Category: Cooperative Design

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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.

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Jeanne D’Arc: A 110 Year Perspective on Sustaining Co-op Success

After the first year of operations, Jeanne D’Arc reported $6,063 in total assets.  At December 2021, the number was $1.8 billion.  This is a compound annual growth rate of 12.25%.

The credit union’s history, like its namesake, is an example  of human determination and independence.  It also demonstrates a credit union continually expanding its role as a “civic trust.”

The third oldest US credit union celebrated its 110th anniversary on February 12, 2022.

How does it sustain success for five generations, through two world wars, multiple economic crises, changing technology and always competitive financial markets?

What can credit unions learn from the example?   Can this longevity provide perspective as credit unions evaluate multiple business alternatives today such as mergers, greater size and even buying out local banks?

I believe there is much to be gained from their history.  For the fundamentals of cooperative success have not changed because  they are embedded in coop design.

The Founding

The credit union opened in 1912 in St. Jean Baptiste Parish on Merrimack Street, in Lowell MA, to serve the Franco-American Community.   It was founded by a catholic priest adapting Canada’s Caisse Populaire financial model to serve French speaking immigrants in an area known as Little Canada.

These workers who provided the labor in in the local weaving mills were an early example of an entrepreneurial enterprise “cluster” that might today be described as a “textile silicon valley.”

From the beginning the Credit Union helped build the community as a mortgage lender.  The board voted to accept loan and mortgage applications in May 1912. Personal loans were capped at $100 with an interest rate of 6.00%; real estate loans at $2,000 with an interest rate of 5.00%. It recorded its first mortgage on February 21, 1913.

In the decade that followed the credit union closed over 252 first mortgages helping members move away from the noise of mills to resettle in the fast-developing Pawtucketville neighborhood.  Today almost 85% of the credit union’s loan portfolio is first or second mortgages.

Over the years the credit union has grown steadily as membership expanded out from Little Canada, first to the adjoining area known as the Acre, and eventually migrating to the surrounding suburbs and beyond.

The Acre was the historical entry point for succeeding waves of immigrants.  These included Greeks, Irish and more recently Cambodian refugees and Hispanics.  Lowell today has the second highest population of Cambodian arrivals after Long Beach,  California.  The credit union has always been known as a safe place for these newcomers to put their  money.

Legacy and Continuity

The credit unions roots run deep so that until 1977 all board meetings were conducted in French.  Mark Cochran is only the 7th CEO.  When he moved to Lowell from New Jersey the members would tell him stories about the credit union’s long history in the community.

At the time the credit union had begun rebranding itself as JDCU.  Mark returned to the  original name, Jeanne D’Arc, and reemphasized the credit union’s long time commitment to the area.  He set a priority that the credit union should also be celebrating its heritage in addition to members’ stories.

Today Jeanne D’Arc serves 93,000 members though eight full-service branches in Lowell, Dracut (2), Tyngsboro, Chelmsford, Methuen and Westford, Massachusetts and Nashua, New Hampshire.   It operates three fully operational high-school branches at Lowell High, Dracut High, and Nashua High School South that serve as both financial training for the students and a source for potential future hires for the credit union.

Focus on Members

Jeanne D’Arc’s focus is the foundation of every credit union, that is, it is a movement by and for people, not a financial growth machine.

The most critical outcome of this design is the trust earned with members. Their loyal relationship means the credit union can go out on a limb to help those with damaged credit or no credit at all. Paul McDonald, the cooperative’s vice president of residential and consumer lending, admits the credit union makes loans his previous community bank employer wouldn’t have, and that’s OK.

A Commitment to Community

These loans nourish the community and members’ roots with its long-standing lending priority of helping members buy homes in the local community.  “When they move in this part of the state, it is traditionally only 5-10 miles away.” says Cochran.

In the construction of its new head office, Tremont Yard, the site is on the base of the remaining historic brick foundation of the Tremont Mills Power House, dating back to the 1840s.  “We’ve got a legacy that means something,” Cochran says. “Building on this historical foundation fits our legacy.”

It was also in investment to revitalize this commercial area of Lowell.

“We’re committed to staying on the street where we were founded and giving back to this area that’s been so good to us. People are shocked when I tell them about our history. They don’t believe we’re this old and still in Lowell.” according to Robin Lorenzen, chief marketing officer.

This sense of place determines not only its branch network including those in three high schools, but also how it distributes time and money to meet local needs.

