Category: Cooperative Design

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‘It’s the End of the World as We Know It’ (and I Don’t Feel Fine)

The title is from a Commentary by William Reinsch written four days after Russia’s invasion of Ukraine.

He is the Scholl Chair in International Business at the Center for Strategic and International Studies. His professional specialty within government and outside is international commerce and trade policy.

His article projected the end of the rules-based system of international trade that had been developed post WW II.

He foresees the war causing economic chaos, a return of power politics, and resurgence of authoritarianism.  The world will not be the same; unintended consequences will proliferate.

Turning Points in History

In individual, organizational and country’s histories there are moments that are eventually understood as turning points.  Sometimes these are sudden and instantly consequential.  Like Ukraine.

Other changes occur slowly, but inexorably, in a new direction with the outcome unseen for years.   For example the evolving demographic composition of the American population; or even the  inevitable forces leading to the deregulation of financial services in the 1970’s and 80’s.

I believe the century long credit union movement is in one of these transformational periods. This  involves significant changes in the regulator’s role,  credit union business priorities, accepted performance norms and the ambitions of leaders.

These cooperative developments are occurring as economic trends are moving away from the two decade  experience  post 9/11.   Inflation is nearing 8%, unemployment is at historic lows, worker shortages are occurring in many sectors, and interest rates  are projected to rise to potentially the highest level this century.

The juncture of these economic and industry changes could significantly alter the institutional makeup of the cooperative system. They could result in the loss of credit union’s independent identify and purpose.

The Breakdown in the Regulatory-Industry Relationship

The seeds were sown in the disruption of the Great Recession in 2008-2010.  The scope of the potential corporate problem created a rupture between NCUA and the industry.

NCUA leaders whether through fear, inexperience or bureaucratic instinct distanced itself from credit unions.   The agency took  the sole role of developing one all encompassing solution for five distinct corporate balance sheets.  The results were disastrous for credit unions, the corporate system and the credit unions that relied on them.  Additionally, 30-year industry partnership for the CLF was ended.

The most critical long term loss however was not financial, but the agency’s ability or willingness to work collaboratively with the industry—on all issues and in all circumstances.

Instead of viewing their role as empowering a system of cooperatives, NCUA positioned itself as rulers over the credit union system.

At the March 2022 Board meeting this view was expressed by Chairman Harper in comments on the agency’s Annual Performance Plan:  With the geopolitical crisis unfolding in Ukraine, the NCUA will also continue to prioritize cybersecurity and guide the credit union system through the economic uncertainty caused by inflation, rising gas bills, and continued supply chain woes.

This paternalistic or in loco parentis approach to regulation and supervision emerged from the agency’s ability to impose solutions and rules unilaterally following  the corporate crisis.

The agency publicly proclaimed its independence under Chairman Matz from both credit union involvement and external oversight.  No one at the board or staff has been able to replace the critical experience and knowledge credit unions brought to all issues.

Credit union experience is absent in the regulatory bureaucracy. Credit unions manage over $2.0 trillion for over 100 million members but they have little to no voice in policy priorities.   Stakeholders, both members and the professional leaders, are viewed simply as recipients of perceived regulatory wisdom.

Increasingly credit unions are developing new financial schemes with the regulator seemingly oblivious to their impact on these credit unions or the member owners.   The wheeling and dealing in mergers, bank purchases and raising external capital is accelerating.

The makeover of a number of credit unions from member-centered to financial strategists, gamesman, hustlers and horse-traders is well underway.

This failure to interact removes NCUA’s most important resource – the industry’s professional leadership experience.   Mistakes will continue to be made and paid for by credit unions due to the missing counsel of those who make the system work on a daily basis.

Overcoming the Schism

Credit unions created NCUA and designed and passed in Congress all of its constituent capabilities specifically the NCUSIF and CLF.

Board members seem divided between two binary positions:  let the free market determine outcomes or, NCUA must pass rules to micromanage every credit decision and balance sheet IRR risk.

Effective NCUA regulatory policy is not democratic or republican, or even bipartisan; it is pragmatic supported by facts, logic and cooperative purpose.

Rules and manuals in the thousands of pages cannot replace business judgments and may in fact result in reducing sound operational choices.

Mutual respect is missing.  Credit unions are intimidated or consider fruitless any effort to critique ineffective agency actions.   NCUA’s most frequent justification for more rules is comparison with other financial regulators.

Mutual dialogue creates respect and enhances understanding of shared responsibility.  Future posts will describe changes in priorities, norms and professional ambitions shaping industry character.   All are examples of events occurring without the benefit of public dialogue.

 

 

 

 

 

 

 

 

 

 

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Irony

Voting is the life blood of democracy.  For both political leadership  and within organizations.

