Chip Filson
Hi Chip. I recently joined a credit union and received something in the mail I thought I’d share with you.
The following was in a welcome letter:
We want you to know that you are much more than a customer – you now belong to a family of 200,000 members who cooperatively own [credit union’s name]. Ownership gives you an equal voice to elect our Board of Directors…
How many other credit unions encourage this participation?
Three factors must combine to sustain a unique credit union system:
This last characteristic often gets short shrift. Governance is usually thought of in terms of board effectiveness. That is one element. But in my view it is not the most important.
Effective governance must put the member-owner at the center of the process if it is to inspire the other two factors of cooperative uniqueness,
In for-profit firms, the primary performance driver maximizing shareholder wealth. While many institutions may profess a wider mission, market realities sooner or later come back to this singular focus.
In credit unions, the vital role of the member-owner is often relegated to that of a “satisfied customer.” CEOs and boards are wary of member involvement beyond token ratification of the board’s election at the required annual meeting.
Without stimulating member awareness and involvement, the unique cooperative model can quickly run off the rails. Boards become closed shops. Directors serve for decades. Infrequent vacancies are filled with familiar colleagues.
This isolation from the members turns the credit union into an institution where financial performance is the primary success factor. “Mission” becomes a special project or a PR effort.
Examiners reinforce this focus. I have yet to see an exam that assesses cooperative contributions. This does not mean purpose is dead; it just suggests it is uniformed by continuous member engagement.
An immediate way to start engagement is to treat members as interested owners. One way is publishing the quarterly financial outcomes on the web, and distributing them digitally, with a full discussion of what they mean.
After every calendar quarter, there is not a day that goes by without public companies, especially financial firms, announcing quarterly earnings, the reasons therefore, and their outlook . In credit unions, which must file financial call reports quarterly, there is comparatively total silence. Until some reporter seeks out the 5300 report for an article.
I have found one example of this SOP-private-company process in credit unions. When I asked the CEO why he sent a quarterly letter with full financials and commentary he replied:
He wrote: “Member involvement is a real living tactic for us…..to reach for shared strategic hopes is a win-win model for every stakeholder. We see each other, talk to each other, and trust each other.”
This one tactic is an easy first step for every credit union to take. It would begin to broaden the concept of cooperative governance with the constituency that matters the most: the member-owner. Most importantly, it would show “we trust each other.”
The following is an excerpt from Today’s Edition, a newsletter of current events:
While we should be concerned about the health of the Post Office, I do not believe that widespread alarm or panic is justified. Let me explain…
So, let’s start with a clear-eyed look at the challenges facing the Post Office. The Post Office is in trouble. It has been in trouble continuously since 2006. Why? In 2006, Congressional Republicans imposed a special rule on the Post Office. It requires the Post Office to account for its retirement obligations in a way that no other federal agency is required to do. As explained by the Institute for Policy Studies,
In 2006, Congress passed a law that imposed extraordinary costs on the U.S. Postal Service [that] required the USPS to create a $72 billion fund to pay for the cost of its post-retirement health care costs, 75 years into the future. This burden applies to no other federal agency or private corporation.
Nor does it apply to private corporations.
Since 2006, the Post Office has been on life support, beholden to Congress and the Executive for its continued sustainability because of a made-up accounting rule . . .
Government authority creating numbers to flim-flam decisions is not restricted to Congress and the Post Office. NCUA has made a habit of the same practice for over a decade.
I have written about NCUA’s May 2019 conservatorship of Municipal Credit Union in three blogs. One described the reported $123 million loss for the June 2019 quarter. Another analyzed the equally unprecedented and outsized net income of $30 million achieved in the final three months of that year.
NCUA has provided no information about the conservatorship affecting almost 600,000 members in this $3.6 billion credit union. The only data comes from the quarterly call reports.
These highly unusual financial results in conservatorship continue.
The June 30, 2020, call report shows a net income of almost $15 million as compared to the $123 million six-month loss in the prior year. This is certainly positive. More remarkable is the 54% gain in reserves from $104 million to $160 million in the year since June 2019. This is a return on equity of over 50%, an extraordinary outcome, perhaps unprecedented for a coop.
But these unusual financial results are not the results of operations. Rather, like the Post Office, NCUA imposed accounting “adjustments” for liabilities far into the future, in an attempt to justify its conservatorship. And NCUA avoids answering questions after examining the credit union for decades without requiring any such one-time “adjustments.”
Exaggerating problems to justify supervisory edicts does three things. It creates a public case for why regulators are needed, or as one NCUA chair explained: “to get honest numbers.” Secondly, this sudden discovery deflects questions about where the regulators were as the problems developed. Finally, it shifts the spotlight for responsibility by blaming (and sometimes suing) those in place, versus those examining.
Just prior to the conservatorship in March 2019, Municipal reported a well-capitalized net worth of almost 8%. NCUA had to justify taking over a solvent credit union in May and putting in its own management. So far, this action has resulted in 200 job losses, the closure of 7 branches and a reduction of over $150 million in loans outstanding. The allowance account has been funded to 223% of reported delinquencies, 50% higher than the industry average.
Taking a credit union away from its members via conservatorship is the most serious action NCUA can take. Any credit union that reported going from a quarterly loss of $139 million to a quarterly net income of $30 million six months later would be highly suspect.
When government imposes pseudo-accounting write downs to seize control of an institution, both the organization and the government lose credibility.
NCUA has a record of dictating reserves which proved to be significantly in error and contrary to the judgment of experienced managers. This occurred in the five 2010 corporate liquidations, which the agency still defends, using exaggerated estimates of loss as recently as the June 2020 board meeting.
