Category: NCUA

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Can Merger Incentives Be Replaced by Better Comp Plans?

Editor’s note: The following guest commentary is a response to the NCUA board’s July 18 proposed rule requiring written succession planning policies for all credit unions.  One rationale was that this action would reduce the number of mergers now occurring due to a lack of available CEO or board candidates at times of leadership transition.

By Ancin Cooley

The succession planning discussion during last week’s NCUA proposed rule is about who will control the future of an organization’s resources: the member-owners versus transferred to an outside third party’s control?

Here’s the key question to keep in mind as you read my views:

Is the members’ loss of their charter and capital comparable to the costs of Board/CEO succession planning by any measure?

Bridging the Gap: “The Middle Way”

The solutions below are born of fatigue from reading about merger abuses and pragmatism. I’d rather a Board give a CEO what they feel he or she has earned in a manner similar to community bank compensation versus that same CEO attempting to convince their Board to merge for a “backend” payout from the surviving institution.

If we don’t openly address “backend” payouts post-merger, we won’t have a serious conversation on this issue. (Source: CU Merger Update Part II: More Management Comp Deals, Some Member Payouts, Usual Reasons and, Sometimes, No Reasons are Cited for Combinations)

Practical Solutions for Succession Planning

Let’s get down to business.

  1. Incentivize CEOs with Bonuses for Succession Planning Tasks: Offer financial incentives to CEOs for the annual completion of board succession tasks. This ensures that succession planning remains a priority and is executed effectively. (A colleague on LinkedIn thought this was a horrible idea, stating that CEOs are already getting paid to do their jobs. I agree with her logic, but I have also been working in financial institutions for 20 years. It won’t happen without a carrot.)
  2. Allow CEOs to Benefit from Capital Growth: Create a system where CEOs can benefit from the internal capital growth within their organizations, fostering a sense of ownership and alignment with the credit union’s success. For example, if a CEO starts with $8 million in capital and grows it to $24 million by retirement, they should access some of those funds in the form of a “liquidity event.” This approach reduces the risk of CEOs seeking payouts through unnecessary mergers.

Implementing these actions addresses the “elephant in the room” of self-interest driven mergers while aligning personal and organizational outcomes. The goal:  fewer mergers and more stable, mission-driven leadership transitions.

Who is going to object to the solutions I’ve provided above?

  1. Credit unions that rely on one solution for their continued growth-more mergers
  2. Firms that provide secondary capital that support mergers
  3. Lawyers that offer merger services
  4. Financial firms, brokers and consultants that provide merger services

This collective group drives the marketing and PR surrounding mergers, shaping the narrative to their advantage. During the comment period, this same group will prompt state leagues to oppose what is truly in the best interest of the members, thus prioritizing their own financial gains.

The institutional efforts to grow via industry consolidation is a feasible external growth strategy. But it belongs in the banking open-market world, not the credit union cooperative model. Credit unions with merger growth plans are playing tackle at a flag football game.  Cooperatives were intended to be perpetual by paying results forward, a different outcome entirely from private wealth accumulation. 

Common Rebuffs Against Succession Planning

  1. Regulatory Burden:

Ah, the classic “regulatory burden” argument—how many times have we heard this one? It’s a tired refrain. But let’s break it down: What is the regulatory burden, and for whom? For the management teams who find it cumbersome? What if this so-called burden is a safeguard for the members?

If we truly embrace free markets, then if one CEO finds succession planning too burdensome, the members, through their directors, can find a CEO who sees it as a manageable task. The framing of regulatory burdens should always consider who is complaining and why.

During the recent open discussion on the matter, NCUA Board Member Kyle Hauptman mentioned a CEO who claimed that implementing succession planning would force his credit union to merge.

Is it the managers’ place to suggest to their members that putting effort into leadership continuity—to protect their charter—is going to result in a merger? Imagine if you owned a commercial building and asked your property manager to implement a succession plan. If your manager rebuffed with, “If you make me put this succession plan in place, we’ll be forced to sell the property,” what would your response be?

  1. Flexibility Concerns:

Some feel that a one-size-fits-all rule for succession planning would not consider each credit union’s unique needs. The NCUA proposal allows for broad discretion in implementation, enabling each credit union to tailor its succession plans according to its specific circumstances and needs.

  1. Cost of Implementation:

While developing and maintaining a succession plan involves some time and cost, these are minimal compared to loss of the charter. NCUA’s new charters are required to raise a minimum of $500,000 t0 $1.0 million to open for business.  Thus, the loss of any charter for the membership, the community and the credit union cooperative system is huge. 

