Category: Local Effect

The CEO of the $50 billion State Employees’ Credit Union (SECU), Mike Lord retires at the end of this month. His career is noteworthy for two remarkable achievements:

1. He successfully navigated 30 years of intellectual contrarianism with Jim Blaine, his boss. Jim’s motto is “often wrong, but never in doubt.” His public name-image-likeness (NIL) brand is an animal of the horse family, but typically smaller than a horse with longer ears and a braying call.
   
2. Against all odds, he sustained and expanded SECU’s exceptional level of leadership and member well-being as Blaine’s successor in 2016.
   Succeeding a legend and then taking results to a new level whether in business, coaching a sport, politics or any field of public endeavor, is an incredibly rare event.

“Don’t Mess It Up”

The management consultant Peter Drucker stated, “the most common source of mistakes in management decisions is the emphasis on finding the right answer rather than the right question.”

For Lord and SECU that question has always been how to enhance member service. The mission and vision of the credit union are folksy truisms: “Send Us Your Mama” and “Do the Right Thing.”

When Lord became CEO in 2016 his stated goal was just as straight forward: “Don’t mess it up.”

In today’s individualistic culture that celebrates personal achievement, choosing a leader where the mission supersedes personal ego is a tribute both to the organization’s values as well as the leader’s character. Especially so in the second largest credit union in America.

An example of these values is SECU’s compensation practice. The credit union follows the “Mondragon model” to assure balance among all staff. There are no perks, no bonuses, no incentives and all staff receive the same benefits (health, retirement). This means that SECU CEOs are not paid the multi-million salaries prevalent at many smaller, less complex, less successful CUs.

Focus and Consistency

Several decades ago, SECU’s Board decided to “limit” SECU’s FOM to North Carolina. Those members who moved out of NC or lived in foreign countries could remain, but if they wanted loan services they were referred to a local CU. This focus on the core members who “brung us to the dance,” makes SECU a formidable force against major national banking competitors, several of whom call North Carolina home: Bank of America and Truist.

Today SECU serves 1 in 4 North Carolinians. Rather than trying to be a “national” credit union, its statewide focus has improved economic prospects for individuals and communities that are little more than an afterthought for large competitors.

Sustaining success following the iconic 30-year tenure of Blaine required an underrated leadership trait, consistency, one of Lord’s strengths. While he may have had to go outside of SECU for some expertise, Lord continued to promote from within for employee advancement. Front line staff are much more than transaction providers. Some even receive training in multiple areas of financial service, including tax preparation, life insurance and investment counseling, while earning the appropriate license for each discipline.

Traditional media advertising was shunned. The credit union relied on word of mouth and its foundation’s public philanthropy to keep the SECU name in the press. The funding of scholarships for every local education agency in the state, contributing to teacher housing, new hospice facilities and dozens of other projects projected a “brand” deeply involved in members’ communities.

A Cooperative Financial Conglomerate

Describing SECU as the second largest credit union in the US does not begin to define the scope of its member services. With the credit union at its core, the credit union also oversees the following organizations-CUSO’s:

• SECU Life is the only CU-owned life insurance company in the US. Other CUs which offer insurance do so as an agent for an outside firm;
• A broker dealer and investment advisor that developed a unique partnership with the low-cost Vanguard mutual fund family for members seeking off balance sheet investment options;
• A 501(c)3 Foundation that donates over $15 million per year for community needs in North Carolina;
• A property management company (SECU*RE) that owns and manages 1,500 properties to provide housing, and improve declining neighborhoods, sometimes even selling homes to members. This company is for-profit, taxable and was begun as SECU’s response to the 2009 housing crisis. Its purpose is to reinvest in neighborhoods, prevent bottom fishers from underpaying for foreclosed properties, and provide renters a better choice than local slum lords.

With these multiple business lines come many regulators: NCUA’s ONES and North Carolina’s Credit Union Division of the Department of Commerce, NC Department of Insurance, CFPB, FINRA/SEC, and of course the IRS for the Foundation.

Staying Local While Becoming Larger

With a branch in every county of the state, the credit union’s over 270 locations operate like small credit unions. They provide local employment, knowledge and expertise for every part of the state. Branch managers consult with local advisory boards and often make recommendations for SECU services or foundation grants for their areas.

Lending decisions are all made at the branch level. Branch personnel are intimately familiar with local economic conditions and politics, even in the smallest community. This gives SECU deeper insight into all things economic when making loan decisions and keeps charge-offs way below peer averages.

