A Gen Z Story About Money Management in the Digital Era

(by Marit Hoyem, a junior  at Williams College)

Last summer I interned for Callahan and Associates where I wrote blog posts about my generation’s financial outlook and spending habits. As a Gen Z and local Credit Union member, I provided a perspective how credit unions can better serve their next generation of  members.

Currently I am studying abroad in Edinburgh, Scotland where I faced new financial challenges and learned valuable lessons about spending, budgeting, and saving money.

The Venmo User

During this time, I found myself reflecting on a prior  post, “Hello Venmo (Goodbye, Checking Account)”.  This discusses how Gen Z sees P2P payment services as de facto checking accounts, sharing money back and forth without ever using their credit union account.  Please see that piece for information  on Venmo and how phones facilitate Gen Z spending.

I first got Venmo in high school. What started as a way to split the cost of movie tickets or dinner through my phone has gradually evolved into a form of social media with friends. On the app we can see who our friends are paying and leave little messages with our payments that appear on a Twitter-like feed.

As I have gotten older, I have continued to do more transactions with the app, for much more money. Next semester I will split groceries and utilities as well as pay my rent using Venmo.

From Physical to Digital Spending

While I have done my fair share of splitting costs using Venmo while abroad, what has resonated during my experience in Scotland is how digital money affects how I budget and spend.

In Europe cashless payments are becoming the norm. In restaurants, grocery stores, and pharmacies, to make a payment all I do is double-click my power button and let Apple Pay do the rest.

After my first month in Scotland,  I checked  if I was sticking to my expense budget  I was shocked to see I had gone way over the amount of planned spending. One of the issues was that I was paying in a new currency, pounds, and wasn’t always doing the mental math to see the amount in American dollars.

Although there are ways to check my payments daily on my credit union app, it was difficult for me to follow just how much was leaving my account while paying for food, bedding, and other necessities.  I see the issue now–growing up in the era of digital money, I never had to take cash out of my wallet, physically count out dollars, or go to the ATM when I ran out.

This isn’t to say that my generation is irresponsible with their money or careless spenders and borrowers.  Rather, our perception and experience  of money is fundamentally different from older generations.

We grew up using phones, cards, and apps to pay for things, not cash. Credit Unions should note this difference in spending habits and offer money management solutions for digital transactors.

Better Money Management

Something that helped me understand my budgeting issue was to go on my credit union app, look back at my recent transactions, and add up how much I was spending each week on necessities (such as groceries) versus indulgences (like eating out with friends).

I think a great service for Gen Z members would be to make this categorization easier. For example, splitting up purchases on a mobile app by month, by location, or by dollar amount to help members track their spending habits.

In a world of cashless transitions, seeing the money available and visualizing the cost of something is harder for everyone, especially those who only make purchases with their phone.

Credit Unions have an opportunity not only to be a checking account, but also to serve as an educational and budgeting resource for their members.

Empower and encourage members to track spending.  Give them an opportunity to learn from moments of spending exuberance (as I did).




Is “Creative Destruction” the Future of Credit Unions?

One of Austrian-American economist Joseph Schumpeter’s descriptions of capitalism was called “creative destruction.”

This refers to a competitive economy’s relentless efforts to innovate for advantage and market dominance.   He described the process as: “the old way of doing things is constantly getting destroyed or supplanted as it is replaced by a newer, better.”

Some would suggest that business failures in a competitive economy are an inevitable and necessary event, even when they cause local hardship or dislocations.

The cooperative system is supposed to be immune from some of these economic forces. Credit unions are owned by their users, they have no traded stock, cannot be bought and sold as private firms, and reflect the values necessary for a communal, versus for-profit, enterprise.  Their founding, focused on a ”local” constituency with a common bond, is intended to improve the welfare of a community, not just individuals.

Local Destruction Where Dreams Become Reality

One example of this “creative” process is in neighborhood across the street where I live.   There is no home sold for less than $1.5 million and when offered, most list for at least twice that amount.

Even with this going-in price tag, Edgemoor is not a place for old homes.  No matter the asking price,  every purchase becomes a tear down.   Here is an example from across the street this past week.

The builder, entrepreneur, risk taker and innovator.

The destruction phase.

The front view.

This home built during  the depression was sold as is for $2.0 million.  About five or more large white oaks were cut down before the demolition started.  The land and location are so valuable that the builder will put up a mac-mansion of enough square feet to justify a new sales price at least double his cost.

Obviously, whoever buys this new home will believe this is progress, just what they were looking for. This is the free market at work.

Credit Union Destructions

We can debate the social and political implications of tear downs to build back bigger and more expensive homes, office buildings or condos.   But the example is not limited to real estate.  It happens in credit unions.  It is called mergers.

The key question is whether mergers are helping or hurting the credit union system–to be more precise, the mergers of sound, well capitalized long standing credit unions which have served their markets for generations.

Everyone undertaking a merger believes their new creation will be bigger and better.  Any downsides will be temporary.   Mergers are just a way of getting to the future faster especially when asset size is believed to be THE essential for competitive competence.

