We all take risks in our lives. Shopping, learning, and worshiping are not places where we should fear for our safety.
This weekend, can we reflect about the changes we support to create the society we wish for ourselves and our children?
Today’s NCUA Board Meeting: an Opportunity for Insight into the NCUSIF
With only one agenda item, the NCUSIF’s March quarterly update, today’s NCUA board meeting presents an in-depth learning opportunity about the fund’s management.
With almost $22 billion in assets, the NCUSIF is the largest investment under NCUA’s control.
Because NCUA publishes monthly updates on its three major funds, credit unions are able to monitor how their members’ funds are being used.
The public board discussion is a vital part of this process for credit unions and board oversight.
What I Am Listening For
- There is much confusion caused by the NCUSIF’s use of Federal GAAP versus private GAAP accounting, the standard credit unions must follow. The Federal accounting terms, presentation and practice are different from private GAAP.
This is because Federal GAAP was intended for use by entities which rely on government appropriations.
Some examples. Cumulative results of operations: Following SFFAS No 7 the NCUSIF recognizes interest on investments as “non-exchange revenue” which in turn means unrealized holding gains and losses are reported as part of revenue.
In contrast, credit union “available for sale” securities are reported at book value with unrealized gains or losses recorded in a valuation account, not as an income or expense. This account is not included when computing the net worth ratio.
Credit unions report retained earnings. Federal accounting has no comparable account. This and other differences mean that NCUA staff transform NCUSIF Federal presentation into a private format, but then do not follow private accounting practice.
For example the 1% deposit true up (or refund) is treated as revenue in the NCUSIF; however credit unions record this adjustment as an investment asset on their books.
Will this confusion be addressed? How will this affect the calculation of the 1% true up when presenting the NOL ratio for the fund? Private GAAP recognizes the true up as a receivable or payable on the insurer’s books when the insured risk is reported triggering the required deposit adjustments.
- How has the NCUSIF investment committee responded to the rising interest rate environment? The market value of the NCUSIF’s investments may have fallen by as much as $1.5 billion from the peak in 2021. What changes have been made in response? How will the below market income stream from the fixed rate, lower earning. long-term bonds, affect the income of the fund and projections of the NOL in 2022?
- Credit union’s first quarter results have been summarized in Callahan’s Trendwatch. How does the first quarter’s 9.3% actual share growth compare with NCUA’s projections for the year? What impact, if any, will the rise in interest rates have on CAMELS ratings?
- What changes in NCUSIF investment policy and accounting presentation/practice is staff proposing? Or will be requested by the board?
Over the past 16 months, I have written several blogs about NCUSIF investing and accounting anomalies. Here are selected observations and additional background for the questions that may be raised in today’s meeting:
- https://chipfilson.com/2022/03/inflation-interest-rates-and-managing-the-ncusifs-21-billion-investment-portfolio/
- https://chipfilson.com/2022/01/managing-the-ncusif-is-it-too-late-to-act/
- https://chipfilson.com/2021/12/a-better-way-ncusif-losses-and-revenue-management/ (final article of three part analysis)
- https://chipfilson.com/2021/11/ncusif-investment-decisions-are-hurting-credit-unions/
- https://chipfilson.com/2021/04/fridays-ncusif-fact/
- https://chipfilson.com/2020/12/what-is-ncusifs-irr-investment-policy-is-this-a-gap-in-ncua-board-oversight/
I’ll follow up next week on the board’s dialogue. Hopefully this will be a fresh start for improving the fund’s financial practices.
Red Hot Inflation & A Perspective on Previous Fed Approaches
The Federal Reserve’s dual mandate of managing monetary policy to sustain full employment and price stability is now focused on just one objective: reducing the 8% current inflation to the 2-3% range.
It intends to do this by reducing demand at all levels. The primary means is by raising short term rates to discourage borrowing and reduce existing demand.
What level of rates will be necessary is unknown, as well as how long the process will take. Also uncertain is whether the result will be a gradual slowing of the economy or end in recession.