Conclusion

Succession planning is not just a procedural necessity; it is an organizational imperative to ensure the continuity of the mission and values of credit unions. As we navigate the complexities of leadership transitions, let’s prioritize the long-term health and cooperative principles that define our organizations. By doing so, we can safeguard the future of credit unions and continue to serve our communities effectively.

Implementing practical solutions, such as incentivizing succession tasks and allowing CEOs to benefit from capital growth, can harmonize personal and organizational interests, leading to a more stable and mission-focused future.

In short, THERE AREN’T TOO MANY CREDIT UNION TRUE BELIEVERS LEFT. COOPERATIVE IDEALS SEEM TO BE A THING OF THE PAST. IF THE MOVEMENT HAS ANY CHANCE OF SURVIVING, FOLKS GOTTA GET PAID. 

P.S. To all the institutions relying on mergers as their primary driver of growth.

The day after the merger, all the problems that existed before your merger will still be there. Only now they’re scaled and compounded.

Mergers teach you one thing: how to merge. You haven’t learned how to execute a strategy, build your brand, or manage the risks of a larger organization. You haven’t developed a talent pipeline. And candidly, you won’t have time to address any of these issues because you’ll be too busy dealing with the residual effects of the merger, such as core integrations and member withdrawals.

Mergers should accelerate a strategy that’s already working, not as the ignition for your growth. God bless and happy hunting.

If you are interested in further conversation, please reach me at acooley@syncuc.com or check out my YouTube channel here.

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Knowing When It is Time to Leave Office

For the past month, the public has watched President Biden struggle whether to continue his campaign as more and more questioned his leadership capacity.   His predecessor took a more forceful effort to remain in office on January 6, 2021.

It is extraordinarily difficult for appointed or elected public officials to know when to leave their roles.  These public positions are prized for their power, perks and prestige.  Stepping out of the limelight is contrary to the ambition that brings most persons to seek roles of public responsibility in the first place.

Moreover appointed positions frequently confirm a person’s sense of special purpose or even even self-worth.  As former NCUA Board member McWatters commented about his colleagues’ views in May 2015:

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

Compounding the difficulty of moving on, is that one’s closest advisors brought to new positions of responsibility that will be lost, are hesitant to tell the “boss” it’s time to go. So their counsel is to remain until external events cause turnover.

The Two Exceptions

Every NCUA board member and chair have stayed beyond their established term until the administration moved to replace them.  There are two exceptions-the first two Chairs of the NCUA Board.

Larry Connell left his six year term on January 1, 1982 following the appointment of Ed Callahan as Chair the previous October.  He became CEO of Washington Mutual Savings Bank in Seattle.  The thrift had 37 branches and was the largest and oldest mutual savings bank in Washington.  For Larry it was a clear move up in terms of personal and professional opportunity.

At the February 1985 CUNA GAC meeting in Washington DC, Chairman Callahan announced that he and his two colleagues, Chip Filson and Bucky Sebastian, would be leaving NCUA to form a credit union consulting company.  Ed’s resignation was effective May 1, 1985 or over two years before the August 1987 end of his six-year term.

Ed’s explanation for why he believed it was time to move on is insightful. He said that he had done what he came to NCUA to accomplish.  In a May 1985 NCUA News interview he listed these as “the deregulation of Federal credit unions, the decentralization of the agency, the capitalization of the NCUSIF. The result was that “most people at NCUA have a good sense of where the Agency is going and how they fit into the picture.”

The Example for Today’s Leaders

In Callahan’s view, his role as Chair was done. “It’s all working. The team is in place. There is a sense of confidence in the Agency, and it has infected the credit union movement as well.”

Time to move on.  Government employment was not his career goal or personal ambition.

Ed and Larry’s examples of leaving with time left on their terms illustrates the character of these two initial chairmen.  Their professional lives and contributions were not defined by their time at NCUA.  Both continued to make meaningful impact in multiple future leadership roles.

I believe the logic Ed used to describe his decision is important for  leaders today.  He became chair with a purpose and a plan.  When the results were accomplished, his role as chair was complete.  His tenure was not arbitrarily defined by the term of an appointment.  Or the next election outcome.

Without a clearly defined purpose, leaders within government and credit unions will resort to cliches about safety and soundness or people helping people. Leaders whose purpose is simply responding to unfolding events will not know when their role should end. For change is always happening.

The instinct to perpetuate one’s time in a role and then referring to one’s experience as the basis for continuation, will lead to stagnation.  This is the common justification for renominating current board members to fill annual vacancies in credit union elections.

Knowing when it’s time to leave is as important a skill as the effort used to earn the position in the first place.

