Author: Chip Filson

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NCUA and the Supreme Court

There is a case before the Supreme Court this term that could influence credit unions’ options when they disagree with an NCUA action or ruling.

In the 1984 Chevron case, the Court’s decision gave deference to a federal agency’s interpretation, as well as enforcement, of the law.

As described below this precedent and the authority it gave federal agencies is now the subject of an appeal that might curtail the scope of that decision. The case is described below.

How Might this Affect Credit Unions

If the Court’s decision were to limit the agency “deference” practice  from Chevron, it would create better opportunities for credit unions to challenge NCUA actions.

A recurring example of the agency’s unilateral interpretations are its determinations of the adequacy of a credit union’s loss allowance and hence its net worth/PCA ratio.

A classic example is NCUA’s conservatorship of Arrowhead Central Credit Union in 2010.  The agency said the credit union was severely undercapitalized with a net worth ratio of only 3%.  However that ratio was because the agency disputed the adequacy of the credit union’s allowance account.  Examiners required significantly more allowance expense.  Subsequent events showed management’s original estimate was exactly on target.

NCUA celebrated the credit union’s miraculous turnaround in May 2013 pointing to a net worth of 10.5% up from the 3% estimate when conserved 36 months earlier. The situation was another example of regulatory misjudgments from which there has been no external appeal.

Ironically the legacy of this account’s over-funding continues today. Arrowhead’s coverage ratio (allowance account/delinquent loans) is 940% or roughly 800% higher than the industry average.

Even NCUA board members who interpret the law as they read it have no standing.   Board member Mark McWatters,  a lawyer, presented his legal analysis opposing  the agency’s risk based capital proposals as not authorized by statue. His reasoning was “overruled” twice by a simple board vote, 2 to 1.

Rebalancing Unilateral Decision Making

The Chevron precedent has inhibited credit unions from challenging NCUA’s judgments and actions in court.   For example the so-called merger of the TCCUSF with the NCUSIF to use the funds for natural person loses was specifically prohibited in Congress’s  legislative language with the bill.  This was pointed out to the board, the IG and  NCUA’s auditor in letters and formal comments, but to no avail.

Should the Chevron precedent be modified, it could result in a better balance between the judgments of the regulator  and the rights of credit union’s to challenge those determinations.

Agency deference

by Jonathan Turley, Shapiro Professor of Public Interest Law, George Washington University. (Jan 1, 2022)

While not often discussed with the “matinee” cases of the term, one case on the docket could bring sweeping impacts across various areas — from the environment to financial regulations to public health. American Hospital Association (AHA) v. Becerra raises a highly technical question of a U.S. Department of Health and Human Services rule that cut outpatient drug reimbursements to hospitals. The rule is based on an agency interpretation of vague statutory provisions — an interpretation that was defended under the deference afforded to agency decisions.

 The case is technically about outpatient care for Medicare Part B recipients; however, for some justices, particularly Samuel Alito and Neil Gorsuch, it is all about Chevron and agency deference.

 Chevron USA Inc. v. Natural Resources Defense Council Inc. is a 1984 administrative law case that has come to embody the role of federal agencies in not just enforcing but creating law. The “Chevron Doctrine” has insulated agency decisions for decades from substantive review, giving federal agencies an overwhelming degree of authority in our system of government.

 For some of us, the dominance of federal agencies has become equivalent to a fourth branch of government. The question is whether a critical mass has formed on the court to substantially curtail that decision. If so, AHA v. Becerra could be a torpedo in the water for the Chevron Doctrine.

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Member Voices After Being Merged

In June 2018, the NCUA board approved a new merger rule.  The rule was extended to all FISCU’s because the agency believed there were safety and soundness risks if a merger was not done in the members’ interest:

For example, members of a merging credit union who discover, after the fact, that they were inadequately informed about the details of the merger may become disgruntled. The dissatisfied members could create bad publicity, creating a reputation risk for the continuing credit union. Unhappy members could also choose to stop doing business with the continuing credit union, affecting earnings projections.

In contrast to commenters’ assertions, the statutory factors the Board must consider in granting or withholding approval of a merger transaction include. . . the general character and fitness of the credit union’s management.

Members Reacting Post Merger

There is no “after the fact” process for NCUA to learn members’ reactions to the merger of their credit unions.  The following  comment posted on January 14, 2022 to Just a Member is an example of one reaction:

Comment:

Recently, Teresa Freeborn has left Kinecta to manage her Daughter’s Business interests.  The merger of Xceed FCU and Kinecta was a disaster.  After months of wait, the transition was a bust.  Poor customer service.  Problems with online access and mismanagement of credit cards from XFCU visa to Kinecta Mastercard.  I paid off my Visa and the balance rolled to the unactivated Kinecta Mastercard.  I had to file a complaint with NCUA to get it resolved.  I have now closed my accounts and ended an over 40-year relationship with XFCU.  I have found better banking deals at BOA and Citibank.  I think you have made a smart decision, Teresa Freeborn, to exit credit unions after protecting your interests and abandoning the Credit Union members!

George E. Skelton

Today’s social media options provide multiple sources for members’ post-merger experiences.