Some firms, such as IBM, encourage their stock holders to vote at the annual meeting:

To express our appreciation for your participation, IBM will make a $1 charitable donation to Opportunity@Work on behalf of every stock holder who votes.

Voting is integral to credit union design.  This is the season for annual meetings with members electing their directors.  Unfortunately actual voting is rare.  Most vacancies are filled by acclamation as the number of candidates equals the open seats.

Now CUNA has begun a campaign to encourage member voting. As reported in CU Today:

WASHINGTON–CUNA has relaunched its “Credit Unions Vote,” a campaign focused on getting credit union members to vote in the 2022 midterm election. The campaign ties civic engagement to credit unions’ ability to improve financial well-being and advance local communities, CUNA said.

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“Credit unions understand that elections affect their members’ financial well-being,” said CUNA Deputy Chief Advocacy Officer for Political Action Trey Hawkins. “With the Credit Unions Vote campaign, we will reach out to America’s credit unions providing them with resources to encourage their members to play an active role in both their primary and the November election.”

An Observation:

Yes, elections do indeed affect members well-being. Especially the choice of credit union directors.

If CUNA wants to encourage member’s good voting habits, why not begin by promoting elections at credit union’s annual meetings?

That would seem a more immediate way to illustrate the power of the franchise and their well being.

 

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Inflation, Interest Rates and Managing the NCUSIF’s $21 Billion Portfolio

Last week the Federal Reserve began its long-publicized tightening of monetary policy.  The Board raised the overnight fed funds target rate to .25-.50% .  Six more raises are planned which would take this rate at year end to around 2%.

The consensus of economists is the Fed’s  plan may be a day late and dollar short.  From MSNBC columnist Kelly Evans right after the announcement:

The Fed published a crucial update in its projections yesterday that showed members now expect the short-term Fed funds rate to hit 2.8% by the end of next year–up from only 1.6% in their December projections. In just three months’ time, in other words, as inflation has shot way higher than anyone at the Fed expected, the committee is signaling the need for almost ten rate hikes by late next year, roughly twice as many as they previously thought necessary. 

In his March 21st speech to National Association of Business Economists (NABE) Fed Chairman Jerome Powell unveiled an even more hawkish view.  Increases could be in .50% increments if needed to counter inflation.

Interest rate rises have substantial consequences for the management of the NCUSIF.   All planned revenue for the NCUSIF is from earnings on its investment portfolio of Treasury securities.  The portfolio will be almost $22 billion by 2022 yearend as credit unions keep sending in 1% of the increase in their share deposits.

Robotic Investing

As the public concern about inflation grew in 2021, the NCUSIF’s investment committee  continued using a “ladder” approach.  The resulting multiple investments  had average durations of 5-6 years and average yields of less than 1%.   This was done at an historically low point in the interest rate cycle.

Despite Board questioning, the staff defended their decisions by saying they don’t try to “time the market.”  Whereas the record shows that the staff has substantially modified the portfolio’s average duration over the past seven years from 1,815 days in 2015 to as low as 901 days in 2018.

One consequence of the Board’s questions  is  NCUA has now published its NCUSIF investment policy.   It can be found here with a last modified date of February 23, 2022. The substance appears unchanged from the previous February 2013 policy.

While NCUA did not formally request input, it is in the industry’s self-interest, even duty, to look at this document to suggest how the management of this $22 billion portfolio could be improved at this point in the  market.

The NCUSIF’s Financial status as of January 2022

 

The most recent NCUSIF financials are at January 31, 2022.    They show the $20.4 billion portfolio is $265 million underwater (market value less than book); the  yield is 1.20% with an   average weighted duration of 1,244 days or 3.5 years.

January’s total income was  $21 million and expenses $17.4 million (up 20% from January 2021). Monthly net income is  $3.6 million with no loss reserve expense or recoveries.

The portfolio is divided into identical  $2.8 billion dollar maturity “buckets” spread over seven years through 2028.  Just $431 million is held overnight.

One year ago, January 2021, the portfolio was $17.8 billion, with a 1.29% yield, weighted average maturity of 1,184 days or 3.3 years.  The portfolio reported a gain in market value of $459 million.

In January 2020, two months before the COVID national economic shutdown and plunge in rates, the NCUSIF reported an average yield of 1.88% and a weighted average life of 2.9 years.  Interest revenue was $25.5  million and operating expense of $16.9 million resulting in a bottom line of $9.5 million, or three times the January 2022  outcome.

The fund’s portfolio maturity extensions during COVID’s low rate  stimulus environment have put the NCUSIF into a financial hole.  Revenue is much less on a portfolio that is 25%  larger  ($ 5 billion) than two years ago; the portfolio has lost $724 million in market value due to its below market return and maturity extensions at the bottom of the interest rate cycle.

These circumstances  suggest an urgent need for a review of NCUSIF portfolio management and reporting. The current policy implementation is not a positive outcome for NCUA or credit unions.

