Author: Chip Filson

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Ten Questions for Whole Bank Purchases     

Some proponents assert that buying banks is just another market option for a credit union.   Similar to expanding a branch network, investing in technology or launching a rebranding campaign, this is just a business decision that needs to be “pencilled out” to see if it makes financial sense.

Analyzing a purchase transaction is not simple.  Every transaction has a different market context and unique financial data.

Ten Questions Before Any Purchase

Credit unions buy banks with cash, not stock, which is the common practice in bank-to-bank purchases.  Some data provided in bank announcements to enlist shareholder support are also relevant for credit unions.

The following list focuses on evaluating the purchase transaction itself, not the broader public policy implications or a credit union’s strategic framework.

  1. What will be the total expenses of the transaction for all fees, consultants, contract cancellations etc., and how will these costs be recorded by the credit union? What transparency will the credit union provide to demonstrate its own due diligence work.
  2.  What is the dollar total of bank assets and/or liabilities the credit union must sell as ineligible for a credit union charter? If significant, why is the merger being considered?
  3.  How will key personnel be retained and will there be a cultural fit? What obligations will the credit union have to the former executives and employees of the bank? Will covenants or conditions such as non-compete clauses limit major stockholders, senior and/or key executives whose stock has been paid out from becoming competitors. An observation from a merger veteran:  Credit unions talk about “buying” skills during a merger.  If you can’t keep a commercial lending team, mortgage banking team, wealth management team, then you are not buying anything.  Those jobs are like free agency – they sell their skills to the highest bidder.  You are not acquiring a piece of equipment, a patent, or a manufacturing process, you are buying people.  This is a service and relationship (networking) industry.  A star performer can take their network (and team) anywhere.  A merger is often the “nudge” the star performer needed to make a change to a different employer.  If they don’t see a direct benefit from the merger, you run the risk of losing them.
  4. How will the transaction affect the credit union’s net worth position? If all bank capital is absorbed in the acquisition, will the credit union remain well capitalized and able to realize its growth prospects in the newly obtained market?
  5. How will the additional assets affect the credit union’s overall ROA, efficiency, and concentration ratios? What is the payback period (breakeven) on the cash paid out in the transaction? How do various customer retention scenarios affect this return?(Proforma balance sheet and income statements before and after the purchase are useful in addressing these changes.)
  6. How much overlap with current markets exists? If high overlap, why merge to begin with?  If low overlap, is the credit union reaching too far from its geographic core?  How will an investment in a market where the credit union has no presence benefit current members?
  7. How will the bank customers become “involved” credit union members? These bank customers did not choose the credit union, have no direct experience with it and are probably unfamiliar with their acquirer. Can the credit union retain these relationships plus gain new ones?
  8. Why did the credit union pay a premium over the market valuation for this transaction? If the franchise is so desirable, why were there no other bids? How will existing market competitors–bank or credit unions–react?  Will there be critical comments such as taking away jobs, tax revenue, deposits, and local leadership from the community? Might competitors hire away key personnel?
  9. What are the regulatory requirements to be navigated? Will FDIC require public announcements be placed in affected markets?  What process will each regulator follow when evaluating the purchase—will different criteria be used for the FDIC and NCUA? Depending on the selling bank’s structure, will potential double taxation affect the price–  once on the asset value increases in liquidation and again on gains from shareholders’ stock sale.
  10. What existing plans will this acquisition defer, disrupt or postpone? What new risk mitigation measures will this event require?

Knowing questions to ask in any undertaking does not lead to easy answers. Any list of due diligence questions is incomplete as each circumstance introduces special factors.

However, using a check list can help assemble the basic information and analysis to consider versus the generalizations sometimes used to justify these purchases.

Tomorrow I will look at the four current transactions and their individual explanations.

 

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Chapter II: Bank Purchases by Credit Unions: Just Another “market transaction?”

(Two blogs precede this chapter II. One posed the issues of credit unions buying banks; a second reviewed cooperatives’ public policy role.)

As of mid-June, four credit unions have announced agreements to purchase five whole banks. Each of the four purchasing credit unions—Lake Michigan, Vystar, Wings Financial and GreenState (buying two banks at once)—have had prior instances buying a whole bank and/or branch combinations.

These events raise both policy and transaction questions. One explanation by NCUA and trade associations is that whole bank purchases are “just the free market at work.” Nothing out of the ordinary. Two independent firms make decisions in the interests of both sets of owners and their communities.

Not Market-Tracking Decisions

However, this explanation is neither complete nor useful. It is incomplete because only one side of the sale is open to owner scrutiny—the selling bank which must have shareholder approval. The credit unions purchasing the assets and liabilities act like private buyers. They rarely release any factual or financial data except press release generalities such as market expansion, diversification, acquiring new lines of business or adding professional expertise.