CNBC reporter Kelly Evan’s May 19th column provides an historical perspective of previous Fed efforts to stop inflation. These prior results are mixed.
In her full column below she ends by stating what she believes will be Chairman Powell’s approach. Her analysis is a useful summary as pundits will offer critiques at each stage of what will probably be a year long effort.
| Kudos to former Fed chair Ben Bernanke for writing a perfectly timed book on the Fed’s battles with inflation in the 1960s and ’70s. If the book has a rather dry title (21st Century Monetary Policy), that’s because Bernanke sees it as picking up the narrative where his heroes, Friedman and Schwarz, left off in their 1963 classic that inspired his career and explained the Fed’s missteps during the Great Depression, A Monetary History of the United States.
Bernanke, in other words, aims to provide a definitive account of how the Fed “got it wrong” in the Great Inflation that saw consumer prices rising more than 7% on average annually between 1965 and 1981, peaking at nearly 13% by the end of the period before Fed Chair Volcker finally wrested inflation back under control. His retelling contains so many similarities to today that it certainly ought to give anyone pause who thinks the current inflation will simply go away on its own. There were basically only two Fed chairs in the entire period spanning the Great Inflation: William McChesney Martin, from 1951 to 1970, and Arthur Burns, from 1970 to 1978. Martin comes off better in Bernanke’s retelling; he at least conceptually ran the Fed as a countercyclical institution, coining the phrase that the Fed should have “the punch bowl removed just when the party [is] really warming up.” He also emphasized the importance of keeping inflation at bay, noting “price stability is essential to sustainable growth.” And for much of Martin’s tenure, inflation was dormant. The CPI rose only 1.3% or so on average in the decade up to 1965. But “that began to change around 1966, when consumer prices rose a surprising 3.5%,” as Bernanke writes. What caused the sudden change? President Johnson had passed a key tax cut in 1964, the same year he announced the War on Poverty, which culminated with the introduction of Medicare and Medicaid in 1965. The unemployment rate dropped–in fact below what was sustainable without stoking inflation. In December 1965, Martin was able “to take a very public pre-emptive action against inflation,” Bernanke writes, “by announcing a half-percentage-point [rate hike].” But President Johnson was furious, and so began a series of back-and-forths that for the next several years saw the Fed start and stop tightening several times as it tried to coordinate with fiscal policy so as not to overly constrain the U.S. economy. The halting approach resulted in an inflation rate of almost 6% by 1969. “I’ve been a failure,” Martin told his colleagues as he left office. It’s important here to note, amid our current scare, that the U.S. economy fell into recession in 1970 after Martin’s tightening the year before–but it didn’t stop inflation. The CPI still rose 5.6% that year. There were actually two recessions in the 1970s–including a longer, deeper one starting in 1974–but they didn’t keep inflation from rising throughout the decade. Even under Martin’s successor, Arthur Burns, who ran even looser monetary policy, the Fed didn’t enjoy the supposed tradeoff of a stronger economy as a result; it wound up with “stagflation” instead. Burns was a gifted economic forecaster, which would seem like the perfect credential for a Fed chair. But philosophically, he worried that monetary policy was an overly broad tool to fight inflation with. He responded to the 1970 recession by slashing rates from 9% to 5% by 1972. More importantly, he agreed with the consensus at the time that “the U.S. had become more disposed to inflation for reasons unrelated to monetary policy,” like “the growing ability of large corporations and labor unions to insulate themselves from market forces,” pushing up prices and wages supposedly at will. In other words, he believed in the “cost-push” versus “demand-pull” theory of inflation, so he thought monetary policy was the wrong tool to fight it with. In fact, as Bernanke writes, it’s “unlikely” President Nixon would have imposed his notorious wage and price controls in the early 1970s without Burns’s support. Then, like now, there were also oil price shocks that further confused the situation. To Burns, they proved that “inflation was largely caused by non-monetary factors.” His Fed hiked in response to surging oil prices in 1973, then reversed when the recession hit. Meantime, the political mood still emphasized the priority of achieving full employment, passing the Fed’s “dual mandate” amendment in 1977 and the “Humphrey-Hawkins Act” in 1978 that specifically said the