Author: Chip Filson

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The Borrowing-Liquidity Trends in Credit unions

From a September 2023 CEO’s team memo update:

Liquidity

“We remain laser focused on managing liquidity risk in this environment of aggregate decreasing money supply.  

“We finally sold our $18 million pool of auto loans that we’ve been marketing  for two months.  As with all other loan sales, we will service the pool in order to maintain and grow member relationships.  The transaction generated cash of just over $15.3 million.  

“We expect to end the month at a loan to deposit ratio in the 102% neighborhood, down from a high of 106.41% in July.  Our goal remains to reduce this ratio to no more than 100% by year end.  

The best way to accomplish this is through acquisition of core deposits from our friends and neighbors in our primary market.  We’re also marketing another pool of loans so that we don’t have to slow our lending origination machine any further.”

This not an isolated event.  Yesterday’s Credit Union Times summarized  auto loan  securitizations by credit unions since 2019, with two totaling $501 million in this past week.

Economic Forces Drying Up Liquidity

Two factors have disrupted normal  credit union ALM liquidity management over for the year ending June 2023.

The first is the 18 month long increase in interest rates by the Federal Reserve to reduce inflation.  The process began on March 17, 2022. The Fed raised its overnight  Fed Funds target from effectively zero to today’s range of 5.25-5.50%.

The Fed’s intent is to slow the economy, lower demand for financing and lower inflation to 2%.

The second was the sudden bank crisis in March of this year.  Here is the cascading sequence of events from one summary report:

In the lead-up period to the crisis, many banks within the United States had invested their reserves in U.S. Treasury securities, which had been paying low interest rates for several years. As the Federal Reserve began raising interest rates in 2022,  bond prices declined, decreasing the market value of bank capital reserves, causing some banks to incur unrealized losses. To maintain liquidity, Silicon Valley Bank sold its bonds and realized steep losses.

The first bank to fail, cryptocurrency-focused Silvergate Bank, announced it would wind down on March 8, 2023 due to losses suffered in its loan portfolio. Two days later, upon announcement of an attempt to raise capital, a bank run occurred at Silicon Valley Bank, causing it to collapse and be seized by regulators that day. Signature Bank, a bank that frequently did business with cryptocurrency firms, was closed by regulators two days later on March 12, with regulators citing systemic risks. . .

The collapses of First Republic Bank, Silicon Valley Bank and Signature Bank were the second-, third- and fourth-largest bank failures in the history of the United States.

The Fed created a new lending option to cope with the uncertainties resulting from these failures. To calm rattled financial markets and support banks, the Bank Term Funding Program (BTFP) began on March 13, offering maturity dates of up to one year.

The BTFP’s role was focused on  firms that had large unrealized losses on their government bonds and potentially at risk of large-scale deposit withdrawals.  The intent was to prevent losses from forced sales of underwater securities to fund deposit outflows.

The new program charges a higher rate than the discount window.  One other important difference  is that while the BTFP requires banks to offer collateral, it values the collateral at par, rather than on a mark-to-market basis.

The Credit Union System’s  Borrowings at June 2023

Credit unions did not have the lending or deposit concentrations of the failed banks. But like all financial institutions, their term investments have declined in value.

Members were seeing very competitive savings rates in money market  funds and CD specials.  Share growth for the year ended June 2023  was just 1.4%.  At June 2022, the 12-month growth was 8.1%.

Loans however are still increasing at double digit rates (12.8%). Short term liquid funds are declining.

One response to tightening liquidity was increased borrowings. The table below shows the five most recent quarter-ending  borrowing totals and their  source for the credit union system.

Total Credit Union System Borrowings    (June ’22 to June ’23)

Source:  NCUA call reports

The trends from the data show:

  • Total number of credit union borrowers grew 50% from 838 to 1,260 in one year.
  • Outstanding loans increased by $90.1 billion or 300%.
  • The Fed Reserve Bank (FRB) became a significant new source growing from 1.6% to funding 25.5% ($30.8 billion) of credit union borrowings.
  • The largest lender was the FHLB system increasing from $26.1 billion (86%) to $84 billion (69.7%) of total loans.

Total borrowings of $120.4 billion are 5.4% of total industry assets (compared to 1.4% at June 2022) and 55% of June 2023 capital.

System liquidity is tightening. The second observation is that in the market uncertainty following the banking failures and continuing liquidity demand, the credit union funded facility, the NCUA-managed CLF still has zero borrowings.

The last CLF loans were paid off in  2010.  There has not been a single borrowing in the thirteen years since.

The Federal Reserve loan window stepped up quickly and creatively to respond to events.  The FHLB system expanded its traditional lending role.  The CLF has the borrowing capacity and legal authority to match the needs being served by these two primary lenders. But it is “missing in action.”