President Biden has been universally congratulated for his decision to give up his effort to remain in power.  Likewise Ed’s service has NCUA Chair of just under four years, is recalled as a special time of “partnership” between the agency and the credit union system.   Isn’t this outcome what democratic governance is intended to accomplish?

 

 

 

 

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The Value of “Look Backs”

Part Two of Community Capital,  Race, Equity and the Credit Union Movement is a case study of the abrupt liquidation in 2010 of a $750,000 credit union founded by the historic black fraternity, Alpha Kappa Psi.

The story is told from the viewpoint of the credit union participants. Co-author McCray presents eleven historical documents in the Appendix.  These  include the minutes of NCUA’s closed board meeting approving the liquidation and a 32 page transcript of the November 5, 2010 US District Court hearing in which the credit union challenged NCUA’s action.

Reading the documents along with the author’s descriptions presents two very different versions of events.  Ultimately the Judge in November ruled in favor of NCUA’s actions.

What is unusual in this case is the credit union’s perspective.  Rarely if ever do the board members and leaders of a credit union which is the target of an NCUA takeover, ever speak out.

Speaking Out

So what is the value of reviewing this event  14 years later?

As noted in the final excerpt below, the credit union raised a fundamental constitutional question about NCUA’s summary liquidation action that may have relevance today.

The details of the story and in the official record of both parties’ actions are not pretty.  NCUA examiners were at times arbitrary–for example going in and unilaterally changing the credit union’s 5300 call report for June 30.  The agency was informed of the approval of a $100,000 CDFI grant for the credit union, but acted before the funds could be disbursed.

NCUA’s characterizations of the credit union were uniformly negative, often with a factual basis, but absent any context or recognition of the credit union’s unique business model and the founders’ commitment.  The conflicts became personal-on both sides.

This story is a unique first hand account of regulatory and credit union failure.  When a credit union ceases operations, it is a shared responsibility by both NCUA and the coop. In this situation, the effort to merge the credit union with HOPE FCU  is apparently not even considered by the agency.

In every failure there are lessons that may lead to future improvements. However because NCUA is intimately involved in failures, before and after, the bureaucratic instinct is to get rid of the problem as quickly as possible to avoid any regulatory embarrassment or accountability.

The agency will then bring up these unexamined failures as “object lessons” when proposing new rules or as precedents for new authority over credit unions.

Most recently at last week’s NCUA board meeting  a new incentive compensation rule was justified by board members asserting such incentives had contributed to WesCorp’s and a California Credit union’s failures 16 years earlier.   Both references were at best misleading if not irrelevant to the actual problems causing each credit union’s demise.

For example, the fact that NCUA had a full time corporate examiner on site for years at WesCorp monitoring every aspect of the credit union and sending reports back to head office, went unmentioned.

When failures occur,  the regulator’s goal is just to move on.  In past open board meetings all three members  supported a look back at the agency’s management of the Corporate liquidation events.  But nothing has been done to learn from the largest NCUSIF losses in credit union history that in retrospect were based on dramatically erroneous projections of potential investment shortfalls.

Without independent review of regulatory actions and objective “look backs” with the benefit of known outcomes, the credit union system will continue to pay the costs of past failures with future ones.

Whatever one’s assessment of McCray’s description of the closing of Alpha Kappa Psi FCU, all should be thankful he and his colleagues made their points of view public.

The Due Process Arguments

A final excerpt from the Alpha Kappa Psi FCU liquidation-the legal appeal from pages 216-217:

Due process requires that legal proceedings must be carried out fairly and under established rules and principles. In the banking industry, courts have held that due process was satisfied by a post-deprivation hearing. However, the question here was, “Does being heard after the liquidation has already taken place satisfy Fifth Amendment due process requirements for a natural person credit union?”
Are the due process protection considerations the same for corporations as distinct from individuals in membership cooperatives?

Thus, this was a “case of first impression”—that is, a legally significant case that could establish a legal precedent because it was the first time this factual scenario would be considered by a federal court.

There are two fundamental differences between banks and natural person credit unions—individual association versus corporate form, and initial capitalization levels. Banks and credit unions differ greatly. First, banks are for-profit commercial enterprises, while credit unions are not-for-profit associations.

Second, banks are corporations. Natural-person credit unions are unincorporated associations of individuals. Third, the courts have long held that constitutional protections differ between corporations and individuals. The courts have only held that corporations are entitled to First Amendment protections. Hence, post deprivation hearings (i.e., after an action has resulted in loss of life, liberty, or property) do not violate banks’ due process rights since courts have not held that corporations are entitled to Fifth Amendment due process protections at all.

