be seen again. It may feel like these issues linger right through 2022 and 2023, like a bad hangover after New Year’s Eve. Optimism, and a realistic evaluation that things are getting better, will have to rule the day for business planners.

Wow! These three marketplace realities confront every in-place or new leadership team.

The pressure will be high to pick the right investments, to choose the right trends to run towards, and to maintain an optimistic viewpoint, when pessimism is all around. No easy missions for any CEO.

The pressure is not on a single individual; it’s on a network. For a network to work, we all have to help our peers be successful by contributing to each other’s success. If you want to contribute to our CUSO’s success, spend a few minutes thinking about how each of us can be the person who helps us all avoid dropping the ball.

The numbers as of June 2021 are great. The predictions for September 30 are as positive as any year I can remember. My faith in the future is constant, given my faith in all of you.

Source: Randy Karnes, CEO, CU*Answers, used with permission

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“The Best Damned System in the Country”

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

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

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

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

The End of Dual Chartering

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

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

The One Sure Defense: Choice

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

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

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Coop Design’s Two Unmatchable Advantages

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

Ownership Matters

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

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

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

The Power of Relationships

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

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

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

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

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

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

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

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

The Network Advantage

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

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

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

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

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

 

 

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Mergers: Can’t We Do Better than This?

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

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

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

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

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

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

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

Is the credit union system vulnerable to this political critique?

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

The Credit Union’s Website Promises

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

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

Member-Focused Attention Meets Diverse Banking Options

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

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

Member Ownership 

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

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

Open to Anyone — Become a Member Today!

What South Division is Telling Members Now

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

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

Voting by Proxy: A Foregone Outcome

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

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

What is Left Unsaid

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

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

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

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

A Challenge for the Credit Union System

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

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

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

When Collaboration is Most Needed

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

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

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

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

 

 

 

 

 

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

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

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

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

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

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

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

Old-fashioned Patriarchy

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

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

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

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

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

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

 

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Conserved Municipal CU Shows “Progress”

Surely the biggest human failure is not learning from failure. 

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

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

NCUA’s Conservatorship Actions in 2019

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

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

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

The June 2021 Results in Context

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

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

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

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

When Transparency is Lacking, Credibility is Forfeited

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

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

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

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

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

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

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

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NCUA Reduced Expenses $64 Million During 2020 Pandemic

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

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

The Numbers Total $64 million

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

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

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

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

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

Sustaining Success by Incorporating Lessons Learned

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

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Three Credit Union Airplane Stories

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

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

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

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

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

Ed Speed, CEO, Texas DOW Employees’ Story

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

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

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

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

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

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

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

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

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

“The problem was going to be the delivery.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“It all came together.”

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

A Charismatic CUNA President and His Airplane

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

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

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

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

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

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

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

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

How Herb Lost His Job

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

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

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

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

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

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