What’s with the Statue?

The Seated Boxer, an iconic ancient Greek work of art, shows a grizzled veteran of the ring, equal parts resigned and ready to spring into action. 

What I like is a sense of respite from competition, the powerful athletic physique and the tiredness that surrounds his humanity.  Is he a winner this day? Are there more fights to go?  How will his efforts be remembered?

These are questions that all of us encounter, in literal or figurative ways, in our daily efforts. 

Continue reading “What’s with the Statue?”

Taxi Medallions in the American Cooperative System

In February 2020 when the NCUA board voted to sell over 4,500 credit union members’ taxi medallion loans to a private hedge fund, it broke faith with the borrowers and the credit union model authorized by Congress.

Cooperatives are intended to be a financial option different from the market-driven, for profit business models.

Yesterday’s blog, “Low Balling Price to Win Market Share,” described the Uber/Lyft business model’s use of venture capital to underprice the regulated cab industry fares to achieve market dominance.  One reader commented:

The “destroy the competition” at any cost business model is capitalism at its most ruthless point (and it’s what China is doing right now too).  I’m a capitalist but running the competition out of town with an unprofitable business model backed by a war-chest of reserves is poor form.  Don’t know what to do about it; legislating it away may do more harm than good. 

But that legislation is already on the books.  First by state charters, and then in Congress (in 1934), consumers and groups were given an option to fight predatory practices by forming not-for-profit, member-owned financial services.  The question is whether the leaders of the system–regulators and credit union CEO’s–believe in this cooperative difference today.

Cooperative Ownership Supports Individual Owners

To recruit back their driver business partners, Uber and Lyft have reportedly paid incentives of $250 million and $100 million to entice them to return to their platforms.  But this time these price incentives are being passed through in the fares which are as  much as 40% higher.

What made the credit union financing of medallions special was that it gave drivers the chance to buy a medallion and become an owner, not just a worker.

A person familiar with the medallion financing industry described this credit union role as follows:

The decline of the 75-year history of the taxi industry is very complicated.

 But one thing remains true.  “Ownership” was key in its success and if the medallion rises from the dead, that will be why. In America, it is better to own than be owned by your employer-no matter how benevolent that employer might be. That is why immigrants of many colors and nationalities turned to the taxi industry.

 The incentives the ride share companies gave passengers and drivers when they were initially focused on destroying “Yellow” are now gone.

 The medallion buying market is now only owner-operators, so investors and speculation are gone.

As long as the purchase price affords the “new” owner the chance to earn what they earned as a worker, they will choose the owner option.

 Cooperative financing gave these members a way to create their own business-the American dream.  Credit union lending has always intended to enable individual empowerment for productive purpose.

NCUA’s sale of the members’ loans to a hedge fund seeking control of a significant share of the NYC medallion market undercut this core purpose. Several credit union and borrower groups with firsthand experience managing these portfolios asked to provide options and were ignored by NCUA.

If borrowers had been given the payment options based on balances similar to the amount the agency received from the sale, the member workout transitions could have been accelerated and future values enhanced for both NCUA and these borrowers.  But NCUA decided to wash its hands and walk away.

The Credit Union Way or Not?

Time and again credit unions have demonstrated their ability to act in borrowers’ best interests even when this means reducing the credit union’s bottom line or using reserves.   The industry’s wide-spread fee waivers, deferrals, refinancing and just being there for members during Covid is the latest in a history of such actions.

Unlike for-profit firms, cooperative structure provides a shield against the ever-present market pressures for earnings.  Patience provides for both individual circumstances and market cycles to play out so decisions are not made when events seem at their worst.

Cooperative patience is a valuable capability.  It means the industry can act counter cyclically in a downturn by keeping loan windows open and giving members options to defer or even reduce payments.  Even now, there are  reports that the “Yellow” taxi option is making a comeback versus the technology disrupters.

But if this unique advantage is not understood and used by regulators or credit union leaders, then credit unions will end up responding to crises no differently than their banking competitors.  That is not what Congress intended.  It is not what America needs.  It is not in the member-owners’ interest. That banking approach would violate both cooperative design and values.

