Category: Co-ops in Capitalism

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NCUA CAMEL”S” Rating Goes Live on April 1, 2022

In the October 2021 Board meeting, NCUA approved adding an “S” to the CAMEL examiner rating system.

In announcing this action Chairman Harper stated: “The NCUA’s adoption of the CAMELS system is good public policy and long overdue.  It will allow the NCUA to better monitor the credit union system, better communicate specific concerns to individual credit unions, and better allocate resources.”

The rule’s effective date is tomorrow, April 1.  I have been critical of some agency actions in the past. But, this rule is imaginative, even revolutionary, in its implications.

However,  its significance may have been lost do to the recently  implemented RBC/CCULR, on January 1, with the first calculations due as of March 31.  External events such as cyber alerts, the Ukraine war crisis, growing inflation and the run up of interest rates also divert attention.

Special Training for Examiners

The rule’s innovative “S” component required extensive examiner training.  As announced in its 22-CU-05  March 2022 Supervisory letter: NCUA staff will receive training on how to evaluate the new ‘S’ component and the updated system.  In addition, the training will be made available to state regulators’ offices, for those that elect to use the CAMELS rating system.  There is also an industry training webinar planned for credit unions, which seeks to provide a greater understanding of the updates to credit union stakeholders.

Some credit unions may have missed the agency’s transparency efforts, so a brief summary is provided below.

The Imaginative “S” for CAMELS-A Seven Part Analysis

This innovative “S” approach will have significant benefits for all stakeholders—members, other credit unions,  regulators, even the public.  The questions include safety and soundness criteria that align with cooperative principles.  The final ratings are fully comparable with every other credit union regardless of asset size.

Each of the seven “S” criteria are scored independently. These scores are then added for a Grand Total.

Part 1 is traditional. It reviews a credit union’s field of membership process and how open and valued members are.  Market demographics and FOM strategy are assessed.

Parts 2 and 3 look at members’ financial participation, how capital is deployed for their benefit, and members’ involvement in credit union governance and volunteer roles.

Two critical safety and soundness factors are next. Part 5 reviews the credit union’s education and training for  staff and members. It documents external certifications, degrees and recognitions earned (Best Place to Work).  The cooperative section appraises the credit union’s role in CUSO’s and other organizations, such as fintechs, to build a stronger financial system.

The final section 7 reviews all aspects of a credit union’s Concern for Community.  Community is more than geographic boundaries.  It includes partnerships with organizations which “share common goals or opportunities and who choose to work together for everyone’s success.”

Objective, Comparable and Fully Transparent

The overall “S”  1 through 5 rating is determined by the Grand Total Score.   As shown on page 11, a score of over 100 results in a CAMEL 1.  The scores are intended to be shared industry-wide and can be posted in the credit union with the monthly financial statement.

In his March 5, 2022 Supervisory letter cited above, Chairman Harper encouraged dialogue:

The NCUA’s policy is to maintain open and effective communication with all credit unions it supervises. Credit unions, examiners, and regional and central office staff are encouraged to resolve disagreements informally and expeditiously.

As with any change in a supervisory approach, we understand credit unions and other stakeholders will have questions.

Long Overdue

This “S” addition breaks new ground.  It is “long overdue.”   A copy of the entire 11 page form with  descriptions of each section and the individual scoring components is here.  It  is interactive and can be completed online now.

Achieving a high CAMEL”S” score should not be any burden for most credit unions.  Service has been an integral part of the credit union model from the beginning.

Most importantly, the “S” highlights the cooperative difference.  It documents how credit unions  are poles apart from banks.  I believe credit unions should applaud NCUA’s alignment of its examinations with credit union  purpose.

For additional information, NAFCU has also posted this brief, more  prosaic analysis of the rule.

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FOMO Business Decisions

One of the most common sales pitches in life is “hurry up and get this  deal before someone else buys it.”

The Fear of Missing Out (FOMO) has many variations.   For some it impels stocking up on toilet paper in a pandemic.  For others it is a rush into NFT’s, crypto currencies, a meme stock or  IPO offering.  Home sales today are increasingly all cash offers, no contingencies-FOMO.

For the virtual generation, it is the sharing pictures on social media of a special meal  or vacation adventures to stay in touch with peers-FOMO.

