The Navy commander behind the credit union banks love to hate
When bankers complain to Capitol Hill about the competitive threat posed by large credit unions, they are almost certain to mention Navy Federal Credit Union.
With more than 8 million members, 300 branches nationwide and over $100 billion of assets, Navy Federal is the largest credit union in the world and ranks among the top 50 financial institutions in the country. Its net income in 2018, on which it didn’t pay federal or state income tax, was $1.55 billion.
Bankers see the institution as Exhibit A in their fight to get big credit unions to pay taxes, arguing it has swelled in size well past what the founders of the credit union movement intended and continues to hold an unfair advantage over community banks.
“Corporate welfare shouldn’t be given to a $100 billion institution of any type. That’s not what Congress intended in 1934,” when it passed the Federal Credit Union Act, said Alex Sanchez, president and CEO of the Florida Bankers Association.
Yet Navy Federal wasn’t always the banker bogeyman it is now.
Just 15 years ago, it was a much smaller organization, with a third of its current number of branches, roughly a fifth of its assets and serving a quarter of the number of members. It served just one branch of the military and didn’t offer risk-based pricing, meaning members paid the same rates no matter their credit profile. It had customer service problems, too, with lines at local branches that sometimes stretched around the block.
The rapid growth since then is largely thanks to the leadership of one man — Adm. Cutler Dawson, who held the reins of Navy Federal since 2004 before retiring earlier this year.
Dawson was recently recognized by American Banker, Credit Union Journal's sister publication, for the outsized impact he has had on the financial services industry — both banks and credit unions. In 14 years, he helped transform Navy Federal into a credit union behemoth that is feared among community bankers as much, and sometimes even more, as the biggest banks. In the process, he modernized the credit union. It is revered by its customers and regardless of its tax-exempt status, it would still easily rank as one of the most successful financial institutions in the country.
When Dawson became Navy Federal’s CEO, in 2004, it was relatively big and profitable, but it faced serious challenges, including major customer service issues.
After serving in the Navy for 34 years, Dawson took the job with an ambitious expansion plan in mind. For starters, he wanted to widen the field of membership to include Army and Air Force retirees as well as active-duty personnel.
It was a bold suggestion, but at the meeting with his executive leadership team, it did not go over well.
“There was no eye contact around the room when I was talking about expanding our membership to the Army and the Air Force,” Dawson said. Finally, "John Peden, who was the No. 2 guy at the time, spoke up and said, ‘Cutler, it’s hard for them to think about expanding the membership when they can’t adequately serve the members they have.’ ”
Though it had grown past $20 billion in assets, Navy Federal’s infrastructure hadn’t kept pace. The call center was significantly understaffed and the branch network was too small to serve its far-flung customer base. With three decades of naval service, Dawson surmised the organization had assumed the tightfisted personality of its sponsor.
“In the military world, you get a top line and that’s it,” Dawson said. “You’ve got to do more with less." In the private sector, "the more you do, the more revenue you generate. You can pay for things.”
In those early days, Dawson devoted significant time to visiting branches, as well as Navy Federal’s call center. Back in the Navy, walkabouts like that were known as going to the deckplates, deep inside a ship. They were a key component of his management style. They also helped him arrive at a solution for Navy Federal’s customer service woes.
“I used to have a theory in the Navy. I called it retreat to the cabin,” Dawson said. “When you first get on a ship, you get out and you look at things. Then you develop a comfort level that you’ve seen everything. You slowly retreat to the cabin.”
“I maintained you’ve got to continually stay in touch, because things change. You have new people who’d never seen you down in the lower bowels of the ship. You’ve got to continually stay in touch. I’d tell young officers, 'Don’t retreat to your cabin.' "
“I was visiting branches right up to my last days at Navy Federal,” he added.
His leadership style was effective, said Mary McDuffie, Dawson’s successor as CEO of Navy Federal, who headed lending when he joined.
“He knew the business and got the right information that he could communicate to each group, regardless of who they were, enough about what was important about what they were doing and how they were contributing to the overall success of the credit union,” she said.
According to Dawson, that style took some getting used to for Navy Federal’s line workers, who weren’t accustomed to such a hands-on approach.
