First Tech Federal Credit Union's Annual Meeting (2022)

First Tech Federal Credit Union (FTFCU) held its annual meeting April 19, 2022 in San Jose, California. Dotty Hayes presided, and I was immediately captivated. It's not only that Hayes looks like she could be Warren Buffett's sister--her entire demeanor reminded me of Midwestern cornfields and an honest day's work. Imagine a postcard sent from the heartland, bits of soil attached--that's Hayes in a nutshell, notwithstanding her Massachusetts' education. Though most banking executives couldn't utter the words "Openness, Transparency, Integrity, [and] Accountability" with a straight face, Hayes says them without irony, making you believe such values are still possible in America. When asked about professional challenges, Hayes said she contemplates questions we "should be asking that we haven't thought about," i.e., "what are we not thinking about?" FTFCU's selection of her as Chairperson (we may ignore the website's outdated title of "Chairman") is a credit to the union's organizational intelligence. 

FTFCU President Greg Mitchell followed Hayes. Mitchell's touched-up photos don't give you the essence of the man--yes, he's large and tall, but more Bernese Mountain Dog than bear. He praised Tom Sargent, FTFCU's former president, who died in November 2021. Under Sargent, First Tech grew from a "$100 million local credit union into a $2.3 billion regional leader" and also advanced children's causes through generous philanthropy.  The Northwest Classic, for example, has generated 10.7 million USD in donations from 2000 to 2021. As Mitchell discussed the late Sargent, he stifled a sob but continued without interruption, highlighting other key employees with similar longevity.

FYI Taking a photo with me does not imply endorsement of me
in any way, shape, or form--a good writer or artist will be untouchable by mainstream brands while alive or at least disdained by the majority

FTFCU's deposit and member growth has been remarkable, but once upon a time, First Tech Credit Union served only Tektronix aka "Tek." In 1947, Tek had 12 employees in Oregon and a few years later, 250. In 1963, Tek went public, eventually accepting a Danaher Corporation buyout. Mitchell said FTFCU aspired "to become America's most admired credit union" and sought to achieve its goal through a time-tested strategy: "good people doing the right thing for good people." Mitchell ended the meeting by presenting Hayes with a gavel made from Oregon white oak and California live oak.

I call properly managed credit unions the "Frank Capra" financial model: a place where money works for communities in the most idealistic way possible. Interestingly, because credit unions are restricted in the kind of investments they can make, many of them--including FTFCU--have a high percentage of variable and/or short-term loans (think cars). Though counter-intuitive, making as many variable loans as possible is one way to diversify revenue for credit unions, despite higher credit risk. I would criticize a large bank with a majority of its loans as variable, but FTFCU's general counsel told me one reason S&Ls collapsed in the 1980s and 90s was because of too many fixed rate loans. When interest rates rose more rapidly than expected, S&Ls began issuing new loans to bridge expected revenue shortfalls from prior loans. In doing so, executives relaxed credit and collateral requirements, ignoring sound risk management. (Sound familiar?) A twisted logic emerged: given a choice between going bankrupt or making another loan, why not make another loan and hope for the best? My evening's most poignant lesson was realizing variable short-term loans could be the basis for long-term community building, but only with strict limitations.

FTFCU's "Frank Capra" model is possible because it cannot invest in high-risk endeavors, not even preferred shares or an S&P 500 index. Credit unions may invest in Treasuries, limited derivatives, agency bonds and mortgage-backed securities--most likely because of Fannie Mae--but not CDOs or corporate bonds. An exception exists for AAA-rated bank bonds, but such purchases require credit underwriting, aka documented due diligence, so unless a spread is substantially favorable to comparable government debt offerings, credit unions are strongly incentivized to buy the safest assets possible. As a result of its limitations, a credit union's annual report is easy to read. While skimming the 2021 annual report, the only troubling information was the "Provision for Loan Losses," which had been reduced by nearly half, from ~61 million dollars to ~32 million dollars. 

During the meeting, Mitchell remarked that "people are everything" and "at the end of the day, this is a co-operative." It's certainly a fast-growing one, welcoming 85,814 new members in 2021 and increasing its total membership to ~658,000. I'm no expert on Basel regulations, but with 14.9 billion dollars in total assets and ~6.3 billion in new loans (mostly mortgages), FTCU is well-capitalized even with rising interest rates. (BauerFinancial agrees, giving FTFCU its highest rating, 5 stars.) Perhaps that's one reason Mitchell can focus on people and talent rather than numbers and marketing gimmicks; when you lack trading desk volatility, your entire business is knowing your people, both customers and employees. Perhaps a wonderful life is possible--as long as you're a well-managed credit union. 

© Matthew Mehdi Rafat (2022)

Update: FTFCU responded to one item above, the "Provision for Loan Losses" (from page 13 of the 2021 Annual Report):

"Actual reserves for loan losses remained essentially flat between 2020 and 2021...  The reduced provision expense (referenced in your article) was driven by historically low levels of delinquencies and charge-offs and full compliance with GAAP... From Deloitte’s review: Loans, net of allowance for loan losses of $73,252 and $73,344 as of December 31, 2021 and 2020, respectively." 

Miscellany: FTFCU's NCUA Charter number is 19976. Cookies were available for attendees.