No Creativity, Just Destruction

Now to be fair, the house across the street had not been well maintained.  The owners had lived there for four or five decades.  The yard and landscaping were totally neglected.   The 80 foot tall oak trees made the property look like an unkempt urban jungle.

So whatever goes up after this tear down, will certainly be a visual and living enhancement-except for the missing trees.

Similarly, some sound credit unions have not been well maintained.  Leadership is just holding on until retirement; the board has given up leadership responsibility.   Selling out looks like an easy way to take care of members when the motivation has gone.

It becomes time for a new generation of leaders to take over the credit union’s legacy and continue serving members in the future.

An Existential Vortex

These easy-exit examples are becoming more numerous.  Personal advantage, not member value, appears to be the motive.

The systemic risk is creating an “existential vortex”  where all credit unions, not just the small, the poorly led or even the ambitious, are caught up in a system that is  increasingly circling the drain.

There are no new charters.  Industry assets are more concentrated. The leadership purpose  is more and more institutional growth and success.  The members, are not owners in any sense of the term, but merely customers used as the means to greater financial glory.

Credit unions competitive advantage has been collaboration and interdependence.  This is how the cooperative system was created, their regulatory institutions were differentiated, and why purpose justified a tax exemption.

Creative destruction destroys legacies, whether buildings, companies or credit unions.   New brands emerge.  Old locations closed.  New markets and business models tried.

Credit unions are not rebuilding on their old foundations.  Instead large mergers are just the age-old, typical financial market strategy of buying up competitors to become more dominate and survive.

I don’t think the merging of well run credit unions is sustainable.    It will take over two years before the new home is ready on the now demolished site and the new owners move in.   This  is also about the operational transition timeline of a large merger when members start to look for other options.

Unfortunately the creative destruction in credit unions is not putting new homes in place of the old; it is just moving all the occupants into the existing one.

Schumpeter believed that capitalism would gradually weaken itself and eventually collapse. Specifically, the success of capitalism would lead to corporatism and to values hostile to capitalism, especially among intellectuals.

In an historical irony, cooperatives intended as an antidote to the excesses of capitalism, are instead succumbing to the allure of free market takeovers.

Everyone wants to own a bigger house.

The Wisdom of Elders

In talking with a retired CEO who still follows credit union events, I asked how his perspective had changed.

I don’t feel the intensity or nuances from the grind of the day to day.  . . or the tactical lust for short term passions.”

Without an organization’s boundaries, the retiree tends to be more observant of general trends.

An example of this capability is John Tippets,  who retired as CEO of American Airlines FCU in the first decade of this century.  In retirement he continued to consult in strategic planning sessions and speak at credit union events. During the 2008/9 financial crisis he was the interim CEO for three years at the troubled North Island Credit Union, which he saved from a regulatory closure.

Before his credit union roles John spent about 25 years in the for-profit world of American Airlines.  Most of that time he was an Officer with Sky Chefs, an American airport restaurant and concessions, and airline catering, subsidiary.

He has had multiple retirements and career involvements.  He and his wife Bonnie have written a book, Hearts of Courage published in 2008, the story of his father’s survival from a plane crash in Alaska in 1943. The story behind the book is in this 2009 article.

There have been two CEO’s since John at the credit union. The airline sponsor has gone through much turmoil including bankruptcy, mergers and leadership changes.  The relationship of the credit union and its sponsor has continued strong even through numerous board changes.

The one strategic change John made as CEO was to take advantage of the TIP field of membership option.  This permitted the personnel of other employers, co-workers at the airports, to become members of AAFCU. Airports in many ways became the credit union’s communities.

Speaking on Leadership

A favorite topic for John is his Principles of Leadership which he developed into a 50 slide presentation to the Aerospace conference in 2018.

The speech summarized his multiple professional and personal interests in a diagram similar to the UCLA basketball coach John Wooden’s nine principles of leadership.  Here is John’s organizational template using a similar framework for credit unions.

The slides develop each of the nine points using examples from his numerous life experiences.  The speech summarizes his approach to leadership.  It also characterizes how he sees meaning in his multiple organizational and personal responsibilities.

The Underutilized Resource

John is now working on a book about his 25 years in credit unions.   His activities are just one of multiple examples of credit union leaders who have stepped down but continue to follow credit union events.  For many, these professional years are the most satisfying responsibility they have had.

Look around.  There are examples of professional experiences and resources in every community, often like John, willing to provide perspective and an occasional assist.   They see the world differently, often with more clarity than incumbents might assume.

And sometimes they are even delightful guests for the board, employees and members to hear from when those occasions arise.

In his book, John talks about his father’s  recounting his story to youth leaders.  Joseph would encourage them to keep teaching the lessons, because even though they might not seem to care, “kids are hearing and someday they may really, really appreciate what they learned.”

Life stories are not just for kids. For the past is never past, but always present.

Respecting Cooperative Owners: The One Thing Essential

This past week’s financial runs show how fragile consumer confidence can be.

A critical distinction in credit union design is democratic ownership-one member one vote.

