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The Cooperative System’s Unique Capabilities In a Crisis

Since the era of deregulation, the credit union system has navigated multiple national and local crises. These include the October 1987 stock market shock, the meltdown of the S&L system, the bankruptcy and government rescue of the FDIC and FSLIC, the Y2K uncertainty, the 9/11 terrorist attack, and the Great Recession of 2008/09.

Now the coronavirus threatens national physical and economic security.

There are three vital responses that characterize credit union capabilities in a crisis.

1. Liquidity

The number one priority for both credit unions and their members. As economic uncertainty mounts, markets begin to tighten, there is no longer rational pricing, and everyone starts to hoard cash. Consumer spending slows, job losses mount and business revenue becomes less certain.

The most important action credit unions take is to keep credit flowing. Actions include supporting members’ credit requests, financing purchases such as cars and housing, and marketing lower interest rates to help members refinance higher rate loans.

2. Act Counter-Cyclically

Credit unions are designed for crises. Cooperatives’ unique structure enables them to act counter cyclically and therefore stand against the market pressures to put institutional financial priority ahead of member interests. Credit unions are the solution to many of the individual and community economic strains a crisis brings. By keeping the loan windows open and liquidity available at normal rates, market failures can be ameliorated and the time to recovery shortened.

3. National Legislation

The national legislation that accompanies a crisis should be an opportunity to enhance the cooperative model, not queue up at the federal trough seeking taxpayer funds for an industry built on the concept of self-help.

Significant legislation to upgrade the cooperative system historically occurs once each decade. Given the rivalry with banking groups and conflicting treasury priorities, it is difficult to predict when and how any opportunity will occur.

Rather than being caught up in the bailout legislative frenzy, this is the time to upgrade the cooperative system. Necessary bold changes could include:

    1. The redesign of the CLF to bring governance by the member owners and to enhance purpose by enabling cooperative access to the secondary market via the CLF.
    2. Explicit recognition of member-owner rights in cooperative governance.
    3. Enhanced accountability and transparency by NCUA for use of member funds and the agency’s responsibility in advancing cooperative solutions.

Not Letting a Crisis Go to Waste

The urgency of a crisis can cause responsible parties to focus only on the immediate challenges and not broader opportunities. Restoring the status quo can dominate the immediate agenda.

Credit unions were created to transform market options for members. During the Depression they were a national policy response resulting in the passage of the FCU Act.

Credit unions can respond to crisis in ways firms worried about share prices and market reactions cannot. Their member ownership structure ensures credibility by placing members’ interest first. The cooperative financial structure permits patience to persevere through the cycles of value that accompany every crisis.

Leaders Who Believe in the Power of Self-Help

These features mean that credit unions, in crisis, can demonstrate practically and forcefully why America needs cooperative solutions more than ever.

The key to realizing these crisis advantages is leadership. Can the persons responsible avoid getting caught in the panics that ensue? Will leaders listen and collaborate with credit unions on the front lines already responding with creativity and resilience? Will they promote the cooperative solutions or revert to practiced roles promoting personal or political advantage?

The cooperative message is that we are not prisoners of fate in a crisis. Credit unions demonstrate the many ways to overcome the doubts of today for a better tomorrow.

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What Can Credit Unions Learn from Bethesda’s Tastee Diner

In 1982 I moved to Bethesda, Md. It is a zip code address with a post office, but there is no city. The local government is the Montgomery County council. There is no local representation. As a result the Bethesda area’s fate is not controlled locally. A dominant objective of the County Council has been to stress development and the growing tax revenue that results.

Since the metro line opened in 1984, Bethesda has gone through waves of building booms and increasing construction. All local gas stations have been replaced by 12 story or greater condominiums. Local shops such as a fresh fish store, barbershops, nail salons and second hand consignment outlets survive only until the next rent increase.

The development boom has accelerated this past year with the construction of a new metro purple line connecting with the original red line stop. On top of this juncture of the two lines are three 30-40 story glass and steel office centers. No historical site such as the farmers market, no single or double story retail space is safe from this development driven construction frenzy. All the familiar, locally-owned businesses are being replaced by high end retailers, national chains and the latest trendy eateries.

