Category: Cooperative Design

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Technology versus Slow Checkouts

America loves innovation.  Especially in technology.  We celebrate, honor, and enrich those entrepreneurs who bring efficiency and ease to our life and work with their inventions.

Technology underwrites greater productivity, reach and speed in credit union services. It enables 24 by 7 interactions. Manual processes from loan underwriting and live teller interactions are replaced by AI decisioning and intelligent teller machines (ITM’s).

Even phone responses and “live” chat are now automated to the point where one must opt out to “speak” with a real person.

What society prizes, is what the people will create. One writer contrasts our modern view of success with the culture in ancient Greece.

The ancient Greeks gauged progress differently from us. “What is honored in a country will be cultivated there,” Plato said. The Greeks, imperfect as they were, honored beauty and justice and moral excellence, and so they cultivated these values. We honor speed and connectivity and portability, and so that is what we get.

The author asserts our current focus leads to: “cognitive dissonance from our misplaced faith in technology, and an attendant disregard for other forms of human progress.”

The Introduction of “Slow”

I was reminded of this contrast between ancient and modern values after reading about a new approach in retail services in Europe, called Slow Checkout.

Jon Horvat describes this approach in retail and service industries: With so much buying happening online or through self-service kiosks, the art of shopping has lost much of its attraction. Some market-savvy executives have noticed this shortcoming and have recently introduced slow checkouts, which turn the routine chore into a meaningful experience.

Many retail experiences, that is personal shopping, are no longer personal.   Human contact, especially the kind of interactions characterized  by local farmer’s markets have been eliminated in the race for self-service and cashless checkout innovations.

The pressure to automate customer interactions will only accelerate as labor shortages occur in many retail service sectors.

Executives at several retail grocery chains in Europe noticed something was missing in their retail experiences. Some customers wanted human interaction.   Jumbo a Dutch supermarket chain and Carrefour, the French grocery leader, both introduced “slow checkout” lanes after discovering that people wanted to chat when then paid for their groceries.

Harvat describes this approach as follows:

These small-talk cashier lanes are gaining popularity. They are called “chitchat” checkouts. The French name, blablabla caisses, is a bit more expressive.

About 150 of Carrefour’s French stores have opened blablabla caisses, with plans to have at least one till in every location by the end of March. The lanes are marked for only those who want to talk with cashiers. There are no time limits for the customer, although most try to respect those waiting in line. The lanes come at no extra cost to the consumer.

Shoppers are encouraged to take their time on the slow checkouts; cashiers greet with bonjour and can ask about the family or the weather. No managers will be around to speed the process up. The aim is to slow it down.

Both customers and cashiers report greater satisfaction in their roles where interaction is encouraged.  Shopping is a social experience, not just a purchase transaction. Small talk is an important experience for people living alone or feeling lonely.  Cashiers enjoy the opportunity to communicate with people, giving them a sense of expanded agency in their interactive role.

Credit unions have traditionally been an area where these interactions have been a valued part of the member experience.  Members get tired of talking to machines or referred to online applications or processes.  They want to talk with real people.

People are social creatures.  These chit-chat interactions show that economics, the best rate or the fast turnaround, is not the only, or even the most important, human need in every circumstance.

Every person has needs that surpass material economic sustenance. Humankind does not live by bread alone.

The Boutique Credit Union

One person who has recognized this critical capacity for human interaction is Bo McDonald.  He is a credit union consultant who has focused on the unique capabilities and experiences provided by smaller credit unions.   While some may see credit unions with assets of under $100 million or below the credit union average size as a disadvantage, he sees these as “boutique businesses.”

When inspired by passion they provide member experiences long lost in some billion dollar institutions.  Ultimately every credit union is founded on relationships, even if the only measures traditionally used are the number or size of  transactions.

These boutiques may not have the growth patterns of their larger brethren; but they demonstrate the enduring power of cooperative design.  For  when we look under the technology covers increasingly deployed by credit unions, we learn that what members really value is someone to talk to  when they have a need.

Boutique credit unions demonstrate that real progress can also be achieved by slowing down and giving members your undivided attention.

 

 

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Cooperatives and Awakening the “Sleeping Giant”

Three recent observations:

  1. While reviewing an exam for a billion-dollar credit union of 25 pages, nowhere was the word cooperative used.  There were no  comments on any of the credit union’s responses to members during COVID, their PPE loans and multiple  community involvements including expanded DEI.   If the name were removed from the exam,  it would be impossible to know it was a credit union, not a bank.
  2. Two readers commented on REI’s values approach to its “brand:”

“While I am a fan of REI, I would like to mention (and this is probably not a surprise to you) that they too have a tendency towards oligarchic governance you have talked about in the context of credit unions. If I recall correctly, to be eligible for a candidacy in board elections you have to have leadership experience in a Fortune 500 company.

