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.





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.”


Do Small Credit Unions Matter?  Should They?  Will They?

In March 2014 before Jim Blaine laid down his sword, err pen, he wrote about the demise of small credit unions.  In the blog Clubbing Baby Seals, he used numbers to describe this decline concluding: “We’re in the midst of a “CU ecological” meltdown.” And the cooperative climate has only gotten hotter since.

The Less than $10 Million Segment Trends

The starting point in Jim’s analysis was ten years earlier in 2004 when there were 4,255 credit unions under $10 million.  At his writing, the total had fallen by half.  I updated his numbers for the most recent decade, 2010 through 2020, which show a continuing decline of the under $10 million segment from 2,908 (41% of cu’s) to 1,179 (23% of cu’s)—a 60% drop.

Many would react to these trends with a shrug: “They are what they are. This is just the marketplace at work.  These credit unions often underperform industry averages, do not provide a wide range of services, and members can find better deals elsewhere.  Besides larger credit unions continue to add members and grow. These organizations are not significant to carrying out the cooperative mission.”

Why Credit Unions Should Be Concerned With this Trend

This trend matters because of its impact on the system’s future  in two respects.

  1. All credit unions start small. Every credit union operating today was organized with assets in the hundreds or thousands of dollars.  From these small seeds large oaks can grow.  While all credit unions under $100 million show declines in charter numbers, segments above this amount have added 351 to their number in the same decade.  All emerged from the smaller asset segments. For the largest category, greater than $1 billion in assets, the count has gone from 167 in 2010, to more than 375 today.  Without seeds, the system will eventually run out of crops to harvest.
  2. The traditional interpretation of the decline is incomplete. Credit unions from the very beginning have started and then faltered.  Most that do not sustain operations are small.  Since FOM changes in the 1980’s, the vast majority of closed charters merge with other credit unions.

In 1978 when NCUA published the ratio for the FCU survival rate–number of active charters divided by number of charters issued–the percentage was 55%.   That was after 44 years of operations.

Today that ratio is 13%. (3,185 active/24,925 FCU’s chartered).  However, the reason for this dramatic decline in sustainability is not that small credit unions cannot survive.

The Federal Regulator’s About Face

In every year beginning in 1934 (except three war years) until 1971, the number of new FCU charters granted always exceeded the number cancelled.  In that year, FCU’s were required to qualify for NCUSIF insurance.  In 1978 NCUA became an independent agency.

In the same length of 44 years of NCUA’s oversight, the number of cancelled charters has exceeded new startups every year.  The loss of just federal charters during NCUA’s  tenure as an independent agency totals 9,865—from 13,050 (in 1978) to 3,185 (2020).

The primary reason for the decline of almost 10,000 active federal credit unions is that new charters have become virtually impossible to attain. They have averaged fewer than 10 per year in this century, and only 2.5 in the last decade.

The possibility for groups of citizens to form and control their own democratically governed financial entity has been effectively extinguished by the very organization charged with overseeing the cooperative system’s safety and soundness.

So What?

With new entrants effectively turned away, the industry’s structure will inevitably become more  consolidated in much larger credit unions. The diversity in credit union charter size is being eliminated.

Some would opine, “so what?”   Members continue to join, and the industry is financially strong and independent of sponsors. This is the natural outcome of any business in a competitive market economy.

Punching Above Their Weight

Blaine’s concern about the demise of smaller credit unions was summarized as:  Small credit unions “punch well above their weight” in terms of member impact and community importance.  Every credit union was created for a purpose, rarely did that original purpose have anything to do with ‘growth’”. 

He calls out the organizing motivations for a cooperative charter: persons with a common interest getting together to improve their local circumstances and opportunity.  Members then and today care most about the service they receive.

A credit union’s asset ranking, number of branches, surcharge free ATM’s or even its multiple channels do not create loyalty if an institution cannot respond to individual and local circumstances. That is the key factor in small credit union success.

The Democratization of Financial Opportunity

Credit unions’ democratic character was created from a fabric of relationships and community support.  These local origins were their source of political support.  Even though banks have opposed credit unions from the beginning, they have been unable to block their efforts to expand member services.

“Punching above their weight” is illustrated most recently by the quickness of Congress to overturn the Supreme Court’s interpretation of the Federal Credit Union act in 1998 limiting common bond to a single group.  In just months, the Credit Union Membership Access Act was passed approving the  field of membership interpretation NCUA authored in 1983.