In credit unions, this tendency shows up most frequently in mergers and whole bank purchases. Both transactions are enabled by consultants, brokers and other experts who only get paid if a sale occurs.   Creating a sense of urgency-FOMO- around each opportunity is part of the pitch.

This blog will focus on bank purchases.  Many press  announcements  of another deal close with a momentum building observation such as:  “The pioneer (arranger) for credit union purchases of banks, emphasized again that the speed of CU purchases of banks is quickening.” FOMO

FOMO Bank Purchases

A number of credit union bank purchases are repeat buyers.   GreenState in Iowa during 2021 announced three  bank purchases in a 12-month period.  All were out of state and entering separate new markets.  Three deals with different banks, requiring multiple system and cultural conversions all at once.  To keep up with this purchased growth, the credit union has issued $60 million in subdebt to sustain its capital ratio.

Vystar’s purchase of Heritage Southeast Bancorporation, Inc. ( HSBI )is the largest bank acquisition by a credit union to date. HSBI is a holding company of three local community  banks which together manage $1.6 billion in 22 branches across Southeast Georgia, through Savannah and into the Greater Atlanta Metro area.

To support this acquisition, the Jacksonville based Vystar just issued $200 million in subdebt to maintain its net worth ratio.  The final closing has been postponed twice this year.

In early March  he $2 billion Barksdale Federal Credit Union in Bossier City, La., agreed to buy the $74 million Homebank of Arkansas in Portland, Ark.  Here are some details from the Credit Union Times story:

This is Barksdale FCU’s first bank purchase. Homebank was founded in 1908, employees 25 and has about 1,000 customers.  The bank was issued FDIC Consent Orders in 2011 and 2019.  The Bank reported a loss in 2020 of $419,000 and $50,000 in 2021.  Capital is $7.4 million

In explaining the purchase which would seem to bail out the bank’s owners, Barksdale’s CEO  stated:   “We believe that the structure and policies we have in place with our operation will satisfy the consent order items.”   One wonders what the members would think of this use of their funds.

The Risks in Bank Purchases

Buying whole banks at multiples of book value, or at prices much higher than recent market valuations,  creates an intangible asset called goodwill.   These are all  cash purchases. The total member funds paid for the premium and net worth goes to the bank’s shareholders.

In almost every case, but especially in private bank purchases, there is very little transparency for members or analysts to evaluate how the decision will succeed financially.  There is no expected ROI on the investment, nor business plans for achieving it. The incantation used is variations on the theme of scale.

In cases of very large transactions relative to the credit union’s assets  (see Memphis-based Orion FCU’s efforts), or multiple acquisitions in a short time, or when the bank is underperforming, all of the normal risks are multiplied.   Yet the actual outcome may not be known until years down the road.

A  Former CEO’s Observations

I was copied on an email in which Jim Blaine, retired CEO of SECU (NC) highlighted some of the differences in community bank practice and credit unions.   The dialogue began after a credit union member asked his impression of the $4.8 billion Summit Credit Union’s intent to buy the $837 million Commerce State Bank in West Bend Wisconsin.  Here is a part of what  Blaine wrote:

This is an example of the “other problem” floating around in CUs. As you’ll note, Summit is not merging, it is “acquiring” an investor-owned  bank. First, it is illegal for a CU to own a bank charter, so actually Summit is acquiring only the assets/liabilities of the bank (the loans and deposits, the buildings, computers, etc but not the capital!)…and after doing so the bank charter is cancelled.

To judge the fairness of the deal, look for the acquisition multiple…usually quoted as some multiple of the the bank’s net worth (i.e. capital)…if the bank’s net worth is $100 million for example and Summit is purchasing the assets/liabilities for a multiple of “1.5X”then Summit will pay $150 million to the bank stockholders. (Paying 150% of the book value!!)

Just as with CU mergers, these bank “purchases” can be open to significant valuation variance. In an investor-to-investor transaction the owners on both sides scrutinize whether or not the deal is for “fair value”. With a CU there is not an activist group of shareholders to protest a bad deal. Not too hard to imagine an insider “wink and nod” transaction…in the example above that $50million excess might lead to some “flexible ethics” …certainly happened with the mutual S&Ls!