“We desperately need legislation that ensures fair electoral practices in co-ops. Glad you are advocating for this in credit unions. REI is a great company and credit unions are great – but they also need some tough love. “  (Leo Sammallahti)  

“I’m sure REI is admirable in its promotion of important values. However, the current unionizing effort does not seem to put REI in a good light.

“My own experience in a nonprofit progressive worker-rights advocacy organization (prior to joining the credit union movement) was that the management vigorously fought our efforts to unionize. It’s not an uncommon story among “liberal” organizations. Our effort was ultimately successful, but it taught me a lingering lesson about progressive hypocrisy. The co-op world is not exempt.”  (Cliff Rosenthal)

  1. Here is a small sample of the number of  job openings from Sunday’s CU Insight:
  • 77 positions at Lake Michigan Credit Union
  • 65 or 5.4 percent of NCUA’s authorized staff of 1,201. Fifteen were at Head Office and 50 in the regions (from NCUA Operating Fund report)
  • 40 positions at Michigan State University FCU
  • 37 positions at True Sky Credit Union

What do these Observations Mean?

Is our cooperative model struggling?   Is our business merely subject to the same economic forces affecting every other firm?  Are credit unions even addressing the multiple challenges of  inequality existing in every community?

In some respects the cooperative model is not working well.   On the surface we increasingly appear as just another financial option.  In many cases, let’s be frank, credit unions are not much different from many other financial choices in their behavior and impact on their communities.

Instead of transforming financial opportunity, credit unions increasingly embrace the tactics of their competition including purchasing banks, mergers (sell outs) of sound long- serving coops, and measuring performance by strictly financial and growth goals.

Recapturing our Promise

Occasionally a story appears in the press about a find in a flea market or an opportunity shop.  A person discovers an antique looking Roman bust selling for $34.99 in a Goodwill store.   She later learns it is 2,000 years old and priceless.

Sometimes in  life we do not understand the value of what we have.

But every credit union, not matter its size, has a founding story and purpose.  Every board inherited a legacy of power, fortitude and energy to make life better for members.

But does senior management and the board know what they have?  That is, an institution with the power to override the ever present push and pull of market forces of greed, domination and even exploitation?

The credit union charter is intended to enrich its members versus building institutional glory.  Every charter comes with that hope and potential.

So what is lacking today for why this transformative promise seems to be missing?

In One Word: Imagination

One of the examples of creative capability was Ed Callahan’s way of presenting the potential for the credit union movement, both as Chairman of NCUA and as CEO at Patelco Credit Union.

He believed the credit unions were “a sleeping giant,” or America’s “best kept secret.” They should be an option for all Americans.  Whether retired, between jobs or even for college and high school students.  The field of membership was an inclusive, not an exclusive concept.

In practice he did not let current reality limit what the future could be.  The NCUA exam cycle was over two years for federal charters when he arrived.  He held a “fire drill” that resulted in every federal credit union filing, for the first time ever, the yearend call report.   Working with regional directors, every federal credit union had an exam contact in 1982, and each year thereafter.

To celebrate the 50th anniversary of the passage of the Federal Credit Union Act, he announced a movement goal of 50 million members by 1984.   He inspired the largest credit union conference attendance ever in December of that year when state and federal examiners and credit union leaders came together in Las Vegas to debate their future.

Working with credit unions, the NCUA’s share insurance fund and CLF were redesigned following cooperative principles to create a three-part regulatory framework for the cooperative system.

These transformative events were inspired by the promise of what credit unions could be.  He recognized that in the new era of deregulation not all would perform with the same capability.  But working together, the system could position every credit union to be a competitive and valued experience for members.

Imagination was fueled by belief in what the pioneers had envisioned.  While the three current observations above may seem like challenges, they are opportunities to create a better coop system.

Let’s be honest.   Credit unions have always been understood, even trusted, as more than another financial choice.  They represent a member-centric focus dedicated to improving members’ lives and community options.

They are more than a financial institution.  Credit unions at their best represent the common hopes of young and old for a better life and a meaningful role in their chosen community.

The tools for transformative change have been a part of the cooperative model from the beginning.    What is needed is imagination tempered with vision and compassion.

Then indeed, the “sleeping giant” will be truly awakened.

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Credit Unions and Democratic Practice

Credit unions are strong proponents of democratic values.   Until they have to practice them.

I was reminded of this reluctance in a press story of a recent merger approval.  When asked about the vote tally, the credit union did not answer how many of its 9,870 members supported their charter cancellation:

Members of the $137 million Embark Federal Credit Union in Great Falls, Mont., voted to approve a merger with the $1.7 billion Horizon Credit Union, the Spokane Valley, Wash.-based financial cooperative said in a prepared statement Tuesday.

Horizon did not disclose the final vote tally. The credit union did not respond by deadline on Tuesday afternoon to CU Times‘ request for the member vote count.

Reporting the vote outcome, but not the actual numbers, suggests the credit union does not want the totals known.  The credit union provides the veneer of democracy but not the facts of how many member-owners actually participated in this required step to give up their charter.