The Tastee Diner

One business has avoided this construction destruction: the Tastee Diner. First opened in 1935, it is the only restaurant that has survived economic crisis and successive waves of ever dense building. The life span of any restaurant in Bethesda is measured by the years left on the lease as landlords seek increasing returns from their valuable holdings.

Tastee Diner is literally a throwback to the dining car layout of train travel. It has not changed its seating format of wooden booths or sitting at the counter and watching the cook work at the grill. It even has a jukebox at each table. For a quarter you can hear Johnny Cash Walk the Line or other 1960s rock and roll hits.

The sign on the door says: “Welcome, Open 24 hours.” The diner closes only 42 hours per year from noon on Christmas eve to opening at 6:00 am the day after Christmas.

The menu is classic American “comfort food.” Fried chicken, meat loaf, burgers, creamed chip beef on toast, etc. There are specials of the day and a senior menu for over 55. Kids eat free in the evening, one per each paying adult. Prices are the best food value in town. All drinks have free refills. The diner doesn’t have a liquor license, a key source of restaurant income.

Three years ago the local DC cultural magazine listed the diner as one of the top five restaurants to go in the greater Washington area for pancakes on Shrove Tuesday.

At the Foot of Marriott’s New Head Office

Today, the 85-year-old diner literally rests at the foot of the construction of the new international headquarters of the Marriott hotel chain. It will be dwarfed by this 27-story office building that will tower over it in every possible way.

How Do You Survive?

As we left the diner this past week, I asked the manager how they’ve avoided the fate of all the other local businesses. How can you possibly stay here in this increasingly upscale, luxury retail environment that constantly turns over renters every three to five years?

The answer was simple: “We own the land.”

The message for credit unions worried about fintechs, new entrants, big bank competitors or the constant refrain that you have to be big to survive is to remember the Tastee Diner model.

Your members won’t go away. Local loyalty can trump all the newcomers in the world as long as we remember that our members “own the land.”

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Credit Unions Purchasing Banks: One Step to Improve the Process

It is hard to know if credit union bank purchases are working out or not. Are they in members’ best interests? Are the terms reasonable? How will the financial benefits be realized?

One difficulty in these deals is that only one side is required to disclose the terms: the selling bank. That disclosure can be further limited if the bank is privately held.

The Importance of Transparency

Because credit unions do not have stock and the resulting marketplace pressures that this reality places on boards and managers, it is difficult to track whether a credit union bank buy is working or not.

From 2015-2019 consulting firms estimate that the average premium to book value on bank mergers has ranged from a low of 136% (2016) to a high of 175% (2018).

This is just one element of disclosure for public companies. The bigger the transaction, the more details provided. For a stock company being merged, the details matter in that competitors might offer a competing bid if selling shareholders feel the price is too low.

For an acquirer, the impact of a transaction on future performance is an important factor to justify paying premiums over book value.

An Absence of Public Information

In credit unions, there is limited disclosure on the front end of a purchase. There are rarely any projections of future performance. There are undoubtedly reams of financial information required to gain both board and regulatory approval. But this data is not shared.

When deals are secret, no one can learn from the experience. Secrecy can lead to a lack of accountability. The process can be manipulated by interested parties to the transaction or those directly responsible to ensure member assets are not wasted.

Public relations messages dominate the information presented. This or that purchase will increase “service to the community, enhance customer relationships, provide greater expertise and expand growth opportunities” in a new market. But rarely are facts offered to support these generalizations.

Market-Based Transactions?

NCUA Chairman Hood defended credit union purchases of banks describing them as market-based transactions. He is only half right. For credit union members receive neither the financial data that bank shareholders receive when selling, nor the subsequent performance monitoring provided by a daily stock price.

Today credit union bank purchases are unknown events. They may indeed be win-win for all parties. Only one group of “shareholders” receives the information to make that judgment. Shouldn’t credit union shareholders have the same “level playing field?”

Examples of Financial Datapoints in Press Releases of Bank Purchases

Under the terms of the transaction, shareholders of Edon Bancorp will receive $103.50 in cash in exchange for each share of Edon Bancorp common stock for a transaction valued in aggregate at approximately $15.5 million. The consideration represents approximately 135% of Edon Bancorp’s tangible book value per share as of December 31, 2019.