When facts about the transaction—such as the sale price– are presented, they are from the seller’s briefing their owners not by the purchasing credit union.

In a “normal” market-driven bank purchase (or merger via exchange of stock) both parties will provide their rationale for the transaction. Here are several excerpts from 2021 sale announcements provided by the bank undertaking the purchase, not the selling party:

BancorpSouth said it expects to have $125 million in merger-related costs. The bank said it plans to save $78 million in annual non-interest expenses as a result of the merger. The bank plans to achieve 75% of its merger-related cost savings by 2022, and 100% in 2023. or,

Webster plans to cut about 11% of the combined entity’s annual noninterest expenses, American Banker reported Monday. The company expects to incur $245 million in merger-related expenses, but the deal is projected to save $120 million while the company generates an extra $440 million per year. or,

NYCB and Flagstar: Accelerating Our Transformation Strategy: NYCB estimates the merger will result in additional capital generation of $500 million annually, as well as $125 million in annual cost savings. The bank expects to incur $220 million in merger-related expenses. (the release includes full operational and financial estimates)

Each of these purchasing banks provides data about the transaction, how it will benefit shareholders, goals for cost recovery and the expected return on investment in following years.

Credit union purchases convert firms subject to market monitoring into private entities. No longer can external markets assess management’s performance. Coop member-owners are not involved in the process before or after.

Investing Beyond a Firm’s Experience

In many areas of commercial enterprise there are wealthy individuals or firms who jump into an industry by “investing” in competitive arenas different from where they made their wealth. Consider Silicon Valley entrepreneurs buying professional sports teams, wealthy heirs venturing into the film and entertainment business, young work-from-home retail investors jumping into $0 cost online stock trading, etc.

Long time professionals sometimes refer to these new entrants’ cash inflows as “dumb money”–affluent outsiders bitten by a bug to try something different or indulge a personal interest. And there are plenty of brokers, salespersons and expert third parties helping these newbies learn the ropes and get into the business—for a fee.

These promoters make their living by closing deals. Their most common message is urgency–“act now or miss out” — if you don’t, someone else will take this opportunity off the table.

But how is an interested credit union member supposed to weigh such an event? One approach is to ask if the member would buy the bank’s stock for their personal investment based on the information available to their credit union?

Would You Buy This Bank’s Stock?

Too difficult for a member? Here is an actual case.

A $605 million credit union announced in July 2019 an agreement to buy all the assets of a bank with the following performance record:

  • June 30, 2019, bank data: $97.8 million in bank assets, $77.6 million in deposits; $11 million in equity; a $7.0 million FHLB loan; and loans of $73.7 million.
  • The bank has had negative income every year since 2008.
  • The “efficiency ratio” for 2018 was 111.08% and for 2017, 129.0%. At June 2019, 127.8%. Every period’s operating expenses have exceeded income.
  • Two consent orders were issued by the Office of the Comptroller of the Currency. The December 19, 2012, one was followed by a second on November 2015 designating the bank a “troubled institution”.
  • This order was ended in February 2019 after the bank raised $4.5 million new capital issuing 600,000 new shares for a price of $7.50 per share in January 2018. The cost of the offering for the bank was $366,000 or 8.1% of the gross proceeds.
  • The bank’s 2018 annual report states its core market deposit shares as: 1.69% Arlington Heights, 2.83% Rolling Meadows, and .03% in Cook County.
  • The 2018 annual report included the bank’s outlook: We do not anticipate net income until we experience significant growth in our earnings.At mid-year 2019, just before the credit union announcement, the bank’s operating loss was $262,000.

Would a person buy this bank’s stock that has not had positive earnings for a decade, promises none going forward and has miniscule market share? The new investors in 2018 paid $7.50 per share; the day before the announcement the share price was $6.80-below what the new investors paid.

The credit union offered $10.33-$10.70 per share or $2.4 million higher than the book value and 55% higher than the market valuation prior to the sale.

The credit union addressed none of this operating history, even though the facts were public. The credit union offered no information about how this decade long losing operation would benefit it or the members. The purchase was finalized by Corporate America Family Credit union and announced on April 30, 2020.

Why did the credit union bail out this bank’s owners with their members’ collective capital? How will this $13-$14 million dollar “investment” provide any return for the credit union? No one knows; the outcome is now hidden away from external or internal oversight. On the public facts, this would not appear to be a “smart money” move.

Tomorrow I will provide critical questions to evaluate these purchase transactions.