To paraphrase a term from writer Jared Brock, credit unions have become “cooperative oligarchies.” The word comes from the Greek oligarkhía, meaning  “rule by the few.”

Merriam-Webster ‘s definition:  “a government in which a small group exercises control especially for corrupt and selfish purposes.”

Democracy has rarely been tried by capitalists.  Can credit unions really go against the incessant drive for corporate dominance and consolidation of power sought by firms in “free” market economies?

Many CEO’s and credit union boards don’t want democratic governance. They want silent customers who will passively accept the  leaders who achieved their roles years, or sometimes decades, earlier.

What they ignore is that members are the political constituency to whom  fidelity is owed. Boards and CEO’s are nothing without members.  Members deposit the funds, borrow for loans, pay the fees and generate transactions that keep the credit union revenue flowing.

Member-owners are the reason credit unions exist.
Members keep the lights on.
Members create 100% of the wealth for their cooperative.

One would think it required practice to tell members the vote tally in this management initiated effort to give up their independent credit union charter.  Especially as the CEO was awarded a $100,000 bonus and continued employment at an increased salary with the continuing credit union.

Horizon Credit Union assumes Embarks FCU’s member capital of $14 million, (approximately $1,500 per member).   The members get rhetorical promises about the future.

Is this the democratic model that will sustain members’ belief in credit unions?

 

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Call Federal, 60 Years Young & Still Run with Passion

60 years ago seven employees of the Philip Morris Company formed a credit union to serve their employees. It cost 25 cents to join.

What is noteworthy is that the founder’s commitment, the human motivation required by any coop startup, still drives Call Federal today.

The mission statement is  “passionately local banking.”   The focus is building lasting relationships and giving back to the community.  That commitment is stated as follows:

Call Federal has called the banks of the James River home for more than 60 years. Our employees live here, all decisions are made here. The money we make here stays here. We’re invested in this community, because it’s our community too.

The Members’ Voice

I learned about this “passion” for member service in a video celebrating their 60-year charter milestone.  The three minutes is almost entirely member interviews.  The culture of member service is described through real experiences.  These are situations where the credit union has made a difference in members’ lives spanning generations.

(https://www.youtube.com/watch?v=Wyuu80sb6YM)

A Workplace of Choice

The CEO John West recalls his predecessor, Roger Ball–CEO for 36 years–saying that service is not just the words used, but how you make members feel.

West’s current senior management team brings varied career backgrounds to the organization,  not limited to financial services.   “We want employees to span different schools of thought to continuously enhance our member relationships.”

West’s background illustrates this prior life and work experience.  In November of 2021 he was appointed to the Board of Families Forward Virginia. The press release tells how this appointment aligns with the credit union’s mission:

Families Forward Virginia is the commonwealth’s leading nonprofit organization dedicated to disrupting cycles of child abuse, neglect, and poverty. . . Working with parents and their children, the statewide nonprofit provides Home Visiting Programs, Family Support, and Education, Professional Development, Child Sexual Abuse Prevention Programs, Advocacy, Public Awareness/Public Education.

Prior to joining Call Federal in 2012, West was a senior accountant with Mary Washington Healthcare. Before that he worked for the United Way of Fredericksburg. West is a graduate of Leadership Metro Richmond and served for one year with Lead Virginia.

West commented on his appointment:  “Growing up in cooperative housing for steel mill workers, I know the value and importance of a strong community. Part of our mission at Call Federal is recognizing the stress that financial burdens can create.”

A Creative Financial Wellness Program

One example of how the credit union addresses this “stress” in members lives is its creative Financial Wellness Program.  The program rests on three unusual principles  to help members “be more confident in their financial decisions.”  The three are:

  1. Create Self-awareness. Discover your “money personality”: the habits and attitudes that influence your financial health, for better or worse.
  2. Understand the fundamentals of money management.
  3. Go Beyond by taking care of your physical and mental health and by giving back to your community and the world around you.

One example of this holistic approach to member financial well-being is a free resume review. Other services include coaching, financial workshops, even for kids, and  articles to help members with both financial events and career planning.

Sustaining the Movement

Speaking with West about how the credit union sustained the founder’s original passion for serving members, he replied that the effort was not merely a credit union story.  Rather it is the “human story,” that is, serving each other while living in community.

The credit  union’s 2021 “State of the Union” video  below describes the credit union’s response during COVID.  It includes two members recounting their personal circumstances, an employee’s special efforts to help staff and a community agency discussing the credit union’s steadfastness.   Each person speaks with passion about their credit union connection.

That passion is the difference that never grows old,  no matter a credit union’s charter date.

(https://youtu.be/K4REjbxV68A)

 

 

 

 

 

 

 

60 years ago seven employees of the Philip Morris company formed a credit union to serve their employees. It cost 25 cents to join.

 

What is noteworthy is that the drive and commitment, the human capital required by any coop startup, still motivates Call Federal today.