Tomorrow I will evaluate what the CLF’s absence means for NCUA and the credit union system.

 

 

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Doing the Right Thing

Yesterday a long investigative report on the contested SECU board director election was published in The Assembly.  This digital investigative journal’s role is to publish “deep reporting on power and place in North Carolina.”   Carli Brosseau has written a lengthy description of the circumstances around this election.

The article is well- researched, provides multiple points of view, and important context.   She contacted me as part of her reporting.   I referred to my blogs on SECU for why this event was significant for the entire credit union system.

What It means to be a Credit Union

Carli provides a straight forward description of their unique design for her readers: “Credit unions are set up as not-for-profit cooperatives where every member, no matter their account balance, is an equal part- owner.  That ownership share is the reason members get a say in who’s on the board. It’s also part of what makes them different from banks, which are for-profit and owned by investors. “

Her story provides two themes about how this coop democratic design is at the core of this election.

The first is the multiple ways the incumbent leadership has tried to thwart the members’ role in elections.  The nominating committee refused  three member petitions to be on the ballot.  The “self nomination” process was changed to limit to ten days the time to gather the required 500 signatures once the “official’ candidates were announced.  The annual meeting process has been modified to prevent traditional new and old business from being brought to the floor.  This was how the initial member concerns had been raised.

This recounting of board incumbent’s trying to protect their position and to discourage or ignore member views is not new.  In almost all cases thwarting these attempts  is successful.  The result is no democratic coop governance.  Incumbency perpetuates itself. Boards crystallize into a ruling elite.

This SECU example is important because it shows that even in a very large coop, the members can make their voice heard-albeit with much perseverance.

The Debate Over Loan Pricing

The second element of democratic design at issue is how should the loan and saving products offered members be priced.   Should members using the same service such as an auto loan or a CD be given the same pricing?  Or, should those who are better off receive more favorable terms than those who have lesser funds?

SECU’s adoption of risk-based lending is the other theme in the story that is relevant for credit unions role as an alternative to for-profit banks.

Most financial firms and credit unions use risk-based pricing today.   SECU is an outlier. Its 85-year history shows a single pricing model can succeed. Carli’s story clearly presents these contrasting views of its role in SECU.

CEO Brady’s logic and initial results are reported as follows:

“SECU opted for a more compressed pricing structure than most other lenders use, said Leigh Brady,

“SECU launched risk-based lending for car loans in March, with a 4.5 percent spread between what a borrower in the lowest credit tier pays compared to a borrower in the top tier, Brady said. And the credit union’s core members—state employees and retirees—get a 0.5 percent discount.

“From Brady’s perspective, the policy is working. More members are opting for car loans from SECU, and a greater share of those borrowers have credit scores in the top tier—18 percent in March 2022, and 28 percent a year later, according to data Brady provided.

“SECU is still willing to lend to people with low credit scores, she said. “There are lenders that just absolutely will not lend to anyone below a 660 credit score,” said Brady. “We do. We lend below 540.”

“She thinks the new loan policy is actually fairer than the old one.

“Brady said she came to recognize the “harsh reality” that SECU had been overcharging its members with the best credit.

“Another factor, director Wooten said, was persistent questioning by regulators about the diversity of the loan portfolio. “We had regulators that were always concerned that we had all of our lending in one bucket,” he said. “We had all of these mortgage loans, and they were in this bucket where most of the folk were in, you know, this middle tier or lower.”

The contrasting view is presented by one member-nominated candidate’s letter sent to SECU’s chair following the risk based pricing discussion at the 2022 annual meeting:

“Clements laid out his credentials—he had been a member for 45 years, currently serves on the local advisory board, and was previously on the SECU Foundation board and a loan review committee—and said he was appalled by the board’s adoption of risk-based lending. “This policy clearly signifies that all our members are NOT equal.”

What is a Credit Union’s Purpose?

The debate is joined.  How should a democratic, member-owned  coop behave after the votes are  counted.   Does this democratic foundation end at the ballot box, or is it intended to carry over in the business practices of the credit union?  Should a member with more resources get a better deal than one with less?

Or even more direct, should those with a lesser financial status be charged more on loans so that the well-to-do pay less?

Both models can and do work.  Is coop design intended to perpetuate the financial inequalities that members bring to their relationships or to give everyone  an equal place on the financial starting line?

The distribution of wealth in America is increasing year after year.  Those that have the least or know the least, pay the most. If the coop model does not address these growing disparities in financial outcomes, how can democratic economic opportunity be realized?

The article presents clearly the credit union challenge of democratic governance and opportunity in a capitalist economy where accomplishment and status is often equated with personal wealth.

What’s Next

After interviewing many of the principals, the author concludes with this outlook:

“It’s unclear which vision will win members’ approval in the board election, or how many people will seize the chance to have a say.”