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The Corporate Resolution: Hard Truths and the Need for an Objective Lookback

The most disastrous event in the 110-year credit union story, the corporate crisis of 2008/9, has created its own myths and interpretations. The good news is that most credit unions successfully navigated the burden of paying billions of unneeded premiums.

The downside is that there has been no change in NCUA’s unilateral ability to impose its internal resolutions on problems unchecked and lacking objective data.

Edwards Deming, the founder of the quality improvement movement, stated: “Without data you are just another person with an opinion.” Opinions of the corporate events have always been plentiful and often predictable, from 2009 to today.

The latest March 2021 AME quarterly financials show NCUA’s 2010 loss forecasts and current outcomes differ by over $20 billion.

Common sense requires an independent factual commission analyze the entire event so this kind of catastrophic mistake never happens again. This is not an exercise in 20:20 hindsight. It is to prepare a full record from contemporary data, documents and participants to prevent future ruinous system outcomes.

Here’s the latest data and comparisons with NCUA’s forecasts.

AME Surpluses Grow to $3.125 BN

Total projected distributions to members of four of the five corporates now total $3.125 bn. This is an increase of $95 million from three months earlier.

Credit union shareholders in Members United and Southwest Corporate will receive 100% of their capital, plus liquidating dividends projected at $14 million and $307 million respectively, for a total of over $1.3bn. Both reported millions in regulatory capital in their August 2010 call reports before being taken over by NCUA.

WesCorp’s Deficit at $2.175 Bn

Only WesCorp shareholders will receive no distribution on their $1.114 bn of member capital. NCUA estimates the NCUSIF loss on WesCorp’s estate will be $2.2 bn. (AME: B4 Due to government)

NCUA’s Liquidation Expenses Exceed 10 Years of Operating Budgets

Section B 1 of the AME financials, “Liquidation Expenses,” reports total operating costs paid from each of the five estates of $4.786 bn. Subtracting expenses for legal recoveries (line 15) of $1.258 bn, NCUA has spent $3.528 bn administering the corporate resolution plan.

This net amount exceeds all of NCUA’s combined operating budgets from 2010 through 2020 in its oversight of 5,000-6,000 credit unions, the NCUSIF and the CLF.

Moreover, these “expenses” do not include realized losses charged to the AMEs of over $1.0 bn. NCUA incurred those additional losses by selling non-legacy, fully performing investments immediately after seizing the credit unions in 2010.

Total Surplus Approaches $6.0 Billion

NCUA boasts of the net legal recoveries of $3.8 bn. However, that amount would just pay for NCUA’s TCCUSF administrative expenses with only a $200-$300 million overage.

The growing combined surpluses of nearly $6.0 bn from the AME estates and the TCCUSF merger are from the “legacy” investment payments of interest and principal. Expected losses forecasted in 2009 years into the future, and expensed from capital, were billions in error. Instead of recognizing losses as incurred, they were written off all at once based on faulty modeling assumptions of future cash flows over the securities’ remaining lives.

TCCUSF Forecasts Billions In Error

When the TCCUSF was merged on October 1, 2017, its entire surplus of $2.562 million was transferred into the NCUSIF. However, when the liquidations commenced in 2010, NCUA projected a loss of $8.3 to $10.5 bn in the TCCUSF. This one aspect of the resolution plan’s outcome was in error by $10.6 to $13 bn.

NCUA estimated the range of total resolution costs after seizing the five corporates at $13.9-$16.1 bn. Projected recoveries were $0. The $5.6 bn extinguished credit union capital was gone forever. Additional TCCUSF assessments from credit unions ranged from $7.0-$9.2 bn.

These total AME estimates were off by over $20 billion when adding the growing surplus to this loss forecast.

These Resolution Costs Detail estimates of July 2010 were disclosed only after the seizure and liquidations were undertaken. At the same time the KPMG audit of the TCCUSF (note 6) projected a total loss of $6.4 bn at December 2009 across the entire corporate network. This audited loss provision estimate was not released until December 27, 2011, or 15 months after the liquidations commenced.

In contrast, at June 30, 2010, just prior to the five seizures, the 27 corporate call reports showed the entire system reporting gains in reserves of $260 million and significant reductions in AOCI (all other comprehensive income) of over $8.8 bn versus June’s 2009 totals.

Every corporate reported improving financial results as financial securities recovered from the depths of the market dislocations in early 2009. Instead of recognizing these positive trends, NCUA imposed a second crisis on the system by liquidating the five corporates.

