Category: NCUA

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Chairman Callahan’s Last Interview at NCUA

“It’s a partnership and it works”

Knowing our shared past helps us to understand the present and envision the future.  History provides our sense of community.

From the May 1985 NCUA News, Vol 2, No. 4:

From the recent interview on NCUA’s Video Network, Chairman Callahan praised the NCUA staff, saying, “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 with confidence as well.”

The Chairman is quick to credit examiners and other Agency personnel for the successes during his term: “Most people at NCUA have a good sense of where the Agency is going and how they fit into the picture.  People at NCUA get the credit for what we’ve been able to accomplish because they brought us to the point we are now.” 

He believes three years of unprecedented growth in shares, loans, capital and membership attest to the positive effects of deregulation and to the success of credit union managers and directors when given the opportunity to make their own business decisions.

As important as deregulation is to Mr. Callahan, increasing the examiner ranks and getting Agency staff out in the field, closer to credit unions is just as important.  “Deregulation actually increased our supervisory responsibilities,” he said.  “We told credit union officials ‘You run our institutions, and we’ll be there to help.’  It’s a partnership, and it works.”

P.S.  See the reference above to NCUA’s Video Network.  This interview was the final edition, number XXI.  If anyone has this recording in their credit union collection, I would appreciate making a copy.

 

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State Regulators and Credit Union Oversight

Who do members turn to when they believe their credit union is not responsive to requests for greater transparency or accountability?  These situations can arise around bylaw interpretation, board oversight, and election conduct.

Following are two examples of members’ interacting with their state regulator when they believe accountability is lacking in credit union conduct.

A Live Hearing-NOW

The first is a hearing of the North Carolina Credit Union Commission at 10:00 AM EDT today.  Several members have sought clarification of the regulator’s approval for bylaw changes, especially those that affect the board election process.  The toll free call in number is 1 (984)-204-1487.  The access code757767261#.

There are thirteen items on the agenda, but the primary one is an update by the state administrator, Kristina Ray, on all areas of her responsibility.   The ability to listen to a live state update is an important opportunity not just for North Carolina charters, but for all credit unions who are interested in the state and federal oversight process.

A Member Complains- the Regulator Responds

A reader sent me a March 18, 2024 article form the Lost Coast Outpost titled:

Coast Central Credit Union Releases Vote Counts From Recent Board Elections Following Complaint to State Regulators

The story is a press release from one of the candidates for Coast Central’s board.  She filed a complaint with the California Department of Financial protection over the credit union’s failure to release vote tallies for the 2024 board elections.

As a result the credit union posted the vote totals for all candidates for the most recen two years with the Chairman’s reply:

“In response to members requests at the annual meeting and in the spirit of enhanced transparency and goodwill, we have taken the additional step of posting the vote totals from the previous year on our website. We hope this action demonstrates our commitment to transparency and our dedication to addressing the concerns of our members.”

Prior requests to the CEO for details of the vote had been turned down.

The complaint was filed by Carrie Peyton-Dahlberg who wrote the press release for the local paper.   The posted results showed she had come in fifth place just 172 votes behind the fourth place elected candidate in the 2024 election:

  • Matt Wakefield: 1,641 votes (73.1%), elected to a 3-year term
  • Terry Anne Meierding: 1,600 votes (71.3%), elected to a 3-year term
  • Ron Rudebock: 1,520 votes (67.7%), elected to a 3-year term
  • Dane Valadao: 1,346 votes (60.0%), elected to a 1-year term for the remainder of a 2023 retiree’s term
  • Carrie Peyton-Dahlberg: 1,174 votes (52.3%), not elected

In her commentary “she urged Coast Central member-owners to use their comment cards to ask for further progress, such as publicly announcing board vacancies, revising board election rules so they don’t hinder election outreach, and changing the board appointment process so that future vacancies can be filled in a way that is more representative of community demographics.”

“Coast Central is moving in a good direction, including releasing these numbers, putting 2024 election reminders in each branch and making sure that its ballots were sent in clearly labeled envelopes. All of these are big improvements over the January 2023 election, and I hope this is starting a new trend.”

 “Bit by bit, if member-owners stay involved, we can encourage Coast Central to move further down this path of listening to the people who own it.” 

Democracy Takes Work

Releasing the actual votes in a member election would seem to be a fundamental requirement, a no-brainer.   The California regulator seems to agree that members are entitled to know the actual votes cast in an election.  That may seem like a small step,  but is still not followed in all credit union merger and board elections-whether for state or federal charters.

This California precedent matters.   Democracy can be a contagious activity.   It is also a participant activity, not a spectator sport.  Carrie Peyton-Dahlberg has done every member-owner a service by raising this issue of election transparency in her credit union.  Hopefully, all regulators will soon see this fundamental accountability for a democratic process the same way.

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NCUSIF Investments: Repeating the Practice that Caused the Current Underperformance

I’m afraid I must rant again about NCUA’s management of the NCUSIF investment portfolio.

From the most recent posted financials as of February 2024, the Investment Committee appears to have learned nothing from the past two years of Fed Reserve short term rate increases.

The Committee bought a $650 million Treasury bond yielding 4.26% with a final maturity of 6 years and three months on February 15.