 Changes to Enhance Transparency and Performance

There is investment expertise aplenty in credit unions.   Some areas for commenting on the newly published policy might include:

  1. How can investment return goals be better integrated with projected income and budgeted expense so that target for investment yield can be set objectively? For example a 2% portfolio yield and today’s fund size would cover all budgeted expenses and still leave over $200 million to grow equity or cover any new reserve expense.
  2. How should the objective of paying a dividend to credit unions be incorporated in the fund’s policy objectives?
  3. How can the fund’s investment decisions be more transparent especially the assumptions used when making decisions and changes to portfolio’s duration?
  4. What additional information should be in the monthly reports posted and provided to the board to evaluate investment performance? For example shock tests?
  5. What financial models does the fund use when making decisions? Can these be made public so that credit unions can comment on the projections and assumptions used?

There are  many potential insights to this critical NCUA board policy that could lead to more effective oversight and performance.  The critical success factor is sending these suggestions to NCUA  to be evaluated for updating the policy.

Auspicious Timing

While there has been no formal request for comments, one approach would be to send suggestions to the investment committee’s new Chair which is the Director of E & I. Kelly Lay was just appointed to this position.  This gives her an excellent opportunity to bring credit union experience to the investment process.  Her email is klay@NCUA.gov.

The timing is also critical because rates will be rising, how fast and how far is anyone’s guess.  Both domestic inflation and international events will create ongoing uncertainty.  But the direction is certainly set.

To continue the robotic ladder when it is known rates will in all likelihood continue to rise, is folly.  It brings no credit to the committee’s work and the board’s oversight.

Yesterday’s treasury coupon yields for 25 weeks was .95% and for one year, 1.31%.    These are higher rates than any of the investment decisions made in 2021.  A portfolio return increase of only 1% would double the fund’s annual revenue.

To decide when to extend out the yield curve should be based on analysis of  what breakeven yield is needed to cover costs and equity growth and any loss reserves.   Whether that is 2% or some other number, the goal should be to optimize yield taking into context the operating needs and sending excess earning back to credit unions.

Circumstances have given credit unions and NCUA a valuable moment to improve the management of this important, ever-growing industry asset.   Will credit unions and NCUA take this opportunity?

 

 

 

 

 

 

 

 

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A Fee that Credit Unions Should Review for Appropriateness

Increasing attention is being given to all financial institution’s overdraft/courtesy-pay/nsf fee structures.   An excellent summary of many of the issues is in this article from CUSO magazine.

After the reassessments of these fees, there is another one that credit unions may want to proactively review.

The Unclaimed Property/Inactive Account Fee

A member recently told the story about learning of this fee the hard way.   She had been a loyal credit union member for over two decades and had left a small balance of $500 in case a family member needed to borrow.

The regular savings account paid interest of .05%, offered only online statements and had no activity for over two years.  When checking her 2021 yearend balance online she discovered that the amount had fallen by 20%.

The explanation: a $3 per month inactive account fee was being assessed.  She knew nothing about the fee or how long it had been in place.  In essence she felt the credit union had effectively free use of her money and was charging her on top of that!

When contacted, the credit union explained the fee and offered to refund the money for the last two years, which was as far back as their system would go.

Credit Union’s Responsibility for Inactive Accounts

When Ed, Bucky and I went to NCUA in 1981, I can remember credit unions approaching the agency about charging inactive account fees, which in essence was the step prior to forwarding these accounts to the states as unclaimed property.

In Illinois the Department of Financial Institutions was responsible for administering the unclaimed property act and ensuring funds were properly reported, returned to the state after five years of inactivity so the owners’ names could be publicly listed to  reclaim their funds.

My colleagues believed charging a fee during this inactive period was counter to both the spirit of the act and for a cooperative financial institution.

Credit unions claimed  the accounts were costing them money: maintaining the account, mailing monthly or quarterly statements and plus interest.  Even as they tried to reactivate them, they wanted to be reimbursed for the operational “costs” of the accounts.

For others, the not so hidden motive was to fee the account to $0, especially smaller balances,  close out the member, and not worry about reporting it as unclaimed property.

Others asserted that the fee was in fact an incentive for members to reactivate their accounts.

Inactive accounts come in all flavors:  parents opening accounts for their children, now long gone; accounts left when members move out of the area; the account opened for an indirect loan member, etc.

The common characteristics are there is no member-initiated account activity, the relationship is static, and there is high probability the owner is unaware of any fees being charged.   Therefore it is an easy fee to assess as it is mostly invisible to the account holder.

Other Credit Union Examples

One CEO I talked with said they charge $3 a month on about 500 accounts generating $1,500 in revenue.   At any point in time about 40% of the accounts will be sent to the state.

Another CEO said the credit union charges $10 per quarter.   In both cases the fee had not been evaluated for decades.