However, natural-person credit unions, as cooperative associations of individual members, are different. They have full constitutional rights and are entitled to individual due process protections. Thus, a post-deprivation hearing did not satisfy individual Fifth Amendment due process protections.

Therefore, KAPFCU believed that the NCUA liquidation and dissolution order was unconstitutional because it was based on a closed-door meeting, and because a post-deprivation hearing could not satisfy individual Fifth Amendment due process concerns as a natural-person credit union. KAPFCU believed its due-process rights were doubly violated.

 

 

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“Rush to Judgment”

An excerpt from Chapter 14 of Community Capital,  Race, Equity and the Credit Union Movement.  Co-author Michel McCray continues telling how NCUA closed  Kappa Alpha Psi FCU in 2010. (fourth in a total of five selections)

“The NCUA board members refused to dissolve KAPFCU at first,” I said. “They recognized that cash basis vs. accrual accounting increased expenses and created our net worth ratio problems.”

“That’s good.”

I explained, “Region IV officials convinced the NCUA board to liquidate KAPFCU based on a series of lies and false representations in an ex-parte proceeding.”

“Which is total bullshit.” Victor said, “We need to demand a personal meeting with Debbie Matz or get a hearing before the entire NCUA board.”

“They ain’t gonna listen to us, Vic,” I said. “They’re trying to screw us.”

“Well, if they won’t listen to us, then we need to get [Representative] Eddie Bernice Johnson,” Victor said, “and the whole freaking Congressional Black Caucus to reach out to NCUA on our behalf.”
“If that doesn’t work, Vic, we need to take them to court ASAP.”

Victor nods. “Who do we know in Washington, D.C.?”

Representative Eddie Bernice Johnson (D-TX) wrote a letter to Debbie Matz requesting a meeting or emergency hearing for KAPFCU. NCUA officials ignored the emphatic request from a distinguishedCongressional Black Caucus member.

They also ignored KAPFCU’s frantic meeting request in a last-ditch effort to stop the surprise liquidation.

I issued a press release announcing KAPFCU’s decision to sue NCUA. If successful, KAPFCU v. NCUA could be the Brown v. Topeka Board of Education case of the credit union movement.(pages 201-202)

Tomorrow: the Court Hearing

 

 

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Confrontation: An NCUA Examiner and Credit Union Leader

In Community Capital,  Race, Equity and the Credit Union Movement co-author Michel McCray tells the story in Part 2 of the closing of Kappa Alpha Psi FCU in 2010.

He creates first person accounts and reconstructed dialogue of some of the events from the participants.  The following excerpt is from a quarterly  meeting between the NCUA examiner and Victor Russell who was leading the credit union.

Confrontation  (From Chapter 12, Alice in Wonderland)

An angry sun glared off the tinted glass of a small law office in Richardson, Texas. I waited for my cousin, the proprietor, to return. Tall in stature but slight in height, Julius Thompson is a brilliant attorney who is the general counsel for KAPFCU. He provides legal expertise and guidance to the fraternity enterprise. He also offers his offices, file cabinets, and conference room to support the KAPFCU effort.

Friends and family call him the “Godfather;” Julius Thompson, the bald barrister with a caramel coffee complexion. Julius has a knack for networking and connecting people. He also recruited me to assist KAPFCU with government relations and community development expertise to help grow the fledgling credit union. . .

At 6:02 p.m., an alabaster male with stern, square cheekbones and thin lips walked into the conference room at Julius Thompson PLLC to conduct the quarterly examination of KAPFCU, the only federally chartered Black-owned financial institution in the state. He wore a dark conservative suit, a busy patterned tie, and polished leather shoes. He was clean-shaven with amber hair and piercing cobalt eyes.

NCUA Supervisory Analyst Tony Rausch personified the Texan view towards minority-owned financial institutions. Privileged, aggressive, and assertive, his demeanor was best described as “typical Texan,” exuding his white male privilege. Empowered as a federal official, he was assertive regardless of whether he was right or wrong. Ultimately, being a “Fed” means that you never have to say you’re sorry.

A loud commotion erupted inside the conference room of the small legal office and real estate title plant. Tony Rausch, a “good ‘ol boy” from Texas, versus Victor Russell, a fast-talking hustler from Chicago. They congealed like oil and water. However, Victor had transformed from Chicagoan to Texan, donning ten-gallon hats and ornate belt-buckles with Italian suits—even Black people do rodeo in Texas.

During the regular quarterly examination, Victor Russell described the current operations of KAPFCU and his plans to increase revenues by origination fees for residential or commercial mortgage transactions. Tony’s eyebrows rose. “Slow down, Victor, before you try to jump into high finance. You guys are just sitting on your deposits. If you want more money, make more loans to your members.”