The investment extended the NCUSIF’s duration, increased the portfolio’s interest rate (IRR) risk, and reduced short term  liquidity. The term portfolio (75% of the $22.5 billion total) is underwater by $1.3 billion and yields just 1.44%.  the Fund’s overnight position in contrast earned an average yield of 5.41% in February.

This new term investment reduces income versus rates available at the short end of the curve by at least 1% or $6.5 million per year until the Fed decides to change course.  Here are the Treasury rates as of Wednesday April 3, 2024 from CNBC  Pro, Stocks at Night:

Bond Yields Above 5%

  • The U.S. 1-month Treasury bill is now yielding 5.36%.
  • The U.S. 2-month T-bill is also now at 5.36%.
  • The U.S. 3-month T-bill is at 5.35%.
  • The U.S. 6-month T-bill is at 5.31%.
  • The U.S. 1-year T-bill yield is now back above 5%, hitting 5.044%.
  • The U.S. 2-year Treasury note is yielding 4.67%.

Ignoring Investment Fundamentals

This decision ignores the IRR lessons from the more than two years of Fed rate increases. The negative consequences of this investment pattern on the earnings and liquidity of the portfolio during this time have been enormous.  Moreover, in recent Board updates, staff said they made no change in their investment policy.

Those policy assumptions fail to adjust to not only  events of the past two and one half years creating this ongoing underperformance; it is oblivious to the history of the Federal Funds rate.

Here is  an analyst’s review of this rate experience in a recent update by a longtime observer and consultant to financial service firms:

Since the inception of the Fed Funds Overnight rate in 1954, the average and median have been in the 4-4.5% range. (https://fred.stlouisfed.org/series/fedfunds)

If you entered the industry after 2009 then you probably didn’t know this.  Your “normal” was a Fed Funds rate in the 0-2% range and you probably think the sky is falling with the current rate at 5.33%.   

The implication of a low Fed Funds rate since 2009 was that you could only survive by making loans because there was very little spread to be had between deposit cost and investment yields.

The Need for Leadership

As NCUA staff repeats its past misjudgments, one would hope the board had the abiity to ask relevant questions and more importantly, documented policy plans and goals.   This is what any examiner would require of a credit union with this continuing record of a $17 billion investment portfolio yielding 1.44%.

The current practice/policy increases the portfolio’s interest rate risk,  provides  no weighted duration goal based on the earnings requirements of the fund, and shortchanges the credit unions who should be receiving dividends from their performance during these last five years of minimal insurance losses.

Reviewing the NCUSIF history since 2009 shows that a portfolio yield of 2.5-3.00% would provide a stable NOL after all costs and growth assumptions.  Returns above that would give credit unions a return on their collective investment—a public commitment when the NCUSIF was redesigned with industry support.

Here for example, is the published forecast from the August 1985 NCUA News (page 3) the year following the Fund redesign:

An estimated 6.8% dividend has been projected for the federally insured credit union deposits  in the NCUSIF based on the Fund’s performance as of June.

The estimated dividend is part of an overall program of reporting to the NCUA Board and to credit unions on the Fund’s activities.  The dividend forecast is updated each month.  Office of Program Director D. Michael Riley noted that he expects the fiscal year dividend to be in the 6.5% to 7% range.

No Muscle or Memory

The core problem is that the board and staff have lost all the “muscle-memory” demonstrated by prior Agency leadership when projecting dividends.   The dividend was and is the key success factor that separates the NCUSIF from all other federally managed deposit funds.

A 5%  portfolio yield would result in total NCUSIF revenue of over $1.0 billion and a substantial return for credit unions.   Current NCUSIF investment policy and practice shortchanges credit unions and mismanages the most important asset under NCUA’s administration.

The only advantage of this six year and three month investment is for the three board members, Their terms will all have expired.  So they won’t have to explain how making the same oversight error increased NCUSIF’s portfolio risk while reducing its earnings for credit unions.   In short, this NCUA board has no memory let alone muscle when it comes to overseeing the NCUSIF.  Perhaps that’s why there was no Board meeting in March.

 

 

 

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An Observervation on the Difficulty of  Gaining a Credit Union Charter

Oscar Abello is the senior economic writer for Next City.  His focus is community initiatives that bring opportunities to those left behind by existing financial options.  New credit union charters are an area of special interest.

His latest story is A Long-Awaited Black-Led Credit Union Finally Gets the Green Light.  The subtitle is “after eight years of work, Arise Community Credit Union just secured Minnesota’s first state charter in over two decades.”

The announcement of this new charter’s background has been reported by the credit union press.  Abello’s story focuses on the difficulties of the process.   Here are some of his observations:

Chartering a new credit union today is like traversing a long-lost trail through the woods, one that used to be well-traveled but is now overgrown, littered with fallen trees and other obstacles no one has had to navigate in many years. Prior to 1970, there were 500 to 600 new credit unions chartered across the country every year. After a steep decline to near zero, the numbers have never recovered. Over the past 10 years, fewer than 30 new credit unions have been chartered across the country.

New Credit Union Charters

The annual number of new credit union charters issued nationwide by the federal government, as published in the annual reports from the NCUA.

According to Inclusiv, a network of credit unions that focus on community development, minority credit unions across the country are closing at the rate of one per week, making the new Arise Community Credit Union’s chartering even more urgent if that trend is to ever be reversed.  (Editor’s note: all credit unions close at a rate of more than three per week). . .