One of the challenges however is that it is easy to treat owners only as customers.  The fact is that many “owners” today are ordinary consumers attracted by a competitive rate or other marketing message.  In some cases, the customer is just an indirect loan borrower who had minimal voice in the selection of where the loan was made.

There is a difference between customers and owners in a financial institution.

Customers do not vote for directors at the annual meeting;

Customers do not vote on merger proposals for their institution;

Customers do not have a residual interest in the reserves of their firm.

Ownership is traditionally honored in other communications such as members’  founding stories or recognizing those who have played special roles in the credit union or cooperative system.

The One Thing Essential

Transparency is one critical leadership characteristic that acknowledges the owner’s role.

Without full, continuous and open communications, the default is to treat owners as customers.  That unfortunately is the attitude of many in positions of leadership today.

Most importantly lack of transparency on specific credit union commitments means the owners have little or no basis for their responsibility of electing directors.

A Regulatory Shortcoming

An example is from last week’s subordinated debt rule approved by NCUA.  Every party to the transaction is provided full information:  Senior management/boards, the brokers, the consultant, NCUA, and most importantly the individuals and entities (including other credit unions) that buy the debt.

Debt issuance of $100 and $200 million have been completed in the past 12 months. The only persons not provided the details of these events are the owners.  It is their loyalty that is the basis for issuing these borrowings that can now extend as far as 30 years.

Without transparency, there is no possibility of accountability.  The owners are removed from any role in governance.  NCUA presumes its in loco parentis role if something doesn’t go according to plan-a distinct prospect with terms of 10, 20 and now 30 years.

Senior Management and Board Compensation

Only state-chartered credit unions are required to file IRS form 990 which discloses senior management and board compensation, political donations and other activities such as grants for all non profits.

These disclosures are essential for owners to know the incentives and circumstances board and management have agreed to in leading the credit union.

Compensation consultants today are plentiful  with four part plans and multiple ways to structure payments now or later.  There are increasing references to a “change of control” clause which would trigger executive payouts no matter other merger bonus and benefits negotiated by the CEO.

Without compensation transparency there can be no accountability.  State charters have disclosed this for decades.  The same logic applies to federal charters.  This information is an important step in owner oversight, even consumer protection.

The Place and Time to Start Showing Trust in Owners

In the months ahead, most credit unions will hold their annual meetings-in person and virtual.  In preparation the annual audit will be available, a Chairman’s report prepared and other required business conducted including election of directors.

Some meetings will include updates on projects such as a new building or branch expansion, a report by a foundation or community activity.  Others will include an educational presentation, an outside speaker and even a meal.

The annual meeting is a primary opportunity for leadership to engage with owners in open and full conversations.

It is especially important in light of recent examples about the resilience of regional and smaller banks.   Confidence in an institution is based on trust.   Trust is not created in a day or by a special press release about a firm’s financial standing.  It is a relationship founded on open communication as both customers and owners over years.

Nothing could be more important this year than showing coop owners that the CEO and board  deserve their trust by being fully transparent with facts and open to the members’ questions and points of view.

That is how free markets are supposed to function in a competitive economy. That is how democracy is supposed to work.







An Irish Weekend and Remembrance

As Bucky Sebastian reminded me many times about this past weekend, “Everyone’s Irish.” St. Patricks Day comes in the middle of Lent because an Irishman could not go for forty days without a drink.

At least that’s one theory.

So I got out my best Irish hat and tried out his thesis with a dark lager and two helpings of shepherd’s pie. There was even a vegan option.  Here’s the outcome.

Ed Callahan Remembered

Which reminds us of the great Irishman who believed in his deepest being, the potential for credit unions. This is Jim Blaine’s, March 17, 2016 portrait of Ed.

“Always suspected that the problem with Ed Callahan was that as a youth he was beaten too often by Nuns in parochial school or, perhaps, not beaten enough. Well, whatever, either way the Nuns left their mark – an indomitable spirit!

Ed Callahan was Irish – brash, pugnacious, loud, hard drinking, fun loving – alive! But why be redundant? I said he was Irish!

For over a quarter of a century, we all watched and observed as Ed Callahan created shock waves in the credit union world. No one was neutral about Ed Callahan. His friends were fiercely loyal, his enemies equally committed. Ed inspired many and angered quite a few. Ed had style; he had presence. With Ed, you weren’t allowed to make contact without becoming involved, excited, immersed, engaged.

At Marquette, Ed must have played football in the same way he played life – without a helmet. You had no doubt that Ed Callahan always played for keeps. He had no intentions of losing, that was not one of the options. Ed was very straight-forward; your choices were always clear. The mission was defined; and, there was only one direct path to the goal. That path was either with you, around you, over you, under you, or through you; you could step aside or get on board. It was your choice; but your choice never changed the mission, nor the path, nor the goal.