The Members United Example

Corporates and the entire economy were on a visible recovery trend when NCUA initiated its September 2010 liquidations. One example: Members United had expensed $600 million in estimated OTTI credit impairments, but had incurred actual losses of only $95 million according to its final call report on August 2010. Its reported changes in the monthly valuation of its investment dislocations (AOCI) had gone from a peak decline of $2.1 billion (March 2009) to $917 million in its final 2010 call report.

Seven years later at the merger of the TCCUSF with the NCUSIF, Member United’s legacy assets had incurred only $297 million losses versus the $600 million expensed. The latest AME March 2021 financials show Members United shareholders will receive $605 million from interest and principal pay downs on their corporate’s “legacy” investments.

Independent Review Critical to Learn Hard Truths

The organization ultimately responsible for the safety and soundness of the credit union system is NCUA. The agency had the resources and authority to lead a mutual least cost outcome. Instead, acting unilaterally, in secret with no communication with those closest to the events, the agency abruptly closed the four largest corporates plus the $1.2 bn Constitution Corporate. The agency justified these actions by publishing loss projections significantly greater than KPMG’s audited numbers.

The agency that was supposed to protect and keep the system safe turned into its prime executioner. Did no one object to the plan? Were no alternatives reviewed? What factual data was the basis for the actions when all the 5310 monthly reports showed recovery was underway?

The billions in unnecessary TCCUSF premiums, the denigration of corporate personnel and their network’s critical contributions, the effective dissolution of the CLF’s liquidity safety net, are all disastrous individual events.

But the ongoing harm is even greater. Credit unions’ trust in the agency and its willingness to work mutually with credit unions is still in doubt. The agency shut itself off from public dialogue, asserting its independence and provided no timely information or objective data—all characteristics part of its current culture.

Reform will only occur when this past event can be honestly presented. Facts should be the basis for truth; and the voices that were ignored or blamed, should be asked their points of view.

Without a transformation in NCUA and credit union interactions, the cooperative option will seem at best, disjointed; at worst, a system where the NCUA’s accountability for safety and soundness is still absent.

We will never know if wiser leadership might have avoided this regulator-induced catastrophe. The purpose of an independent, expert commission is not to change the past. Rather it is to inform future regulators, wanting to act unilaterally, from sending more credit unions over the cliff.

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The Declaration of Interdependence

Richard Blanco’s mother was seven months pregnant when his parents left Cuba for Madrid, where he was born.  Forty-five days later they departed for America.

Technically his full name is Ricardo de Jesús Blanco Sánchez Valdez Molina.

His parents so wanted to come to the US they named their son Ricardo, after Richard Nixon.  Jesus, because his mom on the flight from Cuba said, “If we make it alive, her(sic) middle name will be Jesus.”

And as a poet he calls himself Richard to contrast the Anglo and the white Blanco.  He is a lifelong civil engineer.  He read a poem at Barrack Obama’s 2013 inaugural, the first Latino to do so.

A Poet’s Political Conscience

He was moved to write Declaration after hearing Senator Jeff Flake’s speech in the Senate on  America’s divisions in 2017.  The Senator said in part:

“I rise today with no small measure of regret — regret because of the state of our disunion, regret because of the disrepair and destructiveness of our politics, regret because of the indecency of our discourse, regret because of the coarseness of our leadership, regret for the compromise of our moral authority, and by ‘our,’ I mean all of our complicity in this alarming and dangerous state of affairs. It is time for our complicity and accommodation of the unacceptable to end.”

In this prose-poetry format, Blanco selects phrases from the Declaration of 1776 and contrasts these with observations about the present.  He concludes with the self-evident truth: We’re the promise of one people, one breath declaring to one another: I see you. I need you. I am you.

             Declaration of Interdependence

By Richard Blanco

Such has been the patient sufferance…

We’re a mother’s bread, instant potatoes, milk at a checkout line. We’re her three children pleading for bubble gum and their father. We’re the three minutes she steals to page through a tabloid, needing to believe even stars’ lives are as joyful and bruised.

Our repeated petitions have been answered only by repeated injury…

We’re her second job serving an executive absorbed in his Wall Street Journal at a sidewalk café shadowed by skyscrapers. We’re the shadows of the fortune he won and the family he lost. We’re his loss and the lost. We’re a father in a coal town who can’t mine a life anymore because too much and too little has happened, for too long.

A history of repeated injuries and usurpations…

We’re the grit of his main street’s blacked-out windows and graffitied truths. We’re a street in another town lined with royal palms, at home with a Peace Corps couple who collect African art. We’re their dinner-party talk of wines, wielded picket signs, and burned draft cards. We’re what they know: it’s time to do more than read the New York Times, buy fair-trade coffee and organic corn.