Victor sat upright, interlocking his fingers. “We are trying to mitigate our risk. In banking, we say, ‘know your customer.’ We know our members and make loans to individuals we know will pay us back.”
“Very good, because that’s the only way you can legitimately make money to generate revenues,” said Tony.

Victor argued that KAPFCU was not issuing or holding mortgages on the credit union’s balance sheet. Instead, KAPFCU would only make referral fee income by finding qualified borrowers for other financial institutions. Rausch balked at this and declared that KAPFCU could not generate mortgage fee income because of real estate risk. “I will not let you do that, Victor.”

“What do you mean, you won’t let us do this? You don’t run our credit union—we do!” Victor bellowed.
“That’s not how small credit unions operate.” Tony replied, “You must grow your loan portfolio. Make your money from member loans.”  (pages 180-181)

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A Book Illuminating Recent Credit Union Struggles

July 30, National Whistleblowers Appreciation Day, is the publishing date for Community Capital,  Race, Equity and the Credit Union Movement.  

Here is a brief excerpt by Clifford Rosenthal, one of the authors.  The book’s principal case study is in Part Two. It is the story of Kappa Alpha Psi FCU and its abrupt liquidation in 2010 as recounted by one of the participants, and co-author, Michael McCray

From The Historical Context, page 20, by Clifford Rosenthal (used with permission):

     On August 3, 2010, without notice, NCUA seized and liquidated KAPFCU, sending out checks to close member depositors accounts. KAPFCU was effectively dead and gone.

      Why was KAPFCU’s case so important? For decades before and since, a steady stream of liquidations and mergers decimated the ranks of Black and other credit unions serving communities of color. Our Federation lost many small credit unions, painfully including many Black credit unions with roots in the Civil Rights movement and even earlier.

    But KAPFCU did what no credit union in our movement had dared to do during my 30 years at the Federation: they fought the liquidation in federal court.

    KAPFCU’s fate could have been—should have been—different. Had KAPFCU prevailed in court, Michael argued, KAPFCU v. NCUA could have been the landmark Brown vs. Topeka Board of Education case for the credit union movement.

 On Vacation

Next week I will be away at a singing camp working on Ralph Vaughn Williams’ A Sea Symphony and Five Mystical Songs.  Upon returning, I will post a number of key moments from the book to illustrate both the content and the style.   It is a glimpse into NCUA actions long before the letters DEI were aligned together.

In the meantime it can be ordered on Amazon for those who can’t wait.

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Regulation as a Service

There is a growing use or reinterpretation of  business models where a critical product or solution is not managed in house, but rather outsourced to a third party.

“Software as a service,” a term with multiple meanings, is one example.  Another I learned about recently was “banking as a service.” In this configuration the chartering functions are separate  from the back office support operations, which are run totally by a third party.

In these “service” models, separate organizations integrate their special skills to achieve common purpose.

There was a time and indeed an era, when credit union regulation was seen as actual “public service.” That is regulators were to serve the operations, needs and success of the overall cooperative system.  Their role was integral and supportive. Regulators were not a distant authority merely keeping lookout for and, if necessary, the cleanup  business accidents.

Regulation as a Service

The following are the high points from an extended list in an NCUA Annual report  for how the Agency, in its word, “served” America’s credit unions that year.  There were two categories:  Benefits and Outreach.

For credit unions benefit:

NCUA’s efforts to reduce costs and implement efficiency resulted in federal credit union paying 2.9% of $1.3 million less in 1997 to support NCUA operations.

The second consecutive NCUSIF dividend which returned over $100 million to federally insured credit unions  last October.  . . is a tribute to the strength and sound management skills of today’s credit union community.

At NCUA a major contribution to efficiency was fully implementing the new Automated Integrated Regulatory Examination system (AIRES).  It is a critical component to improve the examination process for both NCUA and credit unions.

Outreach Initiated

Last year 12 federal credit unions and 12 NCUA examiners participated in a pilot program placing examiners behind the scenes  in credit unions for two weeks.The purpose was to provide examiners with first hand knowledge of daily credit union operations.

NCUA began asking credit unions to evaluate their NCUA exam in a brief one-page critique. The goal is to incorporate improvements and to promote open communications with credit unions.

A technical highlight was linking NCUA to the World Wide Web.

The agency . .. launched a major effort to achieve a diverse work force and improve our employee’s quality of life.

