Author: Chip Filson

Posted on

Member Merger Voices Ask: “Where was NCUA?”

When NCUA passed a revised 708b merger disclosure rule, effective October 2018, it also established a member-to-member communication process through its CURE office.

Following are member comments posted in this process. They all point to a common shortcoming summarized by one member: Where was NCUA when these actions were approved?

Brief Summary of Members’ Multiple Concerns

The first comment is from a family of members who question the choice of an out of state merger partner. They note that the manager that has already moved to Florida (from Wyoming) but still receives a “retention bonus” of $240,000. The second commenter asks why no merger benefits were presented. The third points out that the merger discussion via telcon is after the voting deadline. The final set of six comments are members all opposed to the proposed merger because they believe their credit union provides better value.

These voices suggest that the cancellation of these financially sound, long-standing charters are not serving members’ interests. Each merger provides immediate compensation benefits to senior managers far above what they would receive if no combination took place.

There is no indication these member concerns were either followed up by NCUA or answered by the credit union. Every comment demonstrates that members were not involved or consulted when the merger was being considered. Rather, they are expected to ratify a decision made without their knowledge or input.

Merger Comments Follow

1. We Oppose: Manager Has Already Moved to Florida

Greater Wyoming FCU into NuVision

“Me (and three other family members who are also GWFCU members) are opposed to the merger at this time. GWFCU indicates they have looked at Wyoming Credit unions but have only approached one in Casper, which was two years ago, until they looked at NuVision.

“There are five Wyoming Credit Unions with main offices in Cheyenne and as far as I know none of them were approached. I was told it is unprofessional to work with more than one merger possibility at a time. When the wellbeing of the members is at stake management should be looking at all possibilities and when they fail to do that it is a disservice to the members.

“We will lose board representation, all of our assets and our CEO. Ms. Stetz may be working in Florida but will no longer represent our credit union. I think we should take a step back and look at other merger proposals or see if we could hire a new CEO since Ms.Stetz has already moved to Florida. Our Credit Union will be less than one percent of NuVision and local needs will get lost in the needs of other larger markets. Until I have more than one option, I will not vote in favor of this merger.”

In the Member Notice CEO Stetz (apparently in FL) will receive additional compensation of a retention bonus of $240,000 if she remains for two-year transition or $218,000 if she leaves sooner. Loan Officer Brother’s additional compensation is $107,000 bonus over two years or $102,000 if she leaves before then.

2. No description of Specific Benefits-We Should Know Trade-offs Involved

Ball State FCU into Finance Center CU

“I have had accounts with the Ball State Federal Credit Union since 1996. I do have two questions/concerns.

1. In the relevant literature I received from the BSFCU, there is no description of how specific member benefits and applicable policies would change after the proposed merger. Can we get more details about that? It seems that an informed vote would hinge upon knowing the specific consumer trade-offs involved. My letter from the BSFCU stipulates that a detailed member Welcome Kit, indicating all changes to services and member benefits, will be mailed “at least 30 days before the conversion date.” But I’m guessing that is still subsequent to the July 14, 2020 special member meeting for voting on the merger?
2. If the Financial Center First Credit Union is the “continuing credit union,” how is the BSFCU able to “retain the Ball State name and identity”?”

3. When Do Members Get An Open Discussion on the Proposed Merger?

Friendship International Airport FCU (FIAFCU) into Central CU of Maryland

“I understand COVID-19 restrictions on everyone…What I do not understand is why shareholders are not provided a TELCON meeting to discuss the proposed merger. If you have to vote by Feb. 8, 2021 and TELCON is held on Feb. 10. 2021, when do the members get the benefit of an OPEN discussion on the proposed merger?

“Why did the Board of Directors vote NOT to distribute a portion of FIAFE’s net worth in a SPECIAL DIVIDEND? Why did the Board of Directors vote to provide 3 employee members $57,000 + pay their taxes? Not to discount the fantastic job that Delores, Ron and Dorothy did for all of us, and it is much appreciated, but why not split the profit with all of the members.

“If a special dividend of 1% were to be implemented, it would be less than the three board members are to receive. Where was NCUA when these actions were approved? It seems if one were to compare the net worth of the two credit unions, FIAFE appears to be the more efficient and profitable credit union with a Net Worth/Total Asset percentage of 33.43% compared to 10.55% for Central CU.”