In every stage of these oppressions we have petitioned for redress…

We’re the farmer who grew the corn, who plows into his couch as worn as his back by the end of the day. We’re his TV set blaring news having everything and nothing to do with the field dust in his eyes or his son nested in the ache of his arms. We’re his son. We’re a black teenager who drove too fast or too slow, talked too much or too little, moved too quickly, but not quick enough. We’re the blast of the bullet leaving the gun. We’re the guilt and the grief of the cop who wished he hadn’t shot.

We mutually pledge to each other our lives, our fortunes and our sacred honor…

We’re the dead, we’re the living amid the flicker of vigil candlelight. We’re in a dim cell with an inmate reading Dostoevsky. We’re his crime, his sentence, his amends, we’re the mending of ourselves and others. We’re a Buddhist serving soup at a shelter alongside a stockbroker. We’re each other’s shelter and hope: a widow’s fifty cents in a collection plate and a golfer’s ten-thousand-dollar pledge for a cure.

We hold these truths to be self-evident…

We’re the cure for hatred caused by despair. We’re the good morning of a bus driver who remembers our name, the tattooed man who gives up his seat on the subway. We’re every door held open with a smile when we look into each other’s eyes the way we behold the moon. We’re the moon. We’re the promise of one people, one breath declaring to one another: I see you. I need you. I am you.

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As High as an Elephant’s Eye!

July 4th marks the midway point of summer. Half the calendar’s pages are gone. The days shorten by several minutes each till the winter solstice. Summer crops are gaining growth, if weather and nature’s vagaries are gentle.

The musical Oklahoma captured this feeling of good will in its opening number: Oh What a Beautiful Morning. The first stanza proclaims the prospect of a farmer’s potential bounty:

There’s a bright golden haze on the meadow,
There’s a bright golden haze on the meadow,
The corn is as high as an elephant’s eye,
An’ it looks like it’s climbin’ clear up to the sky.

This was Rogers and Hammerstein’s first musical together. Opening during WWII, it created a new era in theater magic, integrating song and dance into the storyline. It ran for 2,212 performances, won the Pulitzer prize, and has been a popular production for high school and regional theaters since.

But what did a New York based composer and lyricist know about farming? “Corn as high as an elephant’s eye” must be one of the most tenuous metaphors ever in musical lyrics.

Growing up in the Midwest, the phrase farmers used was “corn knee high by the 4th of July,” then the harvest prospects were promising.

Climbin’ Clear Up to the Sky

This spring my daughter gave me a Christmas present that did not fit in her garden plans. She had grown blue corn seedlings from a sample packet. No more than inches high, she asked if I wanted to plant them. I couldn’t resist the opportunity to try my hand at farming—or maybe just showing off for neighbors.

I replanted the sprouts, surrounded by cages to protect from rabbits. The results for July 4th: somewhere between knee high and a small elephant’s eye. Blue corn thriving in the summer heat and sun of suburban Bethesda.

Nature’s Red, White and Blue Celebration

A lot more than corn flourishes this time of year. The yard is full of celebratory colors especially zinnias and begonias.

Nature’s exuberance also marks Independence Day: red verbena, red, white and blue petunias, and multiple geraniums.

RED geraniums

White Cosmos

and Blue Salvia

Celebrate with gratitude this Independence Day for all the joys of family, nature, and community. Or as expressed in the final verse of the opening number of Oklahoma:

Oh what a beautiful morning,
Oh what a beautiful day,
I’ve got a wonderful feeling,
Everything’s going my way.

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Has the Credit Union System Lost its Entrepreneurial Edge?

The cooperative model thrived because the founders believed their innovative efforts would improve members’ lives. That belief in creating something better is a key motivation for persons launching startups.

In the credit union system this pioneering spirit lasted well into the 1980’s. New organizations were designed to serve members and enhance collaborative efforts. At a system level, both the CLF and NCUSIF were fully funded with models requiring shared responsibility between the regulator and credit unions.

Onboarding the Next Generation

Coop charters for new generations of members were one element of this creative energy. In 1984, NCUA in coordination with the credit union system, launched CUE-84 (Credit Union Expansion 1984). The goal: achieve 50 million members to celebrate the 50th anniversary of passage of the Federal Credit Union Act.

An essential component was expanding student run credit unions at colleges and universities. In NCUA’s 1983 Annual Report, three student credit unions – at Georgetown, Skidmore, and the University of Chicago– were highlighted from that year’s 105 new federal charters.