unemployment rate for people 20 and older shouldn’t exceed 3%. All told, unlike Martin and unlike his successor, Paul Volcker, Burns “did not believe that inflation was caused primarily by monetary forces, and consequently, he saw tight monetary policy as an indirect, costly, and largely ineffective tool for controlling inflation.” Burns later admitted that the Fed could have restrained inflation by restricting the growth of the money supply, but that would have created “strains” in the markets and economy that the public wouldn’t tolerate. He gave a speech titled “The Anguish of Central Banking” after he left the Fed, to try and explain himself. Bernanke makes it obvious that Fed chairs who dismissed inflation as a “non-monetary” phenomenon, or who only haltingly tackled the problem, were mistaken. Volcker, by contrast, came in after Burns with a “shock-and-awe” monetary policy that did choke off inflation; and even after the deep recession it caused in the early 1980s, the economy recovered so strongly that by 1984 President Reagan would be reelected with the largest majority ever. Volcker wasn’t concerned with “soft landings”; he made it clear to the public that his only goal was to bring inflation down. Fed Chair Powell himself made clear to lawmakers in February that he believes Volcker was “the greatest economic public servant of the era,” and that he is personally committed to protecting price stability. But this is the real test now, with markets spiraling downward and growth looking shaky. If Powell backs down without fully conquering inflation, future historians may not treat him kindly.
|
Technology versus Slow Checkouts
America loves innovation. Especially in technology. We celebrate, honor, and enrich those entrepreneurs who bring efficiency and ease to our life and work with their inventions.
Technology underwrites greater productivity, reach and speed in credit union services. It enables 24 by 7 interactions. Manual processes from loan underwriting and live teller interactions are replaced by AI decisioning and intelligent teller machines (ITM’s).
Even phone responses and “live” chat are now automated to the point where one must opt out to “speak” with a real person.
What society prizes, is what the people will create. One writer contrasts our modern view of success with the culture in ancient Greece.
The ancient Greeks gauged progress differently from us. “What is honored in a country will be cultivated there,” Plato said. The Greeks, imperfect as they were, honored beauty and justice and moral excellence, and so they cultivated these values. We honor speed and connectivity and portability, and so that is what we get.
The author asserts our current focus leads to: “cognitive dissonance from our misplaced faith in technology, and an attendant disregard for other forms of human progress.”
The Introduction of “Slow”
I was reminded of this contrast between ancient and modern values after reading about a new approach in retail services in Europe, called Slow Checkout.
Jon Horvat describes this approach in retail and service industries: With so much buying happening online or through self-service kiosks, the art of shopping has lost much of its attraction. Some market-savvy executives have noticed this shortcoming and have recently introduced slow checkouts, which turn the routine chore into a meaningful experience.
Many retail experiences, that is personal shopping, are no longer personal. Human contact, especially the kind of interactions characterized by local farmer’s markets have been eliminated in the race for self-service and cashless checkout innovations.
The pressure to automate customer interactions will only accelerate as labor shortages occur in many retail service sectors.
Executives at several retail grocery chains in Europe noticed something was missing in their retail experiences. Some customers wanted human interaction. Jumbo a Dutch supermarket chain and Carrefour, the French grocery leader, both introduced “slow checkout” lanes after discovering that people wanted to chat when then paid for their groceries.
Harvat describes this approach as follows:
These small-talk cashier lanes are gaining popularity. They are called “chitchat” checkouts. The French name, blablabla caisses, is a bit more expressive.
About 150 of Carrefour’s French stores have opened blablabla caisses, with plans to have at least one till in every location by the end of March. The lanes are marked for only those who want to talk with cashiers. There are no time limits for the customer, although most try to respect those waiting in line. The lanes come at no extra cost to the consumer.
Shoppers are encouraged to take their time on the slow checkouts; cashiers greet with bonjour and can ask about the family or the weather. No managers will be around to speed the process up. The aim is to slow it down.