Data provided in Member Notice

Credit Union at 6/30/20 Total Net Worth Total Assets Net Worth Ratio
Friendship International FCU $2.1 MN $6.3 MN 33.20%
Central CU of Maryland $4.5 MN $43 MN 10.50%
Combined Net Worth Ratio 13.40%

4. I’m absolutely against the merger; This is the first time I have heard of it

Columbus Metro FCU ($260 mn-10.6% net worth) into Telhio CU ($952 MN and 9.6% net worth) ( excerpts from six comments)

    • The CMFCU has been a great resource for our members for years. Management wins, members lose Being through this and it’s a mean to the end.
    • I am absolutely against the merger. I have enough problems with their last upgrade they did. It will just cause more problems for senior trying to get information from their…
    • I am concerned that Telhio Credit Union money market interest rates are much lower than Columbus Metro Credit Union and the deposit requirements to obtain higher rates are more…
    • I received an email this morning informing me of this proposed merger between Telhio and Columbus metro federal credit union. This is the first that I have heard of any such talks…
    • I just so happen to be a member of both banks. CMFCU has better accounts as far as Christmas and vacation savings, although I never liked that they transfer the money annually out…
    • I urge a NO vote. With ongoing pandemic, unsent financial statements and misleading net worth values, it’s no time to consider merging. Columbus Metro began seventy (70) years ago…

Merger Related Financial CEO Disclosures provide:

  • Under CEO’s new employment agreement, he will receive salary and benefit increases of $1,600 per month: $19, 200 annually;
  • 100% vesting of split dollar policy increases payout by $6,400 per year for 20 years: $128,000
  • Payment of unused sick and vacation: $135,539.

Total CEO additional immediate compensation benefit: $282,739.

The Question: Where is NCUA?

In his February 11th virtual stakeholder update, Chairman Harper reiterated his long-stated commitment to consumer protection:

“We must also strengthen the agency’s consumer financial protection program to ensure that all consumers receive the same level of protection regardless of their financial provider of choice.”

Cooperative Self-dealing Contrary to Member Interest

In June 2018 NCUA passed an updated merger rule requiring that additional compensation benefits for senior managers be disclosed. Public reports, especially in CUToday shown below, had documented the regular practice of secret payments to incent managers to merge their credit union.

In NCUA’s analysis the problem was the secrecy of the payments; therefore the rule’s solution was to just publish them. NO. The error was NCUA’s sanctioning these payoffs greasing palms to induce these so-called “voluntary” mergers of sound, long-serving credit unions in the first place.

The payola continues, but now out in the open. Managers act as if they are private owners, negotiating their personal benefits while promising members nothing more than a “brighter future” once new leadership takes over. The conflict of interest in these merger arrangements is unconstrained.

NCUA blesses this cooperative self-dealing even when common sense and member reactions show these mergers are not serving members. The boards fail to exercise any meaningful fiduciary responsibilities required by rule 704.1 and especially Guidance on Director Duties in NCUA letter 11-FCU-02. Management and board unite in their failure of care, duty and loyalty to members. The result is a cancelled cooperative charter that members created and still value.

The Regulatory Abdication

Multiple NCUA offices facilitate these manager-led sellouts. The regional offices approve the transactions with misleading and vague member notices, CURE posts all the notices, ONES approves mergers with credit unions over $10 billion, and the division of consumer access sits idly by as these transactions multiply.

The member harm is now available for the whole world to see. Just because these payments are now public does not make them proper. Why should a manager(s) be paid additional compensation for giving up their leadership responsibility while accelerating benefits and additional compensation for themselves that nothing more than sinecures? The alleged future merger benefits are so vacuous as to be meaningless or laughable: for example how do 20 additional Southern California branches benefit Xceed’s members in Rochester, NY?

If these boards and managers had presented these merger “plans” to support a new charter, they would have been rejected out of hand. Yet CURE and Regional Directors routinely approve these boilerplate submissions sometimes copied word for word from other merger packages.

The credit unions in these so-called voluntary mergers all report sound financial performance with high capital levels. Chairman Harper’s consumer protection efforts should start within his own Agency, at all levels. For the casual corruption now routinely blessed by the agency suggests it has no commitment to either member “rights” or “best interests,” both terms used in the regulatory requirements.

Disclosure does not make these payoffs and asset transfers any less disreputable or deceitful. NCUA’s administrative “benedictions” merely shows unprincipled conduct permeates the entire process.

The members have done their part. Will Chairman Harper now do his?

Background Articles Reporting Merger Self-dealing–Activity Continuing Today

What NCUA Staff Found When Investigating (Secret) Merger Compensation  (5/25/18 CUToday)

“During the Q&A with the NCUA board members following a proposal calling for greater disclosures in mergers, agency staff were asked about the types of bonus compensation paid to executives and volunteers at CUs that were acquired that they had uncovered in examining merger agreements.