Reinvesting Resources  in the Community

In recent years it has granted $240,000 to the Lowell Development and Finance and Energy Fund, hundreds of thousands annually from its “We share a Common Thread Foundation” to over 100 local organizations as well as similar amounts directly from the credit union.

These organizations range from local little league teams, to Megan’s House-an addiction recovery center for young women; Lazarus House, a shelter and soup kitchen- to direct donations to members to pay home heating bills in winter.

Employees have volunteered almost 10,000 hours annually to make their communities a better place to live.  “We have a reputation for giving back and being visible at our local institutions and their events,” says Cochran

A Strategy Based on Legacy

The credit union’s century long record of service was implanted with its origin story.  It remains literally grounded in the communities of its members and continually reinvesting and attracting more members from  new arrivals.  It is familiar with its communities and known by its members.  It becomes their primary financial home.

Generations of Relationships

Combining this historical local focus with leadership stability enables the credit union to serve members’ financial needs for their entire life.

From “saving at school” elementary programs to educating and recruiting employees through their high school branches, to donations to senior retirement communities, the credit union connections last a lifetime.

Tying Everything Together with Culture

The credit union weaves the threads contributing to its success by creating a culture of service.

“Building a culture of service starts in the hiring process.  We seek peoples with a heart to serve,” says Cochran.

The Unique Capacity of Cooperative Design

I believe there are two additional elements in Jeanne D’Arc’s success that are often overlooked because they are inherent in cooperative structure.  The first is the belief in local ownership as the foundation for vibrant communities.  The second is continuing to mine a niche that is so well developed that even much larger competitors cannot hinder its continued expansion.

“We’ve not strayed from our roots, we’ve just changed how we do it,” observes Cochran.

This is an era when some believe the future can be secured though boundary-less markets, technology innovation or acquiring other financial institutions.

The 110-year message of Jeanne D’Arc is that dedicated consistent implementation of traditional cooperative “knitting” advantages can underwrite a resilient future.  One resulting in an annual growth in excess of 12% for over a century.

Cochran’s future goal is straight forward: “Our members will speak in glowing terms about the institution and its work on behalf of their communities.”

Tomorrow I will contrast this legacy with an interview of a CEO who retired after converting the 96-year-old credit union he led to a stock bank charter.

 

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The President and NCUA Board Members Provide their States of the Union

Today’s post includes excerpts from the speeches of the three board member at the GAC conference in DC this week.

At the same time President Biden gave his administration’s agenda update, NCUA board members were given the opportunity to share their leadership perspective with thousands of credit unions in person at CUNA’s GAC.

Whether their remarks are described as a “state of the industry,” “regulatory update,” or even a “future vision,” I thought about topics they might  address.

My focus was on issues that would most directly affect credit unions and their members.

Will their remarks offer insight?  Will they enhance the credit union brand? What are their priorities? Their tone: concerned or upbeat?  Words to be remembered or quickly forgotten?

How might the extraordinary role of credit unions with members during the two years of the Covid economic crisis be celebrated? And the movement’s political standing enhanced?

Below is my “listening” list with any relevant comment by a board member.  The link to their speeches are on NCUA’s website.

My GAC Topic Checklist

  1. Why the Board decided to implement the new three-part RBC/CCULR capital requirement within days of being posted in the Federal Register. The rule immediately restricted use of over $26 billion in credit union reserves and required $4-6 billion more in additional capital to avoid the RBC regulatory burden. What was the evidence of a capital adequacy shortfall in the system?

Board Member comments:

  1. What are board members’ views of mergers of long standing, well-run, and well-capitalized credit unions that result in fewer choices for members and reduce the movement’s financial diversity?

Board Member comments:

  1. Do board members believe that members’ collective savings compiled over decades should be used to pay off bank owners at premium prices in whole bank purchases? If yes, what should members be told in advance about this expenditure of their reserves?

Board Member comments:

  1. What do board members believe will be the consequences of low-income designated credit unions’ (LID) increasing reliance on subordinated debt from outside investors to comply with higher new capital requirements and for “acquisitions”?

Board Member comments:

  1. How will the agency’s two-year experience with remote exams and work from home impact agency costs and effectiveness? Will future staffing needs be lessened?

Board Member comments:

  1. Is there a special role for the not-for-profit, tax exempt $2.2 trillion cooperative system in American finance? If so what is it?   Or should credit unions be part of a level regulatory playing field?

Board Member comments:

  1. When will the credit union shareholders of the four corporate AME’s  $1.2 billion surplus, receive their final payment as the NGN program ended in June 2021?