When PenFed merged with Postal Employees in Madison Wi, in April 2021 the following comments were provided about the subsequent service:

NameWithheld
August 30, 2021

Lousy place. Abusive. Fails to do what’s requested. Online phone help just as bad. Says being done but not. Waited 65 days for free personal checks that never showed. Still waiting for refunds and account closures. Worse place ever in my 45 years of banking. Local Person at Madison Wi extremely abusive. Place needs to be shut down. Don’t waste your time here. Consider a class action lawsuit.

PETER SCHNEIDER
August 24, 2021

POOR customer service…..so impersonal….hate being treated like a number and not an individual.

PenFed’s Merger with Miramar FCU

Years after the May 1, 2017 merger between PenFed and Miramar FCU, members continue to compare their post-merger service to that received prior to the event:

February 8, 2021

The employees here are nice but the service is not efficient – employees do not know procedures for certain requests or processes. When it was Miramar FCU the staff were more equipped to answer questions and work through solutions with members.
Also, the hours are incorrect. Penfed office of Miramar is closed and there was no update on the website nor any message to inform members. Penfed, please update your information on your website and your employees on procedures. 

Joanne
July 31, 2020

It is 1245 on a Friday afternoon and the hours are stated that you are open until 1pm. so why is no one picking up the phone? have been on a continuous ring and redialing for the 15 minutes, until 1 pm. a business is supposed to answer it’s phone. this never happened to me in the the days of mfcu.

Brad Hines
April 9, 2020

This was a topnotch organization when it was Miramar FCU. Since PenFed took over there’s been a complete overhaul of the staff – and not for the better! I’ve had numerous times where tellers have made mistakes, or they just didn’t know what to do and had to ask for help. Most recent situation was transferring a large amount of funds out of a CD that had matured. The teller didn’t know the procedure, so had the manager come over to help. She explained that my best course of action was to put the funds into a “premium” savings account which yielded decent interest. I authorized this, and the teller made the transaction (after the manager had left). Several days later I just happened to check my account online only to see that that large amount of $ had been put into a “regular” savings account that had very poor yield. Fortunately when I called the national help desk they were able to fix this – but what a gigantic error and problem this would have cost me if I hadn’t discovered it!

A member’s report of service at a former branch of Ft. Belvoir FCU, now merged with PenFed, and the credit union’s response:

Chandra G a month ago

I would like to say that I was so hurt when I left the PenFed on Davis Road. A teller was helping me with an issue. I needed a letter to send to my other bank so she had to refer me to a manager. Before I went into the office, I told the teller that I needed that document back when they were done with it.
By this time I was walking in the office with a manager and a member service representative. The teller is so kind so she wanted to tell the manager that I needed the document back. Before she could say anything, Regina Lawton told her, “you don’t need to be in here. Go back out there.”
She then repeated it two more times, “You don’t need to be in here. Go back out there and help them. You don’t need to be standing in here.”

The teller was just attempting to tell her that I needed the document. She was providing excellent customer service!
I couldn’t imagine working for Regina Lawton. If you speak to your employees like that in front of customers, I can only imagine how you speak to them privately. TERRIBLE
Also, the teller DOES NOT know
I’m reporting Regina Lawton. I went to my car, after the incident, and my conscience wouldn’t allow me to leave knowing someone is being treated like this.

Response from the owner a month ago

Hi Chandra, thank you for bringing this to our attention. We will share this with our branch leadership team. We appreciate your membership and feedback.

Google reviews of PenFed’s merger with a Georgia Credit Union

Yasmin 4 days ago NEW

No customer service whatsoever. I’m a patient person so I waited 30 minutes to eventually walk away and take my business somewhere else. But what I don’t tolerate is when you have 2 customer service reps just staring at the group of people waiting for membership services. No, we will be with you. No, thank you folks for your patience. Just no acknowledgement whatsoever or managing expectations. Then for some reason, they were done with the prior members, it had been about 10 minutes, and they didn’t come for the next group. Not efficient at all. So rude.

Jason Boyd 3 weeks ago NEW

This is a federal credit union that is united but you can’t do business with your other credit union accounts (such as safe federal credit union) unless you have an account with them directly. Not only is that greedy but a poor business model. I will never bank with you and I will make sure no one I know does either. Oh, and thanks for the 15 minute wait for nothing too btw.

Where’s the Problem?

NCUA’s statement that poorly done mergers create bad publicity and soundness risks affects more than a merging credit union’s members.   The reputation of the credit union system is stained.

But the problem is not just badly executed mergers.  When mergers are pursued as an acquisition strategy, institutional ambitions easily become more important than the members’ best interests.

There are fundamental gaps  in NCUA’s oversight  of its merger rule.   Board member Metsger stated at the time of the revised rule:

“Our focus is on ensuring member interests are protected through the regulatory process.”   

However efforts to protect member interests are not evident in NCUA’s supervisory oversight. Egregious self-dealing and hollow future benefit promises are routinely approved.

The member comments above are indications that something is amiss in regulatory oversight.  A later blog will provide some examples of self-dealing, at the members’ expense, routinely approved by the agency.

 

 

 

 

 

 

 

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Finding Qualified Employees-A Case Study

The $10.6 billion Alaska USA FCU operates branches in four states to serve its 712,000 members (September Call Report).