Both recognized that in an era of virtual accounts, minimal interest on savings and near zero marginal operating costs, the credit union should focus on contacting members, not seeing the issue as a revenue item.

I would urge credit unions to look at their current inactive account policy and fees.   It may not be as consequential as overdrafts, but if a class action attorney situation arrives, just looking up the years of records, charges and potential refunds, would seem to suggest any income is not worth the potential cost.

Also don’t forget abandoned safety deposit boxes must also be reported as unclaimed after the statutory period of inactivity.

NCUA’s Unclaimed Policy

Just as a footnote, NCUA also acquires unclaimed insured share accounts when liquidating credit unions.

It is interesting to note that the agency’s policy is contrary to the legal practice required of credit unions.

As stated on the website, if NCUA cannot locate the party after 18 months, it converts them to “uninsured” and retains the balances for use by the insurance fund.

Invariably, some items may remain unclaimed. Some checks are never cashed; or the credit union’s address information was incomplete. There are also cases when we don’t have a recent address and are unable to get a forwarding address from the post office.

Share accounts claimed within the 18-month insurance period are paid at their full-insured amount. At the expiration of the 18-month insurance period, shares that are not claimed are considered uninsured and written down to share in the loss to the National Credit Union Share Insurance Fund. Even if shares are uninsured when they are claimed, there may still be a distribution.

On rare occasions, the liquidation of a credit union may result in surplus funds. If a surplus remains, a distribution to the shareholders is required. This may occur several years after the credit union is liquidated and it is sometimes difficult to locate these members.

This is another example where NCUA exempts itself from the rules credit unions are required to follow to protect member’s assets.

 

 

 

 

 

 

 

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The Credit Union Movement In Five Phases

For some time I have followed the writings of Father Richard Rohr.  He is a Franciscan friar, wisdom teacher, and founder of the Center for Action and Contemplation in Albuquerque, New Mexico.

His spirituality concepts are universal, informed by all denominations and spiritual traditions.  His focus is the search for unitary conscience.   Recently he summarized five stages that religious and cultural developments have historically followed.  He calls these the five M’s: human, movement, machine, monument and memory.

I have paraphrased his approach below to apply it to credit union evolution.  I believe the framework is useful for understanding the different motivations credit unions draw upon with cooperative design.  (Adapted from Richard Rohr, The Wisdom Pattern: Order, Disorder, Reorder )

The Five Stages

“It seems that many great things in history start with a single human being. If a person says something full of life that captures reality well, the message often moves to the second stage of becoming a movement. 

That’s the period of greatest energy. Credit unions greatest vitality  as a “cooperative  movement,” resulted in thousands of new institutions formed annually.  Each was an expression of a larger vision for community. The movement stage is always very exciting, creative, and also risky.

It’s risky because the movement in history is larger than any city, state, country or economic system. Society is unable to foresee its full scope or meaning. We feel out of control in this stage, and yet why would anybody want it to be anything less?

Yet we move rather quickly out and beyond the risky movement stage to the machine stage. This is predictable and understandable. Systems are developed to support individual often independent firms.

The Dominant Machine Stage

The institutional or machine stage of a movement will necessarily be a less passionate manifestation. This is not bad, although it is always surprising for those who see credit unions as the end itself, instead of merely a vehicle for the original vision.

There is no other way; but when we don’t realize a machine’s limited capacities, we try to make it into something more than it is. We make it a monument, a closed system operating inside of its own, often self-serving, logic. By then, it’s very hard to take risks for those most in need following core values that inspired the movement phase.

Eventually these monuments and their maintenance and self-preservation become ends in themselves. It is easy just to step on board and worship their success without ever knowing why they came to be.

At this point, we have jumped over the human and movement stages, becoming like the for-profit institutions we were meant to supplant. There is little hint of knowing who we are meant to serve. Members are often frozen out of any meaningful role other than consumers.

In this stage, credit unions are a platform for building ever larger financial firms while holding on to a memory of something that once must have been a great adventure. Credit unions are no longer serving a distinctive role. Rather they mimic the priorities of the existing capitalist, market driven competitors.

Overcoming the Monument-Memory Entrapment

Increasingly credit unions avoid addressing the most disadvantaged segments of society we were organized to serve.

To avoid becoming trapped in the monument stage with the initial vision merely memory, renewal is needed. Innovative efforts are necessary to keep in touch with the human and movement aspirations. This is not  being naïve about the necessity for machine-like competencies and the inevitable human drive to embrace monuments.

We must also be honest: all of us love monuments when they are monuments to our human ambition, our movement, or our machine.”  (End paraphrase)

Applying Rohr’s Insights to the Credit Union Movement

It is feasible to align the different phases of credit union history with this model.  The more powerful application however may be to help  leaders or institutions recognize that all five stages can be present and called upon at the same time.