This effort continued into the mid 1980’s. The New York Times in a lengthy 1986 article, Credit Unions Boom On Campus, opened with a brief history of student charters:

“The first student credit union was formed in 1975 at the University of Massachusetts. Students at the University of Maine formed one in 1978 and at the University of Connecticut in 1979. But it was not until 1983, when the National Credit Union Administration helped to organize its first conference for colleges, that today’s credit union movement began. Four were formed that year.”

The attraction for the student organizers was “the students who start credit unions see them as good training for a career in finance.”

According to the Times, interest was widespread: “By doing so these young people, a group increasingly known for their career-mindedness and entrepreneurship, have made the student credit union into the campus business of the 1980’s.”

NCUA’s role

NCUA’s support for student charters was a central point of the article:

“There has been significantly more growth in the number of new student credit unions than other types of credit unions,” said Harry Blaisdell, a spokesman for the agency. ”The chartering of new credit unions has slowed down significantly in recent years, but there has been a real explosion of interest in college student credit unions.”

Mr. Blaisdell estimated that at a minimum, another ”half dozen” would be chartered in 1986, with ”a good possibility of more.”

The increase has been due at least in part, Mr. Blaisdell says, to an effort by his agency to encourage their formation. In 1984, the agency modified a credit union regulation so that student credit unions could accept deposits from corporations, philanthropic organizations and ”other supporters” outside their chartered group.

Normally, Federal credit unions are permitted to accept deposits only from members, but the law also allows credit unions that serve primarily ”low income” members to accept insured savings accounts. The agency expanded the definition of ”low income” to include students.

”This is in keeping with the Administration’s emphasis on private-sector initiatives in this time of decreasing availability of college funding,” Mr. Blaisdell said.

Mr. Blaisdell said that his agency has organized several national conferences on student credit unions and published pamphlets that tell students how they can form their own. One of its pamphlets, called ”Credit Unions for College Students,” offers, at no cost, to provide information and send an official to help organize the credit union.” (emphasis added)

De Novo Efforts and the Future

Attracting the rising student generation is critical for the survival of any business or industry. Today NCUA’s chartering process is at best clogged and at worst nonexistent for everyone, not just student led credit unions. This disinterest in new charters is also widely shared. Many existing organizations prefer focusing on established credit unions versus small startups.

Moreover, there is a world of difference in the skills required to manage an established institution versus the spirit necessary to start something new. In an ever-changing economy, losing this startup instinct can quickly lead to obsolescence or what academics call isomorphism—copying the competition and becoming identical in structure and form.

One CEO, an ardent believer in chartering, described why this creative impulse matters:

  • “De Novos spark renewal and all it implies about the faith in what the current players are doing – “we like what we are doing and want more to join us in the effort” – an endorsement of the future.
  • De Novo is about the spirit and the energy of those who will start something worth the effort and are ready and willing to push up a hill.
  • De Novos create a small sandbox opportunity for innovation and agile adjustments to longer standing models.
  • De Novos create a rallying point for participation and sponsorship by ALL – an opportunity to give generously, with gratitude, to encourage system resilience.
  • De Novo efforts are always more than starting a small CU – they are the feel-good effects where individual hope is ever present and renewed.”

Emulating Banking Strategy?

Credit unions’ remarkable success has led some away from the key factor that underwrote today’s industry standing. The cooperative model succeeds because it is people-centric, putting the member as the focus for all decisions.

This is very different from a capital-based system where decisions are driven by investors’ projected return on their wealth.

Credit unions’ financial stability and reserve accumulation have tempted CEOs to adopt this capitalist model:

  • to buy new businesses, not innovate current processes;
  • to merge other credit unions versus organic expansion into underserved markets;
  • to buy banks versus offering better value to their customers and communities.

Credit unions increasingly finance versus invent change. Innovation means searching for and funding external startups deemed relevant to a credit union’s priorities.

A Gap in Human Capital

Credit unions’ growing financial surpluses now cover for a deficit of human ingenuity and commitment. Some CEO’s and boards invert the cooperative model of self-help and collaboration. They use their ever-increasing financial reserves to purchase competitors or further market dominance, not pursue their members’ agenda.

The efforts by students and others to start their own institution should remind all credit union supporters of their cooperative roots. It is vital that newcomers be given the opportunity enjoyed by ordinary citizens in prior eras to start their own coops. If new entrants are not encouraged, the alternative will be a maturing system preoccupied with institutional trophy acquisitions.

A critical priority for today’s leaders, building on the fruits of others’ labors, is promoting this spirit of renewal. Entrepreneurs are an essential resource to bring new life to cooperative systems both present and future.

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Warren Buffet’s Wisdom for Coops

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

Buffet’s phrase would appear to state a fundamental truth about cooperatives.  After all, cooperative results are meant to be paid forward to benefit future generations.