Some said that Ed was a visionary…

… they were wrong. Ed Callahan was a revolutionary. Visionaries talk about change, revolutionaries take you there. Ed led from the front – a leader of conviction, rather than convenience; principles above posture – courageous. Revolutionaries, by definition, create problems; overturn apple carts; rebuke the status quo. That happened at NCUA. Appointed by President Reagan, Ed arrived at NCUA in the midst of turmoil. Ed defined the mission; he reformed and remolded the Agency. He taught a regulatory agency how to stop working to prevent the last crisis. He explained that a coach never executes a play and that on Monday morning it’s never hard to see what went wrong – but it is rarely relevant. Teacher, coach, lessons in life; hopefully well learned, hopefully still remembered.

But let me celebrate the essence of the man – that indomitable spirit – one last time, for those who never had the opportunity; for those who still have doubts; for those who never fully understood. One of Ed’s harshest critics, noted with much wryness, that even in death Ed “couldn’t get it right”. Why, I asked? “Because Callahan died on March 18th instead of on the 17th, his beloved St. Patrick’s Day.” You know this type of critic – cynical, smug, self-assured without much basis, not really worth the effort, but…

Just for the record, I would simply like to point out one final time that – first and foremost – Ed Callahan was a fully-fledged, fully-flagrant Irishman – body and soul! And, no self-respecting Irishman would ever celebrate the end of St. Patrick’s Day until the last bell at the pub had rung. That would have meant that Ed Callahan’s “last call” would have come sometime after 4:00 am – on the morning of the 18th. Style, presence, courage – true to the last! A shamrock of joyful vigor and purpose!  

And one last thought… in the final analysis you can say many things about a great man’s life… some men are admired, some are respected, some are envied, some are feared… and countless other adjectives and accolades. But, in the final analysis, the most important thing you can say about a great man is… he will be missed. ” 

And, Ed Callahan will be missed…  


THE Credit Union Lesson from SVB and Regulation

In a news conference following the failed Bay of Pigs invasion of Cuba, President Kennedy remarked:  “Victory has a thousand fathers, but defeat is an orphan.

The SVB’s failure proves this adage untrue.  The press and numerous pundits have already assigned multiple parentage: the CEO and management, the Fed’s rapid rate increases, regulatory and examination shortcomings, the external auditor’s clean opinion, the Silicon Valley customers $40 billion twitter run, Trump’s deregulation in 2018 and the Biden administration DEI policy objectives.

When everyone and everything is to blame, then no one is accountable.  Just another “black swan” event. With more investigations/hearings to come, each new revelation will just add to the piles of condemnations.  No lessons taken away.  More regulations of course, for this is the default response whenever the barn door is left open.

A Spotlight on One Factor

From all these commentaries, I want to highlight one aspect that contributed to overlooking this risky situation. This factor has just become a part of the credit union regulatory eco-system.

In responding to my analysis earlier this week, Doug Fecher, the retired CEO of Wright-Patt Credit Union in Ohio, commented:

This situation makes me wonder if NCUA’s new “RBC” standards would have flagged the risks to SVB’s balance sheet. From what I can tell, much (most) of SVB’s investments were in “risk-free” treasury bonds and high quality agency securities, which in NCUA’s RBC formula would have earned some of the lowest risk multipliers.

To me it is another example of the folly of RBC-style risk management regimes … and why NCUA was wrongheaded in its pursuit of RBC.

This point of view is not limited to Doug’s observation.

During his time as Vice Chair of the FDIC, Thomas Hoenig challenged the agency’s reliance on risk-based capital requirements.  He questioned both the theory and practice, pointing to the lending distortions which contributed to banking losses during the Great Recession.

He wrote about the SVB failure in this commentary:

The regulator apparently relied on the bank’s risk-weighted capital standard for judging SVB’s balance sheet strength. Under the risk weighted system government and government guaranteed securities are not counted as part of the balance sheet for calculating capital to “risk-weighted” assets.

This allowed the bank to report a ratio of around 16%, giving the appearance of strongly capitalized bank. However, this calculation failed to account for interest rate risk in its securities portfolio or the risk of having a highly concentrated balance sheet. It misled the public, and apparently the regulators.

In contrast, if the regulator had focused on SVB’s ratio of equity capital-to-total assets, including government securities, the ratio falls to near 8 percent; and if they had calculated the ratio as tangible capital-to-assets (removing intangibles and certain unbooked loses from capital) the ratio would have fallen to near 5%.

What this would have disclosed to the world is that the bank’s assets could not lose 16% of their value before insolvency but only 5%, a stark contrast.

Had the regulator not relied on the misleading risk-weighted capital measure, it might have take actions sooner. A simple capital-to-asset ratio, tells the regulator and public in simple, realistic terms how much a money a bank can lose before becoming insolvent. The regulatory authorities need to stop pretending that their complex and confusing capital models work; they don’t.

RBC and Credit Unions: A First Birthday

RBC became the surrogate capital ratio for all credit unions with assets greater than $500 million one year ago on January 1, 2022.

Before this in a September of 2021 analysis, Why Risk Based Capital is Far Too Risky. Hoenig is quoted:

“A risk-based system  inflates the role of regulators and denigrates the role of bank managers. 

We may have inadvertently created a system that discourages the very loan growth we seek, and instead turned our financial system into one that rewards itself more than it supports economic activity.”

