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Tracking Members in Transition in this Crisis

 Keeping an Eye Out for Our Members

 In a recent post I suggested that data analytics could be a powerful tool to identify members going through an economic transition in the pandemic. https://chipfilson.com/2020/05/a-critical-new-data-tracking-need/

Today’s 13.3% unemployment rate for May highlights the importance of tracking this trend at the member level.

Following is a series of graphs with commentary,  showing one credit union’s real time data. With total assets of $150 million, these graphs demonstrate both their ability to focus on the most urgent member situations, and to show regulators  competency to manage the risks, if any, from their special programs.

Credit Union’s Member Unemployment Curve

While we are tracking # of members receiving UE each week – this shows the # of unique members receiving Unemployment on a weekly & monthly trend.

The # of member numbers receiving weekly UE benefits continues to rise with a decline the last week of the May. Definitely something we will continue to monitor.

Monthly View:

Quick math showing # Members that received an Unemployment ACH vs Overall Members w/ a Direct Deposit in a month.

Mbrs w/ UE Deposit Overall Unique Depositors UE Rate
Jan 22 7281 0.30%
Feb 23 7357 0.31%
Mar 71 7391 0.96%
Apr 337 7500 4.49%
May 471 6894* 6.83%

*May is showing fewer depositors due to at time of pulling data – Soc Security had not deposited yet (we have been posting early in prev. months)

Keeping an Eye Out for our Members

We recently compiled some data to reach out to members that have made or requested loan adjustments – here is some data:

# Mbrs w/ UE Deposit UE Mbrs w/ Loan UE Mbrs w/ Loan that Skipped Payment
Apr 337 171 (50.7%) 32 (18.7%)
May 471 218 (46.3%) 41 (18.8%)

April and May were consistent. Approx. 50% of the members that received an Unemployment Benefit have a loan with us.

Further – of the 50% that have a loan, 18% of those members performed a Skip-A-Pay. (Lower than expected). This is something we will continue to monitor to see if a trend appears.

Reshaping the ACH Deposits:

We divided our ACH Deposits into 5 categories:

Tax Refunds, Govt Benefits, Unemployment, P2P Transactions, and Payroll/Other

Here is a March vs May comparison of Incoming ACH Deposits by Category

March 2020:

May 2020

Takeaway:

Unemployment ACH has gone from nearly non-existent in March ($60,000) to 8% ($1,620,000) of our ACH deposits in May.

Average Deposit Amounts

As we know, the Government has provided additional assistance to the Unemployment Benefits. That can be reflected in the data here:

And for the Payroll category the average deposit has decreased as expected.

Plenty more where this came from:

We can use Tool 232 – Common Bonds to analyze this group further. This will give us a complete breakdown of the 471 members that received Unemployment during the month of May – it’s an excellent resource.

Where this dataset is now built we can update this information pretty easily going forward as well.

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Crossing Red Lines

“We crossed a lot of red lines.” That is how Federal Reserve Chairman Jerome Powell described the host of actions by the central bank responding to the COVID economic shutdown.

Actions included lowering interest rates to near zero, conducting unlimited bond purchases, implementing emergency lending programs to business, state and large city governments.

There are more steps planned, novel in scope and speed. These include the main street credit program to make at-risk loans to medium-sized businesses, buying corporate bonds and the debt of states and large cities.

The purchase of non-investment grade debt held by Exchange Traded funds was perhaps the most controversial. Included in the initial $1.3 billion purchases were bonds issued by Hertz, J.C. Penny, Neiman Marcus and Whiting Petroleum all of which have filed for bankruptcy. The US Treasury has been allocated up to $75 billion to cover potential losses on these non-bank, lending initiatives.

The Opportunity of a Crisis

But THE red line crossed that preceded all of these central bank actions was changing the internal mind set of the Federal bureaucracy. “We don’t do this. Where is the authority? We’ve never done this before. How will it work? What if we fail?”