 

 

 

 

 

An Update on the Taxi Medallion Business or:  “Low Balling Price to Win Market Share”

Uber and Lyft have never made money.   Cumulative losses are in the billions.  And continuing.   Two reasons for this lack of profit are spending billions of venture capital funds to subsidize fares below the regulated cab industry.  Secondly, under compensating their driver-business partners.

Now that both firms are public, the pressure for profits by public investors (now that the venture capital funders have made their windfalls) is changing their business and pricing models.

A thoughtful comment by my favorite market analyst (CNBC’s Kelly Evans), suggests the game may be up.  While it does not mean NYC taxi medallions will rise to the former values of over $500,000, it suggests that the future will be much more stable and that drivers and medallion owners can expect reasonable returns—as medallion prices become linked to actual earnings.

Kelly Evans kelly@cnbc.com, June 15, 2021:

Here’s a half-baked thought I’m just going to throw out there: 

Is venture capital bad for society? 

I was thinking about this as we talked to Kevin Roose yesterday about his recent NYT piece, “Farewell, Millennial Lifestyle Subsidy.” His point is that all the goodies millennials enjoyed over the past decade or so–cheap Ubers, food delivery, and on-demand household workers–were never properly priced until the companies all went public, suddenly have to turn (or at least pretend they’re on a path to eventually turn) a profit, and have to raise prices as a result. It doesn’t help this is all happening amidst a historic labor shortage, either.  

“Hiring a private driver to shuttle you across Los Angeles during rush hour should cost more than $16,” he wrote, “if everyone in that transaction is being fairly compensated.” It’s one more reason many millennials have tired of their previous urban/on-demand lifestyles and see the advantages of things like car and home ownership.  

So now that Uber has to shore up its financials, its rides aren’t as cheap and its service isn’t as attractive. This isn’t just a pandemic phenomenon; the company went public at $45 a share in May of 2019, and today trades at just $49 and change. If you’d bought General Motors the day Uber went public, meanwhile, you’d be up more than 60%.  

In other words, the $20 billion that Uber raised as a private company basically just allowed it to underprice rides for a while–long enough to nearly put the rest of the transportation-for-hire business into bankruptcy. How can any viable business, which has to rely on actual profitability, compete with one that’s that highly subsidized by the wealthy (which are most early-stage VCs and their investors)? Are all of these jazzy start-ups really about improving the future, or about using neat technology to earn subsidies that allow them to undercut legitimate businesses all over the country? 

On an even grimmer note, the rise of Uber led to a plunge in the value of New York City taxi medallions, leaving drivers who had bought medallions before Uber’s arrival holding massive debt. A 2019 investigation after more than eight drivers committed suicide in 2018 found the typical driver had $500,000 of debt, and a quarter of them were considering bankruptcy. 

Listen, I’m all for technological innovation. But there’s a difference between hey, now you can book a car from your phone! and hey, our private capital is allowing us to price this way below what it should actually cost.  

Now that we’ve seen how many of these stories actually play out, perhaps we customers ought to be a little more discerning. Maybe I don’t need to play in the unsustainably-cheap-to-the-point-of-being-bad-for-existing-businesses game. Maybe the next time we hear of a “disruptor” raising however many millions of dollars to “change the way we do xyz,” our first question should be–are you really innovating, or are you just temporarily lowballing the price of these services to win market share?  

Just a thought. Am I way off base here? 

**********************************************************

Kelly’s points are very helpful.   We are now seeing the cycle of disruption play out and a new equilibrium being sought.   Four of my previous blogs discuss some of her observations about the fragility of the Uber/Lyft business model.

The common theme of each blog is that credit unions and NCUA should demonstrate as much responsibility to borrowers in a crisis as they do to savers.  Without the former, there will be no return for the latter.

https://chipfilson.com/2019/10/uber-et-al-and-the-taxi-medallion-industry/

https://chipfilson.com/2020/02/an opportunity for the NCUA Board to do the right thing/

https://chipfilson.com/2020/02/NCUA’s betrayal/

https://chipfilson.com/2020/12/disposable-members: an NCUA policy that must change/

 

 

What Credit Unions Can Learn from Morris Plan Banks

In justifying whole bank purchases credit union CEOs will reference learning from their competitor’s experiences and banking knowledge. Several areas include expanded commercial loan opportunities, entry into new markets and adding staff with  different expertise.