RBC and Asset Bubbles

Shortly after the critique of regulatory incentives induced by risk weighted assets, in Asset Bubbles and Credit Unions (JANUARY 10, 2022) the consequences from potential Fed tightening were noted:

When funding looks inexpensive and asset values stable or rising, what could go wrong?

The short answer is that the Fed’s inflation response will disrupt all asset valuations and their expected returns.

The distorted results  caused by RBC was presented in Credit Unions & Risk Based Capital (RBC): A Preliminary Analysis in February of this year.  Among the findings:

The 304 credit unions who adopted RBC, manage $822.7 billion in assets.  But the risk weighted assets total only $479 billion.  That 58% ratio is the NCUA’s discounting of total assets total by assigning relative risk weights. and,

One credit union with assets between five and ten billion dollars, reports standard net worth of 12.5% and an RBC ratio of 48.3%.  

This February analysis using June 2022 data of RBC credit unions showed that:

250 of these 308 credit unions reported unrealized declines in the market value of investments that exceeded 25% of net worth.   Four credit unions reported a decline greater than 50% of capital.  This was before the five additional Federal Reserve’s  rate increases through the end of the year. 

RBC’s primary focus is credit risk, the loss of value from principal losses from loans or other assets.  Balance sheet duration mismatch is not captured as are other common management errors:  concentration in either product or market focus, limited or no diversification of product or market, or  just simple operational mismanagement.

These common challenges become amplified by insufficiently considered non-organic growth forays such as third party loan purchases or originations. Whole bank acquisitions are an example of such risks often accompanied (disguised?} by growing amounts of the balance sheet’s intangible asset, goodwill.

The RBC proxy indicator for safety and soundness creates a distorted impression of real institutional risks.   Managers learn to game the system so that boards, members, and regulators fail to understand the institution’s total financial situation.

And when along comes a change in underlying assumptions, like the Fed’s rate increases, the previously unrecognized vulnerabilities quickly appear.

RBC creates for some institutions a theoretical capital ratio that is nothing more than a “regulatory  house of cards.”  SVB will not be the last example.

As Doug Fecher recommended in his 2016 comment letter on the proposed rule, “RBC should be a tool, not a rule.”

To his credit,  Kennedy learned from the Bay of Pigs misjudgments when the Cuban missile crisis occurred in 1962.



An “Important Message From Our President and CEO”

Immediately following Silicon Valley Bank’s (SVB) failure, credit unions and banks sent messages to their members or customers.  They affirmed that  their institutions were safe. It was also common to point out that that they did not have SVB’s business model or its exposures.

Effective communication is an art, especially in a crisis.  The audience is used to receiving marketing promotions.  This situation is very different from those routine messages.

This special contact should be authentic (even personal), drafted for the event, and include relevant facts for the specific circumstances.

The following are examples from two CEO’s, one from a bank and the other a credit union.  Following each is a response from the audience.

March 13, 2023

Dear Customers and Friends of VeraBank, (posted on the bank’s web site’s landing page)

I want to take this opportunity to address what is going on in the financial markets, regarding the orderly liquidation of Silvergate Capital Bank, the closures of Silicon Valley Bank and Signature Bank, and how it relates to VeraBank.

It understandably creates worry any time there is a failure in our industry. Let me reassure you, these banks are nothing like VeraBank, and we have no exposure to the issues leading to those niche banks’ downfall.

Both Silvergate and Signature Bank focused heavily on volatile crypto industry, and Silicon Valley Bank was the largest bank serving start-up technology businesses and venture capital firms involved in that industry. These banks did not practice the prudent diversification of revenue and risk, unlike VeraBank and the great majority of community banks in this country. For instance, at the close of 2022, 97% of Silicon Valley Bank’s $175 billion in deposits were uninsured, and they only had $12.5 billion in cash on hand to cover those deposits. As of closing this past Friday, only 30% of VeraBank’s deposits are uninsured, and we have over $928 million in cash on hand or 87% of our uninsured deposits in cash on hand to cover any customer liquidity needs. I can assure you that is a very high level for our industry.

In other words, where Silicon Valley had only 7.1% of their uninsured deposits covered by cash on hand, VeraBank has 87% covered. We also have liquidity sources that could fairly easily increase our liquidity by close to twice the amount we have now. At VeraBank, we have always understood the importance of good liquidity and risk management. VeraBank is funded with stable local deposits from the communities in which we do business and not the kind of “hot” and unreliable money that funded the three institutions that are now failing.

VeraBank has been through many good and bad economic times, and we continue to operate with the same conservative philosophies that have served us well for over 93 years

Most recently we went through the Great Recession of 2008-09, the ups and downs of the oil and gas markets of the last 15 years, and a global pandemic, and we have not missed a beat.

Actually, it has been just the opposite at VeraBank: we have thrived because we understood the importance of risk management. We understand that we serve each of you and do not dare put your money at undue risk.

Please do not confuse VeraBank with these other banks and others you may hear about in the weeks to come. I am very confident in our bank and how we protect our customers. Please reach out and talk with any of my 500+ colleagues if you have any concerns at all. Let me provide you with my cell number, 903-649-8790, so you can feel free to text or call me directly if you would like to talk about these issues.

