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Another Tastee Diner Lesson

Readers of this blog may recall the first time I wrote about Bethesda’s oldest, continually operating restaurant. In it I asked the question how this old fashioned restaurant model, serving comfort food, open 24 hours a day could survive in the affluent, high-end dining market now dominating Bethesda. Moreover, the new 27 story international headquarters of Marriott International is going up cheek and jowl on three sides. Why didn’t they just move out? The owner’s answer was simple: “We own the land.”

Normally the diner closes only one day per year, Christmas. But when Maryland went into a state-wide stay-at-home order, the diner closed just as every other retail establishment. Two weeks ago, Maryland entered Phase 2. The diner reopened following the state’s covid guidelines.

I visited Sunday morning to see how they were doing. Was there another lesson for credit unions from this locally owned business landmark?

The Menus: Phase 2, Printed on Paper, Used Once , and Thrown Away

Construction work continues on Marriott’s new headquarters. Eleven stories done, sixteen more to come:

Covid warriors/waitstaff clean every table and benches after each customer. Every other booth is closed. Nothing on tables except napkin holder and sugar packets.

Approximately twelve employees: cooks, wait staff, clean up, owner and cashier. Only four customers at normal peak breakfast time. Covid’s seating capacity is 75 socially distanced.

Tastee Diner’s Challenge is the Country’s

When will guests return? Being open is not sufficient. Customers must feel safe to venture out. That is something Tastee cannot control, but requires consumer confidence in their public officials. Only then can the economy become self-sustaining.

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STOP THE PRESSES: MEMBERS VOTE DOWN MERGER 66% TO 34%

Yesterday the Credit Union Journal broke a unique story. The members of N.W. Iowa CU ($58 million) voted against a merger with Siouxland FCU ($206 million) by an overwhelming margin of over 2 to 1.

Unprecedented Event

Every year, several hundred voluntary mergers of sound, well-run credit unions occur. Under the cooperative democratic structure, these mergers must be approved by a majority of members voting on the request to end the charter.

However, the voting can hardly be described as democratic in any traditional understanding of the term. For the process is akin to a “one party state.” All of the narrative, timing, ballot and ongoing messaging are controlled by the credit union’s board and management, backed by all of its resources and marketing capabilities. There is no “opposition party.” No contrary information or alternatives are ever mentioned.

The majority of ballots are submitted by mail. The “campaign period” is 45 days or less. Anyone opposed has neither resources, time, or expert knowledge to counter the party line. The decision is a simple yes or no vote on the merger. The option to remain independent is not even present on the ballot.

Members overwhelmingly mail in ballots, as requested, approving the board’s recommended action. After all, if members didn’t believe in the board leaders they elected at some point, why would you trust them with your money to begin with?

Since becoming involved with credit unions in 1977, there have been over ten thousand such voluntary mergers. I am unaware of any time that members turned down this board/CEO recommendation to end a credit union charter.

Information Provided to Members

The public information from N.W. Iowa follows this traditional process. The required Notice of Balloting dated April 20, 2020 was sent to the 5,000+ members outlining the reasons for merger.

These included the convenience of five Siouxland branches and “advanced products and services with competitive rates.”

Other details noted the credit union would continue to operate under its own name (as a division of); the current CEO would retire but continue to work as an advisor; employment would be offered to current staff; two directors would join Siouxland’s board; and a charitable account would be set up to receive “at least 51% of earnings” to build engagement with the Iowa community.

The four-page document lists the new main office in South Sioux City, Nebraska, and its five branches.

The required merger related financial disclosures included bonuses for all merged employees plus severance if terminated without cause in the next two years. Four senior loan managers would be entitled to additional benefits totaling over $330,000.

The credit union’s Facebook page (https://www.facebook.com/NWIACU/) still shows the video of the two CEOs promoting the merger as well as an announcement from the chairman: Thank you for being engaged. Your credit union will remain independent.

Why the No Vote?

We don’t yet have information why opposition developed their point of view and how they organized to overwhelmingly reject this merger event.

N.W. Iowa is a very strong credit union. Its growth of shares (8.4%) and loans (7.9%), operating expense ratio (0.53% of revenue) , ROA (0.94%) and delinquency (0.35%) are all better than Siouxland’s March 2020 numbers. By any standard, this charter granted January 1, 1966, is a strong performer.