Board Member Comments:

  1. Would board members encourage an enhanced democratic member governance role in cooperatives especially at the annual meeting’s election of directors? Would NCUA consider developing a cooperative scorecard, with the industry, to enhance awareness and better implementation of the seven principles?

Board Member comments:

  1. As individual board members frequently voice a commitment to transparency, when will details of the NCUSIF NOL modeling and the Cotton accounting memo be public so credit unions can understand the logic behind NCUA’s financial decisions? Both are subject of FOIA requests.

Board Member comments:

  1. Are there any areas where the agency is willing to work collaboratively with credit unions to develop better solutions such as a wider role for the CLF, a more supportive new charter process, or even succession planning resources?

Board Member comments:

  1. Please share your vision for the future of credit unions given the their record setting performance during the Covid economic shock and recovery?

Board Member comments:

My Summary

Obviously my list and board member priorities differ.   None commented on any of these topics directly.

The themes from the talks included fintech partnerships, crypto and block chain’s future, and an important insight from Chairman Harper:  Leaders of this industry, like all of you gathered here today, should prudently use your hammers to positively affect the financial prospects of all your members.

Harper did not explain the credit union hammers he was referring to.  He made clear the agency would use its hammers for increased consumer compliance. “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.”

If my topics for board members are not yours, it just shows every person has their meat or their poison.   Skim the talks.   They may respond to  your interests or not.

They do however provide an insight on each board member’s view of the industry and his role as a regulator.  And maybe you should go out and buy some hammers!

 

 

 

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Yesterday the Most Important GAC Speaker Missed His Scheduled Appearance

In the gaggle of bipartisan congress speakers, the nobility of CUNA praising attendees, the inside the beltway literati’s wisdom, and the obligatory regulatory updates, there is one person who  missed his scheduled talk.

Chef and humanitarian José Andrés was to participate in a fireside chat with National Credit Union Foundation Executive Director Gigi Hyland on Monday.  The public purpose was to talk “how he lives out the ‘people helping people’ mission through his global humanitarian efforts as a passionate human rights advocate.

Chef Andres is not in Washington DC.  He was on the ground feeding refugees at the Polish-Ukrainian border where his World Central Kitchen has served more than 8,000 meals.

In a TV interview last night, his destination today was to go into Ukraine.

Chef Andres work in places of natural disaster such as Haiti, flood and hurricane regions of the American south and throughout the world have been widely reported.

In March 2020 I witnessed his work locally.   The entire economy had been shut down.  Restaurants were closed, but Chef Andres kept his Bethesda location, Jaleo open.  His staff was still employed providing free meals for several hours each day to workers and anyone else who needed access to food.

The occasion for his absence may say more than an appearance at GAC could have ever accomplished.

For Jose Andres embodies an aspect of “people helping people” that is often overlooked: he runs, not walks, toward danger, need and human suffering.

Walking Toward Member Problems in Credit Unions

Some of the most powerful examples of the cooperative model at work are when leaders walk toward, not away from their member’s needs.  Here are some examples:

  • In 2009 a Dayton credit union continued and expanded its dealer lending program when all other lenders backed out because the traditional car title collateral was suspect as the auto manufacturers faced bankruptcy.
  • A Florida credit union rewrote first mortgages with payments extending out 50 years to keep members in homes as  incomes were reduced by over half by job loss;
  • Credit unions in Lowell, MA (Cambodian), in St Paul MN (Hmong) and in Missoula, MT (sub-Saharan Africa) serve refugees from all over the world who are new to this country’s financial options.
  • The New York City taxi lender who divided his loans into A and B notes.  A was pay what you earn; B-we’ll worry about later.

Two Crises

In the national Covid economic shutdown in March 2020 there are thousands of examples of credit unions willing to walk in the members’ shoes, share their collective capital by waiving fees and giving loan payment holidays all the while setting up remote delivery options literally overnight.  Employees worked from new home offices and kept their full pay.

Perhaps the most consequential example was when I watched the CEO of the second largest credit union in America offer the senior management of NCUA a solution to the Corporate crisis in early 2009.  He said his credit union and his peers would buy all the legacy assets and carry them on their books if NCUA would guarantee no loss of principal.  He was turned down.  NCUA instead guaranteed wall street investors in the NGN program so they could walk away from the problem.

A Unique Capability

The cooperative model is unique in its capacity to walk the extra mile for its members when they are in harm’s way.   That is what self-help means.  Putting member needs first in all circumstances.