As I follow credit unions, other interpretations of his observation are apparent. Here are some:

Different Views of Shade Trees

Some believe the trees should be cut down and sold for firewood.  Others want the trees removed because it restricts their view.

Some did not notice the tree until they were in its shade.  The conclusion is they were the ones who did the planting.

Occasionally, some uproot their neighbors’ trees to replant nearby to expand their shade.

When asked to help plant a tree for others, the response is, “there is no need, just sit in our shade.”

The government inspectors come to see how the trees are doing.  They direct certain limbs to be cut down because they interfere with the power lines. They believe no new trees are to be planted. The existing canopy gives all the shade the community needs.  Besides it takes too long for a sapling to grow big enough to provide real shade.

Instead of a cooperative forest passed to future generations, the landscape slowly becomes a level field.  All the trees are privately owned, and the communities’ open spaces require members to pay a fee to sit in the shade.

Buffet’s question:  Are today’s credit unions planting trees or living off a forest created by others?

 

 

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Learning from Another Co-op: REI

Recreational Equipment, Inc., or REI, is an American retail and outdoor recreation services corporation. Founded in 1938 in Seattle, Washington as a consumer’s co-operative, REI sells sporting goods, camping gear, travel equipment and clothing.

REI operates 146 retail stores in 39 states plus DC. In addition to its products, it also offers services such as bike maintenance and outdoor-themed vacations and courses.

This is the announcement upon entering the store: reminding members they belong to a coop:

Membership Fee and Equity

REI’s annual revenue for 2020 was $2.75 billion. The co-op lost money in 2020 as stores closed during the pandemic but ended the year with $2.3 billion in total assets and $990 million in reserves. By adding 1 million new members the membership fee portion of equity increased by over $18 million to a total of $331 million. This annual addition to permanent capital partially offset the $34 million 2020 operating loss.

REI defines active members as persons who paid a $20 lifetime membership fee and purchase $10 or more of merchandise in a given calendar year. Each active member is entitled to vote for members of the company’s board of directors.

The annual patronage dividend is normally equal to 10% of what a member spent at REI on regular-priced merchandise in the prior year. None was paid in 2020 due to the operating loss.

Online Community and Executive Compensation Models

The company’s online community notes that 24,313 members have engaged in 31,629 conversations. These dialogues are intended to “connect, learn, share and inspire members to get outside!”

REI employs over 11,000 people and has been ranked in the top 100 Companies to Work For in the United States by Fortune since 1985. Its disclosure of executive compensation could be a model for credit unions. The seven page document outlines both the pay evaluation steps and full details of all remuneration. The 2020 report shows that top executives received no annual incentive and took substantial pay reductions compared with prior years.

What a Credit Union Might Teach REI

As I left the store I picked up REI’s branded credit card application that “co-op members love.” One feature promotes REI’s values on the environment and conservation by donating 10 cents for every transaction, up to $1 million, to the REI Cooperative Action Fund. Members receive 5% back on all REI purchases and 1% back on all other transactions.

Interest rates on outstanding card balances are variable: 11.49% to 23.49%; cash advances have an APR of 23.99% plus a 4% fee with a $5 minimum. Convenience checks charge 3% of the draft amount; the balance transfer fee is 3% and the minimum interest in any month is $2.

Who issues the card? US Bank, a $530 billion bank with a .93 ROA in 2020. It would appear that a partnership with a credit union card issuer could provide members better rates. For REI this would also be an example of the cooperative value of working with other coops.

Anyone interested?

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A Poem for a Summer’s Day and our Time

The essence of genius is presenting profound insight simply.  Frost’s words at first glance seem easy to understand.  A summer field, mowed by a person who is now gone.  The scene and story of a butterfly weed left for nature’s creatures.  An action that resonates in Frost’s own kindred spirit.

The last couplet presents his belief in common human purpose whether working together or apart:

‘Men work together,’ I told him from the heart,

‘Whether they work together or apart.’

The Tuft of Flowers

by ROBERT FROST

I went to turn the grass once after one

Who mowed it in the dew before the sun.

The dew was gone that made his blade so keen

Before I came to view the levelled scene.

I looked for him behind an isle of trees;

I listened for his whetstone on the breeze.

But he had gone his way, the grass all mown,

And I must be, as he had been,—alone,

‘As all must be,’ I said within my heart,

‘Whether they work together or apart.’

But as I said it, swift there passed me by

On noiseless wing a ‘wildered butterfly,

Seeking with memories grown dim o’er night

Some resting flower of yesterday’s delight.

And once I marked his flight go round and round,

As where some flower lay withering on the ground.