 

The mission statement is  “passionately local banking.”   The focus is building lasting relationships and giving back to the community.  That commitment reads as follows:

 

Call Federal has called the banks of the James River home for more than 60 years. Our employees live here, all decisions are made here. The money we make here stays here. We’re invested in this community, because it’s our community too.

 

The Members’ Voice

 

I learned about this “passion” for member service in a video celebrating this 60-year charter milestone.  The three minutes is almost entirely member interviews.  The culture of member service is described through real experiences.  These are examples where the credit union has made a difference in relationships that span multiple generations.

 

https://www.youtube.com/watch?v=Wyuu80sb6YM

 

(https://www.youtube.com/watch?v=Wyuu80sb6YM)

 

 

A Diverse Culture to Become a Workplace of Choice

 

The CEO John West recalls his predecessor, Roger Ball who was CEO for 36 years, saying that service is not the words used, but how you make members feel.

 

West’s current senior management team brings varied career backgrounds to the organization,  not just financial services.   “We want employees to span different schools of thought to continuously create value in our relationships.”

 

West’s background illustrates this prior life and work experience.  In November of 2021 he was appointed to the Board of Families Forward Virginia. The press release tells how this appointment coincides with the credit union’s mission:

 

Families Forward Virginia is the commonwealth’s leading nonprofit organization dedicated to disrupting cycles of child abuse, neglect, and poverty. . . Working with parents and their children, the statewide nonprofit provides Home Visiting Programs, Family Support, and Education, Professional Development, Child Sexual Abuse Prevention Programs, Advocacy, Public Awareness/Public Education.

Prior to joining Call Federal in 2012, West was a senior accountant with Mary Washington Healthcare. Before that he worked for the United Way of Fredericksburg. West is a graduate of Leadership Metro Richmond and served for one year with Lead Virginia.

West commented on his appointment:  “Growing up in cooperative housing for steel mill workers, I know the value and importance of a strong community. Part of our mission at Call Federal is recognizing the stress that financial burdens can create.”

 

A Creative Financial Wellness Program

 

One example of how the credit union addresses this “stress” in members lives is its creative Financial Wellness Program.  The program rests on three unusual principles in their efforts to help members “be more confident in their financial decisions.”  The three are:

 

  1. Create Self-awareness. Discover your “money personality”: the habits and attitudes that influence your financial health, for better or worse.
  2. Understand the fundamentals of money management.
  3. Go Beyond by taking care of your physical and mental health and by giving back to your community and the world around you.

 

An example of this holistic approach to member financial well-being is a free resume review. Coaching, financial workshops, even for kids, and  articles help members with both financial events and career planning.

 

Sustaining the Movement

 

Speaking with John about how the credit union sustained the founder’s original passion for serving members, he replied that the effort was not merely a credit union story.  Rather it is the “human story” of providing service to each other living in community.

 

The credit  union’s 2021 “state of the union” video shows how the credit union responded during COVID in this five minute video.  It includes two members recounting their personal circumstances, an employee’s special help for staff and a community agency discussing the credit union’s steadfastness.   Each speaker communicates passion about their credit union connection.

 

That is the difference that never grows old no matter a credit union’s charter date.

 

 

 

 

 

 

 

 

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Thoughts for Thursday

Feedback from the field:

Reverse Robin Hood: Bank Purchases by credit unions

A response to my comments in a recent conference call: Your points that really resonated were lack of transparency and accountability inherent in the cooperative governance structure.  Also  the fact that the bank acquisitions are taking money from CU members to line the pockets of bank shareholders, truly a reverse Robin Hood situation.

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“If My Words Can Convince One Credit Union”

I think CEOs just get tired. I think boards can get tired, too. And they think if our current CEO can’t make this place grow, who can? They see the simple solution is to merge out.

I am telling small credit unions that is a mistake; at least look for someone. I have had conversations with a number of CEOs who are retiring from small credit unions and they’re not even considering looking for somebody. They aren’t doing anything. They are not telling their boards to look for somebody. In fact, they’re telling the board the opposite—nobody can do this job at my pay.”

That type of thinking, and an unwillingness to “fight,” is hurting the movement.

“If my words can convince one credit union…if one credit union decides not to give up and says at least I will look for a replacement for the retiring CEO, I will feel good. I hope more small credit unions will follow what we are doing here.”  (source:  David Sawin, CEO, MN Catholic Credit Union, interview in  CU Today)

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What’s Missing?

“I am starting to think that credit unions are a waste of my time.

. . . as best I am able to ascertain, CUs are essentially just nonprofit banks – institutions that exist first and foremost to keep their employees employed and to keep the regulators happy.  The trappings of cooperation – invocations of principles, mechanisms for elections of board members, etc. – are either ignored or treated as empty formalities.

The new CEO of the CU on whose supervisory committee I serve told me that members simply don’t give a damn about that stuff; they just want convenience.