Many folks question both the viability of small banks and those branches! (ed. Commerce is the 32nd largest bank in Wisconsin) And besides in banking, customers are loyal to the individual banker, not the bank. The officers and directors at the bank will usually collect on the sale of the bank stock and then as soon as possible leave and take their book of business to another bank…and of course refinance away those loans the CU bought! On the deposit side, many of the larger deposits are tied to loan customers who  will also leave. Lastly, all the bank customers have always had the chance to join the CU…and didn’t…what does that tell you about their future loyalty?

A Different Kind of Deal

Other acquisitions this year include the $2.8 billion Arizona FCU (AFCU) purchase of the $539 million Horizon Community Bank in Lake Havasu City;  Georgia’s Own purchase of Vining Bank; and Robins Financial acquisition of Persons Banking company.

AFCU’s activity is somewhat more public in that some of the financial information is available.   It appears the credit union is paying about twice  book value.  In the year before the sale was announced, Horizon’s holding company stock traded between $8.20 and $10.40 per share.   The bank’s sale announcement projects  shareholders should receive approximately $18.91 per share when finalized.

In addition to the factual circumstances Blaine cites in his comments, there are two other operational challenges.    Are credit unions acquiring  matured/declining banking businesses especially when recent market valuations are substantially less than the purchase price?

The conversion of a community bank’s clientele to credit union control entails an “identity transplant” both internally and in the bank’s market.  How will the value of the acquired assets and liabilities be affected by this change?

Finally in several examples above, the credit union’s loan to asset ratios ranged from the low 40% to just over 50%.   If the leaders are unable to deploy existing funds in loans to members, how will they be more successful buying bank assets?

The lack of transparency in these purchases, the absence of any financial projections or specific business tactics suggest these are events based on good intentions but limited operational planning.

One CEO explained his purchase  this way: “We believe that quality growth and diversification is essential to continued success in our industry, and we intend to achieve it both organically and through mergers or acquisitions.”

This sounds like a strategy driven by FOMO, not member focus.

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Subdebt: The Fastest Growing Balance Sheet Account for Credit Unions

Outstanding subdebt (subordinated debt) for  credit unions grew 51% in 2020 to total $452.1 million.  In 2021 the increase was 109% and with credit unions reporting  $938.9 million.

The number of credit unions using this financial option grew from 64 in 2019 to 104 credit unions at December 2021.  The total assets of these credit unions was $96 billion or about 5% of the industry’s yearend total.

A Product with Many Facets

This financial instrument has many characterizations. 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 all 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.

“A Watershed Moment”

Earlier this month Olden capital announced the largest placement yet: a $200 million borrowing sold to 41 investors including credit unions, banks, insurance companies and asset managers.

The process as described in the release required: The coordination of a team that included leaders from the credit union, investment bankers, lawyers, other consultants and service providers. . . Olden labelled it “a watershed moment, notable for its size and breadth.”

Certainly considering size that is an accurate statement.  This one placement exceeds 40% of the total of all 2021 debt issuance.  Credit union demand is certainly picking up and more intermediaries are getting into the business to arrange transactions.

Olden did not name its client, although the purchasers were aware that it was Vystar Credit Union.

Why the Rapid Subdebt Growth?

This borrowing is a form of “Buy Now, Pay Later” capital for credit unions.   The terms of the debt are generally ten years with no repayment the first five, and level amortization of 20% each in the remaining years.

The interest paid is based on several factors including market rates and the credit union’s overall financial position.

Traditional credit union capital comes only from retained earnings. Maintaining well capitalized net worth means that comes only  from earnings means the process places a “growth governor” on a credit union’s balance sheet.

By raising subdebt this organic “growth governor” is removed in the short term.  Some credit unions have been bold to say that their intent is to use the newly created capital for acquisitions.  Both VyStar and GreenState ($60 million in subdebt) have been active buyers of whole banks.

The overnight increase in the well capitalized net worth category from 7% to 9% by NCUA on January 1, 2022 is also causing credit unions to look at ways to comply with this higher requirement.

Others believe it will help them accelerate investments that might otherwise be spread over several years.

Getting into the Leverage Business

Because subdebt has a price, unlike free retained earnings, and its function as capital is time-limited, its use requires increased asset growth to be cost effective.

It refocuses credit union financial priorities from creating member value to enhancing financial performance through leverage.   This leverage requires both increased funding and  matching earning assets to achieve a spread over the costs of these increased funding.  Buying whole banks is an obvious strategy to accomplish both growth goals at once.