Staff told the board that in “75% to 80%” of mergers they had found “significant merger-related compensation” being paid to people at the credit union that was being acquired, nearly all of which was kept from members when voting on the merger.

In one case, staff said, it found a total payout in the low-seven figures paid to 18 people at a credit union, with the bulk of that money going to four people. In another case, an acquiring credit union discovered after the fact that the board of the acquired CU had cut a deal in which each of them were to be provided with expensive season tickets to a local football team’s games for a three-year period.

NCUA Board Member Rick Metsger asked staff about how some credit unions have worked to “obfuscate” payments being made to officials at the acquired CU, and staff responded that one common method is that instead of having a clearly articulated dollar amount being paid, benefits are paid out in a different fashion, such as a split-dollar life insurance plan.

At another credit union, staff said it found the merger agreement called for the CEO of the acquired CU to be paid for a guaranteed five years of employment, even if at any point that CEO quit or the acquiring CU terminated him.”

Secret Pay Packages (06/12/2018-CUToday)

“The new NCUA rules came after CUToday reported extensively on lucrative pay packages and other benefits going to senior executives and even board members at credit unions that were being absorbed in mergers. As reported, in most cases these pay packages were not being disclosed to members prior to or at the time members were voting on the merger; instead, members were often told only that the merger was about “improved products and services.”

A number of sources told CUToday.info it was common practice for larger credit unions to approach managers and boards at smaller CUs with offers of paying out incentives well into six figures from the smaller CU’s capital, which in many cases could be substantial. Often, none of that same capital was paid back to members of the disappearing CU.”

Happy Independence Day, CU Members (6/23/18-CUToday)

“Just in time for Independence Day, credit union members have been given more rights in their respective democracies. Too bad so many who came before them didn’t have the same rights and weren’t able to make informed votes. . .

The new rule comes after CUToday has reported earlier on just how much undisclosed compensation has gone to and goes to the management and volunteers of credit unions in some mergers, where the capital that belongs to everyone suddenly goes to a few in management—and the board—to entice them to agree to merging into another CU.”

Posted on

Credit Unions and the PPP Loans: Who Tells What Story?

When looking at data that is quite general, it is hard find meaning. The SBA has just released total Payroll Protection Program loans disbursed as of the program’s end on August 8, 2020.

https://www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-508.pdf

SBA total PPP loan data as of August 8, 2020

Loan Count Net Dollars Lender Count Avg Loan
5,212,128 $525,012,201,124 5,460 $100.7K

What role did credit unions play? What are insights from this very summary data? Did the lending matter? Two observations come to mind.

  1. Small lenders were vital. These were categorized as firms with less than $10 billion in assets. They were 98% of total participants. They provided 45% of the total dollars disbursed.

As shown in the table, loans less than $50K were the majority of those granted (69%) but only 12% of the total dollars disbursed.

$50K and Under From SBA Loan Size table

Total Loans Total $ % Loans %Total $ Loans Avg Loan
3,574,110 $62.742B 68.6% 12.0% $17.6K

This is the primary category that includes credit union activity. Their average loan size was $46.7 K.

  1. If the public relied solely on the eight SBA data summaries, credit unions’ role would be significantly understated. The Lender Segment chart assigns 84% of the credit union participants to the under $1 billion asset group. That “credit union” segment’s loan total is only 35% of the actual disbursements credit unions reported in their September 30, 2020 call report.

From SBA’s Lender Segment Chart

# Lenders # Loans $ Total Loans Avg Loan
Credit Unions (<$1B): 719 67,846 $3,099,426,436 $45.7K
% cf. to Call Report 84% 35% 34.6% 97.8%

From NCUA September 30, 2020 Call Reports

# Lenders # Loans $ Total Loans Avg Loan
Call Report Totals: 859 191,856 $8,954,408,403 $46.7K

Credit unions comprised 17% of all lenders.  They disbursed 1.7% of all PPP loans.

Ohio’s Example

The SBA also presents macro totals by state. The following is for Ohio. The credit union data is from call reports.

Ohio Total All Loans from SBA

# Lenders # Loans $ Loans Avg Loan
N/A 149,144 $18,532,840,346 $124.3K

Ohio CU Totals from 9/30 NCUA Call Reports:

# Lenders # Loans $ Loans Avg Loan
38 4,792 (3.2%) $263.7M (0.4%) $55K

Wright Patt CU was the largest PPP coop lender in Ohio, and the 41st by loan count nationally. Their 952 loans totaled $67 million or an average of $70.4K.

What is the Story? Who Tells It?