Was it some information in the notice? A perceived lack of any relevant benefits from the merger? The payment of employee bonuses in a time of economic uncertainty?

Outsiders generally know two things about Iowa: It is the first state to hold a presidential primary every four years, and it grows lots of corn and hogs. The state is middle west conservative with a legacy of rural small towns and farming communities–not the likely source of a populist uprising.

Le Mars, the home of the credit union, is called the Ice Cream Capital of the World. Were residents upset at the loss of a community pillar with its local focus, relationships, reputation and over 50 years of service?

Reemergence of the “Grass Roots”

In this time of crisis, is this event another example of popular protest emerging in other areas of society. The traditional obedience to authority and status quo behavior is being challenged as COVID concerns and economic uncertainty grow. The people want to be heard, not taken for granted. They want the institutions to serve them not the parochial interests and rationales of their leaders.

The no vote was announced on July 1, just in time for Independence Day. Can this be the spark for a revolution to return the focus of credit unions to serving their members? And challenge the unprincipled pursuit of mergers when members need their credit union relationships more than ever?

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Getting the Best Leadership for NCUA: A Case Study

For the last decade the appointments, or repeats, to the NCUA board have been a total surprise to the credit union community. New names, no industry references.

After the fact, we learn the selections arose primarily from their Washington insider connections. Their lack of credit union cooperative understanding and/or management experience is glaring.

With no vision or expressed views on the unique role of credit unions, appointees instead swear an oath to safety and soundness. That mantra is used to justify whatever actions, regulations or policy changes are subsequently proposed.

Appointees lacking credit union experience has not always been the case. Until credit unions reassert their collective interest in NCUA board nominations, these three positions will continue to be consolation prizes for party loyalists seeking a government sinecure.

Appointing the First Federal Regulator

When the Federal Credit Union Act was passed in 1934, the responsibility for creating a new federal system was placed in the Farm Credit Administration (FCA). The concern of Roy Bergengren (a founder with Filene of the credit union system) was that there should be a single integrated movement, not dueling state and federal charter designs.

The Governor of the FCA asked his first assistant, Herbert Emmerich (who had helped draft the federal legislation and coincidentally, was a credit union member) to serve as interim director of the credit union division, until he hired an assistant to devote full time to this new responsibility.

Who did Emmerich ask for leadership recommendations? Roy Bergengren. They had worked together on the final legislation.

Bergengren knew that the new legislation must be implemented by a credit union advocate or end up stillborn. He gave Emmerich seven recommendations. Bergengren was in turn asked to determine each person’s interest.

The “Proper Credit Union Spirit”

Bergengren’s first choice was Claude Orchard, who when approached, said he would accept the $4,600 per year job. He thought Orchard had “the proper credit union spirit.”

In his July 17, 1934, response to Bergengren’s outreach, Orchard wrote: “I hope the “assistant director” will be permitted the chance to get out into the field to actually set up a few key credit unions and have the opportunity to train organizers both paid and volunteer. That would be a fine sort of job for me.” (Moody & Fite, page 167)

Once on the job, Orchard got Emmerich’s permission to actively encourage the founding of both state and federal charters. His main goal — to increase the number of credit unions in the United States — was a spectacular success. One example of his public advocacy is a speech to the New York Credit Union League in 1937 as reported in the New York Times.

Who Was Claude Orchard? Why was he so successful as the first Federal Regulator?

Claude Orchard began working at Armour and Company in Omaha, Nebraska in 1903. He was intimately acquainted with the financial problems of the company’s employees, many of whom were poorly educated blacks and immigrants working for 17-18 cents per hour.

He first heard about credit unions in 1929 from a lawyer sent by Bergengren to help organize credit unions in Nebraska. The two quickly organized the first Armour credit union which so impressed the company that management freed Orchard to travel to other Armour plants to organize more credit unions. By 1933 the number of Armour credit unions had grown to 70.

The Takeaway for Today: Speak Out

Ed Callahan, NCUA chair (1981-1985), frequently observed “people do what they know.”

Experience matters especially for those in positions of senior leadership. It frames relationships, brings life’s hard-earned lessons and shapes the values a leader follows in the job.

Two of the most sought-after outcomes in secular life today are money and power. But cooperative design is based on an inversion of these traditional market driven ambitions.