The Unintended Consequences

The use of subdebt as a source of capital was provided as a sop to help credit unions meet NCUA’s new higher and much opposed RBC capital standards.

The irony is that its use will entail a more intense focus on balance sheet growth to pay the cost of this new source of net worth.  Unlike retained earnings, the benefit is only for a limited period.

The event will impose a new set of financial constraints or goals that have no direct connection with member well being.  It converts a credit union’s strategy from “member-centric” to maximizing balance sheet financial performance.

In later blogs I will explore some financial model options for subdebt, the transaction costs and other factors in its use.

One of the most important needs at the moment is for greater transparency for individual transactions.

These are ten-year commitments that may exceed the tenure of the managers and boards approving the borrowings. The financial benefits and impact on members will  not be known for years.  This is  especially true when the primary purpose is to acquire capital as a “hunting license” to  purchase other institutions.

This rapid and expanded use will have many consequences for the credit union system, some well-meant, others unintended.   It is a seemingly easy financial option to execute that the cooperative system will need to monitor.

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‘It’s the End of the World as We Know It’ (and I Don’t Feel Fine)

The title is from a Commentary by William Reinsch written four days after Russia’s invasion of Ukraine.

He is the Scholl Chair in International Business at the Center for Strategic and International Studies. His professional specialty within government and outside is international commerce and trade policy.

His article projected the end of the rules-based system of international trade that had been developed post WW II.

He foresees the war causing economic chaos, a return of power politics, and resurgence of authoritarianism.  The world will not be the same; unintended consequences will proliferate.

Turning Points in History

In individual, organizational and country’s histories there are moments that are eventually understood as turning points.  Sometimes these are sudden and instantly consequential.  Like Ukraine.

Other changes occur slowly, but inexorably, in a new direction with the outcome unseen for years.   For example the evolving demographic composition of the American population; or even the  inevitable forces leading to the deregulation of financial services in the 1970’s and 80’s.

I believe the century long credit union movement is in one of these transformational periods. This  involves significant changes in the regulator’s role,  credit union business priorities, accepted performance norms and the ambitions of leaders.

These cooperative developments are occurring as economic trends are moving away from the two decade  experience  post 9/11.   Inflation is nearing 8%, unemployment is at historic lows, worker shortages are occurring in many sectors, and interest rates  are projected to rise to potentially the highest level this century.

The juncture of these economic and industry changes could significantly alter the institutional makeup of the cooperative system. They could result in the loss of credit union’s independent identify and purpose.

The Breakdown in the Regulatory-Industry Relationship

The seeds were sown in the disruption of the Great Recession in 2008-2010.  The scope of the potential corporate problem created a rupture between NCUA and the industry.

NCUA leaders whether through fear, inexperience or bureaucratic instinct distanced itself from credit unions.   The agency took  the sole role of developing one all encompassing solution for five distinct corporate balance sheets.  The results were disastrous for credit unions, the corporate system and the credit unions that relied on them.  Additionally, 30-year industry partnership for the CLF was ended.

The most critical long term loss however was not financial, but the agency’s ability or willingness to work collaboratively with the industry—on all issues and in all circumstances.

Instead of viewing their role as empowering a system of cooperatives, NCUA positioned itself as rulers over the credit union system.

At the March 2022 Board meeting this view was expressed by Chairman Harper in comments on the agency’s Annual Performance Plan:  With the geopolitical crisis unfolding in Ukraine, the NCUA will also continue to prioritize cybersecurity and guide the credit union system through the economic uncertainty caused by inflation, rising gas bills, and continued supply chain woes.

This paternalistic or in loco parentis approach to regulation and supervision emerged from the agency’s ability to impose solutions and rules unilaterally following  the corporate crisis.

The agency publicly proclaimed its independence under Chairman Matz from both credit union involvement and external oversight.  No one at the board or staff has been able to replace the critical experience and knowledge credit unions brought to all issues.

Credit union experience is absent in the regulatory bureaucracy. Credit unions manage over $2.0 trillion for over 100 million members but they have little to no voice in policy priorities.   Stakeholders, both members and the professional leaders, are viewed simply as recipients of perceived regulatory wisdom.