Both customers and cashiers report greater satisfaction in their roles where interaction is encouraged. Shopping is a social experience, not just a purchase transaction. Small talk is an important experience for people living alone or feeling lonely. Cashiers enjoy the opportunity to communicate with people, giving them a sense of expanded agency in their interactive role.
Credit unions have traditionally been an area where these interactions have been a valued part of the member experience. Members get tired of talking to machines or referred to online applications or processes. They want to talk with real people.
People are social creatures. These chit-chat interactions show that economics, the best rate or the fast turnaround, is not the only, or even the most important, human need in every circumstance.
Every person has needs that surpass material economic sustenance. Humankind does not live by bread alone.
The Boutique Credit Union
One person who has recognized this critical capacity for human interaction is Bo McDonald. He is a credit union consultant who has focused on the unique capabilities and experiences provided by smaller credit unions. While some may see credit unions with assets of under $100 million or below the credit union average size as a disadvantage, he sees these as “boutique businesses.”
When inspired by passion they provide member experiences long lost in some billion dollar institutions. Ultimately every credit union is founded on relationships, even if the only measures traditionally used are the number or size of transactions.
These boutiques may not have the growth patterns of their larger brethren; but they demonstrate the enduring power of cooperative design. For when we look under the technology covers increasingly deployed by credit unions, we learn that what members really value is someone to talk to when they have a need.
Boutique credit unions demonstrate that real progress can also be achieved by slowing down and giving members your undivided attention.
.
Cooperatives and Awakening the “Sleeping Giant”
Three recent observations:
- While reviewing an exam for a billion-dollar credit union of 25 pages, nowhere was the word cooperative used. There were no comments on any of the credit union’s responses to members during COVID, their PPE loans and multiple community involvements including expanded DEI. If the name were removed from the exam, it would be impossible to know it was a credit union, not a bank.
- Two readers commented on REI’s values approach to its “brand:”
“While I am a fan of REI, I would like to mention (and this is probably not a surprise to you) that they too have a tendency towards oligarchic governance you have talked about in the context of credit unions. If I recall correctly, to be eligible for a candidacy in board elections you have to have leadership experience in a Fortune 500 company.
“We desperately need legislation that ensures fair electoral practices in co-ops. Glad you are advocating for this in credit unions. REI is a great company and credit unions are great – but they also need some tough love. “ (Leo Sammallahti)
“I’m sure REI is admirable in its promotion of important values. However, the current unionizing effort does not seem to put REI in a good light.
“My own experience in a nonprofit progressive worker-rights advocacy organization (prior to joining the credit union movement) was that the management vigorously fought our efforts to unionize. It’s not an uncommon story among “liberal” organizations. Our effort was ultimately successful, but it taught me a lingering lesson about progressive hypocrisy. The co-op world is not exempt.” (Cliff Rosenthal)
- Here is a small sample of the number of job openings from Sunday’s CU Insight:
- 77 positions at Lake Michigan Credit Union
- 65 or 5.4 percent of NCUA’s authorized staff of 1,201. Fifteen were at Head Office and 50 in the regions (from NCUA Operating Fund report)
- 40 positions at Michigan State University FCU
- 37 positions at True Sky Credit Union
What do these Observations Mean?
Is our cooperative model struggling? Is our business merely subject to the same economic forces affecting every other firm? Are credit unions even addressing the multiple challenges of inequality existing in every community?
In some respects the cooperative model is not working well. On the surface we increasingly appear as just another financial option. In many cases, let’s be frank, credit unions are not much different from many other financial choices in their behavior and impact on their communities.
Instead of transforming financial opportunity, credit unions increasingly embrace the tactics of their competition including purchasing banks, mergers (sell outs) of sound long- serving coops, and measuring performance by strictly financial and growth goals.
Recapturing our Promise
Occasionally a story appears in the press about a find in a flea market or an opportunity shop. A person discovers an antique looking Roman bust selling for $34.99 in a Goodwill store. She later learns it is 2,000 years old and priceless.