Arise hopes to fill in the gap left behind by other more conventional banks and even other credit unions. Predatory lenders have jumped into the gap left behind by the retreat of the mainstream banking system from certain communities. African Americans are twice as likely to live within 2.5 miles of a payday lending storefront, compared with all Minnesotans. . .

Chartering a new credit union is a huge lift. It’s been nearly eight years of organizing for Arise, but it’s not uncommon for aspiring credit union organizers to take multiple years between initial conversations to raising startup capital to finally getting a new charter. The Association for Black Economic Power also had to deal with a leadership transition along the way — it’s now led by Debra Hurston. The new credit union has its own CEO, Daniel Johnson, who has deep family ties and professional ties to the Northside of Minneapolis.

It would have been easier — and quicker — for Hurston if her group just brought in an existing bank or credit union as a partner organization to provide access to credit and basic financial services to the Northside.

But Hurston says in surveys, town halls and just informal conversations over the years, the Northside’s desire for its own institution has only gotten stronger.

“The mistrust in the banking community, it’s not a small thing, and it can’t be fixed overnight,” Hurston told me last year. “We’re starting from the wrong spot…if I have to protest in front of you to make you treat me right. Something’s not right about that. So no one from our communities has ever asked me if we should just partner with a larger bank.”

Insight for Those Who Care

Abello’s reporting should be a boon to the credit union community.  For as Robert Burns wrote of this ability to see what others may not:

O wad some Power the giftie gie us To see oursels as ithers see us! It wad frae mony a blunder free us, An’ foolish notion: What airs in dress an’ gait wad lea’e us, An’ ev’n devotion!

Music For Holy Week

Christ on the Mount of Olives, by Ludwig van Beethoven (1803)

(https://www.youtube.com/watch?v=5ZKWcn7bqsQ&t=41s)

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What Credit Union’s Can Learn from the FHLB System

This month the Congressional Budget Office (CBO) released a 27-page report analyzing the Federal Home Loan Bank System.

The significant chapters include an Overview, Financial Condition, Subsidies and Risks.

The FHLB system is the largest lender to credit unions. Hundreds of credit unions have capital invested in individual banks and rely on them as critical partners for liquidity and ALM management.  At 2023 credit union borrowings reached a peak in the system’s history:

The Central Liquidity Facility

How can the cooperatively owned, tax exempt FHLB, created to serve the savings and loan system, thrive with credit unions while their own funded CLF plays no role at all? Certainly, the borrowing demand is there.

At February 2024, the CLF reported $913 million in total assets, equity of $862 million and one loan for $1.0 million.

A 5% return on the fund’s retained earnings of $42 million would pay all CLF’s operating expenses.  It’s 4th quarter 2023 dividend of 4.62% trailed the overnight market by .75%. Why aren’t members even receiving a market return on their shares?

More importantly, what can credit unions learn from the CBO’s analysis and the system’s response?

The CBO and FHLB Summary

Ryan Donovan, CEO of the Council of the Federal Home Loan Banks posted a reply #FHLBank to the CBO report: “it does a fair job of acknowledging the many things we have been saying.” He singled out a number of key success factors:

Private investors — not the government or taxpayers — bear the cost of any “subsidy” associated with the FHLBank system.

The FHLBank system plays a valuable role in providing liquidity to its members, particularly during times of market stress.

The benefits the system provides accrue not only to the members but to borrowers and the public. In fact, it says,

“Lower financing costs on FHLBs’ debt are passed along through lower rates on advances than members would receive when borrowing in private debt markets. In turn, competition leads members to offer lower rates to borrowers.”

“Because members are both owners and customers of FHLBs, almost all of the subsidy (after afford-able housing payments are deducted) probably passes through to them, either in the form of low-cost advances or, to a lesser extent, through dividends.”

The existence of the FHLBank system “reduces mortgage rates and provides liquidity to the housing market, particularly during period of financial stress.”

The FHLBank system poses very little risk to taxpayers. If one accepts the CBO’s figure of $600 million in federal tax exemption, the roughly $1 billion that the FHLBanks will distribute in affordable housing and community development grants this year seems like a very good investment for taxpayers.   

Donovan concludes: The report stymies critics . . .because CBO makes clear FHLBanks pose little risk, they provide significant public benefit, the implicit guarantee is perceived by bond investors and the benefits of the system flow through to borrowers and communities.

The FHLBank system is poised to deliver $1 billion toward affordable housing and community development . . .We’re engaged every day with our members and other stakeholders on how those resources can be used most effectively.  (end)

All these housing and community benefits should be possible with the CLF.  Why isn’t this happening?  What might a CBO report on the CLF say? Would anyone care?

Music for Holy Week

With each daily post I will be adding excerpts from some of the great classical music inspired by this Holy Week. Today’s is the “Resurrexit” from Berlioz Messe Solennelle.

(https://www.youtube.com/watch?v=K-RX0XtBBnw&t=29s)

 

 

 

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A Valuable Library Resource from NCUA

In following up an article by David Bauman in which he referenced his FOIA request to NCUA, I was directed to  NCUA’s FOIA Library.

Under the Frequently Requested Information section was what I had asked for:  NCUA’s response to Congressman French Hill on December 14, 2023.   Other items in this section included previous multiple requests that can be accessed by just clicking on the link.