A Simple Product Profile

The primary purpose of each SECU product is to help members become financially stronger. The credit union’s primary product for helping members build wealth is a variable rate home loan to encourage home ownership. Its loan portfolio is 74% first mortgages.

For over a quarter of a century SECU has made 100% mortgage loans with negligible losses to help lower income and young folks achieve home ownership. Underwriting was based on the common-sense idea that if members pay rent reliably they can be counted on to pay the same amount on a mortgage to own their home. These mortgage loans also invested billions in communities throughout North Carolina’s economy, not just in wealthier big cities.

There is no risk-based loan pricing: each product has a single rate whether a credit card, auto or other lending need. Each loan is based on individual underwriting, not credit scores. SECU’s Salary Advance loan has made billions in payday loans to members at APRs less than 15%. The program, which also has a savings component, fights for-profit payday lenders who prey upon the least advantaged in the economy.

In addition to traditional savings and share drafts, the credit union has $170 million in a 529 college savings plan, $67 million in HSA accounts, and $ 4 billion in IRA/Keogh retirement savings. SECU’s 529 plan is a financial “safer option” for all participants in North Carolina’s college savings program, not just SECU members. That selection says much about the confidence in SECU within the state.

As with loan pricing, there are no savings tiers based on account balances–all 2.6 million members receive the same rate on each product.

Serving the Cooperative System

SECU’s influence extends far beyond its 2.6 million members. Within North Carolina’s cooperative system, the credit union supports others who might reach out for mergers to offer mentoring and resources so they might continue their independent journeys. These operational alliances continue today with Local Government FCU, Latino Community CU, North Carolina Press Association Federal Credit Union and Greater Kinston Community Credit Union.

Greater Kinston is the last survivor of 55 credit unions chartered by the black community during the Jim Crow era when financial services were not open to them. SECU was also a leading fundraiser for the Martin Luther King memorial in Washington, DC.

At a time when many peers proclaim institutional growth as the critical performance objective, not members’ financial well-being, SECU adamantly asserts this is a false dichotomy. Members are the credit union.

As many leaders focus on innovation and the allure of the self-service virtual future, SECU continues the traditional embrace of a face-to-face relationships– for all ages from the newborn to the retiree.

The bedrock of its strategy is the cooperative model with all its inherent design advantages versus other firms. Member-ownership is the unmatchable competitive difference. It implements what writer Ken Wilber calls “good power” in which organizations protect the many who are often at the mercy of the firms they use. He contrasts this “good power” with the instinct of “dominant” organizations that use their position primarily to protect, maintain and promote their success at the expense of others.

SECU proves that size does not dilute cooperative values or purpose. It is a powerful example of the ability to achieve mission and counter the prevailing tendencies of credit unions to become more and more bank-like.

SECU demonstrates that economic, social and political influence can be accomplished by implementing and innovating traditional cooperative principles. Its success validates the credit union system’s contribution for both its members’ financial health and for co-ops as an essential part of the American economy.

Sitting in the Same Place Where He First Began

SECU has been developing system leaders, not only by hiring at the entry level and promoting from within, but also by sending leaders to over 30 other credit unions. Some–Tom Dorety, Terry West, Maurice Smith, and Tom Feindt– ran billion-dollar shops while others migrated to smaller but no less vital firms.

Lord’s career exemplifies this leadership development capacity. In a 2016 interview after becoming CEO, Lord pointed out his office was at the same location where he first began his career 46 years earlier. Albeit in a very different building. Lord’s career exemplifies a critical life lesson, awareness of one’s “true home.”

In a poem called “Little Gidding,” T.S. Eliot ends his quartet by writing:

We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.

Lord is the rare exception to Eliot’s observation of human nature. For without exploring, he knew the place he belonged, from the very first time he arrived.

Ed Callahan championed credit unions, even smaller ones, for offering consumers a choice.  A member-owned option was vital to an economy dominated by for profit firms.

From his prior experiences growing up in Youngstown, Ohio, teaching high school in Milwaukee, WI and Rockford, Il. he knew the power of local institutions.  Size did not matter.

The effectiveness of local, nimble institutions has been described in two recent articles.  One focuses on local farmers; the second on distributing Covid vaccines via small, single store pharmacies, not national chains, in two states.

In both case studies, the reader could easily place credit unions as further examples of the responsiveness local ownership provides.

Efficiency is Not Resilience

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

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

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

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

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

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

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

Nimbleness and Local Knowledge Beat Big Chains

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

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

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

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

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

Public Policy Treats Small as Expendable

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

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

Better Results from Being Small

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

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

Regulatory Bias for Bigness

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

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

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

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

The Takeaway for Credit Unions

Every time a sound, locally supported and managed credit union is merged, the local economy, the cooperative system and the American marketplace is less diverse, nimble and responsive.