Sometimes in life we do not understand the value of what we have.
But every credit union, not matter its size, has a founding story and purpose. Every board inherited a legacy of power, fortitude and energy to make life better for members.
But does senior management and the board know what they have? That is, an institution with the power to override the ever present push and pull of market forces of greed, domination and even exploitation?
The credit union charter is intended to enrich its members versus building institutional glory. Every charter comes with that hope and potential.
So what is lacking today for why this transformative promise seems to be missing?
In One Word: Imagination
One of the examples of creative capability was Ed Callahan’s way of presenting the potential for the credit union movement, both as Chairman of NCUA and as CEO at Patelco Credit Union.
He believed the credit unions were “a sleeping giant,” or America’s “best kept secret.” They should be an option for all Americans. Whether retired, between jobs or even for college and high school students. The field of membership was an inclusive, not an exclusive concept.
In practice he did not let current reality limit what the future could be. The NCUA exam cycle was over two years for federal charters when he arrived. He held a “fire drill” that resulted in every federal credit union filing, for the first time ever, the yearend call report. Working with regional directors, every federal credit union had an exam contact in 1982, and each year thereafter.
To celebrate the 50th anniversary of the passage of the Federal Credit Union Act, he announced a movement goal of 50 million members by 1984. He inspired the largest credit union conference attendance ever in December of that year when state and federal examiners and credit union leaders came together in Las Vegas to debate their future.
Working with credit unions, the NCUA’s share insurance fund and CLF were redesigned following cooperative principles to create a three-part regulatory framework for the cooperative system.
These transformative events were inspired by the promise of what credit unions could be. He recognized that in the new era of deregulation not all would perform with the same capability. But working together, the system could position every credit union to be a competitive and valued experience for members.
Imagination was fueled by belief in what the pioneers had envisioned. While the three current observations above may seem like challenges, they are opportunities to create a better coop system.
Let’s be honest. Credit unions have always been understood, even trusted, as more than another financial choice. They represent a member-centric focus dedicated to improving members’ lives and community options.
They are more than a financial institution. Credit unions at their best represent the common hopes of young and old for a better life and a meaningful role in their chosen community.
The tools for transformative change have been a part of the cooperative model from the beginning. What is needed is imagination tempered with vision and compassion.
Then indeed, the “sleeping giant” will be truly awakened.
How a Co-op Tells its Value to members
|
How a Co-op communicates its difference to the member-owners. Sent by a reader and REI advocate. It’s about values, not product, price or convenience.
Credit Unions and Democratic Practice
Credit unions are strong proponents of democratic values. Until they have to practice them.
I was reminded of this reluctance in a press story of a recent merger approval. When asked about the vote tally, the credit union did not answer how many of its 9,870 members supported their charter cancellation:
Members of the $137 million Embark Federal Credit Union in Great Falls, Mont., voted to approve a merger with the $1.7 billion Horizon Credit Union, the Spokane Valley, Wash.-based financial cooperative said in a prepared statement Tuesday.
Horizon did not disclose the final vote tally. The credit union did not respond by deadline on Tuesday afternoon to CU Times‘ request for the member vote count.
Reporting the vote outcome, but not the actual numbers, suggests the credit union does not want the totals known. The credit union provides the veneer of democracy but not the facts of how many member-owners actually participated in this required step to give up their charter.
To paraphrase a term from writer Jared Brock, credit unions have become “cooperative oligarchies.” The word comes from the Greek oligarkhía, meaning “rule by the few.”
Merriam-Webster ‘s definition: “a government in which a small group exercises control especially for corrupt and selfish purposes.”
Democracy has rarely been tried by capitalists. Can credit unions really go against the incessant drive for corporate dominance and consolidation of power sought by firms in “free” market economies?
Many CEO’s and credit union boards don’t want democratic governance. They want silent customers who will passively accept the leaders who achieved their roles years, or sometimes decades, earlier.
