Author: Chip Filson

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From the Rust Belt to the Sun Belt and Back?

Two days ago CNBC host Kelly Evans in her periodic column The Exchange offered the following observations (excerpts):

“Owning real estate in the “sun belt” has probably been one of the greatest money-making opportunities of the past twenty or thirty years. And Covid, and the rise of remote work, has only accelerated all of that. 

“Or has it? The San Francisco Fed just put out a new study suggesting that it could be the “End of an Era” for the snow-belt-to-sun-belt migration which has been the distinctive feature of U.S. population shifts over the past 50 years. Their argument? The South is getting too hot. 

“It may sound like a reach, but their data on population shifts is worth considering. It shows many more parts of the sun belt losing population from 2010 through 2020 than in prior decades. Places in particular like Western Texas and Louisiana. (Although Florida–experiencing an influx of New Yorkers in recent years–remains an exception.) 

“The U.S. population is starting to migrate away from areas increasingly exposed to extreme heat days,” the researchers write, “toward historically colder areas, which are becoming more attractive as extreme cold days become increasingly rare.” Cities like Baton Rouge, Jackson (Mississippi), Shreveport, Garland (Texas); and Long Beach (California) stand out as seeing population declines both pre- and post-pandemic, according to Census figures. 

“Even Phoenix’s population growth has been slowing. By last year, it grew just 0.4%–a quarter of the growth rate it enjoyed pre-pandemic. Houston saw big declines in 2021. . .

“The Midwest could be a big beneficiary of a re-shift.  “Markets that are more affordable, that are enjoying 80-degree summers while other people are boiling, might become a lot more attractive–like Cleveland,” real estate expert Ivy Zelman says, which could be one market in particular to watch. 

“On top of the heat and storms, sun belt populations are also grappling with issues like soaring home insurance premiums (in Florida), or flood insurance premiums (in Louisiana). Real estate prices have also risen significantly in recent years, negating a big part of the cost savings in relocating from the north. 

“And you know what? New Jersey (where author Kelly lives) is lovely, actually. The towns are small and walkable. Errands are all pretty close. The hospital I had my kids at was seven minutes away. Some towns even pick up your trash from the backyard! And being close to Manhattan is a pretty nice perk. Last year was the first year since 2010 that the state actually saw positive net migration. 

“If by some twist of fate this continues, parts of the country that were previously left for dead might be the biggest economic beneficiaries in years to come.”

Strategic Assumptions Turned Upside Down

A significant credit union advantage has been their local roots.  This is partly a function of the field of membership and initial sponsor support; partly the limits of capital; but mostly because this market focus and knowledge created a major strategic advantage over much larger, often out-of-area competitors.

Local meant being part of the community with loyalty passed down through generations.  Then multiple economic shocks and changing regulatory options provided credit unions opportunities to move beyond their historical boundaries.  Select employee groups, multiple counties and even whole states defined new market potential.

After the financial crisis in 2008/09 some credit unions began to seek out of state expansions to diversify beyond their local economy into more appealing growth markets.

A major focus was the sunbelt states, especially Florida. Florida has no state income tax, strong growth, favorable weather and is a retirement destination for credit union executives from the colder states in the northeast and Midwest.

Since 2015, investments via bank purchases, mergers and some new branches have been made by out of state credit unions.  Here is a current estimate of the totals of this activity in Florida by the home state of these “foreign” credit union expansions:

Florida’s Out of State Credit Union Branches

CUs                          Branches
AL 2 6
CA 3 11
GA 2 2
ID 1 1
IL 1 2
MI 2 26
MN 2 2
MO 1 3
NC 1 8
NY 2 2
PA 1 1
TX 2 7
VA 3 36

Totals                  23                                107

These 107 branches are 10% of the 1,045 credit union locations in the state.

Some of these locations undoubtedly serve existing FOM’s such as Navy, Pentagon, and Walt Disney World.  But many represent investments to diversify from cold weather states to warmer climes as in the case of the 26 Michigan branches.

In Nevada, 25 credit unions manage 120 branches.  Of these totals, 11 credit unios are from out of state and manage 50 of the in-person locations.  Mountain American based in Utah has the most branches in the state.