For credit unions to continue as a unique resource for America will require modern day Claude Orchards. These leaders must define and implement policies to bring renewed purpose to a movement whose regulatory institutions are desperately short of cooperative belief and understanding.

Isn’t it time for credit unions to SPEAK OUT before NCUA board openings are filled — rather than spending years trying to educate board members about the industry they supervise? Or more likely, to be totally dependent on the bureaucracy’s recommendations?

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A Suggested Virtual Annual Meeting on July 8

Last year I invested $100 and became a member-owner of Shared Capital Cooperative. Founded in 1978, it is a Community Development Financial Institution (CDFI) organized as a coop with both individual and cooperative members.

Its purpose is funding cooperative enterprises and housing.

Their annual meeting is July 8th and is open to the public.

Why attend? I believe this example of a financial firm may inspire ideas about how cooperative design can transcend current credit union models. Notice follows:

2020 Annual Member Meeting & Cooperative Forum: July 8, 2 – 3:30 pm CT

Click here to register now to join us virtually on July 8 at 2 pm CT

Shared Capital Cooperative is excited to share our impact over the past year and to feature cooperatives across the country that are innovating and inspiring in their response to COVID-19. The event will include: 

· A brief Business Meeting reporting on our activities and impact;

· Annual Cooperative Forum, featuring cooperatives’ resilience, innovation and inspiration in how they continue to serve their members and their communities during the pandemic. 
For more information please click here.

The event is free, and everyone is welcome to attend.. Click below to register: https://register.gotowebinar.com/register/3140026396343107343

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Ben Franklin: Declaration Signer, Creator of Civic Enterprises and Proponent of Community Values

Benjamin Franklin (born January 17, 1706, Boston, Massachusetts, died April 17, 1790, Philadelphia, Pennsylvania) was a person of extraordinary talent. He made lasting contributions to multiple areas of human endeavor including practicing the cooperative principle of Paying It Forward.

As a signer of the Declaration of Independence, he played a major role in getting the document approved and adopted by the Continental Congress. Perhaps more critical, he served as Ambassador to France from 1777 to 1785. securing France’s financial and military assistance in the Revolutionary War.

His Areas of Intellectual and Social Enterprise

One of 17 children, he went to work at age twelve in a print shop run by his older brothers. He published his insights in Poor Richard’s Almanac, many of which are still recited today: “A penny saved is a penny earned.”

As a tradesman and inventor his ambition, intellectual energy and sociable nature, made him a natural leader of public projects. His lifelong commitment to self-improvement also manifested in his civic initiatives to upgrade living conditions in mid 18th Century Philadelphia.

Beginning in 1727, Franklin and his associates enhanced community life establishing a lending library, hospital, school, fire brigade, insurance company, learned society, and militia. To advance public safety: he supervised the lighting, cleaning, and paving of Philadelphia streets and designed a fireplace that conserved fuel while avoiding house fires.

These civic endeavors were in addition to his work as an inventor (bifocals and Franklin stove), scientist (theorist about electricity), musician and author of timeless insights on human nature and society.

The Cooperative Foundation: Pay It Forward

Much of Franklin’s multifaceted contributions from his discipline and hard work, arise from a value centered life focused on the question, how can I help?

“Pay it forward” is the concept that when someone does something for you, instead of paying that person back directly, you pass the kindness on to another person.

In a letter to Benjamin Webb (April 25, 1784) who’d requested to borrow money, Franklin asked his friend to repay the debt by lending to someone else in need down the road. Instead of receiving repayment, he sought to do a world of good with what little he had to give. 

I do not pretend to give such a deed; I only lend it to you. When you meet with another honest Man in similar Distress, you must pay me by lending this Sum to him; enjoining him to discharge the Debt by a like operation, when he shall be able, and shall meet with another opportunity. I hope it may thus go thro’ many hands, before it meets with a Knave that will stop its Progress. This is a trick of mine for doing a deal of good with a little money.

One outgrowth of his “doing a deal of good with a little money” is today’s cooperative credit union movement. Another enduring legacy from the nation’s founders.

As we celebrate this 244th anniversary of the 4th of July Declaration, Franklin’s reflection on our nation’s governance remains timeless:

The U.S. Constitution doesn’t guarantee happiness, only the pursuit of it. You have to catch up with it yourself.