What they ignore is that members are the political constituency to whom fidelity is owed. Boards and CEO’s are nothing without members. Members deposit the funds, borrow for loans, pay the fees and generate transactions that keep the credit union revenue flowing.
Member-owners are the reason credit unions exist.
Members keep the lights on.
Members create 100% of the wealth for their cooperative.
One would think it required practice to tell members the vote tally in this management initiated effort to give up their independent credit union charter. Especially as the CEO was awarded a $100,000 bonus and continued employment at an increased salary with the continuing credit union.
Horizon Credit Union assumes Embarks FCU’s member capital of $14 million, (approximately $1,500 per member). The members get rhetorical promises about the future.
Is this the democratic model that will sustain members’ belief in credit unions?
Learning from Past Mergers to Design a Stronger Coop Future
Since the NCUA updated its rule for mergers in 2017, almost 1,000 voluntary mergers have been completed. In the first quarter of 2022, 41 mergers involving 366,000 members and $5.5 billion in assets were announced.
These were overwhelming strong, long-serving successful credit unions whose boards and CEO’s decided to turn their loyal members’ futures over to another firm.
The 2017 rule was intended to correct self-dealing transactions that were prompted by payouts to senior managers and staff to incent sound credit unions to give up their charters.
The rule required disclosure of all compensation related benefits that would not have occurred if the merger had not taken place. The result has been some, but not all disclosures of promised payments.
The rule has not prevented enrichment, but ironically validated them. The amounts and creativity of merged CEO payouts are growing. Financial Center CU’s CEO and Chair transferred $10 million of the credit union’s capital to their private firm incorporated just prior to merger.-all with NCUA pre-approval. In the merger of Xceed CU the CEO negotiated a $1.0 million dollar merger bonus while promising members to look after their interest as President of Kinecta FCU for three years-only to leave within six months.
The CEO of Global negotiated a “change of control” clause in his contract that will pay him $875,000 upon merger with Alaska USA. Change of control is used in stock corporations for managers who might lose their positions in a sale of the firm. In this case the CEO negotiates the employment clause, seeks out a merger, retains employment post merger as President, Pacific and International Markets, and pockets the money for the deal whose terms he set up.
The Banking Industry Is Looking at Merger Practices
In a May 9, 2022 speech at Brookings, the Comptroller of the Currency announced a review of bank merger approvals:
From my perspective, the frameworks for analyzing bank mergers need updating. Without enhancements, there is an increased risk of approving mergers that diminish competition, hurt communities, or present systemic risks.
Bank mergers should serve communities, support financial stability and industry resilience, enhance competition, and enable diversity and dynamism of the banking industry. Revisions to the bank merger framework would help to realize this goal.
NCUA’s rule 2017 merger rule was off target. It did disclose self-enrichment, incentives which were common place. But it did not prohibit them.. The rule entirely missed the Agency’s primary job which to protect members’ interests.
The evidence before and since the rule indicates that managers and boards act without consulting members, negotiate terms privately, and then present the events as final only needing the members’ perfunctory ratification.
Formal member approval is a foregone conclusion. All of the resources, information and control was in the hands of those who set up the deal. Members are unable to challenge let alone question the actions.
As members are shut out of the process, the concept of member owned financial institutions becomes a fiction. Boards and management control the fate of a charter, its resources and relationships. Members’ interests, loyalty and accumulated wealth are just pawns in management’s efforts to enhance their well-being.
As demonstrated yesterday, the majority of mergers are sound, long-serving and certainly capable of operating on their own.
How does one bring balance, objectivity and most importantly, member interests, to the fore in this increasingly wild west of uninhibited sellouts of cooperatives.
One writer, Denise Wymore, has urged a greater commitment to purpose by credit union leaders.
Decisions, not conditions, determine your credit union’s future.
Do we look for the why behind a tough situation or do we just complain about it? Increased regulation, cost of technology, economies of scale, expanded products and services, lack of succession planning. Struggling to achieve a goal is normal and natural. Is it possible to work together to address the challenges facing “at risk” credit unions?