I don’t know what Chef Andres would have said in a “fireside chat” at the GAC.  However I believe his personal witness is more important than any words he may have used.

I would hope his example might inspire everyone to ask again what our slogan of “people helping people” means in today’s world.

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Two Reactions to NCUA’s Proposed Succession Rule

In January the NCUA board in a 2-1 vote issued a proposed rule to implement new requirements for succession planning.  Two observers’ responses follow.

One approach to succession planning.

Credit union consultant Ancin R. Cooley’s solution.

Her name is Asha Monroe Cooley.  There are two interpretations of this strategy.

  1. Ancin is hoping Asha will be his business partner and successor.
  2. He is perpetuating the Cooley brand, but in another context.

The message for credit unions:  either perpetuate yourself or create new models to sustain the movement.

The Most Important Thing is Not the Person in Charge  (excerpt from CUSO Magazine by Randy Karnes)

“I agree with planning for leadership changes, planning your response to them, organizing for the potential deer in the headlights look you get when your leader decides or has it decided for them now is the time to step off.

“But I do not agree with many of the things that succession consultants and “we can fix it people” will cast upon organizations in the quest to “predict the future and pick people now.”

“By forcing your hand to do something, NCUA has made it all too easy to simply check the box (possibly at great expense) and move on. But succession planning is important for an organization’s longevity. To be successful at succession/continuity planning and its execution:

  • Create an organization that expects, demands, and wills the organization to have a future that needs a leader. Build that expectation every day.
  • Present a firm to the marketplace, candidates, and stakeholders that is based on a dynamic mission worthy of its individual contributors’ time and efforts.
  • Focus on the key processes to complete the task more than you are on the subjective evaluations of human social tradeoffs. It’s a project with tasks to manage, not a social dilemma for the ages.
  • Focus on expected outcomes and their priorities more than the way to achieve them. A prospective CEO needs the assignment as the compass and goal more than a blank page to assign leadership skill to.
  • You need everyone to lighten up and avoid the drive for certainty and perfection from ensuring the paralysis and regrets of failure. It’s a 50/50 proposition picking a new leader, and one that gets better with doing it multiple times, not just once.

“Have plan, budget a course of action, and trust the future. And then get back to building the will, the confidence, and the positive belief that your organization will survive. Because the most important thing to your team’s future is not the person in charge; it is the confidence that your design, your stakeholders, and your membership can sell their intent to survive.

“I hate that so few credit unions today can proudly declare we are valuable, we are the ones our members need, and we see this mission as important, intoxicating, and something to hand off to our future leaders.

“Please do not see this as a task to simply put a new butt in a seat… it’s not. It is a constant culture of building a case to always be in the game and trust the future to those willing to lead.”

 

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Military Credit Unions in Wartime

War has broken out in Ukraine.  All of Eastern Europe is on alert.  Some credit members are on the move.  Others wait to learn what’s next.

When a geo-political crisis occurs, America will be involved.   How much and when depends on events.

One sector of our society at the leading edge of these situations are military credit unions.   Many have spent years planning to help their member’s financial preparedness for whatever comes next.

Frontwave Credit Union’s Military Relations Team

The credit union’s self-description: There aren’t many communities like this one. One foot in the Pacific, the other in the desert. Home to the world’s greatest fighting forces — and a community of blue-collar fighters.

Five years ago, CEO Bill Birnie established the Military Relations Team.  He hired Chip Dykes and two other former marines to lead this group which focuses directly on the financial well-being of military members and their families.

Over 50% of the credit unions 117,000  members are current or former military members and family.

Front wave has been the credit union on base at Camp Pendleton since 1952.   It also serves at three other bases in the area.

Camp Pendleton is the location for all initial basic training on the West Coast for over 17,000 new marine recruits each year.  Bill was concerned about retention of these new military members, many of whom would be assigned out of the area after training.

Chip’s team are all certified financial counselors.  Their purpose is education  on all aspects of money management and financial planning for the new recruits and during every phase of subsequent training.

This counseling is especially important prior to deployment.  For example how do you follow your finances when in an area with no Internet?

The team focuses on member’s financial needs at all levels of the service at each of the four bases where they have branches.   In 2021 they provided over 10,000 marines and family members with basic and more advanced financial courses.

Helping Credit Union Staff Understand the Military Member

Just as important is helping credit union staff understand the needs of the military member with whom they work with daily.

Bill and all three team members are marines.  Many staff have had little direct experience of military life.  The team’s internal mission is to help customer service personnel understand needs from the military member’s perspective.