Increasingly credit unions are developing new financial schemes with the regulator seemingly oblivious to their impact on these credit unions or the member owners.   The wheeling and dealing in mergers, bank purchases and raising external capital is accelerating.

The makeover of a number of credit unions from member-centered to financial strategists, gamesman, hustlers and horse-traders is well underway.

This failure to interact removes NCUA’s most important resource – the industry’s professional leadership experience.   Mistakes will continue to be made and paid for by credit unions due to the missing counsel of those who make the system work on a daily basis.

Overcoming the Schism

Credit unions created NCUA and designed and passed in Congress all of its constituent capabilities specifically the NCUSIF and CLF.

Board members seem divided between two binary positions:  let the free market determine outcomes or, NCUA must pass rules to micromanage every credit decision and balance sheet IRR risk.

Effective NCUA regulatory policy is not democratic or republican, or even bipartisan; it is pragmatic supported by facts, logic and cooperative purpose.

Rules and manuals in the thousands of pages cannot replace business judgments and may in fact result in reducing sound operational choices.

Mutual respect is missing.  Credit unions are intimidated or consider fruitless any effort to critique ineffective agency actions.   NCUA’s most frequent justification for more rules is comparison with other financial regulators.

Mutual dialogue creates respect and enhances understanding of shared responsibility.  Future posts will describe changes in priorities, norms and professional ambitions shaping industry character.   All are examples of events occurring without the benefit of public dialogue.

 

 

 

 

 

 

 

 

 

 

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If You Can’t Beat’em, Better Join’em

Uber has never made money in its decade long existence.   It has negative retained earnings of almost $24 billion as of yearend 2021.

It’s business tactics were to subsidize rides as it disrupted markets in the US and around the world to take market share from existing providers-primarily taxis.  Then dominate those markets as competitors left using its monopoly pricing power  to turn a profit.

The company’s ride sharing platform was innovative. It did offer a convenient easy-to-use service that was  ubiquitous for consumers, many times at a lower, albeit below cost, fare.

But the model rested on two assumptions:  that gig employees would cover all the expenses for  the transportation vehicles and that drivers would value the flexible work opportunity as a non-employee or independent contractor.

The model worked for a while.   Then COVID.   Now the basic flaw in the  model has become apparent.   When drivers have a choice, they will prefer to be owners of their business efforts, not working for someone else as  a gig or part-time piece-work wage earner.

Today the worker shortage has caused Uber to seek partnerships with  taxi operators in the US and around the world.

Three Descriptions of this Strategic Partnering

Call for an Uber, Get a Yellow Taxi  (New York Times)

Uber Reaches Deal to List all New York City Taxis on its App  (Wall Street Journal)

But the most interesting analysis driving this change (no pun intended) is this article from CNBC’s Disruptor Column  Once Rivals, Now Partners (March 24, 2022) highlighting added.

In 2015, CNBC’s Kate Rogers interviewed Safdar Iqbal, a New York City taxi medallion owner who was working to make ends meet as valuations for the likes of Uber and Lyft continued to soar.

Iqbal bought his medallion for $570,000 in 2009 and needed to earn about $5,000 a month to break even on insurance, the medallion mortgage and industry fees alone. The Queens, New York-based driver earned extra income by leasing his car to a second driver who worked the day shift.

“This was an investment in the long term,” Iqbal said at the time. Despite those challenges, the 48-year-old said he wanted to make his NYC medallion work. “It would help me raise my family, take care of the kids, pay the rent and later on, work as my retirement.”

“We need something for app hailing with yellow cabs, to have even arms with Uber,” he went on. “Then, I can compete with them.”

As of today, it turns out he may not have to.

This morning, Uber made a sizable shift in its business strategy that has faced opposition from traditional taxi services since its founding in 2009, announcing that it reached an agreement to list New York City taxis on its app.

Two taxi-hailing apps, operated by Curb and Creative Mobile Technologies, will integrate their software with Uber, allowing users to book taxi rides in the Uber app later this spring. (It’s worth noting that taxis are already available in other countries via the Uber app, including Spain, Germany and South Korea.)

“This is a real win for drivers – no longer do they have to worry about finding a fare during off peak times or getting a street hail back to Manhattan when in the outer boroughs,” said Guy Peterson, Uber’s director of business development, in a statement. “And this is a real win for riders who will now have access to thousands of yellow taxis in the Uber app.”