You have to find meaning, a purpose, something bigger than yourself. Reflect and think about your credit union’s purpose, passion, meaning…
The Comptroller outlined enhanced regulatory reviews such as:
“Community feedback on the impact of a proposed merger also is important. . . .For example, for mergers involving larger banks, , the OCC is considering adopting a presumption in favor of holding public meetings.” and,
“The OCC takes into account an acquiring bank’s CRA rating and performance. Banks with unsatisfactory CRA ratings are highly unlikely to receive merger approval.” and,
Financial Stability in “too-big-to-manage is a risk with mergers, especially for banks engaged in serial acquisitions.”
Whether NCUA can reassess its role in mergers is questionable. Unless political pressure from the Congress is exerted, NCUA seems oblivious to the reputational and safety and soundness implications of the wheeling and dealing now occurring, and the harm done to the communities who are losing their local institutions.
Putting Market Forces Back In transactions
I believe two changes in merger policy are required. The first is make members’ interest the paramount criteria in any proposed charter cancellation via merger. Secondly members should have the benefit of market forces to inform their decision.
Market choice would entail that all credit unions who decide to explore mergers would announce that intent publicly, invite all parties to express interest (both credit unions and non-credit unions) and then select the option the board believes meets the test of members’ best interest. The full process would then be presented to the members for their approval or turn down.
The options for future employment, products and services, return of member capital would all be part of the public record and members would have the information needed to make an informed choice. If a firm that is not selected wants to make a better offer, it would be able to do so and ask the members to turn down the board’s recommendation.
Putting Members Back in Charge
This change would place members in charge of the future of their credit union; not management and its personal preferences for future employment.
Mergers when sought should be a means to the end of enhancing member options and value. Today mergers alone have become the goal. They are about self-dealing, power and control by a few. It is time that members are given the choice about who they want in charge of their shares and loans.
The First Quarter Score: 41 to 0: Who Is Winning This Game?
This score is not the opening of an NBA playoff game. It is the number of credit union charters given up versus new charters issued in the first three months of 2022.
What does the score mean? Why is it so lopsided? More importantly, are any members winning in these charter closures?
365,700 Members Lose their Credit Union
The 41 credit unions’ CEO’s and boards are transferring their 365,700 members to another credit union’s control. These members did not choose this fate. In fact they showed continued loyalty: total members increased by 2% and share grew by almost 11% for the year ended 2021.
These members have $3.3 billion in loans and have placed over $4.7 billion in savings to benefit their fellow members. Collectively they have created over $540 million in common wealth, none of which will be distributed to them. Their average ownership is $1,500 each.
There is no information that any of the members were consulted before the boards and CEO’s made these decisions.
Check the Box Explanations
The Credit Union Times article categorized the 41 by the explanation NCUA provided when approving the mergers as follows:
“34 credit unions that received the NCUA’s nod to consolidate for expanded services, two credit unions got the OK to merge because of poor financial condition, two for inability to obtain officials, two for lack of sponsor support, and one for loss or decline of field of membership.”
The continued growth in shares, membership and most importantly, the 47% increase in loan originations in 2021 suggest this group was more than competitive based on the latest performance data. They ended the year with 9.9% net worth, delinquency of .55% and a collective ROA of 1.25%.
These 41 credit unions are sound performers which the members are loyally supporting.
The Largest Three
The three largest charter cancellations are the $2.5 billion Capital Communications FCU, the $612 million Global CU and $524 million People’s Trust FCU. What they have in common is they are turning over the keys to their operations to credit unions already operating in their communities.
This means these six-decades old institutions are combining with other local credit union competitors. The effect will be to reduce member choice, end opportunities for local leadership, close career options for employees, and extinguish the generations of earned loyalty and goodwill with members and local constituencies.
These credit union’s hundreds of millions of collective capital will be under the control of directors the members did not elect and who will have broader corporate goals then just serving the newly acquired members and their transferred wealth.