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Issues Bigger Than Regulator’s Rules

In 1978, Sangamo Electric Company announced the closing of its Springfield, IL manufacturing plant and head office to move to Georgia.

The company had its own credit union. I had been Illinois Credit Union Division Supervisor for one year. My dad had worked at the company in the 1950s, so I felt an interest in the situation. The issue: what should happen now to Sangamo Employees Credit Union?

For me, the answer was simple. The sponsor and all its direct support, plus the members’ jobs, no longer existed. The employer-based “common bond” was gone. Therefore, it no longer complied with the state’s chartering requirements . It should be closed.

That was not the view of my boss, Ed Callahan, the Director of the Department of Financial Institutions. His logic was that with the company’s closing, the members needed their credit union more than ever. Their jobs were gone. The credit union would be more vital to their future than before.

He suggested we find a way to modify the charter so that the members, not the company or the regulator, could determine their credit union’s future. And that is what we did ­.

Regulators and the Current Pandemic

This incident came to mind when a CEO sent me NCUA’s interagency joint announcement: “Examiner Guidance for Assessing Safety and Soundness Considering the Effect of COVID-19 Pandemic on Institutions.”

The purpose of its eleven pages: “to promote consistency and transparency across the agencies, examiners will continue to assign supervisory ratings in accordance with the applicable rating system. . . CAMELS.”

“. . .it is essential that examiners maintain a clear understanding of the financial condition of each institution.” And “. . .examiners will distinguish between problems caused by the institution’s management and those caused by external factors beyond management’s control.”

Why is NCUA Sending this “Guidance”?

The paper appears self-serving, citing circumstances familiar to everyone. It reads more like a warning notice, than “guidance.”

Its bottom line is “we are telling you, be careful.” Is this a prelude to circumventing normal supervisory due process, using the pandemic’s uncertainty as an excuse?

There are three concerns with NCUA’s forwarding this directive to “promote consistency and transparency across agencies.”

  1. Why did NCUA believe this bank-drafted warning message was even appropriate for credit unions?

Credit unions are different from banks in fundamental ways. Their cooperative design, tax exemption, “common wealth” and reserve/capital options are intentionally unlike privately owned firms created to profit shareholders.

Credit unions fulfill a different purpose, one of which is to be an antidote to the shortcomings of for-profit financial options. The CLF and NCUSIF’s designs incorporate these cooperative differences.

  1. At this time every other arm of government including Congress, Treasury, the IRS, SBA and even the FED are crossing all their traditional “red lines.” Why is NCUA joining bank regulators to announce “business as usual” contrary to the activities of every other government entity?
  2. This “examiner guidance” makes no mention of the special credit union role in times of economic distress. Every day credit unions are waiving fees, lowering rates, providing forbearance and other special accommodations for members. These actions reduce a credit union’s “normal camel ratio ” outcomes. That is what coops are supposed to do with their members’ collective savings.

A current example is how 15 Vermont credit unions have provided $385 million in member relief, so far. Isn’t this the special “guidance” NCUA should be highlighting?

Rising Above Rules

While hitching NCUA’s wagon to other regulators may seem to enhance NCUA’s image, it diminishes credit unions’.

Credit unions were well positioned financially entering this crisis. The cooperative regulator is most effective when knowing how to see beyond the letter of the law and support the spirit of the movement. That is the Sangamo lesson Ed Callahan helped me to see.

This instinct to put members first lives in most credit unions. In this time, shouldn’t NCUA’s “examiner guidance” be to promote this essential mission? And even co-develop special programs with the industry to help members recover financially?

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“Democracy Dies In Darkness”

As I listened to NCUA’s streaming Board meeting Thursday, June 25, I was reminded of this phrase on the Washington Post’s masthead : Democracy Dies in Darkness. The paper’s first slogan was aired in a 2017 super bowl ad.

The words convey a basic truth of democratic governance. They point to the powerful role of public information in discussion, analysis and decision-making, especially in regulation.

Listeners heard, as described below, that the agenda had changed with no explanation. Without transparency, actions become suspect. Trust is forfeited. Confidence lost.

An Email of Public Interest in the Meeting

A friend forwarded a copy of a credit union CEO’s email  to the NCUA Board prior to the meeting:

NCUA Board and Staff,

In 1867, Samuel Fay invented the paper clip. Originally Mr. Fay was trying to find a tool to easily attach tickets to fabrics. It worked and evolved its uses with the same foundational design to the tune of 11 billion purchased annually. 