And then he flew as far as eye could see,

And then on tremulous wing came back to me.

I thought of questions that have no reply,

And would have turned to toss the grass to dry;

But he turned first, and led my eye to look

At a tall tuft of flowers beside a brook,

A leaping tongue of bloom the scythe had spared

Beside a reedy brook the scythe had bared.

I left my place to know them by their name,

Finding them butterfly weed when I came.

The mower in the dew had loved them thus,

By leaving them to flourish, not for us,

Nor yet to draw one thought of ours to him.

But from sheer morning gladness at the brim.

The butterfly and I had lit upon,

Nevertheless, a message from the dawn,

That made me hear the wakening birds around,

And hear his long scythe whispering to the ground,

And feel a spirit kindred to my own;

So that henceforth I worked no more alone;

But glad with him, I worked as with his aid,

And weary, sought at noon with him the shade;

And dreaming, as it were, held brotherly speech

With one whose thought I had not hoped to reach.

‘Men work together,’ I told him from the heart,

‘Whether they work together or apart.’

 

 

 

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What Does It Mean to Declare a Business “Dead?”

One way to get reader’s attention is to declare some activity, celebrity, business or popular style “dead.”  No more growth.  The hype is over.  The transitory fascination revealed.

One widely published writer using this headline is Jared Brock (jaredabrock.medium.com) who in January wrote a blog declaring that Uber and Lyft are Dead.

His essay focuses on the $200 million “dark marketing” campaign the delivery companies used to defeat proposition 22 in California which would have classified gig workers as full-time employees.

The Business Model Critique

After describing the ride-hailing services efforts to kill the new regulation, he also points out their “predatory” financial strategy which  is how others have characterized the firms’ business models:

Luckily, Uber and Lyft occupy a very precarious perch in the taxi universe. Like Airbnb, they’ve extracted a huge amount of value from their employees and stock investors, but what real value have they contributed in return?

If you strip it to the core, you realize the only thing any of these predator app companies actually do is build pretty-looking booking services and then weaponize colossal amounts of debt and private equity to strangle their competition, as while marketing the myth that they’re doing no harm.

 The Meaning of “Dead”

But Brock has another, more fundamental interpretation of “dead” than corporate demise.   More than a rapacious business model, it also refers to the absence of an underlying contribution to society.  He tells the story of returning to his hometown after years away. The main street is full of chains that have replaced the local shops, cinema, and restaurants.  He remarks:

And it hit me: this place is dead. Spiritually dead. Morally bankrupt. Worthless in all the ways that truly matter.

 That’s Facebook. That’s Instagram. That’s Airbnb. That’s Uber and Lyft and Robinhood. Predator companies, leaders in the menace economy. They create nothing, contribute nothing, mean nothing. They just take, broker, skim, flay. They’re dead in the future, yes, but also dead to me right now, and dead to a world that wants to flourish.

When People are Left out of the Calculation

Brock’s critique is that these companies leave people and their communities out of their business calculations. Gig, not full-time employees.  Rental housing, not owner occupied. National versus local solutions.

When challenged they follow the tactics one economist described as the menace economy:  “the pursuit of wealth at the expense of other human beings.”

Is there a Lesson for Credit Unions?

Time will tell if this interpretation of dead accurately foretells the fate of Uber/Lyft.  Brock’s concern is broader than platform technology companies.  What happens when organizations become “spiritually dead, morally bankrupt?”

These are human failings, not limited to organizations built with new technology.  Companies can easily equate financial performance, market appeal or innovation with sustainable success.

Credit unions were formed with a different focus: does what we do benefit our members?

Recently I received the following member assessment of a pre-pandemic merger of two strong, long-serving credit unions:

I have found no personal benefit in the combination of the two organizations.

 The employees I hear from are frustrated in numerous ways and lack a sense that their jobs are still secure. 

  I attended the virtual Annual Meeting . . .A highly scripted meeting seemingly meant only to satisfy the requirement to hold it.  Incumbent board members were re-elected by acclimation as there were no other candidates on the ballot.

 I am keeping a checking account open but transitioning other relationships over to another credit union.

 There are numerous examples of well-capitalized credit unions merging to benefit  executives or using members’ accumulated reserves to buy out bank owners.  Several very large credit unions have even adopted the fintech model of just an online platform, few or no branches. The token rhetoric for these initiatives refers to corporate growth, technology advantages and/or diversification goals, not member value.

Is the future of credit unions these cooperative merger combinations within, bank asset purchases from without, or the total embrace of digital-only?  Is it possible these options are merely the last hurrah of credit unions that are already “dead”?