Now it is up to the members to decide.  This is how the democracy is supposed to function. This is the first-year online voting is  an option.

One person, one vote is an important aspect of coop uniqueness.  Letting the members vote is Doing the Right Thing.

On October 10th, the livestream link of SECU’s annual meeting will be available from the SECU website www.ncsecu.org at 1:00 p.m.  Tune in.

 

 

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When Will Interest Rates Fall?

On Friday’s market close, traders were talking about the 10-year Treasury yield reaching 5%. Right now, it’s at 4.49%.  Other short term rates were:

  • The one-month Treasury bill is at 5.55%.
  • The two-month T-bill is 5.60%.
  • The three-month T-bill is 5.55%.
  • The six-month T-bill is 5.53%.
  • The one-year T-bill is at 5.46%.
  • The two-year note is at 5.03%.

This inverted yield curve (10-year rates lower than short term yields) has been the situation for over a year.

When might rates stabilize or reverse is a topic for any CEO trying to manage  multiple ALM risks.   But must rates go back down?   Or are are markets developing a new normal, higher yield curve?

This week I will look at some industry data about how this rise over the past 12 months has affected credit union liquidity.

Many economic observers have been puzzled why the highest short term rates this century have not stalled the economy, caused a recession, or even undercut the positive stock market gains. GDP is still growing.

But one person thinks this not-too-hot, not-too-cold economy must  face a day of reckoning, unless interest rates come down soon.   This is certainly not the Fed’s latest policy intent from their September meeting.

Kelly Evans is a commentator on CNBC’s The Exchange.  For most of this year, she has been critical of the Fed’s increasing interest rate steps. She cites data from analysts which lead her to believe a recession is inevitable, unless the Fed pulls back quickly.

All of her columns last week examined the sources of interest rate pressures.  These include the changing line up of who is buying Treasury debt, the increased burden from rising federal budget deficits, and why the zero interest rate era of quantitative easing is possibly over.

She has been sounding Cassandra-like warnings  that the Fed’s rate rises are going to break something in the economy-a soft landing is not likely.

Here is  an unusual Saturday column listing all of her commentary from last week.  If you have time to skim only one, start with Friday’s because I believe it summarizes the forces she thinks are now  manifested in growing market jitters.

Her Edited Column

“This was an important week in global markets. Long-term government bond yields showed early signs of a “disorderly” climb, not so much because of any improvement in the economic outlook, but concerningly, as investors seem to be testing how high rates need to go in a high-debt, high-deficit landscape where the key buyer of government bonds last decade (central banks) has vanished from the scene.

Central banks altogether bought $23 trillion of assets (primarily government debt and U.S. mortgages) in the past 15 years, according to Bank of America’s Michael Hartnett. That “liquidity supernova” caused “big asset price inflation…and in recent years subsidized massive U.S., U.K., and European government spending,” he wrote yesterday.

Now, that excess is unwinding. . .

So how did we get here? Here’s a recap of the pieces that examined that issue this week.

Monday: The $2 trillion deficit. How did we get here?   A quick summary of growing government spending and flat revenue growth.

Tuesday: Will the deficit require the Fed to restart QE?  The difficulty in reducing government spending.

Wednesday: When will markets force Washington’s hand? Unless fiscal spending is reduced, there is no telling how high rates might go.

Thursday: If bond yields don’t start dropping… her conclusion: If yields don’t start falling sharply on weaker data–as we’re expected to get in the fourth quarter–investors will really start panicking and rates will rise.

Friday: The sovereign debt bubble is bursting. This is her strongest warning.  It starts by critiquing  Modern Monetary Theory which asserted government deficits don’t matter.  Here is an except:

“By the end of the 2010s, “austerity” talk was ancient history. Global bond yields simply weren’t rising, no matter how much debt governments were issuing. In 2019, almost a quarter of global government debt carried negative yields; it seemed markets were practically begging policy makers for more and more of it, with permission to juice their economies. The New York Times started carrying op-eds promoting the idea of “Modern Monetary Theory,” or near-limitless deficit spending; even mainstream economists like Robert Shiller seemed to half-endorse it.

“And if you really want to take a deeper dive, check out CBO’s writeup (from February) of the U.S. fiscal picture for the next ten years. You can see why markets are getting jittery.”

End

Tomorrow I will review the  liquidity trends in credit union balance sheets for the twelve months ending June 2023.