Another section of the Library was the FOIA Request Logs  which include 474 requests going back to 2019.  I scanned the requests that were open and closed for 2023 to see what information had been asked for.

The log table has the date of the request, sometimes the organization, a description of the information sought and final disposition: granted-partial or full, denied, or “no records” responsive to the request.

I have reached out to NCUA to ask if anyone can use the FOIA log number to review previous responses without having to submit a whole new request—just to learn about the agency’s response.  When the reply is received, I will add to this blog.

In the meantime here are some of the more intriguing request descriptions, all of which were filled in whole or in part.

Selected Titles In the FOIA Library from 2023

Copies of all FOIA appeal logs by year from 2010

Records sufficient to identify all employees who entered into a position at the agency as a Political Appointee since January 20, 2021, to the date this records request is processed, to include a list of enumerated parameters to include resumes and waivers.

Documents and data sufficient to account for the monthly occupancy or vacancy rates for the agency’s five largest buildings (measured by square footage) from January 1, 2020, to December 31, 2022. 

A list of federally insured credit unions with agricultural loan portfolios greater than $100 million.

The application, approval, and any attached materials from the most recent field of membership change by Thrivent Federal Credit Union, headquartered in Appleton, WI.

A copy of the charter for NBC (N.Y.) Employees Federal Credit Union, charter 22351, prior to its merger into XCEL Federal Credit Union, charter 16218. 

A list of nationally insured credit unions that have failed and/or been acquired since January 2001 to include credit union name, charter number, opening date, failure date, and acquiring institution. 

The most recent NCUA salary data.

1)The number of federal credit union mergers completed each year between 1980 to 2020; and 2) The number of active federal credit union charters each year from 1980 to 2020 (as of 12/31 or other uniform date for each year). Note: If information is not available going back to 1980, please provide information going back as far as NCUA records allow. 

A list of all credit union CEOs and volunteers as of March 31, 2023.

NCUA salary data specifically under the category of political appointee.

Quarterly lists of all credit union board members for each quarter from Q42012 through Q42022.

1)Field of membership (“FOM”) criteria and approval documentation for FirefightersFirst Federal Credit Union (“Firefighters”); 2) Firefighters’ application and documents related to add “employees of non-profit foundations authorized by their organizing documents to be for the benefit and support of firefighters” (“Foundation”) to its FOM; 3) OGC’s legal opinion and analysis that supports the addition of the Foundation to Firefighters’ FOM; 4) CURE’s office summary that supports the addition of the Foundation to Firefighters’ FOM; 5) CURE’s approval letter and GENISIS worksheets reflecting approval of the Foundation to Firefighters’ FOM. 

Entire consumer complaint file from 2013.

An Important Resource

This is a partial 2023 listing.  In addition to some interesting reading, it also shows the agency as a resource for names of CEO’s and volunteers (including even CUNA and NAFCU) and for credit union data or other files going back years.

There might even be some valuable credit union press stories in following up some of these past requests.

 

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Who Is responsible for Cooperative Democracy?

Tonight, I will attend a special meeting of the members of a coop in which I participate.  The purpose is to approve a change in the bylaws prior to the Annual Meeting.  The change will reduce the number of board members from 15 to 12.

The bylaws have not been updated in 20 years. All changes must be approved by the members. Some background for the change was sent in advance:

While there’s no fixed rule on the number of Directors a Board should have for a group like ours, what makes sense is to have a size that’s both large enough to bring sufficiently diverse viewpoints and skills to bear on accomplishing the work of developing, guiding, and managing the organization, and also small enough to function effectively.

Given that Board service is a three-year commitment, it has also become more difficult to find members willing to stand for election each year. Twelve members will still assure that the Board is flexible and diverse, and provide enough hands to do the work required, while not overtaxing our use of member volunteers.

All members are encouraged to attend.

Sound familiar?  Recruiting volunteer directors is a challenge for many organizations. What is different from credit union practice is that this bylaw change is being discussed and voted on by members.   One person, one vote,  A special meeting notice sent 60 days in advance.

Credit Union Democratic Practice

In almost all credit unions, bylaw changes are not voted on by members.  This is the purview of the Board, which then submits changes for regulatory approval.

Members may not know of changes, even when it affects their fundamental role as owners in  elections procedures or even the number of board members.

In a recent post I outlined how these non-public changes can go to the heart of member governance.

The two largest FCU’s quietly changed the required number of signatures for member nominations for the board.  In both situations the change removed the 500-signature standard bylaw and replaced it with a percentage of members.  For Navy this new signature requirement was 26,000 and for PenFed 5,800 based on their latest reported member counts.

Regional Director John Kutchey quoted in another context stated, the NCUA considers the right to participate in the director election process a fundamental, material right for members of a federally chartered credit union. 

However, this fundamental change in these two federal credit unions was done without member involvement or  any public discussion.

Democracy Depends on Participation

These behind the scenes reductions in member rights  is how coop democracy dies, one small step at a time.

Without member governance, boards act like self-perpetuating trustees, subject only to their own sense of duty, versus accountability to member-owners.

Democratic practice is hard, requires patience and can be frustrating.  But without it, the required annual board elections become a mere administrative re-appointment of self-selected nominees.

Governance is more than a democratic formality.  It is fundamental to safe and sound oversight.   By eliminating member involvement in these fundamental bylaw changes. NCUA is sowing seeds of future member discontent and failures of accountability.