On a pro forma basis, the transaction is expected to be accretive to SB One Bancorp’s 2019 earnings per share by approximately 8% and approximately 1% dilutive to tangible book value per share at closing assuming a transaction close in the fourth quarter of 2018 and 30% in annual cost savings. The earn back of the tangible book value dilution is projected to be less than one year.

CAMBRIDGE BANCORP AND WELLESLEY BANCORP, INC. TO MERGE

The transaction is presently valued at $45.54 per Wellesley common share, or approximately $122 million in the aggregate, based upon Cambridge Bancorp’s 10-day average closing price of $78.53 as of December 4, 2019. On a pro forma basis the transaction is expected to be approximately 4.4% accretive to Cambridge’s 2021 earnings per share and approximately 1.6% dilutive to tangible book value per share with an expected earnback period of approximately 2.2 years.

A MUTUAL BUYS A STOCK BANK

Under the terms of the transaction, shareholders of Damariscotta will receive $27.00 in cash in exchange for each share of Damariscotta common stock for a transaction valued in aggregate at approximately $35 million. The consideration represents approximately 185% of Damariscotta’s tangible book value per share as of September 30, 2019.

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How to Really Open Eyes

One year ago, CUNA began a digital-first marketing campaign on behalf of the credit union system.

The purpose is “overcoming industry myths and raising the profile of credit unions amidst an ever-competitive financial services marketplace. By the end of 2019, Open Your Eyes to a Credit Union® had reached tens of millions of consumers and earned more than 130 million video views.”

The program has spent approximately $50 million and now operates in 19 states. The hope is to double this effort in 2020.

Is This the Best Way to Open Eyes?

Digital marketing is the latest craze in corporate investment. Combining the technology of large databases and the analysis of artificial intelligence programs, it is now possible to target micro segments. These tactics are the financial wellsprings driving the growth of the large digital retail and social platforms. They are the dominant advertising tactics in political campaigns.

But is this multi-million-dollar marketing spend the best way to promote the credit union message?

The Challenge

In 2020, current trends suggest the total number of credit unions will fall below 5,000. The last time that few a number were operating was in 1935. By the following year the numbers had increased to 3,490 state charters and 1,865 FCUs reaching out to a population of 127 million.

While credit unions are larger and serving more members, the industry is harvesting seeds planted generations ago. The last time there were more new federal charters issued than those cancelled was in 1978 (348 new, 298 cancelled). Simply growing existing institutions without new entrants, will only discourage innovative ideas and the passions that startups attract.

Another Option for the Next $50 Million

Here is another option. Today the NCUA requires a minimum capital commitment of $500,000 to $2.5 million to charter a new credit union.

Why not tap into the timeless passion that people have to help their communities and to own and control their own assets by offering to provide the seed capital for 50 new charters this year?

It would be an unprecedented undertaking. Nothing like this has happened since 1986. To accomplish this goal would require an “all hands on deck” approach involving leagues, state and federal regulators, CUSOs, credit union mentors and all other parties who support the credit union system.

The project could begin with a national “call out” for groups, especially in “credit deserts” that want to start their own financial cooperative. Criteria could be established for screening applications based on some of the same requirements for chartering (founders’ experience, community/sponsor commitment). But it could also include expressions of support from leagues, local credit unions, and vendors willing to underwrite their future relationships in the critical launch years.

Why This Effort Would Really Open Eyes

  1. It would show the movement’s continuing support for new groups willing to embrace cooperative solutions.
  2. It would reverse the industry’s collapsing numbers and demonstrate the continued attraction of the credit union business model.
  3. It would reignite the imaginations of persons looking for ways to support their communities, especially in areas now lacking locally owned financial choices.
  4. It would draw upon the most potent of cooperative advantages: collaboration.
  5. It would fire up the entrepreneurial instincts and provide an attractive opportunity for the next generation of credit union leaders.

Instead of industry resources spent defending the status quo or seeking minimalist changes in regulations, this effort would put the powerful attraction of the cooperative model on display for all to see.