With over one in four workers laid off, unemployment is expected to exceed 20% for May. Powell justified his innovative approach partly by the fact that the burdens of job loss are falling on those least able to afford it. They are lower paid service workers whose ranks are disproportionately women and minorities.

But changing long standing, institutional economic realities is hard. All governmental leaders find bureaucracies reluctant to move in innovative ways or at the pace of events. The easiest thing is keep doing what you have always done. The result, no real change occurs. The status quo remains.

The opportunities for transformational change can be fleeting. Public moods move quickly. Political and vested interests rise up. New approaches can be lost if not seized “in the moment” as Chairman Powell did.

He courageously decided to “cross all the institutional red lines.” Without taking that risk, the whole recovery momentum would be much more difficult.

NCUA’s Withdrawal from the Cooperative System

This crisis is an opportunity for NCUA to reverse the past decade’s pattern of unilateral, isolated and often self-serving regulatory responses in its relationships with credit unions.

Among all financial institutions, the cooperative model uniquely depends on collaboration. It is not just the basis for initial chartering, but also a singular operational advantage.

All elements of the system have a mutual responsibility for safety and soundness. Since the NCUA’s 2009 takeover of the corporate network followed by liquidation of four of the five largest corporates, it has failed to seek solutions cooperatively with credit unions and in members’ best interests.

The disruptions to financial performance by the crisis should be a turning point in this relationship. No regulatory rule or waiver, or congressional legislation, can “de-risk” the consequences of the financial toxicity caused by the pandemic and national economic shutdown.

The regulatory impulse to get rid of problems through mergers and selling member-owners to someone else when the going gets tough is a slow-moving death spiral for the industry.

Cooperative workouts are not presumed to be fast, especially when relying on retained earnings. They take time – sometimes years. They are messy. Each is unique, personal in the details. They require sweat equity and occasionally, 208/NCUSIF assistance.

The purpose of the 1% NCUSIF redesign was to keep credit unions and the system whole. Since the 2009 crisis NCUA has used the resources of this unique cooperative fund to broker problems away and avoid leadership accountability.

Crossing Red Lines to Avoid Red Ink

Jerome Powell has acted fast to help troubled industries, individual business, states and cities work their way through catastrophic revenue shortfalls and unknowable future trends. To keep the cooperative system whole while transitioning this crisis, NCUA must do the same.

The Board should establish an expectation that no credit union charter should be lost because of the current pandemic. Credit unions who work with their member-owners in this transition should expect no less than 100% support from their regulator.

This is not a legal, but a commonsense judgment. Similar to the Fed, the full range of credit union resources should be available whether this be 208 waivers and/or direct NCUSIF capital contributions.

This is a moment for NCUA to highlight the cooperative model in all its member focused uniqueness. It will require NCUA staff to grasp the opportunity for innovation by working with credit union leaders in the trenches. If that bureaucratic “red line” or mindset can be crossed, then the outcome should be a lot less red ink when this is over.

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Local Loyalty: A Meaningful Cooperative Advantage

From Farm to Table

The words community, communication, communion and the phrase common good share similar linguistic roots. Our community, literally common unity, depends on the relationships with those around us.

This shared experience was, and still is, the foundation of a cooperative. Knowing our neighbors, learning their stories, and supporting individual ambitions.

Crises enhance how these “normal” interactions expand to reinforce connections and shared purpose.

Summoning Local Spirit

This cooperative spirit was again called forth in this message from Patelco Credit Union:

Support your local businesses and non-profits

If you’ve already paid your bills, have an emergency fund, and taken care of your immediate needs, consider how you can use the rest of your stimulus payment to benefit your local community.

Non-profits are being called on to do more than ever before, so consider donating to them. We continue to partner with food banks throughout the Bay Area and Sacramento area, many of whom need extra donations right now.

Anchor Institutions

In economies dominated by large national firms who source from global supply chains, the importance of local anchor institutions is magnified in this crisis. Cooperatives along with hospitals, colleges, churches and myriad local businesses create self-supporting “eco-systems.” These institutions can leverage their assets and revenues to promote local development by:

  • Directing their purchasing power toward local vendors.
  • Hiring their workforce locally.
  • Providing skills training for people in the community.
  • Incubating the development of new businesses.
  • Serving as community leaders and network builders.
  • Financing development to promote local retail, employer-assisted housing, and community land usage.