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Largest Ever Credit Union Board Election Closes October 3

The 2.6 million members of the State Employees Credit Union, North Carolina are voting among six candidates to fill three board vacancies.
This is the highest number of potential voters for an election ever conducted in a credit union.
Online voting ends October 3rd.  In person voting can take place at the October 10th Annual Meeting where the election outcome will be announced.
While this event is vital to SECU’s future, it could also impact every credit union in America.   The public perception  of cooperative member-owner governance could be transformed by this example.  Here’s why:
The second largest credit union has implemented a process that provides every member a chance to vote.  There is no excuse for any credit union not holding a franchise for director elections in the future in which all members can participate, not just those few able to show up at the annual meeting.
The current practice of election of directors by “acclamation” at the required annual meeting with few members in attendance, should become the exception, not the rule.
What does democratic oversight mean if members are never able to vote?
The member are engaged in their ownership role,  a unique but rarely practiced aspect of cooperative design.  They are transformed into more than customers. See letter which follows.
The directors are learning the importance of communication with members.   Leadership is more than closed monthly meetings, private decision making and a scripted annual meeting.
Directors are the owners’ representatives. They are not remote “trustees” hand picked by their predecessors based on personal relationships or supposed expertise.
Directors in turn must respect members’ ownership role  with transparency and continual dialogue.
The cooperative design is on public display.  The North Carolina press is following the story.  This election is a precedent for members everywhere who want to see more responsive leadership from their Boards.

A Member Explains His Vote

Here is how one member feels about this election in a letter to the local newspaper,  Oxford Ledger:

North Carolina’s most Impactful election this fall will surprise you.

The most crucial upcoming election in North Carolina isn’t for a governmental position but for a seat on the North Carolina State Employees Credit Union (SECU) Board. For over 85 years, SECU has provided affordable financial services to the state’s employees, teachers, and their families, applying consistent low interest rates on mortgages, loans, and credit cards for all members, regardless of their economic background.

Unfortunately, the current SECU Board, composed mainly of politically influential former state employees, has strayed from this equitable approach. They’ve begun charging higher interest rates to middle-class and lower-income members while offering lower rates to wealthier individuals.

This shift appears to prioritize the board’s interests over serving the hundreds of thousands of Highway Patrolmen, Correctional Officers, Department of Transportation workers, and Teachers that SECU was originally established to assist.

Moreover, the current board has reduced services, increased interest rates for most members, and neglected to raise rates for savings accounts.

They’ve also altered the election rules and bylaws to maintain their power and hinder potential opposition.

To rectify this situation, it’s crucial to vote for the three self-nominated candidates who advocate for restoring SECU to its historical mission. The board’s changes threaten to transform SECU into a conventional bank that favors the wealthy, undermining its original purpose.

Voting for these candidates is vital for safeguarding our Credit Union. Visit secuvote.ey.com before October 3, 2023, to support this cause and ensure SECU serves its members as it was intended.

Camden Carver

Member/Owner of the North Carolina State Employee’s Credit Union

Former Employee

This event matters, so tune in on October 10 to learn the results.  Unfortunately at this point SECU ended the previous practice of a live virtual broadcast of the annual meeting-not a positive sign when a widespread concern of members was open communication and transparency.

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Important New Data from NCUA’s Recent Board Meeting

In anticipation of the NCUSIF update at last week’s board meeting I described several topics of vital importance. These included the fund’s operating stability, the investment lag from market rates, the loss reserving level and the reliability of projections of future performance.

In answering Board member Hood’s questions, there was important new data from staff.

The Fund’s Normal Operating Level is Stable and Growing

As in any enterprise with a bottom line, NCUA’s outcome is to optimize the fund’s retained earnings. Adding the 1% required credit union deposits, these two factors sustain a stable Normal Operating level.  CFO Schied responded that the actual level of the NOL ratio at June 2023 would be 1.29% if the retained earnings and required 1% trueup were recorded in the same accounting period.

Staff’s NOL projection in May had been for a 1.25% at June. This 4 basis point projection materially understated the Fund’s trends and financial stability.

Moreover, we learned that using a six month old data point to calculate the 1% trueup, overstated the reported December 2022 actual ratio.  There had been a $5 billion decline in total savings in the last half of 2022.  That resulted in  $72 million net returns of the 1% deposits from June’s 2022 total. Using this six-month old 1% datapoint resulted in a higher NOL number than if all three ratio factors were from the same accounting period.

The Fund’s Loss Reserve Equals Four Times Its Recent Loss Rate

CFO Schied reported net cash losses in the fund since the taxi medallion write offs, were just .31 basis points of insured shares.   The current loss provision ($204 million) is 3.8 times this recent experience and equals 1.2% of insured savings.

The actual net cash loss for the first six months of 2023 is only $1 million. However,  over $20 million has been added to the provision expense.  When asked why this difference, Schied replied:  “The general reserve is derived using an internal econometric model that applies estimated probability of failure and loss rates.” 

No details of this model were provided to evaluate  assumptions and whether they were validated by actual experience. This is critical detail for users to have confidence in the financial estimates provided.