Thanks for your continued support,
Brad Tidwell

The response:  according to an evening business news report, Tidwell received over 700 calls spending most of his day on the phone.

VeraBank was established in 1930 at the height of the Great Depression, is a privately-owned community bank that serves East and Central Texas with its network of 38 conveniently located branches in East and Central Texas and has $3.5 billion in assets.

A CredIt Union CEO’s Email to Members



I’m pleased to report that Golden 1 Credit Union continued to thrive in 2022 and finished the year in a strong financial position. Throughout the year, our 1.1 million members were able to rely on Golden 1 to deliver financial solutions with value, convenience, and exceptional service. Please view our 2022 Annual Report for more details.

For 90 years, Golden 1 Credit Union has been a safe haven for our members’ money and a trusted partner for the financial products and services they need. Golden 1 exists to serve our members and we take our responsibility to you and your trust in us very seriously. That’s why we employ prudent risk management practices in our decision-making, including diversification of our portfolios, protecting Golden 1 and its members in volatile economic periods.

As the nation’s seventh largest credit union with assets nearing $19 billion, Golden 1 Credit Union is a well-capitalized financial institution with more than $1.3 billion in net capital. Golden 1 Credit Union also has access to more than $10 billion in available liquidity to absorb any potential impacts of shocks within the financial markets.

Safe and secure since 1933, we remain steadfast in our commitment to ensuring our members can thrive financially.

Thank you for being a valued member and putting your trust in us.


Donna Bland
President and CEO
Proud member and employee since 1994


A Member Responds:

Ms. Bland,

Suggestion: If you are going to send out an email blast starting with “I’m” as in “I’m pleased to report…” make sure that your Member/Owners (?) can contact you personally (and not have to guess at an email address because you may be too busy to respond to us plebeians…).

As a credit union that is supposedly member owned, WE (your members) should have an open line of communication with transparent abilities to see how our credit union is run on a daily basis.  

Again, this includes open lines of communication to ANYONE in our credit union, including a directory of staff.  As a member that is hearing impaired, a telephone is not a particularly viable option but email certainly is. . .

This is the first email that I have received concerning the operations of G1 since becoming a member over a year ago.  There should be email blasts to indicate G1 annual reports as well as opportunities for election to the board of directors…

This email is meant to be a frank/direct/open suggestion for improvement of member communications with the actual member/owners of G1.

Thank you,

A Comment

Each reader or CEO can choose which approach best fits their style.

As the credit union member suggests, this kind of member contact should be more frequent.  It would include other items that the owners (not customers) would find useful or relevant, not just when a special event occurs.  For most art generally improves with practice.

Credit Unions and “Proper” FinTech Partnerships

Ancin Cooley , founder and principal of Synergy Credit Union Consulting, has just released a six minute video addressing a key strategic question: How to assess a Fintech business “partnership?”

In the video he uses an analogy that illustrates the difference between a symbiotic and a potentially parasitic relationship. You can watch it here.

I believe his illustration also relates to other forms of third-party business arrangements.  For example, indirect auto lending is an important source of auto loan volume for many credit unions.   The challenge is who is the credit union’s customer? The dealership or the borrowing car buyer?  Can it be both?

Take a look.  Note his observation that not all Fintech relationships are the same.






Subordinated Debt: The Fastest Growing Balance Sheet Account in Credit Unions

In 2022 subordinated debt issued by credit unions grew to $3.381 billion, a 257% increase from December 2021.

The number of credit unions using this form of temporary capital grew from 105 to 150. They represent about 7.3% of total system assets.

While still a very small percentage (1.4%) of the system’s total year end capital, its use is highly concentrated in a few credit unions.

NCUA is presenting a final rule on subordinated debt at this Thursday’s board meeting.  A point of interest will be how much detail is given the board and public about how credit unions used the funds, the various sources, and the reliance on this debt to meet capital compliance ratios.

These details are especially relevant today when bank failures wiped out not only all stockholder equity and retained earnings, but also all bond debt.

Rented Capital or Buy Now, Return Later

By rule subdebt is an unusual financial instrument.

Subdebt is reported as a liability, that is a borrowing, on the credit union’s books.  But because of the structure of the debt, NCUA considers it to be capital when calculating net worth for RBC-CCULR and low-income credit unions.

Subdebt can be sold to other credit unions as well as outside investors. Purchasers perceive it to be an investment, but technically it is a loan to the credit union which makes it as an eligible “investment”  for credit unions to hold.

In the event of credit union failure, the subdebt is at risk if all the credit union’s capital is depleted.

A Financial Growth Hormone

Unlike traditional retained earnings capital, subdebt is not free, with the interest rate varying depending on the structure and the credit union’s financial situation.

Because its inclusion in computing capital ratios is time-limited, the most common justification given by credit unions for raising the debt is to accelerate balance sheet growth.  Book the capital upfront, then leverage it for additional ROA to have increased earnings to repay the “borrowed” capital down the road.