Now Climate Change

While the economic outlook, warmer weather and personal tax advantages may cause Florida and Nevada to appear as attractive expansion opportunities, managing a single branch or small system away from the home office market is a challenge.  The network effects from expansion in adjacent markets are lacking.  There is no brand awareness or legacy reputation in these new locations. Any existing members may live in the area only temporarily.

Are these out of state, diversification outposts hundreds or thousands of miles from a credit union’s primary service area worth it?   What is the ROA of these investments?

Might more stable and innovative future growth now be in areas around major cities in the northeast and midwest such as Detroit, Cleveland, Toledo, Buffalo. Grand Rapids, Milwaukee?  Will local and national infrastructure investment and less extreme climate now make these THE future growth markets?

Is a compilation of “odd lot” branches around the country via mergers or occasional bank purchases a coherent strategy or merely ambition ungrounded by reality?

 

 

 

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Can Merger Incentives Be Replaced by Better Comp Plans?

Editor’s note: The following guest commentary is a response to the NCUA board’s July 18 proposed rule requiring written succession planning policies for all credit unions.  One rationale was that this action would reduce the number of mergers now occurring due to a lack of available CEO or board candidates at times of leadership transition.

By Ancin Cooley

The succession planning discussion during last week’s NCUA proposed rule is about who will control the future of an organization’s resources: the member-owners versus transferred to an outside third party’s control?

Here’s the key question to keep in mind as you read my views:

Is the members’ loss of their charter and capital comparable to the costs of Board/CEO succession planning by any measure?

Bridging the Gap: “The Middle Way”

The solutions below are born of fatigue from reading about merger abuses and pragmatism. I’d rather a Board give a CEO what they feel he or she has earned in a manner similar to community bank compensation versus that same CEO attempting to convince their Board to merge for a “backend” payout from the surviving institution.

If we don’t openly address “backend” payouts post-merger, we won’t have a serious conversation on this issue. (Source: CU Merger Update Part II: More Management Comp Deals, Some Member Payouts, Usual Reasons and, Sometimes, No Reasons are Cited for Combinations)

Practical Solutions for Succession Planning

Let’s get down to business.

  1. Incentivize CEOs with Bonuses for Succession Planning Tasks: Offer financial incentives to CEOs for the annual completion of board succession tasks. This ensures that succession planning remains a priority and is executed effectively. (A colleague on LinkedIn thought this was a horrible idea, stating that CEOs are already getting paid to do their jobs. I agree with her logic, but I have also been working in financial institutions for 20 years. It won’t happen without a carrot.)
  2. Allow CEOs to Benefit from Capital Growth: Create a system where CEOs can benefit from the internal capital growth within their organizations, fostering a sense of ownership and alignment with the credit union’s success. For example, if a CEO starts with $8 million in capital and grows it to $24 million by retirement, they should access some of those funds in the form of a “liquidity event.” This approach reduces the risk of CEOs seeking payouts through unnecessary mergers.

Implementing these actions addresses the “elephant in the room” of self-interest driven mergers while aligning personal and organizational outcomes. The goal:  fewer mergers and more stable, mission-driven leadership transitions.

Who is going to object to the solutions I’ve provided above?

  1. Credit unions that rely on one solution for their continued growth-more mergers
  2. Firms that provide secondary capital that support mergers
  3. Lawyers that offer merger services
  4. Financial firms, brokers and consultants that provide merger services

This collective group drives the marketing and PR surrounding mergers, shaping the narrative to their advantage. During the comment period, this same group will prompt state leagues to oppose what is truly in the best interest of the members, thus prioritizing their own financial gains.

The institutional efforts to grow via industry consolidation is a feasible external growth strategy. But it belongs in the banking open-market world, not the credit union cooperative model. Credit unions with merger growth plans are playing tackle at a flag football game.  Cooperatives were intended to be perpetual by paying results forward, a different outcome entirely from private wealth accumulation. 

Common Rebuffs Against Succession Planning

  1. Regulatory Burden:

Ah, the classic “regulatory burden” argument—how many times have we heard this one? It’s a tired refrain. But let’s break it down: What is the regulatory burden, and for whom? For the management teams who find it cumbersome? What if this so-called burden is a safeguard for the members?