The Annual Meeting Season

As credit unions enter this season of annual meetings and board elections, it is doing so in a political environment in which both camps claim the future of democracy is at stake.

What better way to remind members of our fundamental democratic belief for how we work together in society, than in our own credit union’s political process?

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Personal Letters of Gratitude and Thanks: The Ways of Great Leaders

Over the weekend I was going through my parent’s personal records.  During WW II they had written each other  almost daily.  The letters are in 15 large manila envelopes along with photos and official documents.

My dad was an inveterate record keeper.  In his military file I saw this typed letter addressed to:

My Dear Mr. Filson:  and dated December 4, 1946.

It reads in part:

I have addressed this letter to reach you after all the formalities of your separation from active service are completed.  I have done so because, without formality but as clearly as I know how to say it, I want the Navy’s pride in you, which it is my privilege to express, to reach into your civil life and to remain with you always.

You have served in the greatest Navy in the world.

It crushed two enemy fleets at once receiving their surrenders only four months apart. . .

No other Navy at any time has done as much.  For your part in these achievements you deserve to be proud as long as you live.  The Nation which you served at a time of crisis will remember you with gratitude.

The best wishes of the Navy go with you into civilian life.  Good luck!

Sincerely yours,

signed

James Forrestal     (The Secretary of the Navy)

A Personal Letter from Ed Callahan

Ed was was confirmed as NCUA Chairman in October 1981. Prior to this we had worked together for four plus years when I was supervisor of the Credit Union Division for DFI in Illinois.

I would soon join Ed at NCUA in December. Nonetheless he took time to write.

The letter was addressed to Charles Filson at my Wilmette, Il home, dated November 17, 1981.  It reads in part:

Chip:

I’m sitting here in the in the Albany, N.Y. airport for my flight. I’ll probably have many waits like this in the future. It gives me time to reflect.

The past few weeks have been wild.  Now that the events are past, I’ve got time to think of all the good friends.  The only really important thing is just that-friends.

You have been one of the best. . .

Thank you very much.

I’m looking forward to our future endeavors.  We’ll have some exciting times.

E. F. Callahan

Signed Ed

Chairman

“Gratitude and Thanks“

Neither of these exceptional leaders needed to write these messages of gratitude and thanks.  But they knew the success of their organizations depended on others, not their  individual capabilities.

Government service, whether chosen or drafted, is sometimes under appreciated.  Or worse, captured by the political divisions now seeding distrust of any government calling.

These two individuals in very different spheres of influence and responsibility, illustrate in these personal gestures, what makes great leaders in any organization.

 

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DIXIE DIGEST:  A Family Portrait of NCUA’s Region III

An 8-10 page monthly printed internal newsletter, Dixie Digest, was published by Region III staff for a number of years in the mid 1970’s.

Unlike many semi-official government publications, these updates focused solely on the people in the Region.  Their retirements, vacations, new hires and occasional conferences.  No numbers, no exam or rule updates.  Just stories, sometimes irreverent,  and plenty of pictures, many submitted by the staff.

One editor, or compiler of this family work album, was Mike Riley who oversaw the production for at least two year (1976-1977) when he was in the Atlanta regional office.  After Mike’s death in January, his wife Lori shared his collection of issues with me.

They are a delightful record of a culture of fun, respect and occasional visits from the powers that be in DC.  It also is a valuable insight into the early careers of many later leaders of NCUA.

The Editor’s Ambition: “Scoff or Twitter”

The monthly issues also reflect a very humorous, even playful, wit by Mike.  His editorial credo on the front of an issue was, “The Bill of Rights guarantees a Three Press.”   Everyone thought typo, and so Mike explained his moto:

“In order to pride a bicentennial flavor to the newsletter, I made up a slogan.  However, it was evident that this brilliant pun was not completely acceptable to the masses as they did not understand it.  It is now obvious in retrospect that an explanation should have accompanied it.”

He then describes the first ten amendments to the US Constitution and the importance of the first on free speech.

“As most of you know, the Atlanta region of NCUA is numerically classified as three (3). Thusly it would not be unusual to state “This is Region III’s newsletter. By combining two different meanings into one word, we had hoped to make you scoff or twitter.  So the “Three” press was purely an attempt at bicentennial humor.”

NCUA Leadership Changes-DC Visits

In the next several years there would be three quick changes at the top of NCUA.  In April 1976, the first and to that date, only Administrator of the Bureau of Credit Unions, General Nickerson, submitted his resignation to the President.

The August 1976 edition featured a visit by the General’s successor Austin Montgomery.  It was a pictorial record (often with Montgomery’s pipe in hand) of the visit and this summary account of his activity:

“Mr. Montgomery arrives in Atlanta on Tuesday night, July 20, and had dinner with RD and Mrs. Gansfried.  On Wednesday morning, he toured the office and met with each member of staff.  He later gave an informal talk to the staff and expressed his views on the credit union movement and his management philosophy.  He answered questions on a wide range of topics.

In the afternoon he met with League personnel and State Supervisors.  All ten states in the Atlanta region were represented.  He spent Thursday visiting the Georgia Credit Union League and a credit union where an examination was in process.  We were most pleased to have his visit and were impressed with his open, frank manner.”