(Source:  Page 6  NCUA 1996 Annual Report)

A Public Servant vs. An Independent Regulator

Following the corporate crisis in 2008/09, the NCUA board stressed their independence from credit unions. The revised corporate rules were imposed, not created in consultations. Other examples were the initial refusal to publish and take comments on the agency budget and the secrecy of the NOL calculation.  And later on, the risk-based capital regulation.

These initiatives and publications (A Guide to Credit Union Mergers) and proposed rules (closing all home-based credit unions) were from a position that “NCUA knows best.”

While some regulators will have initiatives from their experience with credit unions, many NCUA board members have little or no prior first-hand knowledge.   As a result they seek answers in the statutes, by looking across town to other regulators, or sometimes simply following the political winds of the Administration (Free market or Consumer protection are recent examples).

Weathervanes Responding to Winds?

To overcome this inexperience and/or knowledge gap, regulation as a service is one way board members can align their priorities with credit union needs.  Without this focus, it is easy to set policy by default. Look for where the wind is blowing the hardest versus what would assist credit unions to better serve members.

Instead of service for the public, NCUA becomes another Washington DC governmental “authority” directing members’ lives.

The interesting part about the verbatim accomplishments reprinted above is that most of these initiatives were not new.   But they reflected an attitude of accountability and support for the credit union community.   Not a bad place for any policy or priority to start.

Editors note:  For an even older description of this service approach read the article, Changing Role of the Regulator: Relationship Based On Mutual Respect,  by CEO Frank Wielga on pages 14 in NCUA’s 1984 Annual Report )

 

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When There Were Two National Credit Union Trade Associations

If you have ever speculated about what is lost in a merger of credit unions, leagues or trade associations, the following example may be a helpful reminder of why choice matters.

CUNA’s Letter on NCUA Leadership

The Credit Union National Association’s August 6, 1973 letter to the White House:

Dear Mr. President:

The members of the Executive Committee of CUNA, Inc respectfully and unanimously urge you to replace Herman Nickerson, Jr as As Administer of the National Credit Union Administration.  . .

We are urging General Nickerson’s replacement because we feel that his actions as Administrator are creating growing bitterness and antagonism throughout the credit union movement, and this is causing a serous loss of confidence and trust in his administration.  . . we would particularly like to call your attention to the following:

  1. General Nickerson’s arbitrary and authoritarian attitude in deail with credit union problems. . .
  2. General Nickerson’s excessive issuance of burdensome regulations. . .
  3. Diminishing morale among employees at the NCUA. . .
  4. General Nickerson’s refusal to cooperate on legislative matters. . .
  5. General Nickerson’s poor public image. . .

Signed by the entire executive committee including Herb Wegner.

NAFCU Responds

On August 10, 1973, NAFCU’sExecutive Vice President Jim Baarr wrote the White House:

Dear Mr. President:

We have received a copy of  the August 8, 1973 letter from CUNA  . . . signed by all members of the Executive Committee.

The letter contains a series of five charges against  General Nickerson. . .

We totally disagree with the five allegations contained  in the  August 8 letter.  . .

Allegation (4):  He has always cooperated whenever possible with this Association. . .

Allegation (5);  “General Nickerson’s poor public image.”  . . .I was not aware that  Mr Jack Anderson (and his column The Washington Merry-Go-Round) was the final authority in assessing an individual’s public image. . .

In conclusion, may I add that as a representative of the credit union industry, I am appalled that a letter of this type would be directed to you by a sister trade association .  . .  may I state on behalf of the officers and directors of NAFCU that we continue to give an unqualified endorsement and support to General  Nickerson.  . . 

(Source of letter excerpts:  NAFCU’s  Washington Line, October 1973,  pages 15-16) 

The Credit Union System’s Challenge Today

A current echo of this concern  of a single administrator is the ongoing political debate about the structure of the Consumer Financial Protection Bureau and its lone Director.

The above debate on NCUA’s single overseer was real. The situation was resolved in 1977 when legislation was passed creating NCUA as an independent agency with a three-person board.  No more than two members could be from the same party.  The board structure was intended as a check and balance on the chairman’s power and to facilitate different points of view on policy and oversight.

As mergers continue to reduce the number of independent voices in the cooperative system, how are different and sometimes opposing points of view getting voiced?   The credit union community values relationships.  Public disagreement is rare.  Internal board dissent is even more likely to go unaired.

One hope is that the competition of ideas will occur in the “free market” and different points will automatically arise.  Rarely happens.  Mergers are often of competing organizations as in CUNA and NAFCU’s recent combination.  The same occurs in many credit union tie-ups.

Another hope is an independent press, but the structure and resources of oversight of these organizations are limited.  The general press rarely follows credit union events, unless there is a crisis. There is no requirement that institutions respond to press queries.