“They’d look up and I’d be sitting at the seat next to their desk and I’d say, 'Tell me what you do and tell me what other tools you need to do your job better.' "
At the call center, the answer to that question turned out to be more people — lots of them.
“When I first got there, I’d walk around the call center. We had these monitors that would show what the wait time was. The wait time back in those days could reach 45 minutes,” Dawson recalled. “Then I’d go in a branch, I remember going into one in San Diego where the teller line went out the door into a Home Depot parking lot.”
Other executives saw the same problems.
“The wait times were very, very long,” said Tom Connelly, who served as Navy Federal’s general counsel from 2007 to 2013 and as the Navy’s assistant judge advocate general during a 28-year military career. “Cutler had this theory that if you answer the phone, people will give you their business.”
In prior years, when call center managers were asked how many additional workers were needed, they’d say three or five. “This guy decided to take Cutler at his word and told him he needed 50,” Connelly said.
It was a critical moment for Navy Federal. Once Dawson signed off on the request, wait times, not surprisingly, “went way down,” Connelly said. “After that, they were measured in the single minutes and often in seconds.”
Dawson expanded Navy Federal’s branch network in similarly decisive fashion. Before his arrival, it was opening three or four offices a year. He accelerated that rate to a dozen or more.
“What we discovered was double-teaming branch expansion with a digital offering” was particularly successful, Dawson said. “We would open a new branch in a location we had never been before. We would see a lift in business even from people who did not come into the branch. What that affirmed to us was they had the confidence they could go in the branch if they need to see someone face to face.”
Modernizing the pricing scheme
Dawson’s other far-reaching early decision involved implementation of risk-based lending, which had been resisted by many traditionalists within Navy Federal.
At the time, Navy Federal loans still priced loans identically for all borrowers. The practice harked back to the institution’s roots, when it was known as Navy Department Employees Federal Credit Union and operations were mostly confined to the Washington, D.C., area. In the 21st century, however, with more than 2 million members, the practice risked becoming an anachronism.
“One of the very first presentations I got was from management on risk-based lending,” Dawson said. The top managers “all voted for Mary McDuffie," who was the head of marketing at the time, "to make the presentation. She put it together so logically. I remember thinking after, 'We’ve got to do this.’ ”
According to Dawson, one-size-fits-all pricing was turning Navy Federal into “a subprime lender with prime pricing. … What we were seeing was all our A-plus credit people going somewhere else because they could get a better price. Our credit quality was just driving down to the C and D tiers.”
Though the issue seemed open-and-shut for Dawson, the merits of risk-based pricing were less clear to others — Chairman John Lockard was opposed, as were many employees.
“It was tough" for some people, McDuffie said. “It required reframing. We had had at the time 70-plus years of doing things one way. With our military DNA, tradition is very important. We had prided ourselves on this egalitarian approach to things.”
After he succeeded in winning board approval for the change, Dawson made it his mission to build support within the organization for the new pricing scheme.
“I told people, 'We are going to do this and we’re going to say yes to more members,’ ” Dawson said. “We would be able to say yes to more high-end people because they wanted the [lower pricing] and we would actually be able to say yes to more of the low-end members, if we priced it right.
“That goes back to my theory of decision-making. You’ve got to take information in. No [situation] is going to be perfect, but you have to have the willingness to make a decision. … A lot of people don’t like making decisions.”
Dawson’s advocacy helped convince employees that the switch to risk-based pricing was the right move.
“I think nobody was thinking about it that way, so over time we reframed it and they saw that, 'Yes, I can say yes to more people,’ ” McDuffie said. “It was a very courageous move. Change is hard … but everybody came around and was happy about it in the end.”
That Dawson succeeded comes as no surprise to B. Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions. Berger met Dawson shortly after joining NAFCU in 2006 as executive vice president for government affairs.
“His communication skills are arguably some of the best I’ve ever seen,” Berger said in an interview. “Every time I saw him [confront] an issue that was difficult, he always built a consensus.”
Indeed, despite his long background as a naval commanding officer, Dawson never came off as gruff, Berger said. “I’m not going to say he was a wallflower, because he wasn’t,” Berger explained. “He always let others speak first. He wanted as much input as possible from everybody. … He took a very thoughtful approach to leadership.”