The January 1978 edition featured the visit of the newly appointed NCUA’s first Chairman, Larry Connell.  Accompanying him was Eloise Woods who had been chair of the National Credit Union board of advisors, which was discontinued when the three person NCUA board was fully staffed.

Pictures and Stories

These official visits were not the prime focus of the newsletter.  It was the employees who often contributed the many black and white photos for which Mike would create irreverent captions.  On one birthday party celebration he wrote of those shown: Ed’s birthday cake. Henry is blessing Ed and Foster Bryant is praying. (one must see the picture)

And there are stories by and about examiners.

Examiner Ron Coleman who recently oved into Jackson MS was immediately initiate into the ranks during a visit in the Mississippi Delta near Greenville, MS.  The first night we were on the road, the hotel clerk gave Ron a key to a room that had already been rented and occupied.  Ron became aware of the problem when he unlocked the hotel room door and cane face to face with a tall, husky and less-than-pleased construction worker who was at that moment in less than fully clothed condition.  Fortunately, Ron survived and was able to obtain another room at the other end of the motel.   

A Record of Early Professional Experiences

I did not arrive at NCUA until late in 1981.  Every current and future regional director and many head office personnel came from Atlanta during my tenure.  Among the names are Bob Boone, Bernie Gansfried, Steve Raver, John Ruffin and Mike Riley.  It was an ideal training ground for a long term career.

In the future I will share several excerpts which capture an office culture of more than the official triad of “Service, Supervision and Support.”  It was a group having fun, sharing their lives and work together, all of it captured by the keen wit of Mike’s eye and pen.

(editor’s note:  I enjoy looking at records of credit union and NCUA’s earlier years.  Often these documents have little relevance and value when their complier moves on.  Please let me know if you have some of these potential treasures in your living or storage spaces.  And thanks Lori for sharing Mike’s compilations.)

 

 

 

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How to Steal a Cooperative and Get Paid $60 million for Doing So

Preface:

This is a long blog, so I will summarize the main points for readers.

  1. Four senior employees and one newcomer of 121 Financial Credit Union will receive a minimum of $9,416,600  in future guaranteed salaries and benefits for merging their credit union with VyStar.  The required disclosures were less than a tenth of this number.
  2. VyStar is a credit union in a financial stall. Peak shares occurred in the first quarter of 2022 at $11.2 billion; at yearend 2023 they were $10.1 billion.  At that point, VyStar reports total borrowings over $2.6 billion including $200 million (corrected from earlier  billon) in subordinated debt to boost its capital ratio.  It bought a $280 million Florida bank in 2019 creating $28 million in goodwill, which suggests a price of approximately twice book value.  It announced its intent to purchase HSBI in 2021 for approximately 1.8 times book.  The transaction was cancelled in mid 2022 for failure to “receive timely regulatory approval.”
  3. In this merger, Vystar eliminates its very effective local competitor that has managed to secure 38% of its members who also have VyStar accounts.  And it gets paid $65 million in new capital versus giving cash to the credit union owners, as would be the case for bank owners, at multiple of their book value.  At year end 2023, VyStar’s ROA was .18% and its ROE 2.6%-both in need of this instant boost from this free gift of $700 million in assets.
  4. Other than the five employees listed, the remaining 130 are guaranteed nothing as they become a very small part of an organization which has 2,260 employees and whose locations will overlap some of 121’s existing branches.
  5. The members no longer have a choice of credit unions. This matters. In 2023, 21% of VyStar’s funding was from borrowings and $10 billion (79%) in member shares.  However when expensing the funding, the credit union paid 53% of its costs to the lenders and only 47% to the members whose savings are provided 80% of funding    VyStar is in thrall to external funding.

In contrast, 121 Financial has borrowings equal to 14% of its funding liabilities.  However, it paid 60% of its funding costs to members and 40% to lenders.  Members no longer get to choose the better deal which is why these combinations are accurately described as anti-competitive.

  1. NCUA is mentioned twice in the merger document. First as a place to post comments “to share with other members”– a digital and street address is given.  And again when “NCUA regulations require merging credit unions to disclose certain material changes in total compensation or benefits” the implication is that the regulator has reviewed the disclosures and announcement and that everything is being done according to Hoyle.

That is not the public rhetoric of Chairman Harper, who sees himself as an exemplar of consumer protection. Just last month in a credit union conference in Hawaii he talked forcefully about the need for credit unions to reexamine their overdraft fees (over which the agency has no authority) and reduce them when they unfairly charge members for the service.

The new board member Otsuka is a lawyer and has worked at the FDIC.  She should understand what the “slow walking” by regulators of an application, for example to buy a bank, means.  Also the fiduciary standards of directors for the “duty of care” and “duty of loyalty.”

An Election with No Vote Tally

Both may hide behind NCUA’s standard position, “well, the members voted for it.” However when members who opposed the merger asked to watch the votes as they were counted, the answer was no.  When they requested the final tally, the answer from staff was the vote would not be released and the ballots had been destroyed.

Once again democracy, in this case, credit union cooperative democracy goes to Florida to die.  Abetted by those appointees who champion the rights of consumers.

Why I am Writing about This

After the vote was announced I received two calls in early February from 121 members who were very, very angry.  They had put up spirited opposition including a website Stop the Merge and spent their own money on advertising.  They claimed to have been threatened in their employment if they continue to speak out after the vote.  All of their results from a mock online poll showed members opposed.

