Category: NCUA

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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 Co-author McCray presents eleven historical documents in the Appendix.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.”

 

 

 

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NCUA May Board Meeting:  Vice Chair Hauptman Finds His Voice.  Harper Cancels June Meeting

(Note correction to spelling of board member Tanya Otsuka’s name from the initial post)

With Chairman Harper on extended medical leave, May’s board meeting was expected to be a routine quarterly review of the financial status of the NCUSIF.

Instead, Vice Chair Hauptman opened with a ten minute critique of NCUA’s new collection of NSF and OD fees from credit unions in future call reports.

Hauptman’s remarks can be heard early in the Board video.  He is articulate and energized. The proposal was not discussed at any board meeting. He had not heard about the effort till January.  All his suggestions for how to use the information were rejected.

Most importantly he believed the policy implications were intended to push fees downward.  This regulatory action would be contrary to the federal credit union act to serve the underserved.

In his view, when a person is short on cash, there are no good options.   In many instances, having the payment go through and charged a fee may be best of limited choices.  He gave several personal examples of being in this situation.

In addition to adding to regulatory burdens, he believed the effort was prompted by two  groups not looking out for credit unions’ best interests:

  1. The press looking for clickbait headlines;
  2. Political groups with an agenda.

Board member Otsuka’s response urged that the collection effort’s impact not be prejudged.  Members have a right to know this information. This is about safety and soundness and consumer protection.

The Meeting’s Outcome

This is the first time Vice Chair Hauptman has been so outspoken in response to Chairman Harper’s priorities.  He has loyally supported new rules, spending initiatives, and staff reports that could have been critiqued on both policy and substantive grounds.

While it is not clear why he chose this topic at this time, the response from Chair Harper absent on medical leave was immediate.  He announced the cancellation of the June board meeting.  This is after cancellation of the March meeting and a very “light” April agenda which the Chair attended virtually.

The power of board members comes from their participation at public board meetings and from the political process provided by the three person board oversight.   This legislative change from a single administrator in 1977 was to ensure no single person had total control over the agency.

Now while physically on leave, Harper is trying to retain his political control by canceling normal board functioning.  With a two-person board, both members have to agree on the board’s agenda and concur for any motion to pass. The check and balance still exists.

However  Harper’s cancellation of public board meetings stakes away the most important power and venue board members have.  He is undermining the Board’s oversight responsibilities and other agency priorities.

Leadership Uncertainties

Harper’s efforts to hold onto his authority while absent raises critical questions for credit unions and NCUA.   For credit unions, the reputation and political standing of the Agency is at risk.  Who speaks for NCUA? Who is leading the staff?    Who sets priorities?   With no public meetings, how are the multiple constituencies to which the agency is accountable, supposed to know what is going on?

For NCUA staff, do they respond to queries raised by board members concerning internal and external events-policy and otherwise or just ignore?   Does the newly created Office of Business Ethics or the IG have a role in this exercise of absentee leadership?   The cancellation of board meetings?  The lack of the Chair’s public presence and accountability?

Hauptman may have thought he was just providing an alternate perspective on an Agency data collection effort.  But his critique, and Harper’s response,  raises a whole new set of consequential issues about the board members’ role in a time of Chair vacancy.

In recent years within NCUA and the broader federal government. when there have defaults of leadership (vacancies and personal management failures)  it has been individuals dedicated to their Agency’s mission and the proper exercise of authority that have stepped into the vacuums.  Did Hauptman just start this process for NCUA?

 

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Deciding on a Merger Partner Shouldn’t Be Like a Blind Date

Edited excerpts from this Second Quarter 2017 column in The NCUA Report provide a perspective on current merger discussions.

Scientific brainteaser of the month: “This man-made creation is defying the normal rules of science by both expanding and contracting at the same time.”   The final Jeopardy answer is: The U.S. credit union system.

In a streak now extending for decades, the number of credit unions in American continues to shrink while credit union membership and assets continue to expand.  . . no other issue is as perennial as the discussion of consolidation within the credit union system.  Many bemoan the erosion of the small credit union fraternity, while others cite the ever- increasing tide of financial services competition for making the erosion inevitable.

Protecting Member Interests

Whatever your perspective, climate change in the credit unions system is real. . . our focus is on ensuring member interests are protected, through the regulatory process and that the merged entlty meets safety and sourndess requirements.

The value proposition of mergers is, as it properly should be, left to the members of those institutions to weigh and then decide. . .

Really Acquisitions

But, while the term “merger” has a distinctively collaborative ring to it, make no mistake many mergers are really acquisitions.  For some credit unions, their growth strategy is defined by pursing acquisitions.  On the surface there is nothing inherently wrong with such an approach by either the acquirer or the acquired as long as sunlight permeates the pathway from boardroom to membership. 

Transparency: a Cornerstone Principle

Throughout my tenure, transparency in governance has been a cornerstone principle my colleagues and I have committed to build upon.  As we are constantly reminded, “every dollar is ultimately a credit union member dollar.”  . . .it is equally valid and important to remember that the same responsibility falls upon boards to be open and forthright with their member-owners when it comes to the merger process.

While many mergers germinate from the ability of the acquired credit union, generally a smaller institution, to adequately serve its members, some voluntary mergers have involved medium to very larger credit unions with relatively strong balance sheets.  In such instances, boards of director should be comprehensive in their disclosures to their members.

If an acquiring institution is tapping the net worth of an acquired credit union to pay for the acquirer’s’ cost of the merger, that reduction in net worth should be transparently, completely and fully disclosed to the members of the acquired institution before they vote on the proposed merger.

Certain disclosures of executive compensation and boards of directors’ benefits are already required under some circumstances, but the threshold for disclosure many not be adequate to provide true transparency to members.

Many board directors initiate the marriage dance long before the merger nuptials are finalized.  Pay and benefit enhancements for the acquired credit union’s leadership are sometimes finalized prior to triggering the current window of disclosures. Members also may not be given adequate opportunity to digest the information before the final merger vote. . .

Merger Windows and Frosted Glass

In the final analysis, it will, and should be, the members who will rightly make the ultimate decision, not the NCUA.  But, as members peer through the merger window, it is imperative their view not be obscured by frosted glass. 

By Rick Metsger, NCUA Board Member