From my perspective, if CUs are just going to do exactly what the local banks are do, then I might as well just move my accounts over to banks.   What am I missing? (name withheld by request)

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 Response to They’re Coming with Bayonets

An uncomfortable change in the conversation (with regulators) will require incredible bravery.   I’ve been kicking around CU’s all my life.  My parents were members of a Teachers and a Manufacturing credit union.  I have been on Boards and now a CEO.

I have studied the history of the movement and the credo’s doled out as battle cries.  We were “choice”, we were “people helping people” – those goals were always color and socioeconomically blind as we emerged fighting against banking practices that were not–think redlining.

But we forgot one credo recently – “not for profit, not for charity, but for service.”  Since this credo does not make a singular virtue of  EQUITY, can we no longer espouse it?

The conversation change needs to be about DOI – Diversity, OPPORTUNITY, and Inclusion.  We were born out of opportunity and we are still built on it.  Will we be brave enough to say it?  We don’t need to be admonished with a new recitation.

We just need to remember our founding principles – which are both relevant and powerful.   (David. A. Jezewski,  President/CEO, CommStar Credit Union)

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Dear readers do not despair.   Tomorrow, Friday the 13th, is good news.  I will tell the story of a credit union that believes in the power of cooperative design.

 

 

 

 

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Tantrums and a $10 Million Credit Union Loss

As interest rates continue their upward cycle to reduce inflation, credit unions will manage this year-long transition process with multiple tactics and product adjustments.

There is no one operational formula to be universally applied because every credit union’s balance sheet and market standing is different.

But a simple model was the core of NCUA’s response in 2013 and 2014 when Fed Chairman Ben Bernanke announced a policy change to reduce support for the recovery after the Great Recession.   The reaction to his June 2013 announcement was an abrupt rise in rates, referred by some writers as  a “market tantrum.”

The following  is one credit union’s experience as NCUA  pursued its own regulatory tantrum as recalled by the current CEO.

A Case Study from a Prior Period of Increasing Rates

Today’s rapidly increasing interest rate environment is very reminiscent of the 2013-2014  period when Federal Reserve Chair Ben Bernanke’s “Taper Tantrum” led to a great deal of market volatility.  While Bernanke’s comments in May of 2013 touched off the increase in rates, it really took until the next year for the full effect to be felt.

NCUA’s response to this period of rising rates was nothing short of a panic.  Any credit union holding bonds whose value declined due to the increase in market yields was heavily criticized for having too much interest rate risk.  This critique was despite the fact that most natural person credit union had more than adequate liquidity to hold the bonds. 

The use of static stress tests, which showed dire results from up 300, 400 or 500 basis points, was used as a reason to force credit unions to sell some of their holdings turning unrealized losses, with no operational reason to act, into realized ones.  These forced sales unnecessarily depleted capital, the very thing that an insurer/regulator should be trying to preserve.

Things got so heated at our credit union that the Regional Director called a special meeting. Only our Board of Directors could attend; management was forbidden to be there. NCUA lectured them about the evils of excessive interest rate risk.  This sent many of them and our CEO into a full-scale panic. 

We sought advice from outside experts but finally settled on the dubious strategy of selling bonds at losses as well as borrowing funds from the FHLB that we did not need.  These were done to bring the results of these static stress tests in line with the NCUA’s modeled projections.  We calculated these actions caused us unnecessary losses of over $10 million before we stopped counting.  These came from both the realized losses, the added expense of unneeded borrowings, and the lost revenue on assets sold.

In the aftermath of that debacle, the credit unions senior management and two board members travelled to Alexandria, Virginia to meet a top NCUA regulator to explain our frustration at the loss.  After waiting for hours for our scheduled appointment, he heard us out.  We never heard back; however, the Regional Director soon departed.  Perhaps our message had at least been partially received.

The Problem with Static Tests

Fast forward to today.  We find ourselves in the “extreme risk” rating at the end of the first quarter due to the rapid rise in rates.  The glaring problem with static stress tests is that non-maturity deposits (which make up a large part of most natural person credit unions’ share liabilities) are limited to a one year average life. 

Several third-party studies document our share’s average life to be in excess of ten years.  Despite this, the asset side of the balance sheet is written down while the long-standing member relationships, on which most credit unions’ balance sheets are built, doesn’t get much credit at all.  For example, if a two-year average life on savings and checking accounts were used, the results of the static test wouldn’t even put us in the high interest rate risk category. 

Closing Thoughts

While we have authorization to utilize derivatives (something we didn’t have back in 2014), this could help lower the costs of compliance if we are forced to take action. However, I’m adamant against doing illogical things just to pass a static stress test this time around.

I’ve wondered how it’s OK for the NCUSIF to hold similarly long-term bonds in their portfolios without any concern during periods of volatility like this. We have the strength of our core share relationships and capital positions to withstand periods of rising rates.  NCUA just keeps reporting growing unrealized  losses transferring their IRR risk to credit unions to make up any operating shortfalls.

I also believe that NCUA should really be much more worried about very low interest rate environments.   These periods of very narrow yield curve pickups are actually much worse for financial intermediaries to navigate than periods like the one we’re now in. Overall the industry’s net margin should generally benefit from rising rates, shouldn’t it?