Can the machine success be augmented with the human passion of the creation phase? I saw one credit union CEO attempt to connect these seemingly contrasting impulses.   He organized a public member meeting each week at a different branch of the credit union.  Fifty visits led by a senior staff person for every branch over the year.

Videos were made of the visits and shared with staff and board.   The results were not, I believe, some dramatic new product or service concept.  Rather it reinforced respect for the members and  their opinions  as well as supporting staff in scattered branches.

I believe the model’s usefulness is most helpful if not seen as linear, trending in a single direction.  Rather it alerts us to the multiple motivations which contribute to success.

If we focus only on the competencies of the machine stage leading inevitably toward monuments, then we lose the important advantages of the initial creative era.   For it is human needs and relationships that were the origins of every credit union and, still today, its most important foundational advantage.

 

 

 

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Going Public: Colorado Partner Credit Union, their CUSO and a SPAC

In March  2021 Colorado Partner Credit Union announced that Sundie Seefried, its 20 year CEO would step away to lead a new cannabis banking company called Safe Harbor Financial.

Safe Harbor was a CUSO formed through the combination of the credit union’s cannabis banking arm and its division that licenses those services to other financial institutions.

At December 2021 yearend Partner Colorado reported $575 million assets, six branches and serving 36,000 members.   Its CUSO investment, presumably all Safe Harbor, was valued at $8.2 million up from $3.8 million the prior year.   These valuations were achieved with a  reported total cash outlay of only $750,000.

In February of 2022 there was a new transaction announced: Safe Harbor CUSO’s cannabis industry-focused financial services would be acquired by ”Northern Lights Acquisition Corp, a special purpose acquisition corporation (SPAC).  

A special purpose acquisition company (SPAC) is a “blank check” shell corporation designed to take companies public without going through the traditional IPO process.

A $185 million Purchase Valuation

The terms according to one news report were that Northern Lights will pay $70 million in cash and $115 million in stock. Sundie Seefried – who created Safe Harbor – will be the CEO of the new public company.

The full February 14, 2022 press release projected the equity market value of the post-sale closing company to be $327 million.

In an interview the CEO Seefried described Safe Harbor’s competitive advantages in managing the financials for businesses conducting legal marijuana transactions:

“The amount of work necessary to manage that BSA risk is expensive,” Seefried said in July. “And the resources are demanding, in terms of the monetary system that you have to purchase. 

“We did cannabis and we did it thoroughly,” she added. “We think we have the compliance program to a good state of stability here.”

The only financial information I could find about the Safe Harbor CUSO was the following;

The company had almost 600 accounts across 20 states and $4 billion in transactions in 2021. It would appear to be a fee intensive business model in return for its compliance expertise and financial transaction management.

What Does this Example Mean for Credit Unions?

Credit union sale of all or partial ownership of a CUSO business is not a new event.  Several major examples include the sale of CUSO Financial Services (CFS) a broker dealer, with minority credit union ownership, sold to Atria Wealth Services in 2017.

Prime Alliance Solutions was a significant national CUSO offering first mortgage services to an estimated 1,900 credit unions.  It was developed by BECU, the majority owner with a limited number of other credit owners and Mortgage Cadence. The CUSO venture was sold to Accenture, in a private sale, in 2013.

Another industry CUSO model that is a frequent target for acquisition is data processing.  The largest credit union owned processor USERS was sold to Fiserv in the 1980’s.  A number of other regional DP firms have also been acquired by private companies.

What make the Safe Harbor-SPAC transaction unique is that the business will now be publicly traded.

At this time several aspects of the transaction seem noteworthy.

  1. The Safe Harbor sale is unique in that the stock will now be publicly owned.  In the past some credit unions converted to stock banks such as HarborOne, but this is the first CUSO to be traded on a public stock exchange.
  2. The creation and development of this unique financial intermediary is a tribute to the CEO who has worked on this business model since 2015. You can listen to her discuss the intricacies  in  podcasts posted on the CUSO website.  Her biography says she has served in the Credit Union industry since 1983 and became CEO at Partner Colorado in 2001.   She holds a Bachelors in Business Management from the University of Maryland and an MBA in Finance from Regis University.
  3. If the CUSO is indeed wholly owned, the transaction should produce a windfall for Partner Colorado and its members. In the FAQ’s on the Safe Harbor web site this relationship is described as: Yes! Your accounts are held at Partner Colorado Credit Union and will be insured through the NCUA Share Insurance Fund.  This would indicate an ongoing business relationship.

Wall Street Is Discovering Main Street Coops

My biggest takeaway is that this is another example of wall street firms discovering  credit unions as a source of new business.   In addition to this public listing, brokers, hedge funds and investment advisors are actively soliciting credit union purchases of banks, placing subordinated debt financing to enhance capital ratios and increasingly bringing wholesale financing and other funding opportunities to the industry such as fintech startups.