The banker-credit union divide
But Navy Federal’s successes caused more consternation with bankers, who watched its growth and rapidly expanding membership with alarm. In 2008, Navy Federal was allowed to serve Army and Air Force personnel as members, the same recommendation Dawson had started with four years earlier. In 2017, membership was expanded again to include all veterans.
Navy Federal’s success has moved it squarely into the line of fire from banking advocates. Sanchez of the Florida Bankers Association, who served in the Air Force from 1976 to 1981, has emerged as an outspoken critic. Sanchez and other Florida banking advocates have watched as Navy Federal has invested hundreds of millions of dollars in a massive operations campus in Pensacola that employs more than 7,500. Over the next few years, Navy Federal plans to push its investment in the region to $1 billion and increase its workforce to about 10,000.
Navy Federal's tax exemption is worth tens of millions of dollars annually and that cash has helped fuel its rapid expansion in Pensacola and elsewhere in the state, Sanchez says. The tax break has also helped fund Navy Federal’s marketing deals with the NHL and ESPN.
"No community bank can afford that,” said Sanchez. “Why? Because they pay millions of dollars in taxes. The reality is, they’re on pace to earn somewhere between $1.7 billion and $2 billion this year. Let them compete on a level playing field against community banks.”
For his part, Dawson has tried not to personally antagonize his banking critics, referring to the skirmishes as the “unpleasantness” between the two industries. He’s kept his voice down during the debates.
In 2015, the National Credit Union Administration proposed amendments to its field of membership regulations that eventually set off a legal challenge by the American Bankers Association that is still working its way through the courts. At the time, Dawson responded with a terse, three-paragraph letter that offered “no comments on specific aspects of the proposal.”
He declined to comment altogether on an equally contentious member business lending rule that also sparked a banker lawsuit.
Though he served nine years on NAFCU’s board, Dawson pointedly declined to seek a leadership position.
“We were mindful that we were the largest,” Dawson said. “We were very correct about our common bond, our membership rules. We thought we needed to lead by example.”
Fred Becker, Berger’s predecessor as head of NAFCU, said Dawson “knew he was the 600-pound gorilla in the room. He made it clear he didn’t want to serve on the executive committee or as chairman.”
That’s not to say Dawson wasn’t an asset to NAFCU. His experience as a high-ranking naval officer gave him an insider’s knowledge of how things get done inside the Beltway.
“It’s a different world, so it was beneficial to have that perspective,” Becker said.
Dawson’s presence on NAFCU’s board proved especially helpful in 2005, when Rep. Bill Thomas, R-Calif., held a hearing on the credit union tax exemption. Becker tapped him to be the association’s star witness.
“I told him from day one that when this comes up, we’re going to need you to testify,” Becker recalled. “Navy Federal is as pure a credit union as you can get, so it was very helpful to have the CEO of the largest credit union appear there.”
“The tax exemption has been very important to the industry and to Navy Federal,” Becker said. “Cutler was aware of that. The larger credit unions were the ones under attack. He understood the politics.”
Though his institution is the one most targeted by community bankers, Dawson said he focused more on the threat posed by big, money-center banks.
“I always considered our biggest competition was the very big banks,” he said. “They’re on every street corner and they have a convenience and a scale that makes them easy to work with. … That’s what we have to work hard on.”
A Navy family
Born in 1948, Dawson was raised in Richmond, Va. His father, Jim, worked for the Internal Revenue Service. His mother, Betty, was a homemaker. Both lived through the Great Depression, so “they taught us the value of money,” Dawson said.
“My first job, I made 25 cents per hour shagging golf balls for my dad,” Dawson said. “He would hit them, I’d go with my catcher’s mitt, catch them on the driving range, put them in his golf bag and bring them back to him.”
Both of his parents served in the Navy during World War II, and though he briefly flirted with charting a different path, he eventually found his way to the Naval Academy, graduating in 1970.
While the Navy gave him several assignments on land over the next three decades, Dawson spent the better part of his career at sea — and in command. In 1975, Dawson, who was 27 at the time, was assigned to skipper the USS Molala, a World War II-era oceangoing tug, making him the Navy’s youngest ship commander.