 In 1899, Johan Vaaler tried to reinvent it. A different design to accomplish, in essence, the same goal. He went so far as to claim it better, campaign and erect sculptures in its honor, but the failure of this design was its impracticality. Many paper clip versions can be seen today but Fay’s original design, with the greatest history and track record of performance, leads the industry. Vaaler’s patent expired quietly.

The FDIC, FED and OCC have unanimously ended RBC requirements and all the work related to its calculation. . .From their September 2019 press release: “The leverage framework will greatly simplify regulatory determinations regarding capital adequacy and eliminate the need for qualifying community banking organizations to calculate and report quarterly risk-based capital ratios in their Call Reports.”

This (new leverage framework) capital adequacy standard is the same calculation that the credit union industry has been using for over 100 years and banking regulators have concluded there is no benefit and high cost burden to move to RBC.

I ask you to consider Vaaler’s paper clip and let RBC discussions and concept expire – for good. We have a proven model, like Samuel Fay. Moving away from the RBC discussion will allow NCUA to proceed with a refocused effort toward doing the work of helping credit unions find ways to help our members – especially in these unprecedented and trying times.

Withdrawing RBC from the Agenda

Opening the meeting Chairman Hood announced the RBC topic had been withdrawn. No reason given.

Was it because he did not have a second vote to discuss the issue? Was it concern the topic was insufficiently addressed? Of all the topics on the agenda, none had more immediate or long-lasting impact on the industry.

Credit unions are “in the dark” about Hood’s decision. At the prior monthly board meeting, the directors failed to second to move a topic forward, but then explained why they refused to do so. This time no discussion. Board members avoid presenting their points of view. There is darkness on both process and substance.

Credit unions are left to wonder what their politically appointed leaders are up to. Board members are subject to public confirmation so their expertise and view of their responsibility can be assessed by the Senate. Appointees embody the public interest in credit union oversight.

Board members’ role is to be publicly accountable for agency performance. Their collective silence prevents any assessment of NCUA’s latest thinking on this vital topic. It sidelines industry input and experience.

Most critically it fails to enlist credit union support for their action. Regulations become edicts imposed, not rules cooperatively and democratically generated.

How Freedom Is Lost

NCUA’s abrupt withdrawal of the RBC topic, deals a double blow to democratic governance. The board shirks its public accountability. Credit unions are denied information to make their voice heard. RBC, the most far reaching regulation ever proposed, lies in limbo.

As the industry speculates on this event, the incident shows the fragility of the public process meant to direct and control the administration of regulation. The board works in darkness; the industry has no light, and another democratic check and balance is minimized.

And that is how freedom is lost, one small step at a time.

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Awards and Institutional Culture

Most credit union associations, many credit unions, CUSOs and even some vendors present periodic awards to individuals or credit unions. These honor specific contributions and reinforce values the groups want to celebrate. Internally, awards reinforce the culture an organization is trying to cultivate.

NCUA’s Awards in 1977

My first recollection of industry awards for results was in a 1977 NCUA press release. Details are now vague. But I recall two specific recognitions.

The first was for the agency employee(s) who had helped charter the most new credit unions during the year. The second was for credit unions that achieved the highest amount of savings growth.

Both awards embodied the agency’s view of its mission and results. The contrast with today’s absence of new charters, promotion of mergers and idolatry of net worth is stark.

An Insight from Police Reform

The Denver Police Department’s decade long effort at cultural reform included reviewing its award ceremonies.

Prior to this effort, every year officers were recognized for “justified use of force,” that is deadly shootings in the line of duty.

The new award, honoring efforts to deescalate encounters, was named the “perseveration of life.”

Awards Say Who We Are

Whether the action be a lifetime achievement or a one-year recognition for outstanding results, awards publicize organizational mindsets.

For many years NCUA and state regulators have viewed their primary task as a mortuary for credit unions they supervise. The announcements come on Friday evenings after reporters have gone home of another “justifiable homicide.” IBEW Local Union 712 Closes; West Penn P&P Assumes Loans, Assets, Shares

Might a new recognition change this regulatory mindset? Is now the time for the credit union community to honor the regulator, supervisor or examiner(s) whose present actions best exemplifies cooperative innovation, credit union ideals and most importantly, sustainability?

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