Numbers are dry. They show activity, not impact. These loans are the means to an end—stabilizing small business and employee income caught up in a crisis not of their making.

The goal is not merely reporting credit union statistics: 192,000 loans totaling $8.9 billion. The message should be what these funds did to sustain local businesses and economic activity.

That outcome, improving members’ lives, is coop’s primary purpose. Now is the time to again tell how the “credit” in credit union makes a difference. Better yet, have some of the members who received these 192,000 payroll protection grants, tell their story from your platform.

Posted on

Timeless Wisdom: Creating Effective Public Policy

Two principles guided Ed Callahan’s tenure as NCUA chair.  One was his positive motivation.  In his many public comments,  he never summoned  fear about the future; rather he always presented examples of hope and progress by the movement.

The second was his belief in the enterprising spirit of human nature.   He believed ordinary men and women had created an extraordinary cooperative system  that deserved the respect and support of regulators.  In his own words:

“Our movement does not exist because it was created from the top down. Rather it was created from the bottom up. We did not tell Congress we wanted to be “safe and sound” institutions. We always knew that if we were lending to our members there was risk involved. Serving came first; safety and soundness was a means to the end of serving.”

Ed Callahan, Callahan Report, May 1999

Posted on

A Critical Role for America’s Credit Union Museum

The stay-at-home pandemic induced isolation has caused many to clean out years of storage.  And find forgotten keepsakes, even treasures.

I discovered two complete copies of the July 21, 1969 Boston Globe, with the headline: Man Walks on the Moon.  The half page black and white fuzzy photo was printed right below.

What should I do with them?  Who might find them uniquely useful for instruction or other use? Should they just be put in this week’s recycle bin along with this week’s papers?

In a nutshell this illustrates  an issue every credit union professional will confront in the twilight of their career.  What to do with all the records, memorabilia, recordings and  newsletters one kept of their professional years?

The emotional meaning and possible historical value that caused them to be set aside, will not matter to one’s heirs.  When downsizing, the easiest thing to do with these basement or garage-stored boxes  is to just throw them out.

But might these individual and industry documents, newsletters, and recordings be valuable to future researchers seeking first hand accounts of credit union history and critical events?

Without an ability to easily access historical records–both public documents and private collections–the movement can lose touch with its past.  Most importantly personal records can help future generations appreciate the “human capital” that laid he foundation for today’s system.

One CEO’s View Why History Matters

“I wish I had kept the phone numbers and emails of CEOs that are now gone from view. Ex-CEOs that could tell what they wished they had done when they faced downward curves to the end. I worry that lessons lost and archived outside our industry are what is needed now.

Some might say that we missed nothing; we witnessed progress and the natural march towards an industry’s maturation. But that sounds like short-term winners talking to me.”

Randy Karnes, CEO CU*Answers, February 2018

This valuable, vital role is one the Credit Union Museum is expanding through its archiving and library functions.  This effort warrants everyone’s support, especially those wondering what to do with their personal archives.

 

Posted on

Timeless Wisdom: Why Small Matters With Two Current Examples

“Credit unions are small, yes very small. But it is vital that America not say they are too small to be worth the effort of keeping them around. Because if nothing else, credit unions keep alive a principle—that principle is freedom of choice.”

Ed Callahan, Callahan Report, June 1997

Two Washington Post news articles present why the choice that Ed championed, even of smaller institutions, is vital for society today.

  1. Efficiency is Not Resilience

The efficiency curse  describes the effectiveness of small farmers adapting more readily to market disruptions of food distribution during the pandemic.   Excerpts follow.

“Efficiency is a wonderful thing. It can result in benefits such as lower prices and better uses of resources. But a hyper specialized system is more vulnerable to disruption; it is not resilient.

“Smaller farmers are doing relatively well. According to Civil Eats, farms with existing CSAs (Community Supported Agriculture) have seen “a massive increase” in memberships since the start of the pandemic, with some reporting a 50 percent bump in sales. One California farmer said, “It took a pandemic for people to support local sustainable agriculture again, and home cooking, and ‘know your farmer.’ ”

“Why don’t we pay as much attention to the benefits of resilience as to the benefits of efficiency? We tend to get good at what we can measure, and it’s easy to produce numbers that support efficiency, such as crop yields per acre. Resilience cannot be easily measured, though. Its benefits are most evident during the catastrophes that can’t be predicted and the trends that haven’t been foreseen.

“One striking thing I’ve learned is that many (industrial scale)farmers and companies lose track of who’s eating their products.