If we truly embrace free markets, then if one CEO finds succession planning too burdensome, the members, through their directors, can find a CEO who sees it as a manageable task. The framing of regulatory burdens should always consider who is complaining and why.

During the recent open discussion on the matter, NCUA Board Member Kyle Hauptman mentioned a CEO who claimed that implementing succession planning would force his credit union to merge.

Is it the managers’ place to suggest to their members that putting effort into leadership continuity—to protect their charter—is going to result in a merger? Imagine if you owned a commercial building and asked your property manager to implement a succession plan. If your manager rebuffed with, “If you make me put this succession plan in place, we’ll be forced to sell the property,” what would your response be?

  1. Flexibility Concerns:

Some feel that a one-size-fits-all rule for succession planning would not consider each credit union’s unique needs. The NCUA proposal allows for broad discretion in implementation, enabling each credit union to tailor its succession plans according to its specific circumstances and needs.

  1. Cost of Implementation:

While developing and maintaining a succession plan involves some time and cost, these are minimal compared to loss of the charter. NCUA’s new charters are required to raise a minimum of $500,000 t0 $1.0 million to open for business.  Thus, the loss of any charter for the membership, the community and the credit union cooperative system is huge. 

Conclusion

Succession planning is not just a procedural necessity; it is an organizational imperative to ensure the continuity of the mission and values of credit unions. As we navigate the complexities of leadership transitions, let’s prioritize the long-term health and cooperative principles that define our organizations. By doing so, we can safeguard the future of credit unions and continue to serve our communities effectively.

Implementing practical solutions, such as incentivizing succession tasks and allowing CEOs to benefit from capital growth, can harmonize personal and organizational interests, leading to a more stable and mission-focused future.

In short, THERE AREN’T TOO MANY CREDIT UNION TRUE BELIEVERS LEFT. COOPERATIVE IDEALS SEEM TO BE A THING OF THE PAST. IF THE MOVEMENT HAS ANY CHANCE OF SURVIVING, FOLKS GOTTA GET PAID. 

P.S. To all the institutions relying on mergers as their primary driver of growth.

The day after the merger, all the problems that existed before your merger will still be there. Only now they’re scaled and compounded.

Mergers teach you one thing: how to merge. You haven’t learned how to execute a strategy, build your brand, or manage the risks of a larger organization. You haven’t developed a talent pipeline. And candidly, you won’t have time to address any of these issues because you’ll be too busy dealing with the residual effects of the merger, such as core integrations and member withdrawals.

Mergers should accelerate a strategy that’s already working, not as the ignition for your growth. God bless and happy hunting.

If you are interested in further conversation, please reach me at acooley@syncuc.com or check out my YouTube channel here.

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Credit Unions and the Presidential Campaign

One of the organizations that Presidential candidate Harris references in her biography is her college sorority, Alpha Kappa Alpha (AKA).   Just over a year ago, this organization chartered a credit union.

I don’t know if Vice President Harris is a member of the credit union.  However, this new charter has the potential to put credit union’s unique role front and center in the campaign.

Following is some additional information on this newly chartered group.

Chartered in February 2023, For Members Only Federal Credit Union is “the FIRST, Black-owned, woman-led, sorority-based, digital banking financial institution in the history of the United States.“

Presidential candidate Harris joined the sorority while attending Howard University.  Its members will undoubtedly be active in the presidential campaign.

Financials After One Year

As of March 2024, the “FMO” credit union reported 7,489 members with an average share balance of $467.   The balance sheet numbers include: $4.2 million total assets, no loans, $3.5 million in shares, and $717,000 in capital.

The following is from a press article at the time of  the chartering announcement:

ALPHA KAPPA ALPHA SORORITY INC. ROLLS OUT DIGITAL CREDIT UNION FOR ITS MEMBERSHIP, AIMING TO HELP BUILD WEALTH

Alpha Kappa Alpha, the nation’s oldest Black sorority, is entering the financial services space to reportedly help build generational wealth.

The For Members Only (FMO) Federal Credit Union in Chicago is being launched by the prominent organization. The institution has gained its federal charter and shares insurance coverage from the National Credit Union Administration (NCUA) and is expected to begin operations this year, based on this news release.