The distribution of operations includes 27 locations in Alaska, 12 in the greater Phoenix area, six in California and 22 in Washington state.  Total employment (FTE’s) is 1900.

Currently its web site lists 240 openings for credit union jobs.   Twelve pages with 20 positions each.  That is a vacancy rate of 12%.

The number of openings poses questions such as: What is the impact on member service?  How do these vacancies affect its current capabilities?  Are the open positions in one area or throughout its network?  Is this just another example of labor shortages across the broader economy?

A Simple Truth

In the credit union’s web site “About” section, their origin story begins:

In 1948, fifteen civil service personnel gathered in Anchorage’s Alaska Air Depot, pooled their savings and their conviction in one another, and formed a member-owned credit union.

At the heart of that decision was a simple truth—local financial institutions simply could not or would not support the credit needs of the personnel who had been recently transferred to Alaska.

This “truth” raises another possibility:  As Alaska USA’s operations  expand beyond Anchorage  throughout the Western United States, has this lessened their “local” advantage for  attracting employees?  What will be the impact of going Global?

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Honoring Leadership

One theme in  Jim Blaine’s credit union writings  was to honor leaders within and without the cooperative movement.
He chose Martin Luther King’s words  in the three posts below.   Each offers insight of how to make a difference. Click the link to see Jim’s  full blog with pictures.

What It Takes to Change the World

“Injustice anywhere is a threat to justice everywhere.”
– Martin Luther King, jr.
(from a jail cell in Birmingham – 1963)

The Persistent Question

“Life’s most persistent and urgent question is, what are you doing for others?”

True Meaning of a Creed: Walking to the Front of the Line

“I have a dream that one day this Nation will rise up and live out the true meaning of its Creed:  “We hold these truths to be self-evident, that all men [and women] are created equal.”

Martin Luther King, Jr.
Lincoln Memorial
Washington, D.C.

August 28, 1963

March on Washington:
* “It’s difficult for someone these days to understand what is was like, to suddenly have a ray of light in the dark.”
*  “The crowd was enormous.  Kind of like the feeling you get when a thunderstorm is coming…”

* “We are here because a woman by the name of Rosa Parks stood up in the back of a bus in Montgomery, Alabama, walked down to the front, and…”

“Walk down to the front” in life and you just might be surprised who goes with you… (Blaine)
The following is King’s statement about our interdependence, which directly speaks to  cooperative design.

A Network of Mutuality

“All I’m saying is simply this: that all mankind is tied together; all life is interrelated, and we are all caught in an inescapable network of mutuality, tied in a single garment of identity. Whatever affects one directly, affects all indirectly. For some strange reason I can never be what I ought to be until you are what you ought to be. And you can never be what I ought to be until I am what I ought to be – this is the interrelated structure of reality.”
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Bon Mots for Friday

We do not learn from experience. We learn from reflecting on experience.  John Dewey

I often tell people that many of the things we do don’t always make sense to business students– but I believe that’s part of our secret sauce. While data is important, people are more important, and our formula has always been based on taking care of people.   Doug Fecher, Retired CEO, Wright-Patt Credit union 

An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today. Laurence J. Peter, Canadian writer

We tell ourselves stories in order to live. Joan Didion

Didion also asks, sometimes implicitly, sometimes explicitly, what happens when you can’t trust the narrator? How do you know whose story to believe? What happens when all stories are both believable by some and unbelievable by others? What happens to that community storytelling creates when the members no longer agree about their story?   Dr. Andrew Roth

There’s a difference between a procedure update and a process improvement. A procedure update might edit step nine in a 10-step sequence. A process improvement reconsiders why there are 10 steps at all. Jimmy Lovelace, Senior Vice President, Community First Credit Union of Florida

A writer annoys his readers by writing too much.

For weekend reading:  It’s Time to Remind Members They are Owners, by Henry Wirz, Retired CEO, Safe Credit Union

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Managing the NCUSIF-Is It too Late to Act?

What should credit unions do when the regulator who makes the rules, does not follow its own rules?

Yesterday the consumer price increase for calendar 2021 was reported as 7%, the highest in 40 years.  This was not a surprise.   Concern about increasing inflation and the Fed’s response had been growing since the summer of 2021.

Interest rate risk is not a new topic. NCUA first proposed adding an S for sensitivity  to the CAMEL rating in 2016.  In October 2021, the board approved a rule adding this “S”  with Chairman Harper saying:

The NCUA’s adoption of the CAMELS system is good public policy and long overdue.  Separating the liquidity and market sensitivity components will allow the NCUA to better monitor these risks within the credit union system, better communicate specific concerns to individual credit unions, and better allocate resources.

The agency’s description of interest rate risk was straight forward:

The sensitivity to market risk reflects the exposure of a credit union’s current and prospective earnings level and economic capital position arising from changes in market prices and the general level of interest rates. Effective risk management programs include comprehensive interest rate risk policies, appropriate and identifiable risk limits, clearly defined risk mitigation strategies, and a suitable governance framework.

Ignoring its Own Rules

However Just six days prior to this, those responsible for managing the NCUSIF’s portfolio invested $1.0 billion (5% of the portfolio) at an average weighted life of 5.95 years and yield of 1.19%.