Two Observations

1. One expert’s view of  the situation today:  As you know, but people often forget, there is no ‘unrealized loss’ if a bond or loan is held to maturity.  There is an interest rate risk component that needs to be managed.  But if I am holding some 4% mortgages 10 years from now, and the overnight rate is 4%, then I am not upside-down.  I just have some of my assets earning the minimum rate of return. 

This is why I prefer net income simulation over IRR shock.  We don’t live in a static world, it’s a dynamic one.

2. During the November 2021 Board meeting the following interaction took place on the agency’s management of the NCUSIF portfolio and stress tests:

Board Member Hood: Thank you, Myra.  And again, I do have another question and this is for the record.  Do we all have an interest rate risk shock test to the fund (NCUSIF)  like we do for our credit unions under our supervision rule?  And also, do we do a cash flow forecast on a regular basis as well?

Eugene Schied: This is Eugene Schied, and I’ll take that question Mr. Hood.  Yes, we shock the – we do perform a shock test and perform cash flow analysis for the share insurance fund.  These are both reviewed by the investment committee on at least a quarterly basis.  The investment committee looks at the monthly cash flow projections for the upcoming 12 months as part of this regular analysis.  That concludes my answer, sir.

Board Member Hood: Great.  Thank you, Eugene.  I would just say that as I consider our investment strategy, we should note that examining portfolios and managing investments in the portfolio are two separate and distinct skillsets.  The NCUA today has over $20 billion, with a capital B, in investments under management; so I think we should have an even greater focus on this during our upcoming Share Insurance Fund updates.

 

 

 

 

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A Member Raises an Abiding Question Both Topical and Troubling

While traveling yesterday I was copied on an email between two credit union members.  The sender asked in part: 

“ I belong to five different credit unions.  I’ve clawed my way onto the supervisory committee of one of them. . . Alas, the Board of one has recently approved a deal by which it will be swallowed up by the biggest credit union in the state. . . When the deal was announced I wrote asking for whatever merger documents they could disclose.

I heard back directly from the CEO, who cheerfully explained they would be disgorging absolutely no documents.  It appears to me that the board and management actually expect the membership to ratify this deal entirely on a “trust me” basis. . . literally every justification that has been publicly offered comes down to some version of “bigger is better.”

His request:  “I am wondering if you would refresh my memory about what specific questions a concerned member ought to be asking about a deal like this.”

Topical and Troubling

If the situation is familiar, it is because it  happens  weekly.   Not mergers, but member-owners cut out of the process entirely.  Private deals supported by rhetorical promises and void of any objective facts.

Takeovers are an everyday event in capitalism and its anything-goes world of buyouts and mergers enabled by the financiers.

Here is how one long serving capitalist CEO described the process in his Annual Report:

Acquisition proposals remains a particularly vexing problem for board members.  The legal orchestration making deals has been refined and expanded (a word aptly describing attendant costs as well). But I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it.  And yes, include me in that category.

Overall, the deck is stacked in favor of the deal that’s coveted by the CEO and his/her obliging staff.  It would be an interesting exercise for a company to hire two “expert” acquisition advisors one pro and one con, to deliver his or her proposed views on the a proposed deal to the board—with the winning advisor to receive, say, ten times a token sum paid to the loser. 

Don’t hold your breath awaiting this reform:  the current system whatever its shortcomings for shareholders, works magnificently for CEO’s and the many advisors and other professionals who feast on deals.  A venerable caution will forever be true when advice from Wall Street is contemplated:  Don’t ask the barber whether you need a haircut.   (Source 2019 Annual Report, Berkshire Hathaway Inc. pgs 12-13)

A Game without Rules: Credit Unions Become Commodities

Mergers are being undertaken by sound, well established and stable credit unions not to better serve members.   But rather to make life easier for their leaders.

Instead of cooperative communities expanding long-time member relationships, these transactions treat credit unions like a commodity.  Leaders who give up their fiduciary positions to an outside third party without  engaging the owners prior to the decision and who must approve this charter cancellation.

This is the situation the member’s email describes.  And hundreds of thousands more members who end up becoming just consumer accounts to be bought and sold.

This is worse than the acquisition games Buffett describes in his Annual Report.  Credit unions and cooperative design is supposed to protect member-owners from self-dealing leaders and board toadyism.

Mergers lack transparency, public disclosures of strategy or benefits, and certainly no post acquisition accountability.  These are private deals negotiated by CEO’s putting their interests first and then announcing their intent to members.

The member vote is merely an administrative process without substance where very few members even bother to participate. All the messaging, resources and formal requirements are under the complete control of the persons benefitting from the transaction-not the members who must approve the decision.

What can members do?  How can the supposed democratic one member one vote governance model be revitalized to ensure member interests are front and center in these self-dealing transactions?

That is what the member is asking.  I will share your thoughts, and offer a few of my own.   Where is the Kristen Christian   when  members now need her to  save their own credit unions?