In subsequent posts I will review some of these other activities and what we can learn from them.

The Need for Transparency

One purpose in writing about these events is so they can be fully and openly talked about.   At the  moment most of the investment banking activities  are private with limited or no public disclosure.

For example two credit unions closed on subordinated debt capital  with identical structures in December 2021.   But the rates paid by the two credit unions appear to be significantly different.  Both are sound institutions but even they must rely on what their brokers and advisors privately tell them about the market which may not be indicative of other options.

The second reason is so that member owners, whose funds are used, will know how they  benefit from these transactions.   Rarely have credit unions discussed these transaction with members.

The annual meeting’s business report and election of directors would seem to be an ideal moment  to explain the financial impact and member payback on these investments.  I have yet to hear of this being done.

A Payday for Members?

Hopefully the members will be the big winners in SafeHarbor’s public offering.  The history of this effort was that it was all done with the credit union’s resources.

Partner Colorado valued its CUSO investment on the 5300 report for December 2021 at $8.3 million while reporting  a total cash investment of only $755,000.   With a SPAC cash and stock purchase of $175 million, will the members be in for a big payday?

 

 

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The Fix is In: Members Act When Denied the Right to Stand for the Board

Credit union’s democratic member voting is a critical feature of cooperative design.

However the practice of democracy can become a charade if those in control fail to follow long standing practices to make it a reality.

A Board Controlling Their Re-election

At December 2021 yearend Virginia Credit Union (VACU) reported $5.0 billion in assets with 310,000 members, 22 branches and 731 employees. The net worth ratio was 9.8%.

In yesterday’s post I shared the member Notice from my credit union’s annual meeting and the fact there would be no voting for four open board seats.  The number of nominations equals the number of vacancies.

Then I received this email from a credit union member about the board of VACU trying to control their own reappointment.  And members’ response.

“Are you aware of this? [link] It appears that VACU needs a mechanism for members’ self-nomination for board elections. Find that hard to believe but VACU is a state-chartered CU and the VA credit union act gives them much discretion.

“Although the nominating committee can send forward more than one candidate for each board vacancy, if they don’t, then nominations from the floor are not allowed and the vote at the meeting shall be by voice vote – which precludes any write-in votes!

“Under any circumstances, if only the uncontested nominees selected by the board appointed nominating committee are eligible to run…it ain’t right…talk about the destruction of cooperative principles?!?!?.

“The fix is definitely in!”

We Own VACU

The link in the email is to a petition in which four members of VACU state their interest in serving on the board.  They describe their efforts as follows:

The Virginia Credit Union Board is trying to rig their election so that YOU lose your right to vote for four amazing community leaders who are running for the board. 

Credit unions are financial cooperatives. They are owned equally by the members with a democratically elected board of directors – one member, one vote. The Virginia Credit Union (VACU) is a Community Development Finance Institution (CDFI) with a responsibility to invest federal dollars alongside private sector capital in the nation’s most distressed communities.

Four outstanding Richmond community leaders and VACU member-owners filed paperwork by last year’s deadline to run for the board in the March 23rd elections — Frank Moseley, Kati Hornung, Richard Walker, and Tori Jones — to bring a different direction, a different relationship with the Richmond community, and accountability for VACU’s atrocious pandemic response to an out-of-touch board of directors that needs all three.

VACU’s board has not only refused to allow their names on the ballot, it didn’t bother to interview or respond to the candidates. Instead the board is planning to hold a Soviet-style election at our annual member meeting on March 23rd, with three board-chosen candidates running unopposed for three seats. You can read the full story here, and learn more about the candidates here.

Tell VACU this is not democratic ownership and we will fight for our voting rights at the credit union the same as anywhere else they are under attack. 

A longer  post called We Own VACU provides the back story of their efforts.  They show the board chair appointed the nominating committee, which in  turn nominated the chair as one of the candidates for the four open seats.

Complaint Filed with NCUA

Where can members go if their efforts are denied?  Who is to call a foul on those in charge if they do not follow their own rules?

The members appealed to NCUA.  Yesterday they filed a formal complaint which can be read in full. The complaint gives the history of their attempts to be nominated starting in September 2021 and the repeated no responses or rebuffs by the board.

They attach their documentation and ask NCUA to vacate the “sham election scheduled for March 23 and require a new election with all four names included on the ballot.”

However their most important request is that NCUA make a policy statement declaring  that:

No credit unions in the country will be permitted to remove member owner oversight, participation in governance, or democratic control, thereby removing the temptation of misguided boards to try.