The deal comes as Uber, Lyft and other ride-hailing disruptors grapple with a shortage of drivers. After a dramatic decline in traveling due to the pandemic, ride-hailing companies have struggled to bring drivers back to full speed, which has made rides more expensive.

But several weeks ago, Uber said mobility demand has improved “significantly” through February, with trips back to 90% compared with its February 2019 figures.

Uber has also said figures have continued to improve when it comes to attracting and retaining new drivers, but as indicated by today’s move, there’s still room to grow. CEO Dara Khosrowshahi said as much last month when he teased plans to bring more taxis onto the Uber app, even beyond New York City.

“I will tell you we want to get every single taxi in the world onto our platform by 2025,” Khosrowshahi said in an interview with CNBC’s Andrew Ross Sorkin.

At their peak, the cost of many cab rides skyrocketed at the same time Uber was experiencing torrential growth — much of which was responsible for the company sitting atop 2016’s Disruptor 50 list, just a year after the value of yellow taxi medallions began to significantly decline.

Today, the company is preparing for its strongest travel season yet. Uber said airport gross bookings by the end of February were up over 50% month on month.

Still the broader concern remains the same it always has: whether Uber is taking on too much risk, too quickly with low tangible results. And that could spell trouble in a speculative market environment like the one some analysts believe we’re in now.

For Uber, there may be a level of risk management related to driver defections in the current decision making. As inflation, especially in gas prices, has hit drivers hard and they have pressed for more help from the company, some drivers have quit and recent research from Wall Street analysts and gig economy experts forecast more defections. And some of those quitting drivers are going to taxi companies.

Esterphanie St. Just, who started driving for Uber in 2015 in California, started working with the unionized taxi movement in California in 2019 as frustrations mounted over making the Uber economics work for her. She contends the longer a driver works for Uber, the less they make as more promotions and bonuses go to new drivers churning through the system (Uber denies this).

After hearing more from taxi drivers and learning more about being a yellow cab driver, finally, in December of last year, she started the process of getting a taxi license and began full time as a taxi driver about a month ago.

“The longer you have been in the Uber industry the more they take and you either quit now or quit later, but it will cost you, because you find out you are a rat in maze always chasing, chasing, chasing.”

Another Learning Opportunity

When NCUA announced its intent to sell credit union taxi borrowers’ loans to hedge fund in January 2020, the agency refused to look at options that would have given these member-borrowers a chance to earn their way out of the decline in collateral value from ride sharing disruption.

NCUA  instead took cash at a fraction of the book value of the loans, recorded a $750 million dollar loss in the NCUSIF, and washed its hands of any further responsibility to these credit union members whose fates were turned over to a Wall Street hedge fund.

Earlier this year New York City entered into an agreement to cap the debt owed by individual drivers and extend terms so that remaining loan payments could be covered by earnings.

Drivers Will Determine the Future

Until autonomous taxis are deployed everywhere, the future of public transportation depends on what drivers want to do.   For many people owning your own business, as described in the above article, is preferable to being someone else’s employee.

That was the opportunity that credit union taxi medallion lenders were underwriting.  Assisting members to own their own business.   NCUA washed its hands of the problem by selling at the low point in the cycle of value.   Credit union’s paid for the losses and a hedge fund now has all the upside.

I admit that no one could have foreseen the New York City stabilization plan financed by Covid grants, nor the failure of Uber’s business model to be sustainable.

However NCUA’s challenge is internal, not external forces or events.    If an organization is not willing to learn from prior difficulties, no one can help.  If an organization is determined to learn, then no one can stop them from finding solutions.

If members’ interest are always front and center, NCUA and credit unions will ultimately find  workable resolution for problem situations, no matter how seemingly intractable.

Liquidating  problems is contrary to why coops were founded and their self-help ethos.  The entire industry and its 100+ million members would benefit if NCUA would embrace this collaborative spirit as well.
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Irony

Voting is the life blood of democracy.  For both political leadership  and within organizations.

Some firms, such as IBM, encourage their stock holders to vote at the annual meeting:

To express our appreciation for your participation, IBM will make a $1 charitable donation to Opportunity@Work on behalf of every stock holder who votes.