Credit unions are an essential anchor for long term community sustainability.

The 100% Local Pledge

When the sweeping small business closures were ordered throughout California in March, the publication Inside Sacramento was concerned about the many small business owners who serve the area’s neighborhoods who were featured in their publications.

The COVID crisis heightened the many challenges small businesses face every day. So as a community champion, the publication began a city-wide effort to urgently support local firms with The 100% Local Pledge. This campaign included yard signs, social media messages, filmed TV spots and the support of local elected officials.

The first business partner to sign on was Safe Credit Union providing funds and marketing support. (https://www.cutoday.info/Fresh-Today/SAFE-News-California-CU-Signs-On-With-100-Local-Pledge-Campaign) CEO Dave Roughtan explained his credit union’s action: “. . . we can make a difference – but we have to work together. Things may have felt a little out of control. But we – together – can take back the future of our region. . .”

Relearning in a Crisis

The COVID crisis reinforces basic facts about the American economy.

One lesson is that consumers have figured out that food does not come from grocery stores. As farmers destroyed crops, livestock and dumped milk due to disrupted supply chains, local farmer’s markets show us the importance of a direct farm-to-table option.

While the pandemic crisis is national, even global in scope, the health care response must be local.

Another recognition of the vital role of “local” is the bipartisan Payment Protection Program (PPP). The purpose was to support local enterprise. One estimate is that 80% of credit union PPP advances went to firms with fewer than 10 employees.

In good times and crises, cooperatives are anchors.

Our actions around inequality, wealth, and power create alternatives in society which empower individuals via collective efforts. These cooperative, group-centered solutions help underwrite local choices necessary for meaningful lives.

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Up To $3.0 Billion Credit Union Capital Sitting Idle During Crisis

Recently NCUA released the December 30, 2019 financial updates for the five corporate AMEs liquidated in September 2010.

The projected repayments to the shareholders of the five corporates are as follows:

  • US Central Shareholders: $1.667 B or 100% of membership capital shares
  • Members United Shareholders: $588 M or 100% of membership and paid in capital shares plus a liquidating dividend
  • Southwest Shareholders: $703 M or 100% of membership shares plus a $300 million liquidating dividend
  • Constitution Shareholders: $36 M or 54% of member share balances
  • WesCorp Shareholders: $0

Avoiding Regulatory Double Jeopardy

The above amounts are a $90 million gain since the September 2019 numbers were released. With interest rates at all-time lows, the securities used to underwrite the NGN program, have undoubtedly gained additional value since December.

The NGN program ends in 2021, one year away. But the ability to return these funds now could significantly help both the 11 corporates and the thousands of credit union shareholders of the three corporates right now. Knowing that these repayments would be added immediately to capital would empower receiving credit unions to make more informed decisions about current member assistance programs. Every corporate and natural person credit union was sent a receiver’s certificate for their share balance. Now is the time to cash these out.

Three years ago NCUA figured out how to end the TCCUSF early and then subsequently closed several NGN trusts before maturity. These almost $3.0 billion  credit union repayments are sitting idle.

The coincidence that these surplus funds from the Great Recession over ten years ago could help in this latest economic crisis is at best ironical. But what would be worse is if the funds accumulated due to serious misjudgments about the actual condition of four of the corporates in the earlier crisis, should once again be unavailable when most needed.

That would indeed be an act of “double jeopardy” by NCUA.

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A Truly Moving Mission

The CEO’s message for the virtual annual meeting in this COVID time opened with a mission statement:

“Our mission is to look for solutions that will take us all to the other side and be better for the changes we’ve made along the way.”

The word that jumped out is ALL. Not mostly everyone, or just the fortunate ones. ALL will make it to the other side of this dual health and economic disruption.

And we’ll be better for it.