Trying to beat the competition by becoming the competition has always been a dubious strategy. Moreover, the example of early competition from the Morris Plan banks suggests credit unions will be more successful developing their own unique competencies.

Credit union success was never guaranteed. In fact, one of the earliest and largest competitors for the untapped consumer credit market grew much faster and was far more consequential than the slowly emerging credit union system. That is, until the 1934 passage of the FCU Act ushered in a new era of cu expansion.

Morris Plan Banks

In 1910, attorney Arthur J. Morris (1881–1973) opened the Fidelity Savings and Trust Company in Norfolk, Virginia.

The Virginia lawyer, was troubled that a securely employed workman, seeking a small loan, was denied access to credit from local banks and forced to borrow from loan sharks. Morris thought that a country that denied bank loans to a large part of its population had a “weak spot” in its banking system. Morris studied the various banking laws in the U.S. in the hopes that some type of “banking institution could be evolved that would correct the existing evils and supply credit to the needy”

Under a concept called the “Morris Plan” he offered small loans to working people. In this approach would-be borrowers had to submit references from two people of like character and earnings power to prove the borrower’s creditworthiness. Repayment of the loan was made through the weekly purchase of Installment Thrift Certificates equal to the face value of the loan, less origination and investigative fees.

Morris Plan Banks expanded relying on state charters just as did the nascent credit union movement. By 1931, there were 109 Morris Plan banks operating in 142 cities with an annual loan volume about $220,000,000.

In a November 23, 1931, TIME magazine personnel announcement, the industry’s two decades of success and growth were described as follows:

“Walter W. Head, past president of American Bankers Assn., was elected president of Morris Plan Corp. of America, succeeding Austin L. Babcock. Morris Plan Corp. has large stock holdings in all the Morris Plan banks, the largest industrial banking system in the U. S. In the last 21 years these banks loaned $1,750,000,000 to 7,000,000 people, and now do about $200,000,000 annual business with 800,000 customers.”

Morris Plan banks pioneered the use of automotive financing through arrangements between the Morris Plan Company of America, the holding company for Morris Plan banks, and the Studebaker Corporation. In 1917 through the subsidiary Morris Plan Insurance Society, credit life insurance was offered to pay off any outstanding loan balance if the borrower died. Any insurance left over went to the borrower’s estate.

In their description of Morris Plan banks, authors Phillips and Mushinski offer one explanation for model’s success versus credit unions:

“The Morris Plan structure was more attuned to the individuality of typical Americans than were credit unions.

“It should also be noted that the Morris Plan was not without critics, especially from the Russell Sage Foundation which viewed the lending procedure to be misleading at best, and at worst, an attempt to defraud the borrowers. Hence, many viewed the profit-seeking Morris Plan institutions as little better, and in some respects worse, than loan-sharks.”

Morris Plan Banks vs Credit Unions’ Growth

Morris Plan banks began the same year as credit unions. In just two decades, by 1931, they became the leading provider of financial options for consumers.

The following slides summarize this state chartered, for-profit enterprise.

1. Begun by a lawyer to meet the need for unsecured personal credit.

2. Innovative legal structure incubated in the state chartering system.

3. Loans were made based on character, for a good purpose with at least two cosigners of similar economic standing.

4. Morris plan banks’ annual loan volume in 1931 is estimated at over $200 million. The state-chartered credit union system reported just over $40 million.

5. Morris Plan banks failed during the Depression. Many converted or were sold to commercial banks which took consumer deposits and had broader lending options.

Today the descendant of this banking model is the Industrial Loan Company (ILC) state chartered, FDIC insured banks that primarily serve as specialty lenders.

Morris Plan institutions relied on wholesale funding and stock subscriptions. Credit unions which offered savings options and consumer loans quickly became the preferred option for members and communities in the Depression. Their non-profit cooperative design, self-help appeal and local leadership created a positive reputation and loyal members following numerous failures in the banking system following Roosevelt’s bank holiday in March 1933.