They had spoken to NCUA before the vote and had calls returned, but not any longer.   Their anger was palpable; they trusted no one; they did not have the ability to make their own case rationally.

They saw this event as a breach of trust by the credit union officials and the governmental oversight system that was supposed to protect them.  Neither caller had first hand knowledge of the credit union system or its press.  All they wanted from me was a lawyer’s name because they said a local firm wanted $25,000 to investigate and perhaps take up their case.

Was I a lawyer? No, a blogger.  “Oh, so you just want to make money off our story.”  I had to shout back to get them to start a dialogue, but said I would look into it.  The result was my blog Are Credit Union Members “American Idiots’?

These two members believe, and I think rightly so, the democratic system that they tried and supported has let them down.  They  played by the rules.  No one will listen to their cause, and it is hard, because they are very exasperated; perhaps a little paranoid.  They certainly feel alienated from the powers that be. And they are right to feel this way.

Information about the two credit unions continues to come in, but here is what we know so far.

The Rest of the Story

What follows is details to support the summaries above.

Who would not be attracted to a credit union whose mission statement is:

Growing together, prospering together.  

To empower our team to deliver innovative solutions through one-to-one service by focusing on he unique value of every member.  

To ensue organizational stability and financial wellness in our community since 1935.

Their home page video promises members they will be “a credit union for life.”

https://121fcu.org/about-121/

But its 89 year-long role as “Jacksonville’s hometown credit union, dedicated to delivering highly personalized financial services that benefit our members and community” is about to end on March 1 when the merger would be consummated.

In April 2023 the executive team of  121 Financial Credit Union first announced the credit union  would merge with VyStar Credit Union, also headquartered in Jacksonville.

Rarely do members join a credit union based on size, which is the prime difference between these two organizations.  Members choose based on convenience, price and service.  When they see and experience a local institution that expresses their hopes, as in the mission statements above, they become believers.  In this case for 89 years.

Many 121 members who were especially loyal strongly opposed the plan to end the charter. They took action and talked to NCUA about the process.  A number put up a website, Stop the Merge, complete with local advertising and publicity urging members to turn down the plan finally disclosed in the formal Member Notice Mailed dated November 30, 2023.

Why Did Management Choose to Give Up their Charter?

The Notice has not a single example of a better rate (savings or loan), fee or product that would benefit 121 Financial members.  There is lots of rhetoric about a bigger organization with a list of VyStar branches.

121 Financial is capable of offering the same system benefits VyStar promises.  In examples of community support, the much smaller credit union features its alliance with  the local  Jumbo Shrimp, a Triple-A minor league affiliate of the Miami Marlins.

Why This Merger is Occurring

I believe that when the full amounts of payments guaranteed to the five senior leaders in the form of salaries, bonuses, severance, and retirement are added together, the answer is simple: personal greed.  These five give up all their current credit union leadership positions, which they had held for less than five years, in return for “special project” roles. The remaining employees are guaranteed nothing.

The members lose everything they spent 89 years building.

$9.5 Million in Guaranteed Payments

But wait—doesn’t NCUA require that “certain material changes in total compensation and benefits of 15% or more of the five most highly compensated employees have received or will receive in connection” to be disclosed?  That is the literal requirement but obscures the full payoffs management has negotiated for itself when leaving their positions of responsibility.

David Marovich, CEO,  appointed full time CEO in March of  2020.  In a press interview (below) said he began merger discussions with the board in the fall of 2021.   The disclosures list a five year contract with a $16,000 salary increase, 2 first year bonuses totaling $245,00 and a supplemental retirement plan (SERP) for five more years at 40% of his final year’s salary.

Using the credit union’s IRS 990 filing for 2022 for these senior salaries, the minimum total payments  for this work and SERP is a minimum of $3,209, 600.

Paul Blackstone, COO since January 2020.  Receives a five-year contract with a $95,000 salary increase and two first year retention bonuses totaling $252,500, and a SERP that pays 35% of his final year’s salary for five years.   The minimum of these payments is $3,867,908.

Cyndi Koan, CFO since December 2019.  Receives a three-year contract with two first year retention bonuses totaling $70,000.  Total minimum payments $1,168,102.

Cathy Hufstetler,  Senior VP Lending since September 2019.  Will continue through conversion then retire and receive a one year severance of $273,000 and two first year bonuses totaling  $56,000.  Total minimum payments $602,000. She began at 121 Financial (Telco) in June 1991 and is the longest serving of the five employees listed.

Nichole Le Blanc, Executive Assistant to the C suite.  No start date given but  her previous experience listed in the Notice, leads one to believe it  to be very recent.  Receives a five-year contract with a $5,000 salary increase and two first year retention bonuses totaling $18,000.  Estimated minimum payments $569,000.

The total (salary data is from 2022) of these five guaranteed positions is a minimum $9,416,600.

In addition It should be noted that in 2022 the credit union began a SERP plan for the four senior positions that will fully vest all earned benefits upon merging.   In addition they will also receive all other retirement benefits that all employees of 121 Financial will vest  upon the charter closing. This is why Hufstetler, above,  has no retirement benefits from the merger. because of her 121 benefits package.