These staff statements continue the practice of unfounded official projections. For example during the NGN funding, NCUA published estimates of the of the total estimated costs to credit unions that have proved to be more than $20 billion in error.
Municipal was not without problems. But the key question is, what did the examiners do or not do to assist the board in their oversight of this $3 billion firm? Also,, what is the plan now to restore the credit union to its member owners? And, why has there been no explanation for the wild swings in financial results?
All crises involve uncertainty. Forecasts are no longer linear extrapolations from a settled environment. Responses must be flexible. Options are vital. Clear thinking is a must.
The issue of subjective estimates of future losses imposed by examiners is especially critical now. In past crises, examiners have dictated individual credit union’s allowance provisions, reducing the credit union’s net worth and compromising its ability to serve members. And then, post recovery, the decisions have been found to be overly zealous.
Regulators are supposed to be where problems are. The track record in Municipal suggests their role has added to the difficulties of the credit union getting back on track. Unaccountable actions, no transparency and no one taking responsibility, is a debilitating, even dangerous, practice.
NCUA’s silence reinforces the impression that they cannot make a public case for their decisions with Municipal. There is no plan. And they hope no one notices the growing impression of regulators not up to the job.
In July, the Library of Congress finished a crowd sourced project to complete the transcription of over 10,000 documents in its collection of Lincoln papers.
Most are letters with complaints, pleas, job requests and military reports. Some are in French, German or Italian. Many are personal such as the desire of a Navy Officer to marry, to which Lincoln responded to the Secretary of the Navy: “please allow him the requisite leave of absence, if the public service can safely endure it.”
One of the most stunning messages for me was a letter from a 65-year old would-be Army volunteer from western New York. He wrote in March 1864:
Father Abraham
I am 65 years old am able to do a fair days work (not the hardest kind of work) day after day am willing to go to the army, or rather into some fort or Garison, where there will be no long marches, was never a good traveler but worker will help you work out our national salvation will go free of any charge to Government except travel and rations Avery Coon is a stout man of about my age will go too to a Fort or Garison he may need the usual pay will be a good hand
We have Faith in God and dry Powder
Truly Yours Daniel Edwards
The question for credit unions: What is the belief and “dry powder” motivating your volunteers?
Few credit unions have completed this voluntary form. NCUA makes repeated requests for more participation. At the July NCUA board meeting one member suggested that credit unions should have an incentive, such as lowering their operating fee. The August 3 NCUA letter to credit unions (20-CU-23) is the latest reminder.
The form is long with five sections. It combines data, qualitative comments and even asks for stories. Check it out here: https://cudiversity.ncua.gov/
Given the wide range of interpretations possible from the information, one can understand the hesitation to complete it, especially if the forms are public.
With heightened concern on implementing truly equal opportunity, this self-assessment could be a useful tool for any organization trying to identify ways to respond. Two suggestions to gather more credit union data;
An example of this approach is the Departments of the Army , Navy and Air Force Distinguished Credit Union of the Year Awards. Four credit unions were honored using each military Department’s selective criteria.
“Later next week we will finalize the [financial] report book and publish. I wanted to send this summary out to you and the team to see the tact and our confidence about the future based on traditional thinking. Our numbers are GREAT! But not for the right reasons.
We are doing the right things. But what are we risking in just doing the right things for now, and not the right things for the coming post-COVID future? COVID is not unprecedented, it’s just another year after year revolving pressing issue. We knock down the pressing issue of the year, every year – chaos is constant, and adjustments are forever needed.
Remember: to see COVID as simply another challenge to success is not dismissing COVID, it simply is recognizing that as cooperative business people, we have the means and the skills to endure and prosper. When you read this financial update, I hope that is what you infer between the lines. Take care, stay safe.”
The Key CEO Question: What are the right things we should be doing now for the post-COVID future?
(A response to What NCUA Nominee Kyle Hauptman can learn from McWatters’ NCUA Tenure)
“I’m sure you are familiar with the story of Passover. At the beginning of the Seder, the children ask the famous 4 questions. It begins with the phrase “Ma Nistanah”. Why is this night different from other nights? Among Jews, family members, we use the phrase as a question: why will this be any different? So if your wife’s mother does the same silly thing again, and you say to your wife “Ma Nishtanah”- you both get it. Sometimes the reference is more serious and that’s unfortunately what I would say about a new NCUA Board Member. Chosen by the same patronage process, using the examples of behavior of the existing board members, and being trained by the same existing staff. “Ma Nishtanah”- why should we expect anything different?”
Friday, July 31 was the final post for Dr. Keith Leggett, who was an economist at the American Bankers Association.
From June 2009 thru last week, he wrote over 11,000 entries. He never joined a credit union. He was an industry skeptic who often highlighted bankers’ concerns with the industry. Most of his columns were reprints of stories or events which he believed justified his disbelief in the cooperative model.
His point of view will be missed. Credit unions value relationships and are reluctant to challenge the errant behaviors of their own. And without critics, a show can get off track so that it becomes too late for the audience to save it.
Last week I read a new blogger’s article about the ongoing fate of the taxi medallion borrowers whose loans NCUA sold to a private hedge fund, Marblegate Asset Management.
The story was written by David Baumann, a reporter for Credit Union Times who had been recently laid off due to COVI . Using his knowledge and contacts in the industry, he started a blog to produce original stories: https://washingtoncudaily.com/
He focuses on events in DC that could affect credit unions. He does his own leg work with interviews and follow ups.
His approach could provide new insights over the next year as the prospect of wholesale political change looms over the country and with it, at Congress and NCUA.
The blog is well designed, latest stories up front, with searchable “topics” of past articles. It’s free. I signed up.