These investments actually extended the portfolio’s overall maturity from the month before.

This was a continuation of the robotic process  the NCUSIF investment committee had followed since market rates had fallen to near zero in 2020.

In December 2020 question were raised about these investment decisions: What Is NCUSIF’s IRR Investment Policy? Is this a Gap in NCUA Board Oversight?  The article pointed out NCUSIF’s most recent investments included a 7-year fixed rate yielding only .45%.  Would any reasonable person make this investment at this point in the cycle of historically low rates?

In August 2021, the NCUSIF continued its market tone-deaf investing by placing $1.2 billion at an average weighted yield of .943% and life of 5.7 years.   The analysis pointed out that these decisions were hurting credit unions.  One immediate decision that month cost credit unions $4.2 million in foregone revenue over the next 7 years before it matures.

At the same time, credit unions in contrast, reported keeping 53% of their record level of investments in overnight funds.

Who Makes These Decisions?

The NCUSIF has an investment committee of four people including the Chief Financial Officer, the Director of E &I, the chief economist and the head of the Capital and Credit Markets division.

NCUA preaches interest rate management,  but does not practice it.  One doesn’t have to run a stress test to see the devastating results  of these recent decisions. The  NCUSIF’s monthly data documents the decline in portfolio value as rates began  rising over the past 12 months.

In September 2020, the $17 billion NCUSIF reported a market gain of $586 million. In October 2021, the latest report available, this had fallen  by 97%, to just $16.2 million on a portfolio $20.3 billion.  Large portions of the most recent investments are now worth less than their purchase price.  These low yields will hurt the NCUSIF’s performance for years to come.

Who Is Responsible for this Performance Failure?

The NCUA board receives a monthly report on the NCUSIF and a quarterly in-person update.

In questions about investments as recently as December’s meeting, staff’s response is they are just following Board policy.   In the September’s 2021 board meeting the CFO agreed to make public this investment policy.  It didn’t happen.  Several meetings later, he explained the policy was under review and would not be released until that was completed-at some indefinite time in the future.

The Board unanimously approved the new interest rate sensitivity rule in October 2021, which was first published in March.   It receives the monthly report showing the robotic investment activity and steadily falling portfolio values.  The board’s  words and deeds are far apart when it comes to IRR.

The Costs to Credit Unions and NCUA

When the agency’s highest professionals show an inability to manage the agency’s largest asset, the $20 billion NCUSIF, in accordance with its own rules on interest rate sensitivity, fundamental questions are raised.

Are senior staff competent for this task?  Are these investments what the Board really intends with policy?   Is no one in the agency,  staff or board, able to see the damage this causes to the fund’s revenue and its financial soundness?

Good judgement comes from experience.  And experience?  That comes from bad judgement. How many more bad judgements does the board need?

More than the NCUSIF’s future is at stake, as important as that is.   This year-long example of failure to respond to the changing economic conditions in managing the funds, begs the question: Is the agency capable of overseeing this issue in credit unions?   The IRR monitoring of the NCUSIF is simple.  In most credit unions the issues are much more complex.

Both the NCUA board and senior staff are letting credit unions down.  Sooner or later the bill for this failure will come due.   A simple portfolio yield of just 2% on $21 billion is sufficient to cover the normal financial expenses in the fund.  When these investment decisions lock in rates of 1% or less for 5 or 6 years, a premium may be required to pay for the damage caused by poor management.

If this failure is the outcome for the simple management of the NCUSIF’s IRR, the bigger issue is whether the agency has the grasp to properly monitor the industry through the coming rise in the interest rate cycle.

The first test will be what the leadership does about their responsibility for the NCUSIF.  Will the board and senior staff continue to kick the can down the road, blind to the consequences of inaction, or make a difference now?

 

 

 

 

 

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Situational Awareness, Leadership and Looking Ahead

As leaders celebrate the known wins in the books for 2021, there is also the need to anticipate what lies ahead in the New Year.  Will it be better or worse?  More of the same, or changes planned?

One approach to this forward-looking exercise is situational awareness, sometimes abbreviated SA.

The concept was developed primarily by the military.  It is a skill to improve one’s ability to identify potential threats, be more ‘present’ and aware of your surroundings in combat.

The term has also been used to analyze danger in various worker environments where the potential for accidental injury is great.   Some even apply the concept to personal safety where one might be at risk such as traveling in an unfamiliar neighborhood at night.

Situational Awareness in Sports

A frequent reference to this ability to react in a situation is sports competition.

Success does not always go to the strongest or fastest athlete, but to those that have a superior “feel for the game.”

My son-in-law played offense tackle for Stanford when the team was coached by Bill Walsh, a former NFL coach,  considered a master offensive tactician.

Walsh would always script his team’s first offensive drive with 6-8 set plays so that he could see how the defense reacted.  Based on what he learned would determine how he then approached the overall game plan previously drawn up.

In basketball one of the elite players at every level was Bill Bradley who played at Princeton, for the New York Knicks as well as being the only collegiate player selected for the 1964 US Olympic team in Tokyo.

A description of his extraordinary sense for the ever-changing dynamics of the game is described in A Sense of Where You  Are, the story of his senior year at Princeton and his preternatural feel for the game.