The loss provision expense comes directly from retained earnings.  The current level reduces the reported NOL level  by over 1 basis point of insured savings.

The NCUSIF’s Below Market Valuation

Current short-term rates under two years are yielding over 5%.   The NCUSIF’s portfolio has a YTD yield of 1.79%.  This was due to the Fund’s continual investing out to seven years when rates were near zero.  The result was a weighted average maturity for the portfolio of almost three years.  That is the time it will take to bring the portfolio back to par once rates normalize.

The market value of the portfolio went negative in December 2021 and was $1.5 billion below book at June, 2023.   This results in revenue far below current yields.   Investment revenue is the primary driver of retained earnings.  This is the most critical management responsibility in the NCUSIF’s financial performance.

When asked about the status of the investment committee’s  policy review begun early in 2022 Schied’s response: The investment policy has not been updated.  The investment committee has identified a few modest updates and clarification, and is still considering one item.  So again, at this point the policy that is on our website remains the current investment policy.

Is there a more important priority for the board than to understand the reasons for the recent underperformance?  And then to update the NCUSIF’s interest rate risk management policy/practice to avoid this outcome in the future?

The Accuracy of Staff Projections

The June forecast for the NCUSIF’s NOL was 1.25% provided to the  board in late May.  The actual outcome was 4 basis points higher at 1.29%.

The staff gave an updated NOL projection for this December of 1.27%.   Projecting the Fund’s actual numbers at June, this would be a gain of $70 million in net income, or lower than the first six month’s bottom line.  The 12-month growth in insured shares was forecast at 4.2%.   The real growth for the first half of the year was 1.8% from the previous June.  In 2022 last two quarters there was a net outflow of $5 billion.

There was no information to support these assumptions and the NOL of 1.27.   If  share growth is zero from June, and the same net income estimate, the retained earnings ratio would rise to .2948 at yearend. This would be an increase from the actual .2922 at December ‘22.

As with the econometric model used in the loss provision expense, this NOL forecast cannot be evaluated without the underlying assumptions being transparent.

The Board Meeting Process

The board members’ comments, their Q & A with staff and staff’s responses were all scripted.  Board members read their statements, there was no effort at dialogue, there was no learning from the supposedly differing points of view represented.

Only Hood engaged the staff on what the NCUSIF numbers mean.  Chair Harper followed his ever present “MO” of hyping future risks after acknowledging the fund’s sound condition.  Hauptman talked about how interest rates are set by buyers and sellers of money, but did not apply his observation to the current outlook for rates.  And how this might affect future decisions.

Hood’s questions brought out some very important aspects of the NCUSIF’s management.  New information from Schied included a positive  forecast of $12 million in further recoveries from US Central’s AME.

The Q&A highlighted the shortcoming of current accounting presentations and  investment practices.  These can mislead users of the financials statement.

The Fund’s below market investment performance will cause lower revenue for the fund and its credit union owners by hundreds of millions of dollars.

Moreover the investment position compromises the two primary goals stated for the investment committee’s performance.  These are liquidity (never borrowing to meet the fund’s obligations) and meeting all operating expenses, plus dividend.  These two outcomes should be a walk in the park in current conditions.

If the fund were earning 5% on its portfolio, total revenue would be over $1 billion, a result that would pay real dividends to credit unions for their underwriting commitment.

There is great potential for the cooperative structure of the NCUSIF to be a positive contributor to the credit union system.  It will be up to the board to ensure this outcome is indeed realized.

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People Helping People-A Major Government Agency’s Program

“People Helping People”

No, this is not  NCUA’S  motto.  It is the IRS’s. And it relies on volunteers.

“The Volunteer Income Tax Assistance Program offers free tax help to low- to moderate-income (generally, $60,000 and below) people who cannot prepare their own tax returns. Certified volunteers sponsored by various organizations receive training to help prepare basic tax returns in communities across the country.

“VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations(such as credit unions). Most locations also offer free electronic filing.”

Free Tax Return Preparation for You by Volunteers

“If you are an individual interested in becoming a volunteer, but need to find an organization in your area to link up with, please submit your contact information using the VITA/TCE Volunteer and Partner Sign Up. Your information will be forwarded to the appropriate local IRS office.

VITA Volunteer Testimonials

“One VITA Site Coordinator had this to say about her VITA site, “I feel comfortable saying all taxpayers using our services were extremely grateful for the patience, expertise and timeliness of volunteers preparing the tax return.

We have many repeat ‘customers’ from year to year and – even during the down months – we are greeted throughout the community with a warm hello and ‘see you at tax time.’ This speaks highly for the good work these gifted volunteers perform.”