This approach would take effort and be riskier than just sending money to Facebook et al. But can you imagine the enthusiasm and cooperative spirit it could create. Fifty new charters in fifty states! Now that’s a campaign everyone could support.

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A Culture of Impunity

A February 10, 2020 Inspector General Report describes personal indiscretions by Michael McKenna, NCUA General Counsel (July 2011 to November 2019) and his Deputy General Counsel Lara Daly-Sims.

The report details strip club visits and drinking while on the job from February 2017 through the beginning of the investigation in November 2019. Several members of the General Counsel legal staff and the Executive Director were also interviewed about the conduct of the two.

While the report is about personal peccadillos, that is not what is significant about this event.

McKenna was Deputy General Counsel in 2004 and became General Counsel in 2011 upon the retirement of Robert Fenner.

As shown in the blog below from Jim Blaine (reprinted with permission) the professional judgment of NCUA’s General Counsel has been a public topic for over five years.

GC Is Not an Independent Position

The General Counsel is a staff position providing interpretations and support for decisions taken by the line staff and the NCUA Board. Jim’s blog below is one example of the Board’s skepticism of McKenna’s counsel. But McKenna did not originate the RBC rule. Senior examination staff and the Board did.

Throughout his career his role was to defend Agency decisions that seemed contrary to common sense and the explicit language of the FCU Act. Actions included rejecting appeals from credit unions and individual members for merger misconduct, denying FOIA appeals, approving Board actions opposed by 95% of credit union commentators and providing legal cover for whatever supervisory actions the agency wanted to take.

His role as General Counsel was to endorse the agency’s conduct regardless of the fact situation. His personal conduct is not acceptable. But the real issue is his professional shortcomings which contributed to a series of agency outcomes that have hurt the credit union system’s reputation, severely damaged its institutional capability, and has cost members billions in misused funds.

McKenna’s personal failings are merely a symptom of an agency unaccountable to any outside authority. One that always places its institutional self-interest ahead of credit union members’ welfare.

McKenna is an example, not the cause, of NCUA’s culture of impunity from top to bottom. If the agency had been a credit union with the public missteps from the last three years or longer, they would have been conserved a long time ago.

Jim Blaine on Credit Unions

Sunday, January 25, 2015

“And What Am I – A Potted Plant !?!”

Chief Legal Eagle

Mr. Michael McKenna is the General Counsel of the NCUA; has been with the Agency for over 25 years; and has held the top legal position for the last few. He is one of the highest paid lawyers in all of Federal government.

Don’t know Mr. McKenna on a personal basis; but would assume from his resume, background, experience, and current position, that he is probably the # 1 U.S. expert on the Federal Credit Union Act (FCUA) and the rules and regulations controlling federal credit union supervision – or should be! 

After all, he has spent a lifetime focused specifically on credit union statutes and rules; has helped draft and craft many of those laws; and is intimately familiar with the logical subtleties and historical compromises underlying their promulgation.

“RBC”(Ringling Bros. Circus)

As you may have noted, there is “a slight disagreement” on the legality of NCUA’s rule-making in the area of risk-based capital (RBC). Who is right concerning the legality of RBC is open to debate, but few will dispute that NCUA, over the last two years, has played the clown on the RBC rule repeatedly – and convincingly!

Three questions come to mind when listening to the legal arguments:

1.) What is Mr. McKenna’s , the #1 U.S. FCUA expert, opinion on the legality of RBC?

2.) Why would Chair Matz feel compelled to pay an outside law firm $150,000 “to do my own due diligence”, when she had Mr. McKenna sitting down the hall?

3.) Given that extraordinary $150,000 outside legal expense, can you determine which of the following. . .

. . .is an expensive, exotic potted plant?

 A) The one on the left.
 B) The one on the right.
 C) Either.
 D) Both.
 F) All of the above.

13 comments:

Anonymous said…

She sought out 11 outside firms! Speaks volumes! McWatters is certainly paying attention and understands the legal and ethical issues.

Jan 25, 2015, 7:57:00 AM

Anonymous said…

Who provided the list to her? The Democratic National Committee?