The Ukraine Crisis

When events such as the Ukraine invasion occur, “our ears perk up,” says Dykes.  The European theater is served from units located on the East Coast, so it may not immediately affect West coast units.

When there are relocations,  the team works directly with  all units on the ground to ensure their financial and personal affairs are in order.  And to offer help to family while the service member is away.

Following Events in Ukraine

This article provides a current visual map of Ukraine and the population of its major cities which are now referenced in hourly news updates.  Facts on the country’s demographic trends, its major natural resources and a short history of its relations with the Russian Bear are summarized after the large scale country portrait.

Solzhenitsyn on Ukraine-Russia Relations

(from an essay written June 2014 when Russia annexed Crimea)

“It pains me to write this as Ukraine and Russia are merged in my blood, in my heart, and in my thoughts. But extensive experience of friendly contacts with Ukrainians in the camps has shown me how much of a painful grudge they hold. Our generation will not escape from paying for the mistakes of our fathers.”

There are several terrific English language websites which provide news directly from Ukraine, which are updated frequently.  One is Kyiv Independent and the second the English section of the Ukrainian Information Agency.

The Independent includes minute by minute stories from across the country.

I will share other examples of credit unions serving their members who are or will be on the front lines of this crisis.

 

 

 

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A Credit Union Archetype

Last Wednesday (February 16)  in their 2021 yearend industry analysis Trend Watch, Callahan & Associates included a 12 minute case study of  a credit union’s strategic transformation.

The CEO’s presentation  was one of the most concise, informative and inspiring I have experienced.

He describes this effort as a two-phased journey. The second phase transformed the  credit union’s performance  on three critical dimensions:  purpose, scale and financial performance.

The final slide shows how this strategic approach is both powerful and inherent in credit union design.

Please listen now.

https://iframe.dacast.com/vod/c94cf664f6abb2621f07f249b463a648/e05560a9-729c-7118-b2ac-4a2c170f0e8d

My Reaction

Everyone will listen from their singular perspective.  Takeaways may be different.  I would add two thoughts to ones you may have.

The first: a good example can be very contagious.

It’s hard to get a feel for the cooperative difference until we have met a person grounded in that effort.    When we see purpose enacted, we become more purpose driven. When we learn the impact of values on employees and community, we become more value centered. When we hear someone discern clearly, we become clearer about our own metrics. 

Secondly, powerful communication is more than a good story.  It requires radical transparency.  No topic is off limits. There is respect for differing views when values shared by all become the focus of common effort.

Clearwater’s results validate its vision, What We Believe.

Together, we own

Together, we empower

Together, we include

Together, we matter

Examples matter.  Good examples inspire more. Great ones are rare.

They reawaken us to what can be accomplished- together.

**************************************************

PS: This post from October 2021 tells the story of Clearwater’s role assisting the refugee community coming to the community.

One Photo, Hearts on Fire, a Credit Union and Community Respond to a Vital Human Need

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Three Strikes and RBC/CCILR Should Be Out: Failing the Test of Comparability

My earlier posts described how NCUA ignored two of the three explicit criteria in the PCA law when imposing RBC/CCULR rules on credit unions.

Before looking at the third constraining feature, “comparability,” there is a procedural violation in NCUA’s actions. The agency’s Federal Registration filing for CCULR and amended RBC was December 23,2021; the act took full effect on January 1, 2022.

The PCA act directs how these changes are to occur:

Adjusting net worth levels -Transition period required

If the Board increases any net worth ratio under this paragraph, the Board shall give insured credit unions a reasonable period of time to meet the increased ratio.

Credit unions were given 9 days to comply with CCULR’s 29% increase (from 7% to 9%)  to attain a well-capitalized rating.

The Third Criteria for PCA Implementation

At its core, NCUA has only one explanation for its new RBC/CCULR joint rules:

Harper: The final rule is a balanced approach that gives complex credit unions a risk-based capital framework comparable to those developed by other federal banking agencies.  

The combined rules’ minute details and hundreds of risk weightings are explained with multiple variations of one idea: “to ensure comparability with the banking industry.”

Nowhere is comparable defined.

If comparable means “the same as,” credit unions’ 10.6% net worth ratio at December 2021 already exceeds either banks’ core capital leverage ratio of 8.86% or equity capital ratio of 10.06% as reported by FDIC in their September 30 quarterly report.

Must credit unions now reduce their capital level to be comparable to banks’ average?