A VITA volunteer stated this about her volunteer experience, “VITA helped me acquire more knowledge on my tax benefits. I really love it because you are learning and helping the community at the same time. It’s the best feeling.”

An Example for the Cooperative Regulator

This is the IRS — a government agency which seeks and encourages volunteers to carry out its mission of tax filing and compliance.   The words come right out of the credit union playbook.   I wonder why this spirit is not part of NCUA’s game plan?

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Two Ways of Reflecting on  Life’s Possibilities: The Poetic and the Practical

The Poetic

A teenager’s college essay on the value and difficulty of alternative ways of seeing the world  from the Free Press:

“In another scene from The History Boys, one English schoolboy preparing for Oxbridge entrance exams, Timms, asks Hector why they are reading the poetry of A. E. Housman instead of doing something “practical.” 

Timms: I don’t always understand poetry!

Hector: You don’t always understand it? Timms, I never understand it. But learn it now, know it now, and you will understand it. . . whenever.

Timms: I don’t see how we can understand it. Most of the stuff poetry’s about hasn’t happened to us yet.

Hector: But it will, Timms. It will. And then you will have the antidote ready!

Like Timms, I sometimes don’t understand what I’m learning or memorizing when I study poetry, but I believe Hector when he says it prepares us for the very real events of the world—going to war, falling in love, falling out of love, making a friend, losing a friend, having a child, losing a child. 

Understanding ancient authors as they understood themselves is the surest means of finding alternatives to our current way of seeing the world.”

The Pragmatic

From Jake Meador’s essay, The Misunderstood Reason Why Millions of Americans Stopped Going to Church:

“Contemporary America simply isn’t set up to promote mutuality, care, or common life. Rather, it is designed to maximize individual accomplishment as defined by professional and financial success.

Such a system leaves precious little time or energy for forms of community that don’t contribute to one’s own professional life or, as one ages, the professional prospects of one’s children. Workism reigns in America, and because of it, community in America, religious community included, is a math problem that doesn’t add up.” 

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Freedom’s Reality

The last two weekends Joan and I have gone to two Ukrainian events.  The first was a three-day folk festival at St. Andrew’s Ukrainian Orthodox Cathedral in Silver Spring, Maryland.

A tote bag from the festival.

Yesterday we attended the Sunday service at the First Baptist Church of Alexandria, Virginia  which featured the women of the Kiev Symphony Orchestra.  They are on a 35-day tour of the Eastern US.  The men of the chorus are unable to leave the country,

The women in concert.

Why Ukraine Matters

Timothy Snyder is a Yale history professor who has written extensively on Ukraine.

His course, The Making of Modern Ukraine, is 23 lectures on the country’s  history, completed in December 2022.  Every lecture can be viewed here.

This article is from last week.  The author presents Snyder’s brief historical context for the war.  More immediate, he addresses current political debates including Musk’s recent “non-activation” of his starlink satellite network stopping a Ukrainian attack on the Russian navy in Crimea.

Snyder provides the logic for why this war matters for America.  In the following paragraphs he presents an essential fact about freedom, whether in Ukraine, in America or even in the governance of credit unions.

“The freedom that Ukraine seeks today is “the value of values” because it is a “condition in which you are able to make choices among other values and realize those choices.”

“Americans (and many others) owe Ukrainians a huge debt of gratitude for their resistance to Russian aggression. .  .

“The greatest debt concerns freedom. This is a word that we Americans use quite a lot, but we sometimes lose track of what it really means.

“For the past thirty years or so, we have fallen into a very bad habit of believing that freedom is something that is delivered to us by larger forces, for example by capitalism. This is simply not true, and believing it has made us less free.

“The whole history of the progress of human liberty,” Frederick Douglass said, “shows that all concessions yet made to her august claims have been born of earnest struggle.” It will always be the case that freedom depends upon some kind of risky effort made against the larger forces.

“Freedom, in other words, will always depend upon an ethical commitment to a different and better world, and will always suffer when we believe that the world itself will do the work for us.“

Or, as the Ukrainian sailor defending a Snake Island outpost gestures in defiance  to a Russian warship’s  demand they surrender–an action portrayed on a commemorative stamp:

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The Extraordinary Advantage of Local

IN 1973 a critic of mainstream economic thought was published in  Small is Beautiful: A Study  of Economics As If People Mattered by E. F. Schumacher.

The author espoused a principle that small, appropriate technologies, policies, and polities were a superior alternative to the accepted ethos of “bigger is better”.

His thesis is the exact opposite of the forces driving market capitalism   In a competitive economy firms strive for market  dominance to achieve  monopolistic-like power to better control  the organization’s financial outcomes.

Schumacher advocated for a  “persons-first” or humanistic economics as opposed to contemporary theories which emphasized institutional financial success over human well-being–sometimes caricatured as trickle-down economics.