NCUA has published many such interpretations of acceptable bylaw implementation such as this:

  1. Nomination procedures: Under all options under this Article, the nominating committee must widely publicize the call for nominations to all members by any medium. This requirement can be satisfied by publicizing the information to a large audience, whether by newsletter, email, or any other satisfactory medium that reaches as many members as possible. The NCUA emphasizes that member participation is important during an election, and FCUs must make sure that members are aware of the nomination process. (emphasis added)

But in practice the Agency has shown no interest in member rights even when confronted with documented evidence of board manipulation of voting and annual meeting misconduct. A prime example is the denial of member rights in the Cornerstone Credit Union merger with Belco Community Credit Union.

As a result member participation in annual elections is increasingly a shadow exercise with no substance.  With more virtual annual meetings, the process becomes even more controlled.

As members are removed from the governance process, board and management are free to follow whatever course they alone believe is in the members’ interest. Even when this means giving up sound charters via merger or using member’s collective reserves to buy troubled banks.

Regulatory Leadership or Continued Neglect?

Chairman Harper in last week’s GAC address gave this view of his regulatory approach:

One of my favorite quotes by Molly Ivin’s reads: “I think government is a tool, like a hammer. You can use a hammer to build with or you can use a hammer to destroy with. Whether government is good or bad depends on what you use it for and how well you use it.

He then says how he intends to use his regulatory hammer as Chairman:

Protecting Consumers

Since joining the Board, I have focused on strengthening the NCUA’s consumer financial protection and fair lending resources. Given the consumer compliance examination program for comparably sized community banks, our program’s scope is insufficient, especially for those credit unions between $1 billion and $10 billion in assets. We should be doing more, and we can do more.

I understand this is not a popular opinion in this room. Many within the industry maintain that the NCUA should primarily focus on its safety-and-soundness mission or that the agency has not demonstrated a significant rationale for a stronger consumer compliance program.

Some also contend that the cooperative nature of credit unions prevents their lending practices from being discriminatory because their primary purpose is to serve their members’ needs. However, the logic that credit unions do not discriminate because they are owned by their members is a dangerous myth and one that should end.

Confusing Consumers with Member-Owners

Chairman Harper wants to protect consumers but not coop member-owners who are his primary responsibility.  The GAC comment suggests he has yet to grasp what it means to regulate cooperatives with their system of member governance.

The VACU members’ complaint and the ever-spreading practice of board’s ignoring the critical role of member’s franchise role will demonstrate whether the NCUA Board believes in member rights—or just wants credit unions to see their owners as only consumers.

The VACU members requested a straight forward policy statement that all credit unions could embrace.   It’s much shorter than a GAC speech. It doesn’t require a hammer. Just a reminder of who credit unions are.

I bet such a statement, recognizing members’ governance role,  would also enhance whatever shortcomings there might be in consumer compliance!

 

 

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A Question Sent to My Credit Union’s Annual Meeting

The annual members’ meeting is a legal requirement for all credit unions.   I recently was emailed this Notice from my credit union:

We are conducting the 2022 Annual Meeting by Electronic Transmission as provided in Section 411 of the Amended and Restated Bylaws of XXXX Credit Union. . .The Annual Meeting will be hosted by video conference on April XX, 2022, at 5pm. Members can register by submitting an email request to annualmeeting@creditunion.org.

Questions will not be taken during the Annual Meeting, so please submit any questions that you have in advance along with your attendance request. Answers will be provided during the virtual meeting. 

Please note that there is no new business to discuss. The only matter requiring a vote of the members in attendance is approval of the 2021 Annual Meeting minutes. The Directors nominated (4) will be approved by acclamation of the Board of Directors as provided by the Bylaws.

The Question I Submitted

Before my question I would offer brief context:

We are seeing people’s belief in democracy tested daily at home and overseas.

This one-person, one-vote governance model is the foundation for all credit unions. For coops, it gives every member a voice, an important factor in building a community of common effort.

Democracy is a fragile system both for countries and credit unions.  It requires continual renewal and participation.

The credit union is a strong financial performer. But no institution, especially a credit union, survives because of financial strength alone.

The foundation of every credit union is the relationships with its member-owners. The process of replacing the members’ voting role with self-appointed directors undermines democratic participation and our unique source of resilience.

My Question:  Will the board commit to having open nominations going forward to seek qualified candidates from the over 400,000 members, beyond the number of board openings, so members may make their voice heard by choosing who should lead the credit union? This would be a vital means of demonstrating the credit union’s statement in the Notice: We’re in this together

 

 

 

 

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Credit Union Leadership as a “Civic Trust”

In describing Jeanne D’Arc’s 110 year history yesterday, I said their leadership was fulfilling a “civic trust.” What does that mean when describing a credit union’s role?

The word “trust” refers to the fiduciary responsibility  of  credit union leaders to be conscientious  stewards of the member’s resources and affairs.   “Civic” enlarges the scope of that oversight to the entire community of citizens from which members join.   This public duty is confirmed by credit union’s tax exemption and their democratic one-person, one-vote governance.