Finally, some put their hope for dissenting views in  external oversight by Congress or state regulatory or legislative activities.  The current effort to amend the federal credit union act to accommodate Navy’s management of a military bank, has found sponsors and opponents submitting their views to Congressional committees-which are then reported publicly.

When any industry is marching to a single drummer, sooner or later that approach will be found wanting.  Ensuring there is open and full consideration of differing points is how change begins. Defending the status quo can lead to irrelevance or worse,  purely self-dealing decisions.

Mergers at their core, are anti-competitive.  Anyone doubt that motivation?

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One Credit Union’s Simple Unique Act in 2023

The $46 million Solutions First Federal Credit Union was founded in 1964 to serve members of the International Association of Machinists and Aerospace workers at Fort Novosel (formerly Fort Rucker).

Its main office is in Enterprise, AL with a branch in Ozark.  Over time the credit union has expanded to a community charter for  Dale, Coffee, Covington, and Geneva Counties, Alabama with an FOM of over 170,000.  Today its ten employees serve  5,000 members.

One event makes this credit union unique in the three decades since the turn of the century. It is the first and only credit union to borrow from the movement funded Central Liquidity Facility (CLF).

During the 2008/2009 financial crisis the NCUSIF borrowed $10 billion from the CLF on behalf of two corporates.  There was also an effort to create a special program for credit unions to refinance members home loans that never got off the ground.

So Solutions First is the first stand-alone CLF loan this century.  This unusual borrowing was noteworthy enough that it was mentioned by Chairman Harper in the December 2023 board meeting, but without any details.

A “No-Brainer”

At yearend 2023 credit unions continued to face liquidity demands due to the uncertainty caused by bank failures earlier in March and the Federal Reserve’s raising short term rates to almost 5% to fight inflation.

At the 2023 yearend 1,267 credit unions reported total borrowings in excess of $137 billion versus only $44.8 billion at December 2022.

Following the sudden failures of Silicon Valley Bank and two others, the Fed in March 2023 established a special borrowing facility, the Bank Term Funding Program.  This became the go-to source for credit unions.  The special facility was used by hundreds of credit unions as described in this analysis. The Fed ended the program in March 2024.

Frank Garrett is the CEO at Solutions First, having arrived eleven years earlier from a banking career.  He said the approach for a CLF loan had been suggested by NCUA examiners. The credit union was facing ongoing loan demand especially from its indirect lending program.  The credit union  was funding this with overnight borrowings costing as much as 7%.

By taking a short-term fixed rate $1.0 million CLF loan, the credit union was able to save almost 2%.   The process took about thirty days to become a member and receive the loan which was fully collateralized .  He called the decision a “no-brainer.”

Since that event,  loan demand has diminished dramatically, the credit union has curtailed indirect loans, shares have stabilized and investments yielding as low as 1% matured and been reinvested at 4.5% or more.   He was able to prepay the loan in the first quarter of this year.

In this first quarter, the credit union like many others, has slowly started a comeback from a difficult 2023.  The prior year saw staff cutbacks, expense reductions and above average delinquencies.

The  CLF loan was done with NCUA encouragement, a positive sign.   The critical question Is whether this an example to be emulated by others, or merely the last “bird of summer” ?

 

 

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Three Observations on Sound Credit Union Mergers

Members Vote Against Merger

From the May 24th CUToday story:   In a rare development, members of Hoosier Hills Credit Union have rejected a merger with Centra Credit Union. The two credit unions had announced in January  their plan to combine to create a CU with more than $3 billion in assets. 

The credit unions said in a joint statement that “despite extensive communication from Hoosier Hills outlining the factual details of the merger, the vote was impacted by the circulation of misinformation.”

The credit unions did not say what that misinformation consisted of. The vote tally was not released.  

Why did members reject this merger? Here is a post on LinkIn by Hoosier Hills CEO Travis Markley, based on a Forbes article dated June 20, 2023 about the credit union.  The merger was announced six months later.

“Amazed and humbled to be a part of this organization and everything we do for our members, and so proud of the dedicated staff that make it possible!

“Hoosier Hills Credit Union is honored to be recognized by Forbes as one of the three Best-In-State Credit Unions in Indiana for 2023, joined by our friends at Interra Credit Union and FORUM Credit Union.

“This award, the result of an independent survey conducted by Statista, was based eighty percent on feedback from 31,000 US consumers, who rated their credit unions on criteria such as trust, branch and digital services, customer service, fee transparency, and financial advice. Twenty percent of the scoring was attributed to publicly available Google Reviews from the past three years.