Some Reflections for Credit Unions from the Morris Plan Experience

  • Being first to prove a market need and establishing a dominant position does not guarantee ongoing success. Second movers can create a long-term advantage.
  • Growth requires innovation and staying in touch with a market’s needs.
  • The more flexible the institutional model, the greater the chance of sustainability;
  • The Credit Union system took on a new wave of expansion and credibility when a federal charter option became available—Morris Plan banks were dependent on state-by-state legislation;
  • Values and perceptions matter. Although Morris’ instinct was to serve the unbanked, the for-profit structure created a public perception of conflicting purposes.
  • Dramatic or sudden changes/crises in the economic, social, or political environment can lead to demise of models developed in another era.

Buying Used Up Models?

As credit unions pursue whole bank acquisitions, are they buying “tired” business models built with different values and goals? Are these credit unions giving up the advantages of cooperative design and innovation attempting to purchase scale? Will combining competitors’ experiences (and customers) with the credit union tax exemption create an illusion of financial opportunity that fails to prove out when evaluated years down the road?

Two decades ago, the prophets of cooperative doom were selling charter conversions, first to a mutual option and then later, going public with stock. The pitch was: more capital flexibility, no common bond restraints and expanded asset and investment options. And oh, you could also make a lot of money if the former credit union went public.

Between 30-35 credit unions bought into this vision of future financial nirvana. Today only one institution remains, still a mutual whose growth has trailed its cooperative peers since the conversion took place. But that is a story for another day.

We know the fate of the Morris Plan banking model and the “consultants” siren calls to convert to another financial charter. We don’t know if bank purchases will indeed add value for members or their co-op.

But we can learn one thing from history—if these purchases do not create a stronger cooperative, the credit union’s future may have just been attenuated in this effort to induce growth by paying out members’ collective wealth to bank owners.

Historical Trends & Today’s Share Growth

How unusual is credit union’s 20.3% share growth in 2020?   Or the slight uptick to 23.2% for the 12 months ending March 31, 2021?

For the decade ending in 2020, the credit union system’s compound annual share growth (CAGR) was 6.7%.

Share growth drives the balance sheet.  The two sources for shares are expanding existing member relationships and adding new members.  The rate of new member gain in this same decade was 3.4% (CAGR).  This suggests a balance of internal and external growth sources.

In 2020 however, new members grew at 3.3% or just 16% of the total gain in shares that year.

The 2020 results remind one of the marketing adage about finding more business: there is always more business to be gained from existing customers than from acquiring new ones.

In plain speaking, if existing members aren’t growing their relationship, why will new ones find your offerings attractive?

Data Source:  Callahan’s 2020 Credit Union Directory (pgs. 1-2)

The Key to Cooperative Success

Everyone has a different perspective on the advantages of cooperative design.  For some it is self-help and self-financing.  For others, member ownership.  The tax advantage creating free capital. Cooperative values. Collaboration. Etc.

One CEO described his operational priority that states this critical factor most clearly:

Invest in your owner’s agenda and remember, it’s outside your own. The success of your members is the only chance you have at success.

 I would add that everything else is just becoming the competition.

The Public Policy Role of Credit Union Cooperatives (Part 1)

Most credit union observers agree that the emergence of financial cooperatives was one outgrowth of the reform movements affecting many areas of American society at the beginning of the 20th century.

Across America, factory workers, farmers, women suffragettes, and city social workers had organized numerous initiatives and political efforts to resolve emerging problems. These initiatives responded to individual abuses and inequalities that became exacerbated during this era of monopoly capitalism converting a largely agrarian economy to an industrial one.

Credit unions were one of many attempts to meet the basic financial needs of ordinary people who had no access to fair financial services of any kind. This experiment begun with St. Mary’s Bank in 1909, then slowly evolved state by state over twenty-five years. These various examples became the proof of concept that resulted in the passage of the Federal Credit Union Act in 1934 as part of FDR’s new deal initiatives.

Filene and Bergengren convinced the administration and Congress that a national program for expanding consumer credit could help with recovery during the depression by increasing demand for consumer goods and services with credit.