Founded in 1908 at Howard University in Washington, D.C., Alpha Kappa Alpha (AKA) is an international services organization with 355,000 members and 1,061 graduate and undergraduate chapters in the United States and in 11 countries per its website.

The credit union plans to offer safe, fair, and affordable financial products and services digitally. It will serve members, future members, and their communities. It plans to provide members various savings and loan services its first year, including checking accounts, online banking, and debit cards.

“As the first Black-owned, woman-led, sorority-based, (and) 100% digital financial institution, we are poised to deliver innovative financial solutions that drive economic growth for our members, chapters, families and employees of Alpha Kappa Alpha Sorority,” AKA International President Danette Anthony Reed shared in a letter written to members and reported by the Atlanta Journal-Constitution.

Unlike banks, credit unions often are non-profit institutions serving members. Being member and cooperatively-owned, they can sometimes offer higher rates on savings accounts and lower rates on loans because they have lower operating costs and don’t pay profits to shareholders.

NCUA Chairman Todd Harper said among his comments, “This charter is also in keeping with AKA’s current initiatives to assist members in building economic wealth, promote social justice, and uplift communities, all of which are fundamental to the statutory mission of credit unions.”

Banking analyst William Michael Cunningham says the AKA Credit Union launch is a significant development that will have a positive impact on the Black community. He says he believes anyone can join a credit union if they are within the credit union’s field of membership.

He says relative to the overall Black community, their common bond membership has higher income, is wealthier, has more stable employment, and are better educated. “This is a very attractive demographic around which to base a bank or financial institution.”

 

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Knowing When It is Time to Leave Office

For the past month, the public has watched President Biden struggle whether to continue his campaign as more and more questioned his leadership capacity.   His predecessor took a more forceful effort to remain in office on January 6, 2021.

It is extraordinarily difficult for appointed or elected public officials to know when to leave their roles.  These public positions are prized for their power, perks and prestige.  Stepping out of the limelight is contrary to the ambition that brings most persons to seek roles of public responsibility in the first place.

Moreover appointed positions frequently confirm a person’s sense of special purpose or even even self-worth.  As former NCUA Board member McWatters commented about his colleagues’ views in May 2015:

“Regulatory wisdom is not metaphysically bestowed upon an NCUA board member once the gavel falls on his or her Senate confirmation. NCUA should not, accordingly, pretend that it’s a modern day Oracle of Delphi where all insight of the credit union community begins once you enter the doors at 1775 Duke Street in Alexandria, Virginia.”

Compounding the difficulty of moving on, is that one’s closest advisors brought to new positions of responsibility that will be lost, are hesitant to tell the “boss” it’s time to go. So their counsel is to remain until external events cause turnover.

The Two Exceptions

Every NCUA board member and chair have stayed beyond their established term until the administration moved to replace them.  There are two exceptions-the first two Chairs of the NCUA Board.

Larry Connell left his six year term on January 1, 1982 following the appointment of Ed Callahan as Chair the previous October.  He became CEO of Washington Mutual Savings Bank in Seattle.  The thrift had 37 branches and was the largest and oldest mutual savings bank in Washington.  For Larry it was a clear move up in terms of personal and professional opportunity.

At the February 1985 CUNA GAC meeting in Washington DC, Chairman Callahan announced that he and his two colleagues, Chip Filson and Bucky Sebastian, would be leaving NCUA to form a credit union consulting company.  Ed’s resignation was effective May 1, 1985 or over two years before the August 1987 end of his six-year term.

Ed’s explanation for why he believed it was time to move on is insightful. He said that he had done what he came to NCUA to accomplish.  In a May 1985 NCUA News interview he listed these as “the deregulation of Federal credit unions, the decentralization of the agency, the capitalization of the NCUSIF. The result was that “most people at NCUA have a good sense of where the Agency is going and how they fit into the picture.”

The Example for Today’s Leaders

In Callahan’s view, his role as Chair was done. “It’s all working. The team is in place. There is a sense of confidence in the Agency, and it has infected the credit union movement as well.”

Time to move on.  Government employment was not his career goal or personal ambition.