“We are honored to serve our members, and appreciate this special recognition, which we could not have achieved without the dedication and character of our team at all levels,” states Travis Markley, CEO at Hoosier Hills. “Our knowledgeable and caring staff is committed to carrying out our company’s mission and continues to put the needs of our members and communities at the center of every decision we make and every action we take.”

This Merger Process Seems Suspect

Very soon after this positive external recognition, the merger process started.  The CEO would become the Chief Experience Officer of the new combined entity.

What is even more curious is that the merger proposal posted on NCUA’s website for comment says that Centra is merging “with and into” Hoosier Hills Credit Union, not the other way round as implied in the CUToday article. The Centra Chairperson, Jim Bickel signed the merger plan sent to members (whose?) on November 1, 2023 or five months after the Forbes “best” ranking for Hoosier Hills.

In this Centra notice to members there is an effective date of the merger of July 1, 2024. However, the credit union being merged is North Park, not Hoosier Hills.

This entire episode needs a good hard look by state and federal regulators as the documentation and explanations appear questionable.  There is reference to a detailed merger plan by Centra, but it is not included in the required posting even though the letter states it is enclosed with the Notice to Members.

This example reminds me of a recent post by credit union consultant and former OCC examiner Ancin Cooley.

Mergers are Feeling “Icky”

By Ancin Cooley

Is anyone else beginning to feel a little “icky” about the current merger frenzy in the credit union industry? Something about these transactions just doesn’t sit well in my spirit. . . what do credit union members get for their capital and assets when they merge?

Here’s an excerpt from a recent merger disclosure:

“Members will have access to more branches, a 24/7 call center, industry-leading online and mobile banking services, and will still receive the personal service they enjoy from the same employees they rely on every day.” 

This feels “icky” to me. The credit union I mention below is giving the acquiring credit union 7 million dollars in exchange for no board seats.

Would you give me your house in exchange for my cutting your grass?

The Game

And let me be clear: I do not think the individuals involved are bad people. The game is the game. If the cooperative movement is ever going to survive, it needs to be “guarded” by individuals who believe in its purpose. If your credit union or any cooperative has “unguarded” capital, someone will come and take it.

A Case Study

I’m reviewing the financials of a credit union set to merge as of May 1, 2024. The CEO, who has been there for over 20 years, inherited a credit union with over 16% in capital. By 2015, they ventured into indirect lending, and by 2019, it represented 60% of their total loan volume.

This credit union’s financial health started heavily declining two years ago. I’d be willing to bet that is right around when this CEO started looking for a merger partner. Indirect charge-offs were well over $600,000 last quarter. . . ending with a 7% capital ratio. This credit union was not lost due to technology, costs, or economies of scale. This was bad management and weak governance.

So, this person drives the credit union into the ground, receives a hefty retirement payout from the acquiring credit union, and retires happily. Ick… If you couldn’t earn a performance bonus payout while functioning as the CEO, getting one on the backend of a merger you brought to your Board doesn’t sit well with me.

Where are all the other voices? Where are all the credit union governance experts? Even if you disagree, please point out any errors in my logic or perspective. Don’t discuss this in small circles over dinner. Stop treating credit union capital like you invested in the organization with money out of your pocket.

What Are the Principles?

The evolving landscape of credit union mergers should invite deep personal introspection and discussion on the future of cooperative movements. Are these mergers truly beneficial for all stakeholders involved? Do they warrant a closer examination of the principles guiding such transactions?

Lastly, humans in general, often value relationships with people in close proximity to them vs. folks they don’t know. This manifests itself when directors, close to management, struggle to hold their executive teams accountable.

In the example of this post, if I named that CEO, I’d face more backlash than him or her for running the credit union into the ground.

Why is all this happening?

1) Because we value personal relationships over the member-owners of the cooperative movement. Some very smart and shrewd folks realized this years ago. Once the “old school” credit union folks passed away, it became a market free-for-all.

2) Where else are you gonna get 7 million dollars on a promise for better services? There’s too much money involved and not enough incentive to stop.

The only thing that could turn the tide is if some well-respected CEOs (and consultants) in the industry begin speaking up more. We may well continue to lose at least 15 credit unions per quarter for the next year or so. On my end, I’ll focus my energy on helping credit unions that want to grow, turn a profit, and keep their charters.    END

Another Interpretation of Credit Unions’ Personal Deal-making

The motivation for these so-called mergers of sound credit unions may have been best summarized by the well-known American entrepreneur, Al Capone who said: “This American system of ours, call it Americanism, call it capitalism, call it what you will (cooperative mergers), gives each and every one of us a great opportunity if we only seize it with both hands and make the most of it.”