In choosing the title, the author quotes Bradley:

“When you have played basketball for a while, you don’t need to look at the basket when you are in close like this,” he said, throwing it over his shoulder again and right through the hoop. “You develop a sense of where you are.”

At one point the author takes Bradley to a Princeton ophthalmologist to see if his skill is due to an expanded range of peripheral vision versus a normal person’s.  The tests show he has both greater horizontal and vertical  range.   But that does not explain the instinctive way he applied his talent.  That analysis takes the rest of the book!

For many their first experience of situational analysis is when a teacher claims to have “eyes in the back of her head” so you had better be careful what you do.

Situational Analysis Applied in Business

The Wharton Business school offers an online course which applies the theory and practice of situational analysis to business and political leadership.  The initial lecture and course description is here.

The course extends the concept  beyond its military and industrial origins to understand what happens in organizations. How do critical elements in the environment  change over time?

Many  neglect this analysis because they’re so focused on a particular plan or task that they take for granted essential factors in projecting the near future.

It’s a mindset of not paying attention to one’s surroundings.   Or as the British writer George Orwell observed: “People can foresee the future only when it coincides with their own wishes.

Increasing Awareness

Situational awareness identifies the elements in the environment that are important, changing and create greater uncertainty about the near future.  No matter one’s experience in a  role,  understanding the total environment in which the organization functions is critical for effective leadership.

This analysis is front and center in New Year predictions. Or necessary anytime a future course is being planned.

The Wharton program suggests using a four-quadrant model to identify situations that are important and unimportant, and familiar to unfamiliar.

The critical events are those that are important and unfamiliar, the upper right quadrant below.  The goal is to be more aware of these challenges and take care to understand variable risks, uncertainty, what is moving around, and how to respond.

What to Place in the Critical Quadrant?

My list of evolving situations that the credit union system may need to consider differently from their 2021 experiences includes:

  • Increase in inflation and the inevitable rise in market rates.
  • The growing divide between well-to-do members and those living only on each paycheck’s income.
  • The system’s absence of new entrants/entrepreneurs: the ratio of charter cancellations to new charters, is at 50 or 100:1 depending on the year selected.
  • Effective investment of surplus capital-buying banks or mergers versus organic growth to benefit the members.
  • Finding and developing the best employees when 40% of the work force wants to change jobs.
  • Overcoming the  gap between regulatory actions and credit union priorities  to design a mutual  approach to cooperatives’ future.

How any team completes this exercise depends on their role in an organization.  For those at the top, this analysis is most critical.

Bureaucracies by design are bound by organizational processes.  When complacency and habit replace vigilance, that is how an organization gets into trouble.   Situational awareness is critical to counterbalance this self-approving tendency.

Tomorrow I will provide an example of one credit union’s pivot in response to some of the factors above.    I will also share a classic example of robotic performance damaging a critical cooperative institution.

 

 

 

 

 

 

 

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A Finnish Co-operator’s Suggestion for U.S. Credit Unions

The following observation is from Leo Sammallahti, Marketing Manager for the Cooperative Exchange.   He follows cooperative enterprises in Finland, Europe and the United States. His article suggests a specific investment credit unions can make to help another cooperative effort in the US.

“There are many examples of new legislation seeking to help cooperatives.  But  first we in the movement should  try to find ways to utilize the existing legislation better. Before illustrating this existing opportunity, I want to present something extraordinary happening in Iowa City.

Taking on a FinTech

In 2018, the local food delivery app in the city was bought by Grubhub, which already controlled more than half of the market in the US. They doubled the delivery commission from 15% to more than 30%, wreaking havoc among the local restaurants.

John Sewell was one of those restaurant owners, but he had also worked in  organizing purchasing cooperatives and similar arrangements for rural hospitals. He started an initiative that grew into Chomp, a cooperative food delivery app owned by the local restaurants.  Chomp takes a modest commission and distributes any surplus generated back to the member restaurants.

By the end of the year, it had outcompeted Grubhub with twice as many restaurants on its platform. It became a sort of mass movement with the majority of the residents using it. Rather than a global monopolistic rent-seeker, it transformed the model into a local democratic institution creating community wealth.

Typically, each local market has one delivery platform that with a leading market position – most likely Grubhub. Restaurants join the platform with most customers and customers join the platform with most restaurants.

These “network effects” drive platform  businesses models like food-delivery apps towards a “winner takes all” outcome. These kinds of monopolies and monopsonies are exactly one of the market failures cooperatives counter and fix.

Once a for-profit company app gains a dominant market position, its incentive is to extract as much value from the restaurants for the shareholders as possible. However, for a restaurant owned cooperative platform, the incentive is the opposite. If it gains a dominant position, it has no motive to extract monopolistic “rents” from the restaurants.

Rather it can use economies of scale to lower costs. set lower prices or pay higher dividend rebates. By doing this the monetary benefits go back to the restaurants which pay the delivery commission. If the cooperative  kept the money for itself, the restaurants could elect a new board of directors.

The Credit Union-Cooperative Opportunity

This cooperative food delivery option is now being replicated in seven cities (1)– one in Jersey City, New Jersey.  This is one of only eight states where state chartered credit unions can make direct equity investments in other cooperatives.