In the same decade of the 1970’s, active credit union charters reached a peak of nearly 22,000.   Some saw credit unions as an example of the book’s relevance.

While the author’s critique may have been on point, I believe his alternative approach was insufficient.  For the antidote to overpowering corporate influence is not small, but local.

What Local Enables-Growing Big by Staying Small

Local does not necessarily mean small.  One of the geniuses of the business model developed by the $50 billion asset State Employees Credit Union North Carolina (SECU) was the ability to grow to become the second largest credit union by staying local, that is acting small.

This “local” strategy required providing authority and responsibility for the credit union’s operations all the way down to each branch.  Loan decisions, collections and business priorities were set at the branch level.  Each branch’s connections to their communities were enabled through dozens of local advisory boards, member loan reviews,  and  engaged local community relationships.

Each branch operated as a “small” credit union  enabled by central funding and resources including back office transaction and delivery system support, and an ATM network and call center.   The result was 85 years of continuous growth creating an employee culture based on “doing the right thing” for the members.

This approach continues in other credit unions.  In an article on economic empowerment in a new area,  Golden 1 Credit Union’s  Erica  Taylor, VP for Community  Relations, summarized  their approach in  a disadvantaged community  as  hyper-local and multipronged:

If all goes well — and the concentrated, hyperlocal investment works in Del Paso Heights — Golden 1 hopes to partner with other communities to replicate the initiative throughout the state.

“One of the biggest lessons learned is there is no one-size-fits-all solution,” Taylor says. “Each neighborhood, state, or municipality is going to have unique needs. It’s important to start by asking what those needs are and listening.”

Branch Expansions Continue

I believe this advantage is also reflected in the continuing expansion of credit union branches.   As reported yesterday in a review  of midyear data: ” A CU Times analysis of NCUA data released Sept. 7 shows the nation’s 4,780 credit unions . . .had 21,835 locations as of June 30, having added 53 since March.”

Another number from the article: The average credit union branch in June served 6,370 members, up from 6,335 in March and 5,828 in December 2019.

Presence matters.   Branches are still the major investment for demonstrating a credit union’s relevance for members in a community.

The  Decline of Local institutions

It is often difficult for small organizations to survive alone, without the support of external expertise.  Especially in a community or section of a city that is economically stagnant.

When one looks at long serving organizations that continue to thrive locally such as the Boy/Girl Scouts, college sororities/fraternities, the PTA, national food franchises, the Catholic church and many other successful institutions, the formula is local leadership and centralized common support.

The following  excerpt is from an interim pastor whose responsibility was to close a local church which could no longer sustain itself.  In this summary event, he laments the loss of this “local” presence:

It is hard to imagine another place where this particular group of people would have gathered together for a common purpose. Eugene Peterson reminds us in his book Subversive Spirituality:

“The work of salvation is always local. Geography is as much a part of the gospel as theology. The creation of land and water, star and planet, tree and mountain, grass and flower provides ground and environment for the blessings of providence and the mysteries of salvation … nothing spiritual in our scripture is served up apart from material … this street, these trees, this humidity, these houses. Without reverence for the locale, obedience floats on the clouds of abstraction.”

Imagine being told you can no longer go to a place that you returned to every day for decades, a place you returned to not because you had to, but because it was where you wanted to be. But now it is going to be closed, sold, and, depending on the buyer, it might be torn down and turned into an apartment complex or a storage facility.

This is the same loss that occurs when a credit union merges. Leadership and focus move away from long standing community ties.   It is an  economic, emotional and existential loss for members and their community.

A current interpretation of Schumacher’s “humanistic economics” is George Hofheimer.   He worked for Filene and CUES for decades and is now an industry consultant.   He wrote Banking on a Human Scale to describe how credit unions build relationships, implementing the advantage of local solutions.

His thesis:  “In a world dominated by scale and technology, smaller community based  credit unions and banks have the chance to serve more people and serve them better by making banking more human.”

SECU turned the widely practiced financial growth model in financial services of a centralized, top-down command and control  on its head.  It grew by staying local in focus, execution and relevance.

It implemented the oldest rule of political success which is “all politics is local.”  This reality is how people see the impact of their representative’s decisions on their lives, jobs and communities.  Are they in touch or a remote elite?

Credit unions, as democratically designed, have this same political capacity which when enabled, no competitor can match.  Have you ever tried to oppose a Capital One branch closing for example?

The founder and current CEO of Nvidia, the fastest growing technology stock this year, has a philosophy described by one employee: “He is big on staying as small as possible while still doing big things. “

For credit unions I would insert the word “local” for small.   Member-owners can see how their money is being used and feel their participation matters.  SECU’s experience shows how powerful it is to be large and local at the same time.  Scale, branding and technology cannot defeat the entrenched advantages of community pride and loyalty.