The following slides provide snapshots of the evolution of the “movement” from social initiative to a fully formed financial system alternative for consumers. They summarize the ever changing balance between mission/purpose and institutional financial success as overseen by the federal regulator.

  1. The Need for Fair Consumer Credit

  1. Roosevelt’s support. 4,793 federal charters were issued from 1934 through 1941 when new charters fell temporarily to around 100  per year during WW II.

  1. Credit unions were first overseen by the Department of Agriculture. During WWII oversight was transferred to the FDIC. Post war, the bureau of federal credit unions became a department within HEW. In 1977 the National Credit Union Administration became an independent agency.

  1. In 1977 NCUA’s independent status began with 13,050 active federal charters. At the end of 2020 there are 3,185 active federal credit unions. Of the 24,925 federal charters granted, 92% were issued in the forty-four years prior to NCUA’s becoming an independent regulatory agency. Under NCUA the balance between mission/purpose and economic performance has increasingly focused on financial performance.

  1. Today NCUA’s safety and soundness measures dominate cooperative oversight.

  1. The absence of new charters has stifled entrants with innovative ideas. The industry has consolidated and become more homogeneous in business strategy.

Slides: 3-6 are by Steve Hennigan, CEO of Credit Human FCU using feedback loop analysis.

The traditional view of credit union’s special role justifying their tax exemption has three bases: their cooperative, member-owned structure, the legislative intent to serve people left behind by existing financial options, and the field of membership-common bond-requirement.

As the cooperative business model has evolved, so has the concept of purpose and credit union’s role in their communities. Today member’s financial health is an animating concept for some. Other credit unions continue emphasis on superior service, better value, and member relationships.

Consumer financial services are now available from multiple providers. Credit union’s success confirmed that consumer lending is an attractive business opportunity for banks and other start up firms. Today many financial options and new entrants, from payday lenders to online lending startups, target consumers.

More than a Business Model–A Design Advantage

The founding pioneers of credit unions did more than prove out a new business segment with consumers. The cooperative model was one in which people:

  • Found a solution by working together;
  • Identified common challenges to organize and solve it themselves;
  • Prioritized mutual needs overcoming fears that they couldn’t succeed;
  • Created a community and bond that formed relationships to sustain efforts;
  • Accomplished something they had never done before to get something they didn’t have.

Cooperative purpose established these core traditions that are the foundation for continuing credit union relevance and uniqueness in an ever-changing economy.

The question is, if credit unions did not exist, would we create them today? What needs would they serve? Is purchasing the assets and liabilities of banks, consistent with the credit union cooperative role?

 

What Bubble?

Much professional and political debate is occurring as to whether the real economy’s outlook, measured by GDP, and stock market values are aligned.

One source of uncertainty is whether the increase of fiscal spending will lead to greater inflation (more money chasing fewer goods) or just a temporary adjustment before returning to some steady equilibrium.  That is, a “normal” of both GDP growth (3%) and of inflation, around 2-3%.

Some facts to throw into the confusion.

The current price earnings ratio of the S&P 500 index stands at 40 times or so.  This is up from a same index’s P/E ratio of 23X one year ago.  Historically the ratio hovers in the mid to high teens over an extended economic cycle.

Tesla is priced today at a P/E ratio of 204 times.   Over the past twelve months of trailing earnings, its P/E of 128X is eight times the domestic auto industry’s similar trailing P/E of 16.5X.

The business pages are full of daily stories of meme stocks such as AMC or GME where pricing bears no relationship to actual performance.  Irrational exuberance?  Retail investors with too much time and surplus cash on hand? Historically low interest rates pushing up the value of assets such as homes and used cars? Bit coin and other cyber currencies–the wave of the future for protecting wealth or just a giant Ponzi scheme where another buyer proves the greater fool theory of investing?  Until there are no fools left!

How Should Credit Unions Respond?

Some members, those with retirement, savings or other assets in stocks and real estate are probably feeling confident about their financial situation. Especially if they just refinanced at lower rates.