“That sense of interconnectedness is, for me, one of the most powerful and hopeful lessons of the pandemic. People who had never given much thought to where their food comes from suddenly learned something about farms and farmers. Which is to say, they learned about our interconnectedness. The pandemic has shown us that the world is much more connected than we thought.”  END

The “Know Your Farmer,” bumper stickers of the sustainable-food movement might be translated to  “Know Your Member” as the signature phrase for credit unions.

  1. Nimbleness and Local Knowledge Beat Big Chains

A second example, “Small Pharmacies beat big chains at delivering vaccines,”showed  how local independent pharmacies were more effective delivering Covid 19 vaccine shots than large retail chains. The reason: “local owners know their community best.”  More relevant for credit unions is the author’s assertion that government policy makers promote bigness allowing “market power abuses.”   The parallel to today’s merger-sales of long-standing sound credit union charters, could not be clearer. Excerpts follow.

“More than a month into the coronavirus vaccine rollout, only about 60 percent of the doses distributed across the country have actually made it into people’s arms, according to federal data — a discouraging display of inefficiency. But a handful of states are far ahead of the pack. At the top of the list are West Virginia, which had given out 84 percent of its doses as of Friday, and North Dakota, at 81 percent.

“Many factors are slowing distribution.  But one key element appears to be the type of pharmacy states choose to work with. While the federal government partnered with CVS and Walgreens to handle vaccinations at long-term care facilities in the first phase of the rollout, North Dakota and West Virginia have instead turned to independent, locally owned pharmacies. Small drugstores are prevalent in West Virginia, and in North Dakota they’re just about the only game around: A 1963 law mandates that only pharmacies owned by pharmacists may operate in the state (save for a few grandfathered CVS locations).

“These small providers have proved remarkably nimble. Meanwhile, CVS and Walgreens have stumbled.

“The vaccination results in West Virginia and North Dakota have prompted a wave of national news stories, noting how startling it is that two rural states relying on local drugstores — the epitome of the old-timey “mom and pop” stereotype — have rocketed far ahead of states like Massachusetts and Virginia, with their networks of supposedly sophisticated chain pharmacies that have largely replaced the independents.

Public Policy Treats Small as Expendable

“For decades, Americans have been steeped in the idea that big businesses naturally outperform small ones. Indeed, much public policy is predicated on this belief. Our antitrust rules bless most corporate mergers on the grounds that larger companies are more efficient. Our financial regulations grease the flow of capital to the biggest firms. And in unstable times, the federal government almost invariably steps in to ensure their survival, while treating small businesses, local banks and family farms as expendable.

 “So ingrained is this ideology of bigness that we routinely overlook evidence to the contrary. The fact is independent pharmacies have been outperforming their larger rivals all along. According to research by Consumer Reports, for instance, local pharmacies generally offer lower prices than the chains. And while the major chains only recently began offering one- or two-day home delivery, most independents have been providing same-day delivery for more than a decade (and most do it free).

Better Results by Being Small

“Independent pharmacies achieve superior results not despite being small, but because they are small. It’s their local ownership that makes the difference. Their decisions are guided not by the prerogatives of Wall Street but by the healthcare needs of their neighbors. Lacking top-heavy bureaucracy and rich with local knowledge and relationships, independent pharmacies possess what you might call economies of small scale. That helps explain why, in the places where they’ve been tapped to provide vaccinations at nursing homes, they’ve been able to quickly map out a plan and efficiently execute it.

“Like pharmacies, small banks derive advantages by virtue of being locally run that big banks simply cannot match: The owners know their communities and their borrowers, giving them access to a rich trove of “soft” information that enables the institutions to extend loans to new and growing businesses on the basis of factors that aren’t easily quantified and don’t fit the rigid parameters of big-bank lending. This is true not only during crises like the pandemic: Community banks account for less than one-fifth of the industry’s assets, but they supply nearly half of all lending to small businesses.

Regulatory Bias for Bigness

“So, if local pharmacies, banks and other businesses are outcompeting their biggest rivals, why are they losing ground? The number of independent pharmacies, for instance, has dropped by nearly 1,400 over the last decade, to 21,700 — and their market share has fallen from 28 percent to less than 20 percent.

“The answer is that policymakers, convinced of the inherent superiority of bigness, have allowed a few corporations to amass outsize power and wield it with impunity. Rather than compete head-to-head with their smaller rivals on price or service, these huge companies can simply crush them.  (ed. or buy them out via mergers)

“These kinds of market-power abuses are rampant across the economy, but we’ve been conditioned not to see them. Confronted with yet another shuttered storefront, we take it as simply more evidence that small businesses can’t compete.