Obviously not.   NCUA’s intent is that credit union net worth be measured with the exact same accounting details as the bank’s follow.  Except banks have many more capital options for the numerator.

The rule’s 70+ risk weighting formulas, and multiple variations, applied to credit union assets were lifted directly from the banking model.

The rule duplicates bank regulations at every point even though the asset composition and financial roles of the two systems are drastically different.

This literal interpretation of comparable accomplishes one goal—NCUA now controls credit unions with the same power bank regulators enjoy.  This should be no surprise as Chairman Harper has repeatedly praised FDIC bank regulation as the de facto standard he intends for credit unions and the NCUSIF.

This approach was followed ignoring the two system’s different histories, legislative purpose, financial design and most importantly, financial performance.

What did comparable mean when Congress mandated this new cooperative capital standard in 1998?

For 90 years credit union capital adequacy was based on a flow concept, setting aside a required percentage of total income before dividends, rather than a balance sheet, net worth ratio, measured at points in time. This  new ratio standard was significantly different from credit unions’ prior practice of building reserves over time as a percentage of total income.

The Act explicitly required NCUA to “design the system, taking into account” the not-for-profit  cooperative structure which cannot issue capital stock and relies only on retained earnings for reserves. When requiring a balance sheet ratio test versus a set aside from revenue, NCUA’s process must consider the listed differences in reserve structure and even the board volunteer composition.

The second change under PCA for credit unions  is in a different section of the act:

d) Risk based net worth requirement for complex credit unions.

The agency is directed to include ” a risk-based net worth requirement for insured credit unions that are complex.”

Banks have no call out for complex.  Risk based weightings are universal for all banks.

The new coop PCA  model required a risk-based factor (weighting) for a defined set of complex situations which “take account any material risks against which the net worth ratio . . . may not provide adequate protection.”

These words clearly establish a different PCA model for credit unions than required of banks.

Cooperative PCA standards are clearly intended to be different.  To assert that comparable means to duplicate, copy or be the same as banks practice is a misinterpretation of the Act.

Twisting a Law Reducing Burden to Impose a New Regulation

The most recent example of this misinterpretation of NCUA’s authority is Chairman Harper’s description justifying the CCULR option  proposed by NCUA in July 2021, five months earlier.

Harper: We must, however, also recognize several legislative, regulatory, and marketplace developments since the NCUA Board approved the final Risk‑Based Capital Rule in 2015. For example, in 2018, Section 2001 of the Economic Growth Regulatory Relief and Consumer Protection Act directed the other federal banking agencies to propose a simplified alternative measure of capital adequacy for certain federally insured banks. The result of that effort became known as the Community Bank Leverage Ratio framework which became effective in January 2020.

There is a supreme irony citing President Trump and the Republican-sponsored Main Street Relief Act, to reduce regulation burden.  Then to expand its application to NCUA’s rule making authority over credit unions.

Here is a summary of the reference Harper cited:

Title II Regulatory Relief and Protecting Consumer Access to Credit

Section 201. Capital Simplification for Qualifying Community Banks. This section requires that the Federal banking agencies establish a community bank leverage ratio of tangible equity to average total consolidated assets of not less than eight percent and not more than 10 percent. Banks with less than $10 billion in total consolidated assets who maintain tangible equity in an amount that exceeds the community bank leverage ratio will be deemed to be in compliance with capital and leverage requirements.

There is no mention of NCUA anywhere. NCUA had not even implemented RBC when the bill was signed in May 2018.  There was no basis for credit unions to ask for regulatory relief from a rule not in effect and deferred three times at that point.

The congressionally enacted CCULR option was a banking industry effort for an alternative to a flawed and burdensome RBC rule.   FDIC’s  vice chair Thomas Hoenig had been a long standing vocal critic of RBC.

Further evidence that this section 201 did not include NCUA is that NCUA is specifically named in two other parts of the bill that explicitly provide regulatory relief for credit unions:

Section 212. Budget Transparency for the NCUA. This section requires the National Credit Union Administration to publish and hold a hearing on a draft budget prior to submitting the budget.

Section 105. Credit Union Residential Loans. This section provides that a 1- to 4-family dwelling that is not the primary residence of a member will not be considered a member business loan under the Federal Credit Union Act.

To claim NCUA’s authority for CCULR, Harper refers back to the 1998 PCA bill.  He then uses the “comparability” reference to presume authority in a bill passed twenty years later and in a section specifically omitting any reference to NCUA .