But that success was over two decades ago.  Do credit unions conceived  in earlier eras still have the same political weight today?  Have the growth ambitions of some  via “voluntary” mergers and bank purchases raised issues of both member and public support for a less distinctive cooperative charter?

Can Small be Big Again?

I do not know what the future will bring.   Will ever-larger credit unions be increasingly viewed as just another impersonal financial option, like a bank?  Will the tax exemption survive the expansions of markets and scattering of local attention and knowledge?

Will the goodwill so critical in any industry’s ongoing success wither away as the seed corn for its future is no longer replenished? Or will credit union leaders see this declining trend as a priority and provide support comparable to the $100 million goal of CUNA’s Open Your Eyes marketing campaign?

Renewal efforts are underway. Can the initiatives to repurpose charters with new human capital be proven out?  Will the efforts to create more service center options via CUSO’s succeed?  Can the charter process be assigned to the regions so applicants are supported positively and quickly?

Two factors suggest this trend can be addressed.  The places of economic disparities and need are as numerous now as any time in our history.  The human spirit of solving problems and the values of cooperatives align with many seeking to bring change for a more equitable America.




Two Reflections from Memorial Day

Opposition to the Vietnam war on many college campuses led to the cancellation of ROTC programs.  Subsequently the draft was ended with all branches of the military now relying on volunteers to fill their ranks.

One observer commented on the fewer ROTC programs and the elimination of the draft as incentives for college graduates to serve in an all-volunteer military.  He foresaw a possible outcome as follows:  Societies fall to folly when they draw distinct lines between their warriors and scholars. What this ultimately leads to is society’s thinking done by cowards and its fighting done by fools. 

What if we are called to serve and fail to answer?

The heydays of credit union charters began in the Great Depression with passage of the Federal Credit Union Act in 1934.   Post WWII saw another upsurge in new chartering activity.  From 1949-1970 between 500-700 new FCU charters were issued per year.

By yearend 1978, when NCUA became an independent agency, 23,278 federal charters had been granted of which 12,769 (55%) were still operating.

Many factors affected this chartering explosion.   One was the social ethic of the Greatest Generation.  The cooperative values of self-help, local leadership and community service were closely aligned with the ethos of the generation forged by depression and world war.

Some writers believe this capacity for social responsibility has been superseded in current generations by a more individualistic focus,  personal independence  and financial success.

A guest editorial by Margaret Renkl on this change of values was published Memorial Day, May 31, 2021 in the New York Times.

My question is whether this attitude might contribute to the virtual absence of new charters in this century.   There have been 193 FCU’s in first 20 years of this century, or fewer than 10 per year.  Here are several excerpts of the writer’s thinking:

“Young men of my father’s generation grew up during wartime and generally expected to serve when their turn came. No generation since has felt the same way. There are compelling reasons for that shift — the protracted catastrophe in Vietnam not least — but I’m less interested in why it happened than in what it tells us about our country now. What does it mean to live in a nation with no expectation for national service? With no close-hand experience of national sacrifice? . . .

 The need for some nonmartial way to nurture communitarian qualities is more urgent now than ever. We have lately been reminded of the absolute necessity for Americans to be motivated by warm fellow feeling across divides of region, race, class, politics, religion, age, gender, or ability; to cultivate a sense of common purpose; to make sacrifices for the sake of others. And that reminder came in the form of watching what happens when such qualities are absent, even anathema, in whole regions of the country. . .

If Vietnam exploded the unquestioned commitment to national service, the coronavirus pandemic should have been the very thing to bring it back.

That it did exactly the opposite tells us something about who we are as human beings, and who we are as a nation. There is more to mourn today than I ever understood before.” 

The Question for Credit Unions

To the extent that our society has lost capacity to “nurture its communitarian” responsibilities, how does this affect the cooperative model?  Credit unions rely on volunteers. Their greatest strength is the fabric of relationships they cultivate with members and their communities.   Has the model lost its way as a new generation of leaders takes control without a link or even knowledge of the qualities that created the institutions they inherit?

Have credit unions abandoned their capacity to cultivate a sense of common purpose; to make sacrifices for the sake of others now that they have achieved financial sufficiency and can stand apart from their roots?

Is credit union leadership today susceptible to the social folly described by the first writer?