This financial leverage requires raising more funds matched with earning assets to achieve a spread, or net interest margin, to make the process earning accretive. Buying whole banks is one obvious tactic to accomplish both balance sheet growth goals at once.

The process refocuses credit union financial priorities from creating member value to enhancing institutional financial performance through leverage.

Most Use Is by a Few Large Credit Unions

Community development credit unions are major issuers of subdebt.   The two charters under the Self-Help brand have together raised over $700 million.  Hope FCU in Mississippi and Latino in North Carolina have issued over $100 million each.

Bank purchases have been an important part of other credit union’s use of debt:  VyStar, GreenState, and George’s Own for example.

In other situations where the amounts are more modest, the intended use is less clear.  Is it just a form of “capital insurance” to meet the increased capital ratios of RBC/CCULR?   Is it to “test the waters” to see how the process works? Issuing subdebt is not a simple effort as for example, opening a FHLB account.

The Most Important Missing Rule Requirement

Subdebt has been bought by banks, insurance companies, investors and even other credit unions.

Sometimes the events are announced publicly either by the broker facilitating the transaction or the credit union.   The purpose is rarely specified other than to seek new opportunities for. . .  and then fill in the blank with a generality.

It is the members who pay the cost of the debt. The interest on the debt is an operating expense that comes before dividends.  If the only use is capital insurance or assurance, then the members should be informed as to the terms, cost and role of this approach to meeting regulations.   It is a management and board responsibility to be transparent and accountable to their owners.

If the goal is more ambitious, to capture new growth possibilities, the disclosure is even more critical.   Financial leverage, especially non-organic growth, increases risk.

In both instances the commitments undertaken can extend as far as ten years.  That term reinforces the need for full disclosure so members are aware of the commitments being made on their behalf.

The most important requirement that should be part of the revised subdebt rule is for full transparency for each transaction.  The purchasers of the debt are given all the details of the borrowing as their funds are at risk should the credit union fail.

Shouldn’t the member-owners also be informed of the commitments and terms made using their long-standing loyalty which, in reality, is underwriting the transaction’s terms?

It’s an opportunity for credit union members to be treated as actual owners, not just customers.





What Do This Weekend’s Bank Failures Mean for Credit Unions?

Over the weekend banking regulators closed two banks, the $206 billion Silicon Valley Bank (SVB) and the $110.4 billion Signature Bank in New York.

The precipitating events  were runs by depositors.  In each bank over 90% of depositor  funds exceeded the FDIC’s $250,000 insured limit.

Earlier in the  week, SVB announced its intent to raise additional capital after reporting  sales of long-term treasury securities at a loss of several billion dollars.   The bank had a significant duration mismatch between its customer deposits and long term treasury investments when the Fed began its monetary tightening in March 2022 .

The bank is reported to have lost over $40 billion in deposits sparked by social media posts  (a “twitter run”) advising the bank’s tech startups and venture fund customers to withdraw their deposits.

Signature Bank had a concentration of business with crypto clients and legal firms and was likewise vulnerable to large deposit outflows.

The banks’ failures will erase all shareholder and debt capital.  Depositors’ balances will be insured in full and available for immediate withdrawal.   The FDIC as conservator will attempt to find buyers for the books of business, so intends to keep operating their services. Any losses from the resolution of the banks will be paid by the FDIC through its assessments on the entire system.

More Than a Problem Bank Rescue

To prevent a system wide financial crisis-a contagion-from occurring in institutions with  similar balance sheets of underwater securities and high amounts of uninsured deposits, the regulators announced a special lending program for all banks.

Loan terms will be up to one year, not the normal 90 days.  The amount borrowed can be the par, not market value, of pledged securities (no haircuts).

This will give banks time to work through their duration mismatches by raising more capital or portfolio rebalancing.  The cost of borrowings will be high.   Earnings may be adversely affected if  loans become a large source of funds.

The quick action by the Fed, FDIC and Treasury is intended to prevent a  loss of market confidence leading to  panicky withdrawals from regional banks which have comparable balance sheet situations.

What does This Mean For Credit Unions?

Before this weekend, liquidity was growing tighter for all credit unions. Share growth was negative in the second half of 2022.

The early results from 2023 show continued  deposit challenges.  Consumers are once again learning about the returns and liquidity in money market funds.

As reported in 2022 yearend numbers,  1,193 credit unions had borrowed a total of $99.6 billion, or 4.6% of total system assets.  Within these totals, 797 credit unions reported $92.3 billion from the FHLB system, up 318% from the year earlier.

In contrast  436 credit unions reported loans of  $2.3 billion from the corporates. Several corporate CEO’s reported that their overnight short term settlement loans had risen from only a couple of dozen a year ago this time, to over 250 per day in the recent months.

In Callahan’s Trend Watch call for Q4 2022, a whole new section of charts portrayed the  system’s changing liquidity picture:  the drawdown of investments and increased levels of external funds.  The presentation  reported that  borrowing credit unions’ loan to share ratio was 82%.  For  those without borrowings, the ratio was 58%.