Buffett’s Merger Conclusion

“I’ve concluded that acquisitions are similar to marriage:  The start, of course, with a joyful wedding–but then reality tends to diverge from the pre-nuptial expectations.  Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes.  In other cases, disillusionment is swift.  Applying those images to corporate acquisitions, I’d have to say it is unusually the buyer who encounters unpleasant surprises.  It’s easy to get dreamy-eyed during corporate courtships.”

 

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An Observer on Freedom, Democracy and Credit Unions

“Alexis de Tocqueville shows that the capacity to choose the right thing is best understood in communal and political terms.

“Praising the New England townships of early Puritan America, he points out that the citizens made their decisions in common, framing laws, electing those who would govern them, setting taxes, providing for the poor, and in all things looking only to themselves and their own responsibility. These physically unimpressive settlements in the New World enacted self-government in ways that monarchical old Europe could hardly imagine in the 17th century. . .

“Tocqueville consistently reserves the word “freedom” for active engagement in public life and a concern for the common good that counters isolated self-interest. Citizens are free when they see and respect their dependence on each other. They can best continue to do what they know to be the right thing if they are committed to political self-rule.”

Source:  Glenn Arbery, A Taste of Freedom,

 

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How One Co-op Conducts Board Elections

Democracy is difficult to practice, especially when incumbents mange the process.

No one likes to give up positions or power, even if one is a volunteer.  This is true for local and national elections and in credit unions.

The press has reported on the attempt by four members of Virginia Credit Union to be considered for nomination to stand for election to the board.  Their efforts were ignored, and they were denied the chance to raise the issue at the March Annual meeting.

“The four people seeking to run for a board seat—Frank Moseley, Richard Walker, Tori Jones and Kati Hornung—have called the election a “sham” and alleged the process protected incumbent board members or their hand-picked candidates. The group said in earlier remarks that the CU’s chairman selects members of the Governance Committee that selected members to run for board seats, including the same CU chairman.”

An early account of their efforts can be found in this post,  The Fix is In.

A Shining Example of Democracy in a Coop

Shared Capital Cooperative is a lending and investment fund for co-ops of all types and sizes. They are cooperatively owned and managed by the co-ops that borrow from and invest in the firm. Borrowers and investors experience genuine cooperative finance—generating grassroots community wealth while building social, environmental, economic and racial justice.

The Coop’s vision is “building economic democracy.”

Founded in 1978, it is a Certified Development Financial Institution (CDFI) located in St. Paul, MN.   Its staff of 10 manages approximately $14 million in loans.  The board has eleven members elected from coops across the country.

The coop has both individual and 265 organizational members.  One board seat is voted by individuals and is not up this election.  There are six candidates for the three open board seats, each with a three-year term.

Board Election Ends Today

Voting is electronically from March 28 and ends today.   The link sent to me via email goes to an eleven-page listing of the candidates’ biographies.  The second link provides current board members’ backgrounds.   Here is an excerpt from the email:

Meet our candidates! For biographies and candidate statements of this year’s candidates please click here. For more information on our existing board, click here.

Cooperative members eligible to vote (not individual members like me) receive an email with their voting credentials. Annual meeting details are also given.

Shared Capital Cooperative’s Annual General Member Meeting and Cooperative Forum. It will be held virtually on Thursday, May 12th, from 12:00 pm to 1:30 pm CT.

The event will be free and open to the public. All are welcome! More details will be posted at www.sharedcapital.coop.

This relatively small, $16 million total assets organization, practices the democratic principles it committed to when formed.

Following Shared Cooperative’s Footsteps

This is an example of a board election/annual meeting that any credit union could emulate.   The process might prove enlivening and a confidence builder with members.  Especially as some credit unions struggle to involve members in this required annual democratic voting ritual.

This approach might result in more than a pro forma election; it could enhance member engagement and belief in the credit union!

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Learning from the Past

History is vital to interpreting human experience and meaning.   Understanding  where we have been helps us appreciate the present  and what the future may hold.

Our perspective of the past can change as events unfold.   What may have seemed wise or foolish at the time can now be viewed with greater clarity.  This capacity for self-reflection is critical when making decisions today.  It is called wisdom.

Calling for Wisdom by a Board Member

At the March NCUA Board meeting during the staff’s update on the Corporate Resolution Plan,  Rodney Hood observed:

But with any significant challenge, there are opportunities to learn lessons.  One lesson I would take away from the failed corporates is patience in the resolution process.  So I am glad that we are going to look back at the failed corporates, not to second guess or question decisions, but to learn from this experience as history can repeat itself. 

The Largest Loss Ever for Credit Unions

The liquidation en masse of five corporates was the largest projected loss ever.  NCUA said it would cost credit unions between $13.5-$16.0 billion.  The latest corporate AME numbers estimates the actual loss to the NCUSIF will be just over $2.0 billion and that is from just one corporate, WesCorp.