Ed and Larry’s examples of leaving with time left on their terms illustrates the character of these two initial chairmen.  Their professional lives and contributions were not defined by their time at NCUA.  Both continued to make meaningful impact in multiple future leadership roles.

I believe the logic Ed used to describe his decision is important for  leaders today.  He became chair with a purpose and a plan.  When the results were accomplished, his role as chair was complete.  His tenure was not arbitrarily defined by the term of an appointment.  Or the next election outcome.

Without a clearly defined purpose, leaders within government and credit unions will resort to cliches about safety and soundness or people helping people. Leaders whose purpose is simply responding to unfolding events will not know when their role should end. For change is always happening.

The instinct to perpetuate one’s time in a role and then referring to one’s experience as the basis for continuation, will lead to stagnation.  This is the common justification for renominating current board members to fill annual vacancies in credit union elections.

Knowing when it’s time to leave is as important a skill as the effort used to earn the position in the first place.

President Biden has been universally congratulated for his decision to give up his effort to remain in power.  Likewise Ed’s service has NCUA Chair of just under four years, is recalled as a special time of “partnership” between the agency and the credit union system.   Isn’t this outcome what democratic governance is intended to accomplish?

 

 

 

 

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The Value of “Look Backs”

Part Two of Community Capital,  Race, Equity and the Credit Union Movement is a case study of the abrupt liquidation in 2010 of a $750,000 credit union founded by the historic black fraternity, Alpha Kappa Psi.

The story is told from the viewpoint of the credit union participants. Co-author McCray presents eleven historical documents in the Appendix.  These  include the minutes of NCUA’s closed board meeting approving the liquidation and a 32 page transcript of the November 5, 2010 US District Court hearing in which the credit union challenged NCUA’s action.

Reading the documents along with the author’s descriptions presents two very different versions of events.  Ultimately the Judge in November ruled in favor of NCUA’s actions.

What is unusual in this case is the credit union’s perspective.  Rarely if ever do the board members and leaders of a credit union which is the target of an NCUA takeover, ever speak out.

Speaking Out

So what is the value of reviewing this event  14 years later?

As noted in the final excerpt below, the credit union raised a fundamental constitutional question about NCUA’s summary liquidation action that may have relevance today.

The details of the story and in the official record of both parties’ actions are not pretty.  NCUA examiners were at times arbitrary–for example going in and unilaterally changing the credit union’s 5300 call report for June 30.  The agency was informed of the approval of a $100,000 CDFI grant for the credit union, but acted before the funds could be disbursed.

NCUA’s characterizations of the credit union were uniformly negative, often with a factual basis, but absent any context or recognition of the credit union’s unique business model and the founders’ commitment.  The conflicts became personal-on both sides.

This story is a unique first hand account of regulatory and credit union failure.  When a credit union ceases operations, it is a shared responsibility by both NCUA and the coop. In this situation, the effort to merge the credit union with HOPE FCU  is apparently not even considered by the agency.

In every failure there are lessons that may lead to future improvements. However because NCUA is intimately involved in failures, before and after, the bureaucratic instinct is to get rid of the problem as quickly as possible to avoid any regulatory embarrassment or accountability.

The agency will then bring up these unexamined failures as “object lessons” when proposing new rules or as precedents for new authority over credit unions.

Most recently at last week’s NCUA board meeting  a new incentive compensation rule was justified by board members asserting such incentives had contributed to WesCorp’s and a California Credit union’s failures 16 years earlier.   Both references were at best misleading if not irrelevant to the actual problems causing each credit union’s demise.

For example, the fact that NCUA had a full time corporate examiner on site for years at WesCorp monitoring every aspect of the credit union and sending reports back to head office, went unmentioned.

When failures occur,  the regulator’s goal is just to move on.  In past open board meetings all three members  supported a look back at the agency’s management of the Corporate liquidation events.  But nothing has been done to learn from the largest NCUSIF losses in credit union history that in retrospect were based on dramatically erroneous projections of potential investment shortfalls.

Without independent review of regulatory actions and objective “look backs” with the benefit of known outcomes, the credit union system will continue to pay the costs of past failures with future ones.