Jan 25, 2015, 10:15:00 AM

Anonymous said…

Isn’t it rich? Isn’t is queer?
Losing my timing this late in my career
But where are the clowns? Send in the clowns
Well, maybe next year

Jan 25, 2015, 10:20:00 AM

Jim Blaine said…

…should note that you missed the penultimate verse of the Sondheim song;

“But where are the clowns?
Quick, send in the clowns.
Don’t bother, they’re here.”

Jan 25, 2015, 10:31:00 AM

Anonymous said…

Matz has stayed far beyond her shelf life date, expect the stench to continue to grow.

Jan 25, 2015, 10:50:00 AM

Anonymous said…

There is something happening here.
What it is ain’t exactly clear may ass! Ms. Matz is spending credit union member’s money to politically connected law firms! Probably connected to Mr. Matz. Time we demanded real accountability from the head of NCUA. NCUA is uniquely paid for by credit union members. She has a fiduciary responsibility to the credit union membership.

Jan 25, 2015, 11:32:00 AM

Anonymous said…

Does Ms. Matz really believe that wasting a lot of money on a bogus legal opinion makes the incredible credible?

No matter how you slice it, bologna is still bologna!

Jan 25, 2015, 12:30:00 PM

Anonymous said…

McKenna is the General Counsel of NCUA. Generally, speaking it is not within the authority of the NCUA Board to change the FCUA. This is the specific authority of Congress.

If you want a different opinion, you have to pay a lot of someone else’s money to a Specific Counsel for an opinion to specify that the NCUA Board has authority for what they generally do not have under the FCUA.

Jan 25, 2015, 12:48:00 PM

Anonymous said…

So who are the clowns? Is it the NCUA Board? Is it the outside law firm? Is it the credit union industry for condoning this fraudulent waste of money?

Jan 25, 2015, 12:53:00 PM

Jim Blaine said…

Je Suis Les Clowns.

Jan 25, 2015, 1:26:00 PM

Anonymous said…

If the credit union industry allows Ms. Matz, her Lapdog and her Potted Plant to get away with the purloining of Federal Credit Union Act authority, than:

Nous Sommes Les Clowns!

Jan 25, 2015, 2:06:00 PM

Jim Blaine said…

Much better grammar…

Jan 25, 2015, 2:18:00 PM

Geoff Bacino said…

Jim states that he doesn’t know Mike McKenna on a personal basis…but I do. Mike served as my Senior Policy Advisor during my time on the NCUA Board. There are few that have a better understanding of the Federal Credit Union Act than does Mike. Apparently, Chairman Matz chose to seek outside counsel as a way to insulate the agency from appearing to be “too close to the situation.” That this outside counsel did not feel that the agency’s case is ironclad should not reflect on Mike but rather the interpretation of the firm and what might happen if this rule was legally challenged.

Jan 26, 2015, 12:25:00 PM

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Shakespeare on NCUA’s Sale of Members’ Taxi Medallion Loans

In the play Timon of Athens, the central character lives lavishly beyond his means. It shows a society that thinks having money and spending it is proof of one’s moral goodness.

Several observations about human nature appear relevant to NCUA’s action to sell 4,500 members’ future fortunes to the investment fund Marblegate.

From William Shakespeare’s Timon of Athens:

‘Tis not enough to help the feeble up,
But to support him after. . .

Men must learn now with pity to dispense;
For policy sits above conscience. . .

I wonder men dare trust themselves with men. . .

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“Hard of Listening”

My colleague Bucky Sebastian sometimes describes a person as “Hard of Listening.”

This is his play on the words “hard of hearing.”

A person speaks about 225 words per minutes. But the mind can hear over 500 words per minute.

So when “listening” we dual task, shift attention, or think about our reply.

One observer commented: “No one ever listened his way out of a job.”

Whose voice did you miss today?

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Go Go Grandparent- A Community Ride Service Platform

At a church luncheon I learned about Go Go Grandparent, a nationwide platform to provide more convenient access to Lyft/Uber rides for older persons.

The service focuses on serving older persons without cars and who prefer to use the telephone, not an app, to request ride services. The service would be similar to calling a taxi; however, it adds a set of information options so that repeat visits are as easy as pressing 1, 2, or 3 on the phone when prompted.