Flying to Japan in April 1970, I had two days to find off-base housing for my family before beginning sea duty on the Windham County LST 1170. The ship left Yokosuka Naval Base to join a small task group in Operation Golden Dragon.

Golden Dragon was a joint military exercise with the South Korean navy off the coast of Korea. Our LST’s tank deck was filled with Korean marines, landing craft, trucks and tanks for amphibious landing drills.

As we crossed the Sea of Japan, the ship’s captain, CDR J. P. Mann, reminded us of the January 1968 seizure of the USS Pueblo (AGER-2), an intelligence gathering ship. Captain Bucher and his crew of 82 were held for eleven months before release.

Our captain told the officers in a wardroom meeting that should there be any threat of North Korean intervention, we should know he would never let his ship be captured, whatever the circumstances.

That was my introduction to how this commanding officer understood duty and our collective obligation. Growing up I had watched the WW II television series “Victory at Sea” with its portrayals of the Pacific island-hopping campaigns. Now it was real life.

Credit Union Duty

There are three pillars of cooperative duty:

1. The trust, loyalty and support of the members
2. Leaders who take the fiduciary responsibility managing their inherited legacy to heart
3. An effective networked collaborative support system including sponsors, joint ventures, supervision and collective resources.

If members lose confidence, leaders shun accountability, or supporting organizations forget who founded them, the cooperative model will slowly decline in relevance.

All Three Pillars Weakened

Two back-to-back emails from members about a current merger vote suggested that all three elements of duty are lacking in this proposal.

One read in part:

“I’ve learned a lot about credit union mergers from you. Curious if you have an opinion about the merger of Kinecta FCU (formerly Hughes Aircraft Employees FCU) and my credit union Xceed Financial/XFCU (formerly Xerox FCU).

Based on online reviews of Kinecta FCU, I voted against the merger. As a former Xerox employee myself, my father worked for Xerox in Rochester’s Xerox Square for 30 years I hate to lose the affiliation of what’s left of my Rochester focused credit union.”

The second was a comment on my blog, “Should a CEO’s Last Act be a Merger,” published August of 2020.

“Is there any organized attempt among members to oppose this merger?

I have been a member of Xceed for over 25 years and have been very satisfied with the institution.

I was also a member of Kinecta from 2002 until I closed the account in 2017 due to them nickel and diming me with fees that were often worse than the big banks, and horrible customer service.

In 2014, Xceed gave me a substantial personal loan, right after Kinecta rejected my loan application.

I have no desire to go back to Kinecta’s fees and horrible customer service and will likely close my account if the merger goes through.”

Until these emails, I had not seen Xceed’s Member Notice of December 30 requesting member approval for the merger. Reviewing this Notice confirmed the issues in my first blog. For this event is nothing less than giving up the ship. This sale of long-standing member relationships, loyalty and common resources by those in authority undercuts all three cooperative pillars.

Xceed’s Leaders Surrender

Voluntary mergers require that members vote to approve closing their charter. No minimum participation is needed. A simple majority determines the outcome. Each member has one vote regardless of account size or length of membership.

To properly make this voting decision, members should have sufficient information to exercise an informed choice. This Member Notice is woefully deficient in describing why the abandonment of this 1964 charter is necessary.

Some of the questions that should be addressed so Xceed’s 48,500 members can make a knowledgeable decision about management’s proposed “surrender” include:

• Since members are turning their long-standing relationships to an unknown management team and board, why is no information on these individuals provided?
• If Kinecta is the chosen successor, why is no data about their past and present financial performance, current business model and future plans given?
• If “enhanced convenience” is one of the reasons for merger, how does adding 23 Kinecta branches, all in Southern California, help Xceed’s members in their eight locations in New York, New Jersey and northern California?
• If Xceed’s employees and branch network are integral to member value, why were employees given no post-employment commitments and all branch locations now “subject to business necessity?”
• Xceed’s net worth ratio is 20% higher (10% versus 7.9%). Why are the members’ $94 million reserves given to the “continuing credit union’s” control and they receive nothing? Not even a token homage for their $2,000 individual pro rata value?
• If merger costs (contract cancellations, core conversions, etc.) are so great that transferring Xceed’s $94 million equity “will not result in a material increase” in Kinecta’s 7.9% net worth ratio, shouldn’t these new costs be fully disclosed?
• If “better pricing, additional products, lower operating costs” will result in “lasting benefits” why is no single fact or comparison of existing fees, savings or loan rates provided to support this promise? What is the evidence of Kinecta’s superior member value?
• What is the basis for five senior employees receiving a “possible maximum amount” of additional compensation of $3.5 million while giving up their leadership roles and responsibility for future performance? What is the rationale for the CEO gaining $1.5 million in added compensation above that earned by staying on the job? Is this a conflict when senior managers negotiate their own benefits and do not provide any for members?