 

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Transparency: A Test for the Cooperative System

“Democracy Dies in Darkness.”

That is the official slogan of The Washington Post, adopted in 2017. The slogan was introduced on the newspaper’s website on February 22, 2017.  The phrase was popularized by investigative journalist Bob Woodward, who used it in a 2007 piece criticizing government secrecy.

Yesterday long-time credit union supporter and reporter Frank Diekmann published an “editorial” on the CU Today web site, Why NCUA Should Require Credit Unions to Disclose What They’re Paying for Banks.

Based on years of covering bank purchases, he critiques the absence of meaningful data in many of these transitions.  No information is provided, such as the purchase price,  that would show how the members collective capital is being used to pay off owners of banks.  Here is some of his logic:

“Why the secrecy?

“It’s quite the hypocritical disconnect for a CU community that defends the federal tax exemption largely on the back of the “structure,” that is that credit unions are democratically run cooperatives where the members are the owners, to then turn around and say certain information belongs to some but not others (never a good sign in a democracy) and that some cooperators are more equal than others. . .

“There is another big, CU-principal-grounded reason for letting members know how much of their money is being spent and for what, and it’s a real ironic kicker: if the acquiring credit union were a publicly traded bank buying up another bank, it would be required to disclose the purchase price, and analysts/customers/the market would have the opportunity to put the ROI under the microscope. . .

“And then there is this other “let’s not go there” issue. But I say, let’s do. While this may not be the primary reason for buying a bank, it’s also not an innocent bystander: CEOs who have language in their contracts tying their compensation to asset size are getting raises out of these deals. Members have a right to know about that, especially since—again—it’s their money being used to goose the comp.

“It’s time to dispense with the rosy sounding but generic banality and to specifically document how members of the acquiring credit union benefit, and how the former customers are better off, with some real dollar figures around the savings on loans and fees and the increased rates on deposits. You know, how much more is going into people’s pockets?”

Transparency Is the Lifeblood of Democracy

Frank’s concern about credit union’s secrecy extends far beyond bank purchases.  Boards and CEO’s have grown used  to not disclosing or even explaining anything to members especially around their leadership roles and activities.

Credit unions want to retain their “private” character, but to act unfettered in the public market place.  CEO and board salaries are  not required to be disclosed by federal charters.  For states the information is supposed to be provided in the 990 filing, but it is often late, after the major participants have left and not reviewed by any authority for accuracy.  Many credit unions check the disclosure box on the report as provided only “on demand.”

While some merger disclosures were required from a 2018 rule, NCUA’s oversight of the rule is inconsistent and lacking in any meaningful effort to inform members about the transaction.  Merger actors have perfected the arts of circumventing required benefit disclosures.

The supposed democratic governance model of one person one vote in annual board elections never happens, because there are no elections.   The board controls the nominations to just equal the vacancies.

Even when the rare election takes place, the ability of members to learn about candidates’ position is not offered by the credit union-except for incumbents.  See the current SECU board contest as an example.

In almost all other institutions dealing with the public, the SEC mandates disclosures far beyond anything credit unions provide so that owners of companies can be informed about the basis for transactions.

NCUA has completely ignored any obligation to protect the rights of member-owners compromising the fundamental governance mechanism in a cooperative.

Transparency Is a Requirement for Democracy

It’s no accident that the Post’s motto was aimed at governmental secrecy. The one exception I would raise to Frank’s thesis is that he wants NCUA to require greater disclosure.  The regulators are part of the problem.

NCUA repeatedly draws its own curtains of secrecy over its actions and even “facts.”  Listen closely to today’s hearing on the NCUSIF for reference to undisclosed econometric models and staff actions not subject to public or even board scrutiny.

When the NCUA chair was asked recently about a well-publicized problem in a credit union, he commented that he couldn’t talk about such situations and pivoted to the need for more authority over vendors.   NCUA itself fails to put on the public record the details for its decisions leaving both members and the industry in the dark about its effectiveness or even awareness of key events.

The Transparency Advantage

Frank closes with another reason, beyond the owners right for relevant information to make informed decisions about the credit union’s activities.

It is a moral issue that can put cooperatives on the ethical high ground or cast them as just another form of  self-serving enterprise:

“Not only would documenting all that (about bank purchases) be the right and ethical thing to do, it would make for an effective response to critics. . . that claim credit unions are just “profit-seeking enterprises masquerading as tax-exempt non-profits.”

Transparency is a leadership requirement.  It creates trust and confidence even when things go wrong.  Doing the right thing should not require a rule or reg.   It is a character trait.  Cooperatives and transparency are naturally intertwined, until pulled apart.  As Frank points out, that separation undermines the special possibilities and accomplishments cooperatives were empowered to do.