These combinations eliminate local options and the diversity of models and service approaches that make credit unions successful. Consolidation and concentration which reduces local competition may make life easier for managers. It does not enhance member choice.
The most important math in credit union mergers is the 1 + 1 = 1. There is no expansion of credit union coverage; the system did not grow market share; the members gained no immediate benefits. But they will pay all the costs of merger including the cancelations of vendor contracts, employee benefits, and of course the help of professions who facilitate the deal making.
A Game without Rules or Umpires
Mergers of sound, well run credit unions are not benefitting members. Rather they have become a sop for managers to game the system for self-benefit and boards who have lost any sense of fiduciary responsibility.
Writer-commentator Scott Galloway has characterized the motivations for mergers as:
Competition depends on rules, and rules depend on umpires. We should fight to protect competition — not winners. Because winners subvert the process. In the name of competition, they demand that their anticompetitive acts go unpunished. In the name of freedom, they insist on their right to shout down the dissenter’s voice.
His thesis is simple in capitalist economies: No field sees winners try to retract the ladder behind them more aggressively than business or I might add, the CEO’s of sound merging credit unions.
The primary advantage of the credit union model is the member relationship grounded in democratic ownership. Their unique advantage is their local knowledge and relationships that provide members a sense of agency over their lives and communities.
That goodwill, built up year by year over generations of members. is sacrificed in mergers.
NCUA requires new charters to survey potential members to demonstrate support, years of financial projections, vetting of proposed board members and employees with a process that takes hundreds of pages of documents and generally years to approve.
To give up a successful coop charter which took generations to succeed, is literally approved in weeks. The form is perfunctory, there is no effort to validate the reasons given nor the rhetorical promises made.
The credit union system is failing the members who created it by routinely approving consolidations that mimic the activities of institutions for which credit unions were supposed to be an alternative.
At a time when individuals and communities are confronted by forces, events, private and governmental institutions over which they have no say, the credit union is supposed to be an option they can count on. Mergers destroy this sense of influence over events in one’s life.
The score this quarter is 41 to 0. At the moment, the members are losing this game.
Tomorrow I will provide some thoughts of others on what might be done.
California Dreamin
Just spent four days in California at my granddaughter’s graduation from Claremont McKenna College (CMC). Some observations from the trip.
- The governor announced that California will have the largest budget surplus of any state ever. Over $100 billion.
- Air and water now cost $2 minimum
- Debit versus credit. You decide. You pay the exchange fee now for card points!
- The Search for Employees by recruiting customers. In addition to the signs outside firms such as Wendy’s Now Hiring, there are numerous efforts to reach out to a firm’s customers.
On the TV screen on my flight was the headline, Captain Your Career. It was an invitation to train to become a pilot for United Airlines. The website https://unitedaviate.com/ explains that: We intend to hire more than 10,000 pilots in the next decade and have the largest fleet of wide body aircraft in North America, offering you exciting opportunities to advance.
And on my fast food receipt:
- The next generation’s college thesis topics. Each graduate of CMC writes a senior thesis. Here are some of the titles:
Which consumers are driving electronic vehicles; An analysis between EV adoption and individual characteristics.
Does H1-B Visa restrictions hinder American innovation?
Moral Hazard in Monetary Policy: Assessing the Impact of Federal Reserve actions on asset returns during the COVID-19 Pandemic.
The impact of merger and acquisition on the United States Video Game industry.
Potential for electoral success and the future of the Republican party.
The effects of CFO gender on earnings quality and financial risk.
And so forth for over 300 submissions. Makes one feel behind the learning curve. One topic I thought might have relevance for credit unions and their regulator: A Paradoxical relationship: US Government authority and the American people.
- A green Uber option. A Tesla, EV option to reduce pollution is offered. The driver said he leased the Tesla for a week at a time for around $330 under a special Hertz-Tesla agreement. Applicants go online. When he showed up there were at least 30 other drivers waiting to pick up cars under the plan. One way to recruit more drivers (provide the auto) and create a positive public image.
- The reason for traveling-Mom and graduate.