“It’s not just some hazy nostalgic feeling that we’re losing when independent businesses close. The stakes are much more consequential. We’re trading away some of the most productive and effective parts of our economy. The strong performance by local pharmacies in distributing lifesaving vaccines makes that clear.” END

The Takeaway for Credit Unions

Every time a sound, locally focused and managed credit union merges, the surrounding economy, the cooperative system and the American marketplace is less diverse, nimble and responsive.

Posted on

NCUA Leadership Is in a Rut – Part 2

Part I showed how the changeover of NCUA board chairs has perpetuated a leadership vacuum at the agency frustrating effective policy development and positive relations with the industry. Following is a recent example of this challenge.

A classic case of ineffective pubic policy  is NCUA’s management of the corporate credit union crisis. It also demonstrates the embedded cultural mindset from the agency’s actions in this event.

This regulatory hangover continues whenever any corporate topic arises. Since 2009, NCUA’s attitude in supervising the corporate system could be described as, “If you don’t have a seat at the table, then you must be on the menu.”

The absence of market expertise at the NCUA board and staff level has created policy decisions by rote. Lacking different perspectives and professional insights, the existing culture plods on. When governmental backgrounds are the dominant experience senior officials bring to their roles, the disconnect with credit unions competing in the open market can become great.

Policy On Autopilot

One example of this bureaucratic legacy is from the NCUA board’s January 2021 meeting. It approved by a 3-0 vote a final rule 704 permitting corporate credit unions to invest in the subordinated debt of natural person credit unions. However, this “loan” must be deducted 100% when computing a corporate’s net worth ratio.

The following is the logic for this rule from the board memorandum:

NCUA claims open-ended authority: The FCU’s “broad mandate,” “plenary grant of regulatory authority,” and “an express grant of authority” can be exercised as “the Board deems appropriate.” The words are presented as unrestricted power to do whatever the board wishes. An unchecked authority.

“Under the FCU Act, the NCUA is the chartering and supervisory authority for Federal credit unions (FCUs) and the federal supervisory authority for federally insured credit unions (FICUs). The FCU Act grants the NCUA a broad mandate to issue regulations governing both FCUs and FICUs. Section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe regulations for the administration of the FCU Act. Section 209 of the FCU Act is a plenary grant of regulatory authority to the NCUA to issue regulations necessary or appropriate to carry out its role as share insurer for all FICUs. The FCU Act also includes an express grant of authority for the Board to subject federally chartered central, or corporate, credit unions to such rules, regulations, and orders as the Board deems appropriate.”

It’s a loan: “Treating the purchase of such subordinated debt instruments as lending ensures consistent treatment between natural person credit unions and corporate credit unions.”

It must be fully deductible from the capital ratio: “The Board believes that fully deducting such instruments from Tier 1 capital ensures any potential losses do not affect the capital position of the investing corporate credit union. This measured approach strikes the right balance between providing corporate credit unions the flexibility to purchase natural person credit union subordinated debt instruments and avoiding undue systemic risk to the credit union system.”

The Result: A Nonsensical Rule

This “updated” rule restores an activity, previously allowed but then revoked, to make a loan. But only if it is 100% deducted in calculating the required net worth ratio.

Loans are a credit union’s primary purpose. Few “loans” would ever be made on the condition that the institution must “write it off“ when calculating capital compliance.

In effect, NCUA confesses a lack of confidence in its own supervisory decisions. For NCUA must first approve all the subordinated debt issuance by natural person credit unions. The rule’s logic is that this approval and oversight are so suspect that the only prudent behavior is to write it off if a corporate purchases this loan debt. This is not mere risk rating; it is 100% reduction from capital when calculating net worth.

The write off is not proper accounting under GAAP. It is an imposition of regulatory accounting practice or RAP. There is no limit to RAP interpretations; see authority claimed above.

No facts were offered to support this claimed risk. Has any issuance of subordinated debt ever been written down or subject to a loss? What is the evidence to document this risk? Moreover, how important is this debt option for credit unions? If it is an important, why discourage its use this way?

If NCUA is so concerned about investments or loans used as capital by the recipient, then why aren’t credit unions required to write down their home loan bank equity requirements?

Or closer to home, why aren’t the corporates required to write off their CLF capital investments. Are they not at risk?

The ultimate rationale is that this is the way we have done it before. The result is that past errors of policy, guidance, interpretations compound far into the future. The mind set continues.