The Molala was the first of six sea commands, an “extraordinary” achievement by Navy standards, said Connelly, the former general counsel of Navy Federal.
An early mentor, Capt. Pete Hedley, gave Dawson a crucial leadership lesson. Hedley counseled the up-and-coming officer to take command whenever he could.
“What he meant when he said, 'Go to command as early and as often as you can’ was that you will learn things on a small ship that as you go up the chain you’ll say: 'I’ve been here. I’ve had this situation. Here’s what worked and here’s what didn’t,' " Dawson said.
“It was true. The more you do it the better you get.”
The Navy’s command philosophy proved another powerful lesson. COs are expected to be problem solvers, given wide latitude to act as they see fit “unless otherwise directed.” That grant of authority, known as UNODIR, “is almost unique to the U.S. Navy,” Dawson wrote in "From the Sea to the C-Suite," his memoir. “You are given a broad objective, but very few specifics. You are not told how to do your job.”
Dawson would test the limits of UNODIR more than once in his career. One of the first instances came in 1976. Still wet behind the ears as a CO, Dawson invited the civilian master of a Soviet spy ship, which the Molala was shadowing off the coast of Southern California, to lunch aboard his ship.
“The idea came from me,” Dawson said. “As I reflect on it, it’s not any different than what a lot of CEOs … go through. There are some ideas only they can come up with. They’re so out-of-the-box their folks just aren’t going to present to them. This was one of those.”
“I did a risk-reward evaluation of having him come aboard: What was the reward from having him come aboard? What was the risk? I determined there was little if any risk of me compromising U.S. information.”
Dawson had a good sense of how far he could push UNODIR. Not all his colleagues were so canny.
“Later in my career I was in the North Arabian Sea going into the Persian Gulf when one of my cohorts invited a Soviet ship to join in on his gun shoot, on target practice,” Dawson recalled. “He got admonished for that. Washington kind of jumped on him and said, ‘It’s the policy of the U.S. government not to do joint exercises with the Soviet Union.’ ”
“He got slapped — but not too hard. The Navy likes initiative. They like can-do people, and they like people who are not just thinking about what’s best for their careers.”
Playing it safe
That same careful risk analysis that guided him later at Navy Federal, Dawson said.
Though it expanded significantly during his tenure, the credit union’s lending hewed fairly tightly to the traditional credit union model, focusing on auto and home loans. As of Dec. 31, 2018, Dawson’s last year as CEO, commercial and commercial real estate loans amounted to just over $400 million of a $74 billion loan portfolio.
“We do make commercial loans, but it’s a real small part" of the business, Dawson said. “Navy Federal has attempted to grow it, but the main thrust, what the Army would call the main effort,” is retail lending.
The company’s old-school attitude extended to the payday alternative loans the NCUA authorized in 2010. The PALs program allows for a top rate of interest of 28%, higher than the 18% allowed on conventional loans. Uncomfortable with the bigger cap, Dawson kept Navy Federal on the sidelines.
“You can get small-dollar loans from us, but we’re not interested in” exceeding the 18% cap, he said. “We’re just not going to do that.”
Navy Federal is a major auto lender, with $14 billion of car loans in its portfolio at Dec. 31, all direct. Navy Federal studied indirect auto the year before Dawson took over as CEO, rejecting the option. He saw no reason to change things.
“The institutions that are in indirect lending have to be very careful those loans perform,” Dawson said. “I don’t think the dealerships have any skin in the game once the car is off the lot."
Though Navy Federal may have rankled bankers, Dawson himself has never been painted as a villain in the way some big-bank CEOs have been. According to Becker, that’s in part because Dawson was seen “as a true gentleman” throughout the industry who was known for his down-to-earth style.
“He always gives other people credit,” Becker said. “There are some credit union CEOs who let things go to their head. He didn’t. He was just like everyone else. … He never wanted to be addressed as Admiral. He wanted to be called Cutler.”
His leadership had a lasting impact on Navy Federal, McDuffie said.
“One of the things I said to him before he left is, 'You know, Cutler, you really enabled us to be our best selves and be who we are and execute our mission to its fullest,’ ” she said. “I think he unleashed potential in us as an organization for which we owe him a debt of gratitude.”