The result of this newly found authority is to increase credit unions’ restricted capital. As stated in the Board memo:  ”The Board believes that a CCULR of nine percent is appropriate because most complex credit unions would be required to hold more capital under the CCULR framework than under the risk-based capital framework.”

A False Narrative

NCUA was not given CCULR authority.  It is a false narrative permeating RBC/CCULR that credit unions’ rules can exactly copy bank rules.

This duplication-interpretation overlooks the two-decade reality that credit unions were fully compliant with their PCA risk based net worth (RBNW) model and repeatedly surpassing banks in financial performance under it.

The staff perpetuates this duplicating justification in its board memo: A special note that most, if not all, of the components of the CCULR are similar to the federal banking agencies’ CBLR.

The Consequences of Unconstrained Regulation

There are immediate and long-term unfortunate consequences when authority is improperly interpreted and asserted.  This erroneous RBC/CCULR precedent will undermine the credit union system’s unique role and diversity, directly contrary to PCA’s intent to respect cooperative character.

It sets an example of agency interpretation independent of fact, statutory language and prior compliance precedent.

Board Member Hood pointed out this long-term risk in his December board comments:

We now have (PCA compliance) with our risk-based network requirement. This law gives this board serious responsibilities which we must faithfully uphold, but this does not mean that since the bank regulators established a risk-based capital regime, we must follow them.

I actually worry that once we decree that 7% may no longer be adequately capitalized, then whether it’s this board or a future board that settles on an 8%, 9%, 10% net worth in the complex credit union ratio, as some say in North Carolina, the barn door is now open to that interpretation or that change.

I worry that we may have set an arbitrary standard above the law that a future board can easily change at any time.

There is much more at stake from RBC/CCULR than approximately  $30-40 billion of forced sequestration and newly required credit union capital. And the rule’s faulty legal standing.

The central issue is whether the NCUA board is willing or able to support the continuing evolution of a unique cooperative financial system in its regulatory actions.

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CCULR/RBC Unconstrained by Statute: An Arbitrary Regulatory Act

The new RBC/CCULR rule must meet two administrative procedural tests, as any other rule, when NCUA claims to be implementing a law.  The first was outlined yesterday:  Was there substantial objective evidence presented to justify the rule?

As I described, NCUA presented no systemic data or individual case analysis whatsoever. In fact, the credit union performance record  shows an industry well capitalized and demonstrating prudent capital management over decades.

In the December board meeting Q&A , staff confirmed that in the last ten years, only one failed credit union would have been subject to RBC.  But today 83% of the industry’s assets and 705 credit unions are now subject to its microscopic financial requirements.

The second test is whether the rule conforms to Congress’s legislative constraints when giving this rule making “legislative” authority to an agency.  The PCA law was very specific in this regard when extended to the credit union system.

NCUA’s PCA implementation must meet three tests: that it apply only to “complex” credit unions, “consider the cooperative character of credit unions,” and be comparable to banking requirements.

NCUA had already passed these PCA implementation tests before. In 2004 GAO reviewed NCUA’s risk based net worth (RBNW) implementation of the 1998 PCA requirement and concluded:

The system of PCA implemented for credit unions is comparable with the PCA system that bank and thrift regulators have used for over a decade. and,

. . . available information indicates no compelling need. . . to make other significant changes to PCA as it has been implemented for credit unions.

At that time the risk based capital (RBC)  requirements had been in place for banks since 1991.

Today  NCUA’s new RBC/CCULR rules clearly fail all three of these constraining criteria.

A “Simple” Interpretation of “Complex”

NCUA 2015 RBC rule declared that the complex test include all credit unions over $100 million.  After the full burden of the rule was apparent, in 2018 the board changed complex to mean only credit unions over $500 million in assets.

Some credit unions clearly undertake operational activities or business models that are more involved than what the majority of their peers might do.

Examples could include: widespread multi-state operations, conversion to an online only delivery model,  lending focused on wholesale and indirect originations, high dependence on servicing revenue, using derivatives to manage balance sheet risk, funding reliant on borrowed funds versus consumer deposits, innovative fintech investments, or even the recent examples of credit unions’ wholesale purchases of banks.

The agency did not define “complex” using its industry expertise and examination experience to identify activities that entail greater risk.

Instead, it made the arbitrary decisions that size and risk are the same. In fact, most data suggests larger credit unions report more consistent and resilient operating performance than smaller ones.