Those without these assets, or just holding savings accounts earning .10-.50 basis points are undoubtedly less sanguine about their situation.  Living on fixed incomes with prices rising on everything can raise anxiety about being left behind.

No one knows the future.  Most forecasts are based on past data and current assumptions about the environment.  But learning from these past forecasts might just help us navigate current uncertainties.

The 1978-1979 Inflation Takes Off

In 1978 the economy was experiencing dramatic rises in short term rates and inflation was a constant source of governmental attention.   In that year the money market mutual funds began to attract consumer deposits from all financial intermediaries whose rates were fixed by government regulation: generally 5% for banks and 51/4% for S&L’s on passbook accounts.  No interest was paid on checking–prohibited by regulation.   No depository money market accounts permitted. All CD rates and terms were similarly government controlled. Federal credit union rates were capped at 7%.  Share drafts were us just barely introduced although all Rhode Island state charters offered NOW accounts and paid interest on them.

Illinois chartered credit unions operated with a 12% loan usury ceiling in place since first the first act was passed in the 1920’s.   The Department issued updated guidelines for certificate accounts trying to help credit unions remain competitive if they had sufficient earnings.   I can remember, as Credit Union Supervisor, offering Ed Callahan, the Director of DFI, my considered opinion that rates would never rise about 12%.  They had never done so in the past. That loan ceiling reflected the collective judgments of generations of lawmakers and policy analysts that gave the number an aura of human observational certainty like the law of gravity.  What could be closer to a natural law than paying simple interest on loans at 1% per month?

Ed didn’t argue with my facts or logic.  He only replied: “Don’t ever say never.”  Meaning that when someone asserts something cannot change, be careful.  One year later his comment was proven true, and the economy and all financial institutions started responding to Treasury yields that would eventually soar to the mid-teens and 30-year mortgages became unavailable at any rate.

Consumers transferred billions from deposits to money market mutual funds which could pay these higher rates.  This disintermediation was the ultimate straw triggering complete deregulation of the depository institution industry.

Credit unions transitioned this financial earthquake by continuing one critical strategy-serve the member well and good results will follow.  A credit union advantage is being partially shielded from the everyday pressures of the market and the power of stock price on performance and management behavior.

Some data today suggests that certain parts of the economy are overpriced.  Others believe there are still bargains to be had and don’t want to miss out on the action.  It can be an entertaining game to watch, but not one credit unions are supposed to play.  Fortune tellers can only make a living if someone believes in their crystal ball.

Resist  the allure of future predictions and focus on getting ever better for members in the present.

 

 

 

Gratitude

One of the most positive expressions of human interaction is gratitude.

G.K. Chesterson wrote, “gratitude is happiness doubled by wonder.”

The word came to mind as I read the opening of one writer’s reflections on her experiences working with credit unions. Living gracefully and sharing are some of the benefits she highlights:

Coming up on my fifteenth year working for a cooperative CUSO, it seems right for me to reflect on my experience in the credit union industry. During my lengthy time here, I have found not only a home, but a lot to say about the things the credit union community does right.

Unlike other places I have worked, I’ve noticed the credit union industry has some unique attributes, many of which are the reason I’ve stayed for fifteen years. First and foremost, there is a genuine care about the consumer in our industry, where being a member still means something in today’s competitive world. Furthermore, credit union employees like to learn from each other and this knowledge is then freely shared with other people. There is also a fellowship among people in the credit union industry that I have not seen in other places I have worked. And finally, what is most impactful is that this care extends to an interest in all credit unions being successful.

Thank you Alycia for helping all of us be more aware of how special our credit union experiences can be.

Source: CUSO Magazine, What Makes Our Industry Unique, by Alycia Meyers

A Member and a CEO React to Merger Events

A member of Xceed found my post from 2020 on that credit union’s merger with Kinecta.

Reading the analysis from Should a CEO’s Last Act Be Merger, he posted a comment:

Thank you for your article.  It is right on point.  As a member of XFCU since 1982, I have seen this organization decline at an alarming rate.  Now that that the merger has taken place, I am still waiting to see the additional value I am to receive from this merger.  XFCU began its fall when it closed the Texas operations.  Today, we have no personal service, personal bankers, investment opportunity, or competitive products.  Teresa Freeborn has been the only person who benefited from the merger.  I voted against the merger since I believe she participated in the merger with a conflict of interest.  