Only one credit union in the country, Vermont State Employees Credit Union, is actually using this legislation to invest in other cooperatives. This authority is an example of a very useful but underutilized legal tool.

An immediate example where this option could be especially useful is  helping local restaurants in Jersey City who  are creating a platform delivery cooperative to keep money circulating locally and more equitably.

Supporting Local Economies Via the Members

However, there is much any credit union could do besides investments. It’s common for credit unions to provide retail discounts for their members, for example, 30% off  on movie tickets.

Restaurant cooperatives promote themselves with discounts sending a coupon code for a free first delivery. Credit unions could distribute this discount for a free first delivery in the six cities where  a restaurant owned delivery platform cooperative is being formed.

These discounts provide a tangible benefit in the everyday life of a credit union member. It would align credit unions with the wider cooperative ecosystem generating community benefits and social capital. It would help the restaurant delivery coops reach a mass audience  quickly and inexpensively.

It reduces the uncertainty of the startup and avoids the costs of  big tech ad intermediaries like Facebook or Google. Instead, credit unions could directly reach around one-third of adults, on average, who are credit union members.”

(1)The six additional cities are:

KNOXVILLE, Tennessee

OMAHA, Nebraska

RICHMOND, Virginia

LAS VEGAS, Nevada

TAMPA BAY, Florida

LOS ANGELES, California

 

 

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Asset Bubbles and Credit Unions

During his time as Vice Chair of the FDIC, Thomas Hoenig challenged the agency’s implementation of risk-based capital requirements.  He questioned both the theory and practice, pointing to the lending distortions which contributed to banking losses during the Great Recession.

I became aware of  his views when in 2014 NCUA began the process of imposing the same flawed system on credit unions.   Hoenig believed the best capital indicator was  a simple leverage ratio, the credit union model for 110 years, until December 2021.  Then NCUA dictated a complex, three-part capital structure, CCULR/RBC, to replace this century long capital standard.

Hoenig’s Other Regulatory Dissent

Hoenig was a career regulator.  He began as an economist in bank supervision at the Kansas City District Federal Reserve Bank an area of the country where he had grown up. In the 1970’s during a period of unprecedented double-digit inflation, he saw first-hand the impact on lenders and their borrowers whose relationships were underwritten with collateral-based loans.   The security was believed to be ironclad during this decade of ever-rising prices for farmland and commercial real estate.

Hoenig’s story is told in a new book, The Lords of Easy Money,  and a summary article in Politico. The article describes how he became the lone dissenting vote in November 2010 on the Federal Reserve’s Open Market Committee.  He opposed extending the monetary policy called quantitative easing beyond the Great Recession to jump start the economy.

His opposition was based on his early Midwestern regulatory experience, as the Fed tried to get inflation under control. From Politico:

“Under Volcker, the Fed raised short-term interest rates from 10 percent in 1979 to 20 percent in 1981, the highest they have ever been.

“You could see, Hoenig recalls, that no one anticipated that adjustment.” More than 1,600 banks failed between 1980 and 1994, the worst failure rate since Depression.”

But the banking failures and borrower bankruptcies were not the primary reason for Hoenig to  oppose Fed Chair Bernanke’s continued quantitative easing.

The “Allocative Effect” of Asset Bubbles

When borrowing rates are effectively negative, as now, this fuels inflation with surplus liquidity looking for places to go.   Too many dollars chasing too few goods. With funding costs near zero, any reasonable investment looks like a sure thing.

As asset prices rise quickly, a feedback loop develops. Higher asset prices today drive tomorrow’s asset prices ever higher. Especially when those assets are pledged to support more borrowing.

For Hoenig, his greatest concern with this low interest rate policy is the distortion or  “allocative effects”  of the additional wealth created by this monetary stimulus.

As summarized in Politico:

“Quantitative easing stoked asset prices, which primarily benefited the very rich. By making money so cheap and available, it also encouraged riskier lending and financial engineering tactics like debt-fueled stock buybacks and mergers, which did virtually nothing to improve the lot of millions of people who earned a living through their paychecks.

Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.”

The Economic Consequences Hoenig Warned About

Those distortions are here now.  One need only look general stock market levels as well as individual company valuations that are unhinged from  performance to see examples that don’t compute.

In a January 7 essay “A Stock Market Crash is Coming and Everyone Knows It” the writer notes wild stock valuations: The price earnings ratio for the S&P index of stocks historically averages 15.  Today the ratio is 29 times;  Amazon’s ratio is 60 and Tesla’s 330.

This disconnect between stock prices and a company’s financials is most visible in meme stocks, IPO’s and SPAC’s often with no history of positive net income.  These new offerings and crypto-currency  asset hype are explained as harbingers of  a  newly emerging digital-metaverse economy.  Predictions of these asset bubbles bursting go back at least two years.  Because it hasn’t happened yet, doesn’t mean the Fed’s changed policy won’t be disruptive.

The Credit Union Impact

Credit unions are creatures of the market. Co-ops whether by design or neglect that have become distant from their members, are even more dependent on market sourced opportunities.

Approximately 80% of all credit union loans are secured by autos, first and second mortgages, or commercial assets. Before asset bubbles burst, decisions about new loans and investments look straightforward, easy to project future returns.