A Visual Expression: In this Together

Sometimes a picture captures meaning more powerful than words. I believe a wonderful example of this CEO’s mission is expressed in this 50 second news report . It shows over 250 Amish men, dressed in black, lifting together, and then walking a barn by hand to a new site. All in less than five minutes.

The Cooperative Mission

Might the credit union outcome from this pandemic be nothing less than to become America’s Premier Public Financial-Health System?Isn’t this the mission we were created for? Will we lift all our members so that everyone makes it to the other side?

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Where Poppies Grow

In Flanders Field is a battlefield poem composed during WWI by Canadian doctor Lieutenant-Colonel John McCrae. He was inspired to write after the funeral of a friend and fellow soldier who died in the second battle of Ypres. McCrae died of pneumonia in January 1918 near the end of the war.

His image of poppies growing (between the crosses, row on row) in the fields of graves of fallen soldiers resulted in the flower becoming the world-wide symbol in commemorations honoring those killed in combat, including Memorial Day in the US.

The third verse of his poem reads:

Take up our quarrel with the foe:
To you from falling hands we throw,
…The torch; be yours to hold it high
…If ye break faith with us who die
We shall not sleep, though poppies grow
……In Flanders fields.

The memories being honored are not only the casualties of war, but also the causes for which they fought. The poem challenges us to catch the torch and keep the faith for all who’ve died.

An American professor and humanitarian, Moina Michael, in the spirit of Flanders Fields elevates the poppy’s symbolism in her poem We Shall Keep the Faith (1918). She first proposed that the poppy become the enduring symbol of remembrance.

We cherish, too, the poppy red
That grows on fields where valor led;
It seems to signal to the skies
That blood of heroes never dies,

May the personal sacrifices and the duties answered, be a blessing that will again inspire you on this day.

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A Graduation Address: Entrepreneurial Skills in Pandemics

While this graduation address was written for a specific set of students, I believe his points are especially relevant for credit unions. The times require risk-taking, but the human instinct is to hunker down. Excerpts follow.

Nurturing — and Celebrating — Next-Generation Innovators in Uncertain Times

(Jim Chung, the Associate Vice President for Research, Innovation & Entrepreneurship at George Washington University-May 5, 2020-excerpts)

The coronavirus pandemic has upended the educational and career prospects for the most senior members of Generation Z. Millions of college students are finishing the academic year through online classes, and soon-to-be graduates face the daunting challenge of finding a job in the midst of a global economy in turmoil. While the outlook is intimidating, the students most prepared and able to succeed in these uncertain times maybe those who have embraced entrepreneurship during their college careers.

Innovation and entrepreneurship training programs at the George Washington University (GW) and other institutions across the U.S. provide students with a methodology and mindset critical to operating in resource-constrained and challenging environments. These environments are often defined by high stakes problems with highly uncertain outcomes.

Problem Solving Approach

Our approach to solving problems through innovation is to treat it like a scientific experiment: Identify the problem, break it down into component parts that are solvable, test your hypotheses and assumptions, ask the right questions and understand the outcomes. Often, students run into inconvenient or unexpected answers that force them to change course entirely. If anything, the current pandemic encapsulates the type of environment we are working to prepare our student entrepreneurs for.

Virtual Competition

It’s against this backdrop that we decided to forge ahead with a virtual version of our GW New Venture Competition even as much of the university’s co- and extra-curricular activities have been canceled or postponed. Going virtual enabled us to still honor all the hard work and fascinating ideas of our student and faculty participants. But perhaps even more importantly, our decision to pivot amidst the sudden onset of COVID-19 has also served as an invaluable object lesson: Being forced to adapt quickly is something innovators must do.

This year, our competition venture winners and runners up sought to confront a diverse set of challenges, everything from a lack of innovation in the global supply of blood to nocturnal asthma attacks in children. They developed educational platforms to help adults with autism spectrum disorder achieve career and other goals and devised inspired ways of capturing and harnessing the kinetic energy produced by opening and closing doors. One of our runners up even devised an app that consolidates the tools needed for songwriting.