“In addition, the February 2020 proposed rule included a requirement for a corporate credit union to fully deduct the amount of the subordinated debt instrument from its Tier 1 capital to ensure consistent treatment between investments in the capital of other corporate credit unions and natural person credit unions. Under the current regulation, corporate credit unions are currently required to deduct from Tier 1 capital any investments in perpetual contributed capital and nonperpetual capital accounts that are maintained at other corporate credit unions.”

This rule is not based on any assessment of actual risks, Moreover it perpetuates “confirmation bias” errors that have been extraordinarily costly to the corporate and credit union system.

Which Leadership Model Will New Chair Harper Follow?

He inherits a decade-long policy of top-down mandates. Former board member McWatters described the situation this way in a 2015 speech to Pennsylvania League’s Annual Meeting:

“NCUA should not treat members of the credit union community as Victorian era children—speak when you’re spoken to and otherwise mind your manners and go off with your nanny—but should, instead, renounce its imperious ‘my-way-or–the-highway’ approach and actively solicit input from the community on NCUA’s budget and the budgetary process.

“With the strong visceral response within the agency against budget hearings, it seems that some expect masses of credit union community members to charge the NCUA ramparts with pitchforks and flaming torches to free themselves from regulatory serfdom. I, conversely, welcome all comments and criticism from the community.

“I champion the right of the regulated to speak to the regulator on the record regarding the expenditure of their limited resources. . . It’s simply a matter of respect and professionalism evidenced through the lens of transparency and full accountability.”

‘Step Down from the Ivory Tower’

McWatters also cautioned against the view that board nomination validates knowledge:

“Regulatory wisdom is not metaphysically bestowed upon an NCUA board member once the gavel falls on his or her Senate confirmation. NCUA should not, accordingly, pretend that it’s a modern-day Oracle of Delphi where all insight of the credit union community begins once you enter the doors at 1775 Duke Street in Alexandria, Virginia.”

https://www.cutoday.info/Fresh-Today/McWatters-Says-NCUA-Treats-CUs-as-Victorian-Era-Children-Comments-Draw-Rebuke-From-Chairman

Duty vs Loyalty

The Chair’s approach to board leadership also affects how agency staff perceive their jobs. Is staff supposed to provide their professional judgment, or are they just expected to fall in line with the Chair’s approach?

This staff dilemma was described by former Chairman Rick Metsger: “As I told Mark Treichel, the then executive director of the agency when I became chairman when he offered his loyalty, I said I didn’t want his loyalty, but I did expect his loyalty to the mission of the agency and that he would offer unvarnished opinions and options to help me make the best decisions possible.”

https://www.cutoday.info/THE-tude/Political-Storm-Karma-Makes-Landfall-at-NCUA

Harper’s Challenge: Reset or More of the Same?

Todd Harper was chief policy advisor to Chairman Matz. Her top-down leadership approach to policy is what prompted the above comments by board members and staff who worked with her.

Will Harper follow her leadership and policy example? Or will he embrace the widespread belief that there needs to be a reset in Agency and credit union relations?

Posted on

NCUA Leadership Is in a Rut Part 1

Since 2017 there have been four NCUA Chairmen designated by the President. Two republicans and two democrats.

The Board’s primary responsibility is the “management” of the agency as stated in the Federal Credit Union Act. The chair sets the agenda and is the primary spokesperson for the Agency.

Any organization that undergoes four changes of the titular leader in the same number of years would face unusual difficulties in both policy and operational effectiveness.

In the past decade, no one has accused NCUA of being well governed. Less than optimal outcomes can be endured in normal times. When crisis occurs, ineffective decisions can be destructive. A prime example is the ruinous handling of the corporate legacy asset resolution plans in 2008-2010.

These prior mistakes compound; the legacy perpetuates in subsequent decisions. The errors become hard-to-shed precedents especially when there is an organizational aversion to back-testing past events.

An Example of Effective Leadership

In October 1981 when Ed Callahan became NCUA chair, the economy had double digit unemployment and inflation. Credit unions had only one concern: survival. Only in 1977 had NCUA become an independent agency governed by a three-person board. The CLF was still in formation. The NCUSIF was out of cash and using 208 guarantees to assist troubled credit unions to work through problems.

Chairman Callahan’s approach was twofold: implement deregulation so that credit unions, not the government, could make the essential business decisions to serve members and effectively compete in the changing market; and secondly, build a regulatory infrastructure and supervision capable of overseeing the deregulated industry.

But his approach was not top-down but bottom-up policy implementation. To succeed, he initiated a multi-faceted open dialogue with credit unions. The first effort was a 24-minute video produced by the Illinois Credit Union League entitled: “Deregulation–What Does It Really Mean?” The video featured a panel discussion of three credit union CEOs, CUNA’s Vice President for Governmental Affairs, and Bucky and Ed from NCUA.