Absent an effort to understand how these projections were made, everyone will offer stories and interpretations that may be totally at odds with the facts as they unfolded.  In the desire to portray the resolution as a success, the most important lessons may be lost.   The seeds for future mistakes, remain unrecognized.

One example where the learning might begin is the liquidation of Southwest Corporate FCU.

Modeling for Failure

Unlike US Central and WesCorp, Southwest was not in conservatorship when seized.  It was being managed by its board and senior managers who made extensive monthly disclosures about the status of their credit union and every aspect of its investments.  The last report they issued was for July 2010 and was 21 pages of detailed information.

On September 24, 2010 NCUA issued an Order of Conservatorship on Southwest.  It was exercised “without notice” and warned that “Any business following service of this Order may subject members of the Board of Directors and management to civil or criminal liability.”  An explicit threat not to contest the Order.

A second document Grounds for Conservatorship included the following facts:

The credit union was solvent with “$88.6 million or 1.06% of  Southwest’s daily 12 month average net assets.”

The $88.6 million in remaining capital was after having “recorded OTTI charges totaling $496,258.357.” The Grounds document did not point out, as did the corporate in is July 2010 update, that only $49.7 million of actual losses (10%)  had been incurred. These investment write downs were based on modeling of  projected cash flows years, even decades,  into the future.

OTTI is not an allowance account.  It is a reduction in the value of an asset.  Under the accounting treatment at the time, improving loss projections based on the same modeling may not be recognized or netted with increasing loss projections.

In addition to its low solvency ratio NCUA declared it “marked to market” the investment portfolio resulting in a Net Economic Value (NEV) shortfall of ($718 million). This determination was accompanied by the statement that there was “with minimal opportunity for material improvement.”

Yet in the six-month period ending June 30, 2010 the negative NEV had improved by $382 million (35%).  The recovery had been underway since September 2009 and the market dislocations affecting the values of securities had begun to normalize.

But NCUA rejected these recent improvements asserting ‘future OTTI losses will continue to deplete its capital, negatively affect NEV, negatively affect its overall risk profile and decrease member confidence.  Even if NEV continued its recent slight improvement, the losses are more than Southwest’s balance sheet can absorb.” 

It further claimed: “Though a slight improvement in the increase in the fair value of the investment portfolio, the NEV increase is overwhelmed by the enormity of losses and the potential for additional OTTI charges from high risk investments.  The prospect of significant and sustained NEV improvement remains bleak.”  

A $1.5 Billion Modeling and Forecasting Error

 

Instead of a $718 million negative  NEV outcome and dire predictions of greater losses, the December 2021  projection is that SW Corp shareholders will receive $736 million in returned capital and liquidating dividends.  This is a $1.454 billion change in the actual economic value of the credit union.

The projected $736 million now being returned to shareholders equals 8.8% of the assets at the time of the seizure, or more than eight times the 1% solvency asserted by NCUA when placing the corporate in liquidation.

The projections and modeling were wrong.  The credit union had expensed hundreds of millions in  unrealized  OTTI losses that never took place, but were based on faulty assumptions.

Three of the other corporates had similar circumstances  Even in WesCorp’s situation, in which there will be no payment to shareholders, the estimated loss to the NCUSIF has gone from $6.2 million to just over $2.0 billion.

Next Steps in Understanding

 

A first review effort would be to update the projected versus actual loss experience on Southwest’s legacy assets.  The complete spreadsheet of legacy assets updated through September 2017 (when the TCCUSF was merged with the NCUSIF) is here.

How accurate were the OTTI write downs? What percentage of the $736 million payouts are from recoveries in the value of  “legacy assets”?

What can we learn further from the corporate resolution plan?   Especially in today’s economic circumstances?

Certainly the value of patience, in that there is a cycle of value with almost all assets in a dynamic economy.   This perspective could be especially important in this time of rapidly rising interest rates.  These increases  will temporarily depress the market value of many loan and investments assets on the books prior to Fed’s change in monetary policy.

The lessons should be more profound than relearning about fluctuations in economic value.  These might include the shortcomings of relying on “experts” like Black Rock and PIMCO for understanding what management options might be; or hiring Wall Street to design cooperative solutions; or even the native intelligence and insights of some of the corporate leaders who were summarily dismissed.

“No reasonable alternatives to conservatorship are evident.”

This assertion about the future of Soutwest in NCUA’s Order is perhaps the most important factor to assess.   What alternatives were evaluated?   By whom?  When?

One of the significant advantages of cooperative design versus private organizations is their dependence on member support and trust.   This factor is embodied in their democratic governance structure.

However, if those who lead an organization directly or through regulation do not honor this capability, then the advantage is loss.   The temptation to ignore, overrule or act based on solely on position and authority will sacrifice the long-term viability of an institution or even a system.

If NCUA demonstrates the ability to reflect on its own actions, transparently and in common cause with the industry, it could result in a leadership action that could resonate throughout the cooperative system—and perhaps beyond.