I submitted questions to her on service to members not on the East or West Coast.  This merger has so far shown me no benefit.  I moved my business account to BOA.  As other investments matured, I moved them to Fidelity and Merrill Edge.   As a 40-year customer, I expect to move all accounts by the end of the year to BOA.  Communication is terrible.  The XFCU Officers and Board have failed all members of this organization.

In October, prior to the merger vote, he sent Xceed an email asking for more information:

Subject: XFCU / Service to Members outside of California and New York

Good Morning:

Member since 1981.  Since closing the Texas Branch, service and communication has gone down to a level that I now question whether XFCU remains an option for me.  What services will be available to me in Texas through any CU affiliations that allows me to make deposits, withdrawals locally if needed. 

I was never advised of this merger and am a very disappointed longtime customer.

Thank you,

He told me: “I never got a response.”

When I asked what his credit union experience had been he wrote:

I am a retired Insurance Executive who worked for Crum & Forster Insurance acquired by Xerox in 1980’s.  I was recently a Senior Vice President at McGriff, a BB&T Company, now Truist.   

During my working career, XFCU was an important part of my personal financial success.  I bought several homes and cars.  Today, if I needed financial help, I wouldn’t know where to start at XFCU.  I don’t recommend CU to my kids any longer as I question their viability in today’s economic challenges.

Xceed’s First Quarter Financial Results

The combination with Kinecta had not been completed as of the March 31, 2021 call report.

In the first three months Xceed reported the following:  a loss of $2.1 million (ROA of  -.87), a 22% drop in loans ($146 million), 11% share growth, 112% operating expense/total income ratio, net worth of 11%, a 9.2% decline in members and 19% fewer employees (35 out of 185 have left) both compared with one year earlier. The writer is not alone in seeing difficulty.

Kinecta reports positive ROA of .70% and a net worth of 7.8% in the same first quarter.

One observer commented on the two credit union’s longer term track records: “it looks like two rocks  being tied together and tossed into a lake to see if they can float.”

But the members are already bailing out.   Unfortunately, it is they who will suffer the loss of value as the writer detailed in his experience above.

A Different Decision: A CEO Closes a Merger Conversation

In talking with a CEO of a $2.0 billion credit union, I asked if he had ever discussed a merger, especially with a much larger firm in his market area.  The two were intertwined and competed directly.

He said yes, the topic had come up.  Both had grown at the same rate, both had sound performance.   But he didn’t pursue the option.

This non-merger had produced a very beneficial result.  In his assessment: “Our competition keeps the entire market for consumers honest because we price against each other.”

In this case two separate, strong, competing credit unions are helping all consumers “stay afloat.”

Intergenerational Thinking and Co-op Design

The concept of paying forward is inherent in the credit union model.  Current leadership begins with a legacy of common wealth inherited from previous efforts.  The assumption is that the current generation will in turn pass an even greater legacy to their children’s children.

This is not the performance standard dictated for profit making firms in a market economy.   Rather the inexorable force of the invisible hand drives a firm’s stock price.   Success or shortfalls, are measured quarterly against explicit annual performance expectations.

What Will our Descendants Thank Us For?

Credit unions were founded with a different ethic of success.  The member ownership allows co-ops to play “the long game.” Performance encompasses obligations for the common good of members and their communities.

John Ruskin (1819-1900) was a leading English art critic of the Victorian era.  He was an art patron, draughtsman, watercolorist, philosopher, social thinker and philanthropist. He wrote on subjects as varied as architecture, myth, literature, education, botany and political economy.

His vision for human enterprise uses an architectural metaphor which I believe embraces this unique, intergenerational scope of cooperative design:

“When we build, let us think that we build forever. Let it not be for present delight nor for present use alone. Let it be such work as our descendants will thank us for; and let us think, as we lay stone on stone, that a time is to come when those stones will be held sacred because our hands have touched them, and that men will say, as they look upon the labor and wrought substance of them, ‘See! This our fathers did for us.”