A comment in the video by Chairman Callahan illustrates his approach to policy leadership:

“Do you want government off your backs?

“Even though I think credit unions want deregulation, I am more committed to the fact that we have to respond to their needs. If they don’t want deregulation, we will see that it doesn’t happen.

“Write us a letter so that we can respond to your needs. I will read each one personally.”

Three months later, April 1982, the NCUA board approved the complete deregulation of all savings accounts with full credit union support. It took the other depository institutions until June 1987 to shed their regulatory deposit limits.

The key to success was having participants with experience in the room, even some who had made mistakes, but who were willing to learn from their involvement. Secondly, persons who would come at issues from a variety of viewpoints and backgrounds–not a single framework–but with multiple perspectives.

A Mutual Process

This engagement with the industry resulting in share deregulation was just the beginning. The insights of credit union leaders were crucial in all areas of policy development.

Before developing a new NCUSIF financial structure, the agency received input from all segments of the industry to prepare a Report to Congress, required by the Garn-St. Germain Depository Institutions Act of 1982. In April 1983 this seven-chapter, 100-page credit union share insurance analysis was submitted. It ended with a list of over 60 names of industry contributors, many of whom were quoted in the study.

The recommendations in that joint study became the basis for the 1% deposit NCUSIF restructure, A Better Way, passed by Congress in 1984. The dramatic change occurred because of the support of the entire system.

In a similar manner, the Central Liquidity Facility was completely opened to all credit unions in an innovative partnership with US Central, the corporate network and the CLF. This liquidity safety net is an example of a public-private partnership based on the unique principles of cooperative design. NCUA ended this valuable partnership when it liquidated US Central.

From 1982 forward, credit unions recorded annual, sound double-digit growth. This mutual approach built a regulatory infrastructure responsive to the moment. The credit union system prospered for the next 25 years.

Bureaucracy is built on the adherence to traditional practice when making decisions. This “mind set” or “culture,” may suffice in normal times. But when changes to meet credit union needs is necessary, then the approach “we’ve always done it this way” will not suffice.

When the 2008/09 financial crisis happened, the agency took a different approach. The legacy of which continues.

Part II will show how this hangover of poor regulatory decisions can infect subsequent rules for decades.

Posted on

“Two Families”–The Strength of Cooperative Relationships

It is common to describe credit unions as family. Sometimes the description is indeed accurate as father or mother passes the profession down to sons and daughters.

But rarely would one expect a regulator, and especially the Chairman of NCUA, to embrace the concept.

On April 9, 1984, the American Banker published a story on credit unions based on an interview with the Chairman: “Callahan mans the credit union helm through the seas of deregulation.”

The article closed with this description:

Mr. Callahan, who once held three jobs at the same time and who says he is “used to hustling,” has a varied background. It includes positions as Illinois Deputy Secretary of State, a math teacher and part-time football coach, and a school principal.

He now boasts of having two families, one with over 40 million credit union members and one that includes eight children.

“Just keeping up with a family of eight has kept me running,” he jests.

Two families. That is a regulator who knew where his responsibilities were truly owed.

Posted on

The Paradoxical Commandments

These ten insights were included in a book, The Silent Revolution, published in 1968 by a Harvard sophomore.

The latter years of the 1960’s were marked by demonstrations and unrest across the country.  Civil rights activity combined with anti-war protests culminated  in occupations and extensive campus disruptions. Kent’s book presented  the alternative of working within the system for change.

To succeed, he presented ten  obstacles to be expected and the necessary counter response to sustain an effort.

I think his sixth commandment is especially relevant for the majority of credit unions, many of whose futures are devalued in public commentary.

The biggest men and women with the biggest ideas can be shot down by the smallest men and women with the smallest minds.

Think big anyway.

Posted on

Timeless Wisdom: The Relationship between NCUA and Credit Unions

“The relationship between credit unions and the regulatory agency is one founded on mutual self-respect, and on the realization that both sides share equally in the responsibility for the survival and future development of credit unions.

It seemed as though we would never escape the attitude that the regulator knows best (but) a dramatic change has taken place in the last few years. We now have a federal regulatory agency which openly concedes that credit union people know more about running credit unions than the agency does.

The nature of the federal bureaucracy, being what it is, there will be a great amount of inertia to cause it to revert to a less creative and less cooperative approach to regulation credit unions. I would not like to see that happen.”

– Frank Wielga, CEO Pennsylvania State Employees Credit Union, NCUA 1984 Annual Report, pg. 14.