Whatever one’s assessment of McCray’s description of the closing of Alpha Kappa Psi FCU, all should be thankful he and his colleagues made their points of view public.

The Due Process Arguments

A final excerpt from the Alpha Kappa Psi FCU liquidation-the legal appeal from pages 216-217:

Due process requires that legal proceedings must be carried out fairly and under established rules and principles. In the banking industry, courts have held that due process was satisfied by a post-deprivation hearing. However, the question here was, “Does being heard after the liquidation has already taken place satisfy Fifth Amendment due process requirements for a natural person credit union?”
Are the due process protection considerations the same for corporations as distinct from individuals in membership cooperatives?

Thus, this was a “case of first impression”—that is, a legally significant case that could establish a legal precedent because it was the first time this factual scenario would be considered by a federal court.

There are two fundamental differences between banks and natural person credit unions—individual association versus corporate form, and initial capitalization levels. Banks and credit unions differ greatly. First, banks are for-profit commercial enterprises, while credit unions are not-for-profit associations.

Second, banks are corporations. Natural-person credit unions are unincorporated associations of individuals. Third, the courts have long held that constitutional protections differ between corporations and individuals. The courts have only held that corporations are entitled to First Amendment protections. Hence, post deprivation hearings (i.e., after an action has resulted in loss of life, liberty, or property) do not violate banks’ due process rights since courts have not held that corporations are entitled to Fifth Amendment due process protections at all.

However, natural-person credit unions, as cooperative associations of individual members, are different. They have full constitutional rights and are entitled to individual due process protections. Thus, a post-deprivation hearing did not satisfy individual Fifth Amendment due process protections.

Therefore, KAPFCU believed that the NCUA liquidation and dissolution order was unconstitutional because it was based on a closed-door meeting, and because a post-deprivation hearing could not satisfy individual Fifth Amendment due process concerns as a natural-person credit union. KAPFCU believed its due-process rights were doubly violated.

 

 

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“Rush to Judgment”

An excerpt from Chapter 14 of Community Capital,  Race, Equity and the Credit Union Movement.  Co-author Michel McCray continues telling how NCUA closed  Kappa Alpha Psi FCU in 2010. (fourth in a total of five selections)

“The NCUA board members refused to dissolve KAPFCU at first,” I said. “They recognized that cash basis vs. accrual accounting increased expenses and created our net worth ratio problems.”

“That’s good.”

I explained, “Region IV officials convinced the NCUA board to liquidate KAPFCU based on a series of lies and false representations in an ex-parte proceeding.”

“Which is total bullshit.” Victor said, “We need to demand a personal meeting with Debbie Matz or get a hearing before the entire NCUA board.”

“They ain’t gonna listen to us, Vic,” I said. “They’re trying to screw us.”

“Well, if they won’t listen to us, then we need to get [Representative] Eddie Bernice Johnson,” Victor said, “and the whole freaking Congressional Black Caucus to reach out to NCUA on our behalf.”
“If that doesn’t work, Vic, we need to take them to court ASAP.”

Victor nods. “Who do we know in Washington, D.C.?”

Representative Eddie Bernice Johnson (D-TX) wrote a letter to Debbie Matz requesting a meeting or emergency hearing for KAPFCU. NCUA officials ignored the emphatic request from a distinguishedCongressional Black Caucus member.

They also ignored KAPFCU’s frantic meeting request in a last-ditch effort to stop the surprise liquidation.

I issued a press release announcing KAPFCU’s decision to sue NCUA. If successful, KAPFCU v. NCUA could be the Brown v. Topeka Board of Education case of the credit union movement.(pages 201-202)

Tomorrow: the Court Hearing

 

 

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Confrontation: An NCUA Examiner and Credit Union Leader

In Community Capital,  Race, Equity and the Credit Union Movement co-author Michel McCray tells the story in Part 2 of the closing of Kappa Alpha Psi FCU in 2010.

He creates first person accounts and reconstructed dialogue of some of the events from the participants.  The following excerpt is from a quarterly  meeting between the NCUA examiner and Victor Russell who was leading the credit union.