In changing its initial ”complex” definition by 500%, it demonstrated Orwellian logic at its most absurd.  Complex turns out to be whatever NCUA wants it to mean, as long as the definition is “simple” to implement.

Universal for Banks; Targeted for Credit Unions

For banking PCA compliance, RBC was universally applied.  Every bank must follow, no complex application was intended.

By making size the sole criterion for “complex” the board reversed the statute’s clear intent that its  risk-based rule be limited in scope and circumstance when applied to credit unions.

The absurdity of this universal, versus particular,  definition is shown in one example. The rule puts $5.6 billion State Farm FCU, a traditional auto and consumer lender with a long-time sponsor relationship, in the same risk-based category as the $15.1 billion Alliant, the former United Airlines Credit Union. Alliant has evolved into a branchless, virtual business model with an active “trading desk” participating commercial and other loans for other credit unions.

NCUA’s “complex” application of the PCA statute is totally arbitrary based on neither reason nor fact.

Capital design: the most important aspect of “Cooperative Character”

The PCA authority additionally requires that the Board, in designing the cooperative PCA system, consider the “cooperative character of credit unions.” The criteria, listed in the law are that NCUA must take into account: that credit unions are not-for-profit cooperatives that:

(i) do not issue capital stock;

(ii) must rely on retained earnings to build net worth; and

(iii) have boards of directors that consist primarily of volunteers.

The single most distinguishing “character” of credit unions is their reserving/capital structure. Virtually all credit unions were begun with no capital, largely sweat equity of volunteers and sponsor support.

The reserves are owned by the members. They are owed to them in liquidation and even partially distributed, in some mergers.

These reserves accumulate from retained earnings, tax exempt, and are available for free in perpetuity-that is, no periodic dividends are owed.  Many members however can receive bonuses and rebates on their patronage from reserves in years of good performance.

Most products and services offered by credit unions are very similar to those of most other community banking institutions. The most distinctive aspect of the cooperative model is its capital structure, not operations.

Cooperative Capital Controlled by Democratic Governance

This pool of member-owner reserves is overseen by a democratic governance structure of one-member one- in elections.  The reserves are intended to be “paid forward” to benefit future generations.  This reserving system has been the most continuous and unique feature of cooperative “character” since 1909.

This collective ownership forms and inspires cooperative values and establishes fiduciary responsibility.  Management’s responsibility for banks is to maximize return to a small group of owners; in coops the goal is to enhance all members’ financial well-being.

This capital aspect of the cooperative charter is so important that if credit union management decides to convert to another legal structure, a minimum 20% of members must approve this change. No other financial firm has the character of a coop charter with its member-users rights and roles. Not even a mutual financial firm.

Bank’s Capital Structure Very Different from Cooperatives

For banks, capital funds are raised up front, usually from private offerings or via public stock. Owners expect to profit from their investments. Dividends are paid on the stock invested as part of this anticipated return. Today shares represent about 50% of total bank capital.  In credit unions, it is zero.

Bank capital stock, if public, can be traded daily on exchanges. The market provides an ongoing response to management’s performance.

This capital is not free as most owners expect a periodic dividend on their investment.  As an example, in the third quarter of 2021, the banking industry distributed 79% of its earnings in dividends to owners.

There is no connection between a bank’s capital owners, and the customers who use the bank, unless customers independently decide to buy shares in the bank. In credit unions, the customers are the owners.

The remaining component of bank capital is retained earnings. However, every dollar of earnings before  added to capital, is subject to state and federal income tax. Credit union retained earnings are the only source of reserves as noted in the PCA act.  These coop surpluses accumulate tax free.

In design, accumulation, use and governance credit union reserves are of a totally different  “character” than bank capital. Their purpose is to support a cooperative financial option for members and their community.

Bank capital is meant to enrich owners through dividends and/or future gains in share value.  Credit unions’ collective reserves are to benefit future generations of members.

Credit unions are not for profit.  Banks are for profit.

In a capitalist, private ownership dominated market economy, the cooperative’s capital structure is the most distinctive aspect of credit unions.  This is not because of its amount or ratio.  It is its “character,” from its origin, perpetual use and  oversight by members.

Nothing in the CCULR/RBC rules recognizes this especial “character” of credit union capital.  By not addressing this issue, the rule ignores this constraint of the  PCA enabling law.

The historical record demonstrates that  credit union reserves are not comparable to bank capital.  Rather they are a superior approach tailored to the cooperative design.

Tomorrow I will look at the third test, whether RBC/CCULR conforms to the PCA’s requirement of comparability.