The cost of the service is 27 cents per minute plus the usual Lyft/Uber fee.

A Community Service Business Model

The reason for presenting this service at this luncheon, attended mostly by seniors, was to replace the ad hoc, erratic demand for ride pickups to church that had been the responsibility of the deacons. The church’s volunteers were not insured and the demand unpredictable.

The Church decided to “outsource” its service. In addition it had received a donation to pay all costs for the first year.

Go Go’s website does not identify attending church as one of the many examples for transportation that non car owning seniors might require. Rather it lists doctors’ visits, shopping and other errands that are part of older persons required away from home visits.

A Partnership Model

The church’s sponsorship and underwriting the first year, the use of existing ride services, the convenience of traditional telephone communications (versus an app) demonstrate how vital partnering is to the success of this startup’s business model.

For it would take much greater capital to sign up persons one at a time in the demographic the business is trying to reach. By creating an information data base of passenger destinations, Go Go helps users manage their own transportation rather than starting all over each time a ride is needed.

Credit Union Implications

Two observations from this example. Is there an equivalent transportation need for a group of your senior members?

Secondly, Go Go is a national platform dependent on local services and organizations to market and complete each ride. Could such a solution be better managed locally? Go Go stores users’ destination data; it inspects drivers’ vehicle for special need passengers, and it claims to interview each driver for sensitivity to older person’s physical limitations.

Should credit unions be fostering these kinds business startups for their communities?

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What’s Special about a Cooperative’s Overdraft Fee?

Most would answer “nothing.” The fee is just another way to grow non-interest revenue.

An article about Alpena Credit Union lowering its overdraft fee again, from $19.52 to $17.50, brought to mind a conversation I recently had with a CEO.

A $35 Fee for “Courtesy” Pay

The discussion was how to explain a $35 fee for clearing a member’s check on an overdrawn account.

This amount would equal a half day’s (four hours) take home pay for a member earning at or near the minimum wage of $10 per hour in their community. The team needs more money to make budget. What choice do we have? The CEO responded, what kind of a co-op do we want to be?

Finding the Right Performance Metric as a Co-op

He further asked whether the strategy was to grow income or member relationships?

The lack of clarity was further confused by the metrics the credit union tracked for acceptable performance. All of the ratios had to do with balance sheet financial outcomes: growth, ROA, expense ratios, productivity goals, etc. In other words, an examiner’s financial checklist.

Members were not the focus of any tactical criteria, except to get more of their business.

He then raised the topic of cooperative metrics. How are we tracking cooperative tactical success? What would these say about who we are and what our business evolution should look like?

His point of view was that to be true to ourselves, credit unions are supposed to enhance member well-being. Absent meaningful metrics, there can be no practical oversight or peer comparisons for what makes cooperatives different. The risk is that members will see credit unions as insincere, just another financial option with a gentler persona.

The right metrics are a choice for every credit union. In this case, is your credit union a $35 or $17.50 co-op? What would your member choose?

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Has Anything Changed?

Almost twenty years ago, Callahans had a program of hiring five new college grads annually for the company’s future growth. There was a two week, full-time orientation to introduce the credit union movement and the company’s history before the new employees began a six month rotation among the firm’s operating units.

In the two-week introduction , we would invite a credit union CEO to speak about why they chose a career in credit unions and their vision for cooperatives.

A frequent guest was Jim Blaine, the now retired CEO of State Employees Credit Union in North Carolina. It was and is the 2nd largest credit union in the country.

Jim is a master story teller. He makes his points with directness. He seeks agreement as he goes along. He wants you to share his beliefs.

The Never Ending Credit Union Challenge

Even with all of his distinctive rhetorical skills, the one assertion that stands out for me from his presentations is:

“In America today, those that have the least, or know the least, pay the most for financial services.”

From this factual foundation, he would then describe his business tactics: the non-conforming variable mortgage with every member paying the same rate, no indirect auto loans, a simple savings account, no paid advertising, etc.

While one might debate the tactics, his observation still stands as a challenge for today’s cooperative executives: what are credit unions doing about this persistent market reality for America’s consumers?

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