Confrontation  (From Chapter 12, Alice in Wonderland)

An angry sun glared off the tinted glass of a small law office in Richardson, Texas. I waited for my cousin, the proprietor, to return. Tall in stature but slight in height, Julius Thompson is a brilliant attorney who is the general counsel for KAPFCU. He provides legal expertise and guidance to the fraternity enterprise. He also offers his offices, file cabinets, and conference room to support the KAPFCU effort.

Friends and family call him the “Godfather;” Julius Thompson, the bald barrister with a caramel coffee complexion. Julius has a knack for networking and connecting people. He also recruited me to assist KAPFCU with government relations and community development expertise to help grow the fledgling credit union. . .

At 6:02 p.m., an alabaster male with stern, square cheekbones and thin lips walked into the conference room at Julius Thompson PLLC to conduct the quarterly examination of KAPFCU, the only federally chartered Black-owned financial institution in the state. He wore a dark conservative suit, a busy patterned tie, and polished leather shoes. He was clean-shaven with amber hair and piercing cobalt eyes.

NCUA Supervisory Analyst Tony Rausch personified the Texan view towards minority-owned financial institutions. Privileged, aggressive, and assertive, his demeanor was best described as “typical Texan,” exuding his white male privilege. Empowered as a federal official, he was assertive regardless of whether he was right or wrong. Ultimately, being a “Fed” means that you never have to say you’re sorry.

A loud commotion erupted inside the conference room of the small legal office and real estate title plant. Tony Rausch, a “good ‘ol boy” from Texas, versus Victor Russell, a fast-talking hustler from Chicago. They congealed like oil and water. However, Victor had transformed from Chicagoan to Texan, donning ten-gallon hats and ornate belt-buckles with Italian suits—even Black people do rodeo in Texas.

During the regular quarterly examination, Victor Russell described the current operations of KAPFCU and his plans to increase revenues by origination fees for residential or commercial mortgage transactions. Tony’s eyebrows rose. “Slow down, Victor, before you try to jump into high finance. You guys are just sitting on your deposits. If you want more money, make more loans to your members.”

Victor sat upright, interlocking his fingers. “We are trying to mitigate our risk. In banking, we say, ‘know your customer.’ We know our members and make loans to individuals we know will pay us back.”
“Very good, because that’s the only way you can legitimately make money to generate revenues,” said Tony.

Victor argued that KAPFCU was not issuing or holding mortgages on the credit union’s balance sheet. Instead, KAPFCU would only make referral fee income by finding qualified borrowers for other financial institutions. Rausch balked at this and declared that KAPFCU could not generate mortgage fee income because of real estate risk. “I will not let you do that, Victor.”

“What do you mean, you won’t let us do this? You don’t run our credit union—we do!” Victor bellowed.
“That’s not how small credit unions operate.” Tony replied, “You must grow your loan portfolio. Make your money from member loans.”  (pages 180-181)

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The Most Significant Challenge to NCUA’s Authority

July 30, National Whistleblowers Appreciation Day, is the publishing date for Community Capital,  Race, Equity and the Credit Union Movement.

Clifford Rosenthal and Michel McCray are co-authors. The book’s detailed case study is in Part Two.  In an earlier post, I quoted Rosenthal on its significance even today.

The story of Kappa Alpha Psi FCU and its abrupt liquidation in 2010 is recounted in five chapters by McCray with frequent observations from participants and referencing key documents from NCUA.

This excerpt from Chapter 12, Alice in Wonderland, presents a core issue.

Regrettably, NCUA evaluated KAPFCU as if it were a mature credit union, defined as being ten years old with $10 million or more in assets. The accounting rules and regulations are entirely different for these small, new credit unions—but KAPFCU was improperly evaluated based on the much higher standard by NCUA examiners.

Ignoring the improvement in KAPFCU’s NWR to 3.67% by June 30, 2010, NCUA opted to move forward with liquidating the credit union. KAPFCU challenged NCUA’s action, bringing the case to the federal district court in Washington, D.C.

Ironically, KAPFCU’s court case may be the most significant challenge to the NCUA’s authority in recent memory. This tiny African American credit union was contesting the constitutionality of the Federal Credit Union Act and NCUA’s rules and regulations themselves. KAPFCU’s chief complaint was that it had not been afforded the full flexibility allowed under NCUA rules, regulations, and supervisory authority for credit unions of similar size and character.  (page 178)

Tomorrow:  the clash of personalities and backgrounds.