The Record of Xceed’s Board and CEO

When asked to approve a merger, members should have factual information not merely rhetorical promises of a better “low-cost” future. Lack of facts suggests the merger tactics have not been thought through.

Performance data is especially important in evaluating the marketing clichés and future hopes offered in the merger Notice.

The track record of Xceed’s leadership is one of continuing decline. The past five years show a compounded annual (CAGR) asset growth of negative (-0.67%) per year. The CAGR for the CEO’s 14-year tenure is 1.39%, less than a quarter of the industry’s 5.77% annual growth. This 1.39% long term growth includes five mergers that added $200 million in external assets and over 30% additional members in this time frame.

The September 2020 financial report shows a year-to-date loss of $1.7 million versus a $2.5 million gain for the same nine months in 2019. The members are already “voting” with their feet: over 4,000 (almost 8%) have left the credit union in the 12 months ending September 2020.

The board and management responsible for these trends state their future roles as President of Kinecta and two directors will “help ensure members have a voice.” What support could this “voice” be in light of their own abdication?

Xceed’s CEO provides members with the criteria they should apply in voting on this proposal. In a 2010 Credit Union Times the CEO wrote:

“At the end of the day, credit union mergers must be based on what’s best for the member (of both credit unions). At Xceed FCU, although we operate across the country, we wouldn’t merge a credit union just for the sake of expanded asset size.”

She continues: “Mergers call for serious consideration and although I appreciate the unprecedented difficult operating environment, we find ourselves in today-let’s continue asking the question “What’s in it for the member?”

Kinecta’s Track Record of Size and Performance

Since Xceed’s summer 2020 announcement, this combination has been justified by saying larger size will bring better value. As presented in the Notice:

“The combined credit union, and consequently the members will benefit from the economies of scale (including a combined entity totaling approximately $6 billion in assets and approximately 300,000 members) translating into lower operating costs by allowing such costs to be spread over a wider membership base. . .this merger (will) create a larger credit union that will be in a strong competitive position to offer members greater value than they have today.”

Kinecta’s record of its “competitive position” suggests that there is little relation between performance and size in this organization. The following shows long term and more recent trends in Kinecta’s asset ranking. It continues to fall even though it has been in the top 100 listing throughout this listing.

1978: Hughes FCU, #3 of all 12,759 FCU’s; no state cu listing available
1995: Hughes FCU, #9 of all 12,107 credit unions
2005: Hughes FCU, #16 of all 9,062 “ “
2015: Kinecta FCU, #34 of all 6,284 “ “
2017: Kinecta FCU, #40 of all 5,815 “ “
2018: Kinecta FCU, #43 of all 5,482 “ “
2019: Kinecta FCU. #47 of all 5,349 “ “
9/20: Kinecta FCU, #49 of all 5,244 “  “

This fall from #3 to #49 means Kinecta’s performance is not keeping pace with its peers. In 2010, Kinecta attempted a merger with NuVision using a two year trial run with a shared CEO. After reporting a $30 million loss in 2011, the effort was ended.

As of September 2020, Kinecta’s 2.74% operating expense to average assets is lower than Xceed’s 3.59%. But size does not automatically create better member value. Together the credit unions report losing 16,000 members in the past twelve months. Kinecta’s 12,000 drop is equal to almost 5% of its total from the previous year.

These declines are not a sign of member confidence. Member value depends on the business model, not the institution’s size.

Members Told to “Abandon Ship”

The two emails above suggest that members are disheartened as they are asked to leave the self-help craft in which they placed their trust, loyalty and belief for six decades. And how must they view the ship’s captain rewarding herself and the senior officers after bailing out of future responsibility.

With so many unanswered questions, Xceed’s members should vote No.

Management’s proposal to sell their cooperative’s future to an unnamed board, an unknown leadership group and then rewarding themselves with additional millions in compensation is a failure of leadership. A violation of duty.

If a No vote prevails, this $3.5 million dollar payoff plus the savings from added merger expenses, should be enough to find the right crew to set a better direction going forward.