The most frequent example today of this financial euphoria is credit unions buying whole banks, frequently in new markets.  When the cost of funds is .25- .50 basis points, paying a premium of 1.5 to 2.0 times book value for a bank looks like a can’t lose opportunity.   Even when the bank’s financial performance is being supported by the same low cost of funds and its underwriting  secured by commercial loans with continuously appreciating assets.

GreenState Credit Union in Iowa, Hoenig’s home state, is so eager to take advantage of these current opportunities that it is buying and absorbing three banks simultaneously, all operating outside its core markets.

In North Carolina, Truliant  Federal Credit Union announced in December that it had raised $50 million in an unsecured  subordinated term note at a fixed rate of 3.625%, The purpose reported in the press: “Truliant has primarily grown the credit union’s loan portfolio organically, however management is open to acquisitions in the $500-$750 million asset range.” 

The announcement is a public invitation for brokers to bring their deals to Truliant’s table.

When funding looks inexpensive and asset values stable or rising, what could go wrong?

The short answer is that  the Fed’s inflation response will disrupt all asset valuations and their expected returns.  The larger question is whether buying businesses whose owners believe now is the time to cash out, and whose results were created by a very different model and charter, will even match a credit union’s capabilities.

In an earlier analysis of credit union whole bank purchases I raised these issues:

As credit unions pursue whole bank acquisitions, are they buying “tired” business models built with different values and goals? Are these credit unions giving up the advantages of cooperative design and innovation attempting to purchase scale? Will combining competitors’ experiences (and customers) with the credit union tax exemption create an illusion of financial opportunity that fails to prove out when evaluated years down the road.

The Discipline Required of the Co-op Model

The co-op member-owner model protects credit unions from some of the rough and tumble accountability of constantly changing stock market valuations.  This difference requires strong management and board discipline to remain focused on the people (members) who respond to and need a credit union relationship.

Buying into new markets and customers through financial leverage, versus winning them in competition, is a new game for credit unions.  Organic growth builds on known capabilities and experiences, not externally purchased originations.

Hoenig’s critiques offer a third lesson relevant for these leveraged buyouts.  The financial consequences of public policy changes can take years  for their consequences to be found out.

It took seven years for the FDIC to recognize there was no cost-benefit outcome with RBC. And eleven years to understand the full economic impacts from when he first opposed quantitative easing as the primary tool for the fed to keep the economy growing.

Credit union success is not because they are bigger, financially more sophisticated, or even led by superior managers versus banks.   They win when their capabilities  align with member needs.  Members join based on their choice, not because their account was bought from another firm.

The beginning of a significant economic pivot, long forecast by the Fed, seems a very suspect time to use member capital to pay out bank owners.   The bank owners are asking for members’ cash, not the stock that other bank purchasers would offer, to protect these sellers from valuation uncertainties.

Credit union leaders buying banks are betting (paying premiums) that they can  manage the bank’s assets and liabilities for a higher future return than their for-profit managers were able to do.

Rather than compete with a superior business design, buying banks intending to run them more effectively, feels like surrendering to the opposition.

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A CEO for All Seasons

Dayton Ohio is most commonly known as hometown for aviation pioneers and inventor-tinkerers, the Wright Brothers. The local Wright-Patterson Air Force Base was named after them.

On that base in 1932 workers at Wright Field decided to chip in 25¢ a week to help an ailing co-worker and his struggling family. It was this shoebox of money that evolved to become today’s $7.0 billion Wright-Patt Credit Union.

The credit union was planted in this southwestern community of Ohio where inventiveness, hard work and the belief that people take care of each other were long standing values.

Doug Fecher and Wright-Patt Credit Union were made for each other.  He grew up in this culture and was reared on its values.  His strength, life-long connections and character are rooted in places where he saw people taking care of each other in times of need.

His capabilities perfectly matched the Wright-Patt community when he became CEO in 2001 after the sudden death of his predecessor.

His career did not start with the ambition to become a CEO. After high school, he left for Chef school, thinking academia was not his forte, and where his mother had paid tuition.  Changing diection, he then enrolled in the University of Cincinnati and eventually graduated while nurturing curiosity and eclectic interests that made him a lifelong learner.

He began his credit union career as a teller, a short-lived position because of the challenge in balancing out each day’s activity.  He then moved on to business development and marketing before joining Wright-Patt as VP of Lending in 1995.

In each phase of life, he developed lasting friendships.  At his retirement celebration he recognized grade school friends with whom he had gone scuba diving later as adults, a high school science teacher whose course he barely passed, three generations of his family as well as many professional colleagues.  He named each while recounting stories of the positive experiences he gained from these relationships.

His Leadership as CEO

His twenty years as CEO spanned unexpected and the most consequential challenges any leader could ever confront:  the attacks on 9/11 which kept the US at war for 20 years; the Great Recession of 2008/09; a decade of historically low interest rates; the national economic shutdown of March 2020 resulting in the steepest one quarter drop ever in GDP, and the on-going COVID-19 pandemic.

These were not classroom MBA case studies. They were real-time events requiring immediate actions. The responses affected every person who depended on the credit union to do the right thing for them. In each of crisis, Wright-Patt met every challenge being there for members in spontaneous and creative ways.