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The Ultimate Coop Advantage

Every organization will face moments or periods of crisis.  These events can cause leaders to question the sustainability of their enterprise.

Sometimes the challenges are internal:  succession, mismanagement, poor leadership, or loss of confidence and purpose.   External threats seem  never ending from unrelenting competition, extraordinary climate events, and even the constant probing by criminal or ransomware bad actors.

What is the ultimate defense against these dual sourced  tests?   Some would say it is the level of capital (net worth ratio);  others, capable tested leadership; and finally some credit unions will reference the fact they are NCUA insured.

The irony of this last assurance is that NCUA has clearly demonstrated that it is not in the business of protecting credit union charters or even granting new ones.   Their approach is purely administrative: to note the steady passing and decline of  industry charters in quarterly updates.

The Strength in All Seasons

I read this mission-like purpose statement recently:

Our purpose is to manifest unity as:

We experience, practice and pursue community;

We share resources willingly to benefit one another;

We know and respond to other’s burdens;

We encourage, admonish and support each another;

So that together we achieve greater economic justice and individual well-being for this and generations to come.

Too idealistic?   Almost religious in tone?   Yet it captures the most important foundation of cooperative strength:  the support and belief of the member-owners working together, that is “community.”

When member confidence in a credit union is not the primary goal of every transaction or service, sooner or later, the owners will see that the organization as just another financial option.  It will have lost the unique cooperative foundation-the loyalty and belief of its members.

This confidence should be the principal responsibility of the board, to be visible and available in all seasons—the good and the challenges.

Because credit unions are in the financial business, it is tempting to assure success in purely financial numbers or goals.  However that has never been the credit union advantage.  Rather it is the relationships with members.  That is an outcome earned over months and years, not achieved with a branding or inventive marketing effort or even offering the latest technology.

Credit unions are organized on one of the most important aspects of life—what we seek is  relationships that reflect our values and priorities.

What matters to you in your activities and professional endeavors?  The $ signs or the relationships?

 

 

 

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A Preview for July 4th, 2024

American Commerce and the Declaration of Independence

The 4th of July is every person’s chance to celebrate the nation’s birthday and honor our collective vision.

Among the Declaration’s unalienable Rights is “the pursuit of Happiness.”

The Commercial Spirit

This pursuit of happiness has become entwined with America’s commerce. In the post WW II federal highway infrastructure project, the car became a symbol of this open-ended personal adventure.

In 1976, Chevrolet was the most popular car in the USA. General Motors crafted a slogan with video declaring that Chevy and the USA were the same: “Baseball, hot dogs, apple pie, and Chevrolet.”  The company even tried to appropriate baseball’s 7th inning stretch to celebrate its brand leadership.

Today, crowds stand to sing God Bless America. A triumph of ideals over markets?

Independence and Credit Unions

Credit unions are an expression of America’s founding document.  Their self-help character demonstrate what makes American freedom and enterprise so powerful.

Credit unions embody more than the Declaration’s goals of life and liberty.  Cooperatives exemplify how the document’s spirit is to be realized in application. The last sentence reads:

And for the support of this Declaration . . . we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

This mutual pledge is every credit union’s founding ethos. Moreover, like America’s political democracy, the cooperative system depends on individuals’ character and their adherence to the principle of self-rule.

The first generation of credit union pioneers. like the founding fathers and mothers. understood both the ideals and challenges of self-government.   Credit unions are started and sustained by volunteers.  They shared funds and a commitment to address needs and common purpose.

The initial dimes and quarters may have been small, but their impact on lives was real.   Like the political colonies, these economic revolutionaries knew each other.  They joined to spread their vision of financial self-rule across America.

The Challenge

While the Declaration’s truths may seem self-evident, the democratic process is an ongoing experiment.  Today almost all credit union founders have passed on—will their basic principles be sustained?

As professional leaders take over, will their institutional ambitions for growth and size replace common purpose for members?  Will the pursuit of happiness instead become the happiness of pursuit?