As I researched Jeanne D’Arc’s legacy, an article about a credit union’s conversion to a bank was published.   The occasion was the retirement of Jim Blake the CEO of Brockton Credit Union, founded in 1917, which he rechristened HarborOne Credit Union in 2004.

As the credit union’s President, one of his industry honors was to be chosen by his peers as Chairman of the Massachusetts CUNA League.

In 2013 he initiated a controversial two-step conversion to make HarborOne a stock owned bank.  At the time the 96-year-old, $1.8 billion credit union was the largest state charter in New England.  The move was controversial.  The member vote was just over 60% in favor.

The result of the conversion was to transfer the “common wealth,” that is the approximately $200 million in reserves, to private owners. The new bank’s shareholders received the benefit of this equity but no payouts for credit union owners.

In his February 27, 2022 retirement interview with the Banker and Tradesman Blake shares his thinking about this decision.

The excerpts below  illustrate a different understanding of cooperative’s obligations than that followed by Jeanne D’Arc’s leadership.  I have added emphasis to certain of his statements.

Q: How did you end up at Brockton Credit Union?

A: A search firm that had called me over the years called because Brockton Credit Union was looking for a CEO. I didn’t know what a credit union was. The company told me about them, and I went to the commissioner of banks’ office and talked with them about Brockton Credit Union and then looked at their financials. When I looked at it, I said, “This looks like a mutual savings bank, and they don’t pay taxes.”

Brockton Credit Union at the time was the largest community credit union in the country. I was hired as the chief operating officer, and the expectation was that if things worked out, the CEO was going to retire and I’d take over.

Most of the people that were CEOs of credit unions grew in the credit union industry, and so their view of the industry was guided specifically toward credit union structure and financial capability. I’m not saying anything bad there – I’m saying it’s good.

That wasn’t my focus. I looked at the organization as a financial institution, and we had a credit union charter. The more I got into it, the more I liked it because we were doing really good things, and it was consistent with the history of what credit unions were about at the time.

Q: What led you to convert to a bank?

A: My position had always been that as a credit union, the charter worked for us. As long as the credit union charter worked, we would continue to be a credit union. But if the charter got in the way of the success of the company, then the organization should consider what other options were available.

That was unusual in the sense that credit unions didn’t want to hear comments like that. But the industry changed, and the economy changed. Then we started moving toward the Great Recession, and from my standpoint, that was the real issue for us. We didn’t have much in the way of foreclosures during that period.

What was obvious, as I pointed out to the board, is that we are the only financial institution in the country that has no ability to raise capital.

“We’ve just gone through a Great Recession where it hasn’t impaired us in capital,” I said, “and if this is what we’re dealing with, what do you think the next recession is going to look like? As a board, are we in a position to risk the future of the institution because of the charter, as opposed to having the capability to raise capital if needed?”

And we then talked about all the other issues that, from a product standpoint, we couldn’t get into. We couldn’t do business in Boston; we couldn’t do mortgages over $225,000; and we wanted to get into the indirect auto lending business.

Q: What was the process like?

A: It was a difficult decision to make because we knew that the entire industry was going to attack us. And they did. There were only 35 credit unions that had ever converted to banks. We were the largest credit union to convert to a bank.

Additionally, we were the largest community credit union in the country, and we had received numerous national accolades and trophies about what we do in the community.

We had the [National Credit Union Administration] that was absolutely opposed to us becoming a bank. The NCUA changed their policies as to how a credit union can become a bank, and we were required to send three proxy documents to all of our depositors that said that there’s really no reason for the credit union to convert to a bank.

We had our membership vote in Randolph at Lantana, and we had staff and police prepared in case there were protests. We had one of the largest in-person votes that had taken place in a conversion, and 96 percent of the customers said “yes” to convert to a bank. So, needless to say, it worked well for us. 

Q: When you converted to a bank, did you plan on going public as well?

A: No. When we became a bank in July 2013, we had a couple of things we wanted to do. We wanted to have the ability to go into Boston, and we wanted to buy a mortgage company. It worked for us until we began to get to a point where we needed capital for the growth that we were looking at in the future.

Q: Is HarborOne different from what you envisioned in 2013?

A: We’re totally different because I never had a vision of us being where we are, in terms of the business we’re in and the size that we’re at. This is a tough business, and I say that because the regulatory requirements and competitive environments and credit cycles that you go through – you do the best you can, and you still get bit.

We’ve never had a regulatory issue of any kind. We’ve never had a quarter in our history of losing money. Most of the years when we’ve had CRA ratings, they’ve been outstanding. I just wanted to grow the bank and certainly had no vision of anything like this at all.

End of Interview.

To see HarborOne’s regulatory environment as a bank, one can review the 110 page 2020 SEC 10K filing for the bank and its holding company here.

Other readers might find this link more appropriate.