The Remaining 121’s Staff

The 121 website lists 17 employees (out of 140) in leadership positions.  Only the five most highly compensated are required to be disclosed according to NCUA’s rules.  So the others may have received a temporary incentive other than vesting 121 benefits.  It is not clear why Le Blanc, the apparent newcomer, was included in the guaranteed benefits given her relatively brief time at the credit union.

The average salary and benefit for VyStar and 121 Financial employees is the same for both credit unions at $97,000.   According to the notice VyStar committed to retain all 121 employees but for how long and under what work responsibilities will be determined.   For all seven 121 Financial locations, the only promise is that all “will remain open for a period of time” which does not sound very permanent.

Given the logic of acquisitions and the need for VyStar to turnaround its deteriorating performance, often the quickest savings is from employee attrition. The 121 employees may have other job opportunities, but they will lose their earned and established professional agency in joining an organization of 2,260 employees.

Will Members Get A better Deal?

A review the financing and business strategy of the two credit unions shows one is hellbent on geographic expansion in FL and GA with more branches-or acquisitions.  The other is Jacksonville’s home grown institution.

One relies on outside borrowings, the other on member funding. With 38% of 121’s members also with VyStar, they have elected to have a choice.  Now that is ended.

Moreover there is a question as to how this data was obtained.  Consumer privacy regulations would normally prohibit either credit union from accessing this information from public sources  no matter which credit union ran this comparison.

What Kind of Credit Union is VyStar?

VyStar’s business model is the antithesis of 121 Financial.  It is the country’s 13th largest with $13.6 billion in assets or twenty times the size of 121.   Both credit unions report very similar financial performance ratios at yearend 2023 with 121’s net worth and ROA running slightly above the larger credit union.

With 926,588 members and 91 branches compared to 49,000 and 7, VyStar’s strategic priority is growth.  Bank acquisitions and credit union mergers are one aspect of this effort.

In August 2019 the credit union announced:

VyStar received approval from the Florida Office of Financial Regulation (FLOFR) to significantly expand its field of membership by 27 counties – more than doubling the original 22 counties – to include all 49 counties of Central to North Florida. . .. In addition, VyStar received approval from the Georgia Department of Banking and Finance and the FLOFR to expand into four Southeast Georgia counties: Camden, Charlton, Glynn and Ware.

That same month VyStar announced the purchase and assumption of the $280 million Citizens State Bank in Perry, Florida.   Terms were not announced.  However, the credit union carries a $28 million goodwill intangible asset which occurs when an asset is acquired in excess of its book value.

In March 2021 VyStar agreed to purchase the $1.6 billion Heritage Southeast Bank (HSBI)in Jonesboro, GA, for an estimated $196 million or 1.8 times tangible book capital.  This effort was cancelled a year later due to the inability to receive timely regulatory approval.

In 2022 the credit union announced the addition of 15 more counties in FL and GA to its FOM.  In January 2023 it announced the merger with First Coast FCU, an $11.3 million firm.

Why This is a Great Deal for VyStar:  The Art of the Steal

In April 2023 when VyStar and 121 Financial announced their merger intention, the American Banker used the headline VyStar Credit Union to Merge with Local Competitor.

In addition to eliminating this local “home grown” competition, VyStar needed this $700 million to keep its growth ambitions going.  For the three years ending 2023 VyStar has had zero share growth, marked by a decline of 5% in 2023.  It has to do something so it turns to another acquisition to juice its growth.

In this way VyStar can instantly add $163 million in investments, $485 million in loans, $24 million in fixed assets (7 locations) and 50,000 member accounts.  And the best part is it will get paid $63 million in member capital for taking this long time operating entity off the hands of its existing leadership.

If this had been a bank purchase, the amount that would have to be paid to the owners would have been at least 1.5 times book or over $90 million in cash payments.  Why would a credit union ever buy a bank when you can steal a credit union?  Just arrange a couple of new senior positions for the senior team.  Can you imagine a bank’s owners giving their shares away free to another bank?

VyStar receives a free capital infusion and a $700 million operating entity.  The credit union’s owners whose loyalty and financial relationships built this very successful organization, receive nothing.  What’s worse, any member could have joined VyStar at any time they thought it was a better deal.  Instead the evidence suggests VyStar members go to 121 Financial because they prefer its local focus.

Should Credit Unions Care?

The easy answer is to keep one’s opinion silent.  This does not involve my members.  But this and similar precedents will end up destroying the reputation of thousands of credit union leaders who try to do the right thing, in the right way.  Because something is legal, does not mean it is right.

Note from two CEO’s joint press interview.

From an April 20,2023 article in the Jacksonville Daily Record by reporter  David Crumpler:  (Wolfburg is VyStar’s CEO)

Wolfburg said the merger “developed organically.”

He said the credit unions have long had a good relationship that existed when he joined VyStar in 2018 and was “started by our predecessors.”

Marovich said he and 121 Financial board members “have been working on this for about 18 months.

“I think our board felt that this was a good time (to think about a merger) and tried to determine who would be the best partners for this.”

The release said all 121 Financial members and its 140 employees will be invited to join VyStar.

“We do not want to disrupt the employees,” Wolfburg said.

“Those are employees who built that institution and who make the brand what is it, and have relationships with businesses and clients.”

There are no plans to make any decisions about keeping or closing branches over the coming year, Marovich said.

“VyStar has a good presence of branch locations, and expanded access was one of the things we’ve talked about,” he said.