The Risks for Credit Unions

Credit unions are part of the country’s financial system.  If consumers or the public begin to doubt the system’s reliability, these concerns will also affect credit union members.  This is the fear of a financial “contagion” which the Fed’s borrowing plan is meant to forestall.

For example, I was sent an email from San Mateo Credit Union to its members on Friday afternoon after the SVB failure.  It read in part:

Dear member name,

Amid today’s news of the closure of Silicon Valley Bank, I want to take this opportunity to assure you that San Mateo Credit Union (SMCU) remains safe, sound, highly liquid, and in excellent financial condition.

Our financials as well as our investments are structured very differently from Silicon Valley Bank. As one of the top performing community financial institutions in the state, SMCU has a very solid liquidity position. . .

CU Challenges and Advantages

Some of the same balance sheet factors causing these bank failure are present to a limited degree in several credit unions.   These factors include underwater securities,  duration mismatches with longer term loans, and a potential for an ROA earnings squeeze competing for funds.

The advantage credit unions have versus these failed banks is there are minimal amounts of uninsured deposits versus the  90%+ they held.  The vast majority of credit union core deposits are “sticky,” unlikely to run off at a twitter post.

Like banks, credit unions have yet to see a major uptick in problem loan credits.   The two weekend failures were not from credit defaults.

Rather investments and loans were made in a low cost of funds environment that now look less sound.  The resolution  of these situations will depend on how the broader economy trends.

Learning from the FDIC, Fed and Treasury

A major gap in the credit union system  is the coordination and use of NCUA resources supplied by credit unions.  The federal or state banking regulators worked in common purpose to respond to specific incidents and create a systemic plan to manage potential ongoing concerns.

Even though the cooperative regulatory tools are managed by a single NCUA board, they have not been positioned for a similar response.

The first line of liquidity mobilization for credit unions is the corporate system.  However its lending ability options are severely  limited by regulations imposing balance sheet duration caps and funding options from 2010.   Less than 2% of borrowings at December 2022 were from corporates.

The second most important source of funding is the FHLB system, eleven  cooperative institutions that are directed and owned by their members.   There has been no comparable credit union operational partnership or planning with the Central Liquidity Facility.   The CLF has not had a loan outstanding since 2009.

NCUA board members have called out Congress for failing to extend the CLF’s COVID era borrowing and membership flexibility.   But it is unclear how those reinstatements would make the CLF any more relevant than it has been in the past.

The CLF is supposed to be a public/private partnership, but the reality is one sided.   NCUA seeks more credit union members’ shares, but wants to retain all say in how the facility is used and any programs developed.

Finally the NCUSIF has fallen prey to the same duration misjudgments as the failed banks.

As of January 2023 only 7.7% (or $1.7 billion) of the $21.8 billion fund was in cash.  The fund’s average weighted maturity was over 3.2 years.  Its market, or immediate liquidity value, was below par by over $1.1 billion.

The credit union system was built on multiple forms of self-help and self-financing-not private capital or government funding.   Capital from retained earnings acts as a financial “governor” on ambitious growth plans.   The NCUSIF and CLF (when operational) were jointly designed  and cooperatively funded.  The system did not rely on taxpayer resources or bailouts as credit unions are exempt from federal taxation.

In addition to the cooperative  FHLB model and this past weekend’s federal regulatory coordination, there is another lesson for credit unions.

The FDIC and Fed stepped in with funding  to save these institutions’ operational capabilities so that  customer payrolls and transactions could continue as normal.   Ultimately the regulators are seeking a buyer for the firms’ business customers.  And  as noted by  one commentator, to make a profit on the situation.

This approach minimizes any loss to the FDIC while continuing service to customers  some of whom have relied on these institutions for decades.

The Overriding Unsettled Issue

The prospect of a “financial  contagion” may have been stopped.  Time will tell.  The overriding issue is what will the Fed continue to do now with rates—keep raising? pause?   How will the greater caution these events imply for the financial community affect the economy?   How will the possibilities of a slow down, continued growth, or possible recession emerge?

While institutional stability may have been achieved, the longer term economic and rate outlook is still uncertain.

History may be useful in this pivotal moment. The previous largest bank failure ever–Penn Square in 1982–was just a prelude to a much wider bank and S&L culling during deregulation.   And the 2008 Lehman Brothers and Bear Stern failures led to a period of extended “market dislocations” in terms of securities valuations and market transactions.

In one case the system responded with no failures even though over 80 credit unions and banks had uninsured deposits in Penn Square.   The CLF stepped up with loans, the insurance fund was redesigned, and NCUA examiners assisted in workouts.

In the 2008 crisis, NCUA went forward without credit union input, just insurance assessments.  Two years after the 2008 financial failures, it created a credit union specific crisis in September 2010 by liquidating five corporates.  That resolution continues on 13 years later. Surplus payouts are approaching $5 billion as opposed to loss projections of $13.5 to $16 billion for the system when the liquidations commenced.

In one case the agency worked with credit unions for solutions.  In the latter one, it did not.  Should there be credit union difficulties this year, that difference in approach will be critical to retaining member, credit union and public confidence in a separate cooperative financial system.