Innovation in Hardship

. . .history has shown that periods of economic downturn and hardship can ignite the most ingenious companies. Walt Disney started his company in 1929 at the start of the Great Depression, as well as aerospace pioneer United Technologies, now merged with Raytheon earlier this month. Closer to our times, WhatsApp, Instagram, and Uber all started during the Great Recession.

Yet, even before this pandemic and looming economic crisis, the U.S. has been losing ground in the global innovation race with the number of startups declining domestically and capital investments moving to entrepreneurs in other countries.

The All-Purpose Antidote

In order to promote innovation post-pandemic, universities will have to redouble their efforts to teach and encourage entrepreneurship among their students. Innovation training has value for everyone, not just students studying business or engineering. Those of us who lead innovation offices and programs have a responsibility to recruit students across disciplines, backgrounds, and life experiences.

. . .Indeed, many of challenges of the current pandemic and looming, complicated issues like climate change, the future of work and, yes, another global public health disaster, ensure that uncertainty and high stakes will be undeniable features for much of this generation’s — and successive generation’s — lives.

Our students need to be ready to think on their feet, to analyze, adapt and ultimately act with confidence. Spurring the next generation of entrepreneurs may be just the antidote we need.

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Merger Math in Credit Unions: A Deeply Flawed Process   

Many credit unions profess a growth strategy based on merging other credit unions. Simple math shows this is a dubious strategy.

Simple Merger Math:

1 credit union + 1 credit union = 1 credit union

The facts are straight forward.

A merger of two sound, well-run credit unions does not grow anything. It changes no market share, initiates no new community relationships and invariably results in new costs and lost members.

Most importantly, real choice for members is lost. Frequently the merging members were eligible to join the surviving credit union. If the surviving firm was indeed a better deal it should be winning over these members. But an unspoken reality is mergers are initiated to eliminate unbeatable competitors.

By cancelling charters of long serving, independent institutions, generations of member goodwill and community relationships are ended. Career opportunities for employees are compromised. Leadership within the communities served and in the industry by the board and senior management is, if not totally eliminated, shifted to senior staff already engaged. Rarely does the surviving leadership team have the local connections of the merged credit union.

Finally, from a cooperative system standpoint, as resources are concentrated in fewer and fewer organizations there is less diversity in risk management. Fewer organizations remain to innovate and develop business strategies.

A Flawed Democratic Process For Members

These issues were again raised in a Facebook post this month about a recently announced merger.

From a member’s point of view, this long-time credit union executive posed vital questions about the explanation  for combining two long serving, multi-billion, very sound charters. His concerns included:

  • Weak, “boiler plate” business justifications;
  • Failure to fully disclose all costs incurred by the transaction;
  • The loss of distinctive institutional cultures and professional career opportunities
  • The destruction of an organization’s unique heritage and its hard-earned legacy of generational relationships with members;
  • The absence of specific, quantifiable and immediate member benefits;
  • The elimination of member choice when the options from a well-run credit union are eliminated.

The post asked if the generalized assertions of potential future institutional gains were sufficient to offset the added costs and real losses incurred by the members of the cancelled charter. His conclusion was the transparency of this transaction is woefully insufficient.

Properly Informing Members

To my knowledge, members have never voted against a proposed credit union merger. A few announced mergers have been withdrawn before reaching the member vote.

While information presented in merger proposals today may be legally compliant, it does not provide the facts for members to make an informed choice.

Rather these votes succeed because they are predicated on trusting relationships even as that confidence is used to ask members to give up their unique institution.

Unintended Consequences

Mergers completed without member benefit as the foremost criteria are a suspect foundation for a cooperative. It presumes that success depends on the accumulation of greater institutional resources, not the relationship with the member-owners. Seeking greater market power is a classic recipe of for-profit firms. That is not why cooperatives were created.

If these deeply flawed, problematic merger processes continue then the future math of credit union mergers may be simply:

1 credit union – 1 credit union = 0. No member-owned coops are left.

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