When severe economic downturns occurred, he stepped up lending to members for home refinancing or ownership and for car purchases. Fees were waived. The credit union reached peaks in market share as other lenders hunkered down and withdrew in the face of economic uncertainty.

How Doug navigated these times is even more remarkable than Wright-Patt’s continued financial soundness.  He believed an organization’s culture, the performance of the entire staff, was what made strategy successful.

He instilled an expectation  of unparalleled and consistent member service. Credit unions were founded so people can take care of each other. The model is simple: members entrust their funds to you to use for others who need financial assistance.

He took a fundamental human value and made it new every day. He designed the three-stakeholder model-the staff, the members, and the credit union-to allocate resources fairly and most productively.

His intense focus on service as the ultimate differentiator, helped him avoid shiny objects, such as mergers, bank purchases or personal notoriety, that drew in other CEOs.

Member relationships were rooted in a saying he quoted from his dad, “Son, just remember to take great care of the people around you, and they will amaze you in return by taking great care of you”.

The Standard for Success

The majority of Wright-Patt members live paycheck to paycheck. Superior service earns their trust and lifelong support. It also strengthens numerous local community institutions that serve these same 445,000 members, including auto dealers, realtors, home builders, and the many retail services and stores necessary to make communities vibrant.

This member loyalty propelled Wright-Patt’s standing from the 95th largest credit union in 2005 to number 40 at yearend 2021. This was accomplished even though the members’ average share balance $10,044 is below the national average of $10,402.

Doug and his team never chased asset growth.  Instead, their success was measured by the number of people served and community impact. Today the credit union is present in  one of every three households in its Dayton home market.

His oft-stated benchmark for tracking Wright-Patt’s relevance was to ask:  If Wright-Patt did not exist today, would our members rise up and create us? 

Temperament Undergirds Success

Doug is a lifelong learner. Success did not come because he had a better idea than other CEOs; rather it was his skill implementing the credit union’s priorities.  Instinctively he understood leadership as a skill to be mastered. In sports terminology, he would be described as a “natural.”

He is an artisan in the craft of leading others. He took a traditional value-serving others-and made it every staff member’s purpose.  In his perspective, credit unions are a movement of people, not money.

At the top of each monthly Partner Update he placed these words:

“Transparency” is an important part of keeping promises. I hope this update is helpful and makes your job easier. Thank you for your interest in how WPCU is serving its stakeholders

Integrity, openness, and honesty are his operating practices. He is eloquent, using member stories he received to make his points.  The tag line at the end of every Wright-Patt email summarizes the credit union’s value proposition in six words:

“Save Better. Borrow Smarter. Learn a Lot” 

His eloquence is enhanced by his temperament.  He never appears angry; he persuades with logic and examples, not arguments.  His presence fills every occasion with humor and goodwill, qualities that bring out the best in people.

Leadership Contributions Beyond the Credit Union

Doug and his team expanded Wright-Patt’s role throughout the credit union system. He organized, joined or founded numerous CUSO’s including myCUmortgage, CUFSLP, Credit Union Student Choice, Cooperative Business Services, CUSO Financial Services and many more.

He used the financial strength of the credit union to develop a short-term loan option that saved consumers hundreds of dollars in fees charged by payday lenders. This model was eventually adopted by over 100 credit unions sharing in a common loss reserve.

He and his team actively participate in state,  national and CUNA leadership responsibilities.

He is a trustee on the Board of Wright State University which enrolls over 11,500 students.  As Chairman he helped shepherd the university through the most important decision a board undertakes: a presidential leadership selection and transition.

I asked him to join the board of Callahan’s after the Great Recession, anticipating an upcoming CEO succession.  Being a volunteer director in a group of peers is a very different role than the person of final resort as CEO.  Developing consensus with other volunteers can, at times, be hard work.

His commitment was unwavering. His wise, perceptive counsel made our whole organization more aware of how credit unions approached their role with members, in the community and with each other.

A Self-Initiated Transition

Doug enjoys many other personal activities such as biking, skiing, motorcycles, playing in a rock group, scuba diving.  He undertakes these “hobbies” for fun and as open-ended learning opportunities.

He left his CEO position at the top of his game, following the most successful year ever in the credit union, as measured by returns to the three stakeholders.  A courageous choice by someone who sees life full of bountiful possibilities.

His parting was a straight forward announcement in response to my email:

From: Doug Fecher <dfecher@wpcu.coop>

“Thanks for your email. I am out of the office and will not be returning as I am retiring from WPCU after 26 years of service. I will miss this job and the people I’ve been honored to work with and am looking forward to the next chapter in my life.

A successor has been named – please welcome Tim Mislansky as the next President/CEO of Wright-Patt Credit Union. He begins his new role on Monday, January 3rd.”

Doug never forgot where he came from or the people whom he knew along the way—a person of conviction who gave hope and a way forward for others.

He ended a recent conversation with a student interviewing him for her paper on leadership with the offer: “Thanks for connecting with me – please keep my number and if there is any way I could help in the future, please call.”

Talent does an old thing well.  Genius makes an old thing new.  Doug did both.