Voting is integral to credit union design.  This is the season for annual meetings with members electing their directors.  Unfortunately actual voting is rare.  Most vacancies are filled by acclamation as the number of candidates equals the open seats.

Now CUNA has begun a campaign to encourage member voting. As reported in CU Today:

WASHINGTON–CUNA has relaunched its “Credit Unions Vote,” a campaign focused on getting credit union members to vote in the 2022 midterm election. The campaign ties civic engagement to credit unions’ ability to improve financial well-being and advance local communities, CUNA said.

thumbnail_Credit Unions Vote

“Credit unions understand that elections affect their members’ financial well-being,” said CUNA Deputy Chief Advocacy Officer for Political Action Trey Hawkins. “With the Credit Unions Vote campaign, we will reach out to America’s credit unions providing them with resources to encourage their members to play an active role in both their primary and the November election.”

An Observation:

Yes, elections do indeed affect members well-being. Especially the choice of credit union directors.

If CUNA wants to encourage member’s good voting habits, why not begin by promoting elections at credit union’s annual meetings?

That would seem a more immediate way to illustrate the power of the franchise and their well being.

 

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Three Field Notes

A Refreshing Difference from a Big, Local Bank

“Last year, my wife and I wanted to do some refinancing by taking out a mortgage on our home to pay off a mortgage on one of our investment properties that had a higher interest rate. We went to a big local bank with which we have done business for 40 years, including a number of mortgages and home owner equity lines of credit.

“We applied as we have many times before. The bank kept asking us for more and more documents. After submitting 69 documents (some were updates of documents we submitted earlier), we gave up. We concluded that they simply did not want to lend to us.

“This was hard to fathom.  Over the years, we have never missed a payment on any mortgage or loan. Also, the appraised value of our home, which would serve as security for the new mortgage, is nine times greater than the dollar amount of the requested mortgage.  Our monthly income, from rentals and Social Security, is ten times the monthly payments that would be due on the mortgage.

“There shouldn’t have been any question about our ability to pay. Our best guess is that the bank did not want to loan to us because we are 65 and older, and  retired, so we do not have salaries that can be garnished easily if we fail to make a monthly payment. In any event, we could not believe that they turned us down.

“The good news is that a mortgage broker suggested Honolulu Federal Credit Union (HOCU). The folks at HOCU welcomed us, asked for about a dozen documents, processed our application, and gave us the mortgage. It was smooth, quick, and friendly. We were grateful for the excellent service. We decided to open a couple of other accounts with HOCU as well. We have been happy with all of our interactions with HOCU during the past year. What a refreshing difference from that big, local bank!”

 Happy 73rd Birthday: Affinity Credit Union

(March 18, 2022)

MEMBERS CELEBRATE IN HONOR OF UNITED STEELWORKERS LOCAL 310 FOUNDING 

Affinity Credit Union celebrated 310 Day on March 16th and March 18th at the Firestone Tire plant in Des Moines, Iowa. This “310” day  honors  our founding members form USW Local 310. Firestone employees were greeted with dollar bills, marketing gifts and entered to win a $310 cash prize.

In 1949, a group of 10 Firestone workers founded Local 310 Credit Union by pooling their money together to make affordable loans for Firestone workers. The credit union charter members carried a few dollars in a lunch box between work shifts distributing $5 and $10 loans. If someone needed a loan, they would first collect  deposits to fund the loan.

At the time, the founding group did not have any credit union members, had little money to lend, and no desk to consult with borrowers. Nevertheless, they persevered with a resource created by workers, for workers, that fed families, futures, and trust.

Today Local 310 Credit Union, now known as Affinity Credit Union, manages millions in financial assets, while helping 14,000 member-owners in central Iowa do more with the money they earn so they can live the life they want.

“On 310 Day we honor the Legends – the USW Local 310 founding members.  From humble beginnings they demonstrated the meaning of People Helping People and our ongoing mission  of Building Better Lives.”   said Jim Dean CEO.

From Maine Harvest FCU’s Newsletter

(March 2022)

Maine Harvest Loan Portfolio Now Over $1 million

We are pleased to report that our loan portfolio has passed the $1 million mark. This is a huge achievement for Maine Harvest FCU.  Our loan portfolio is dedicated to building a better food system in Maine and is:

  • Broadly diversified across sectors including vegetable, livestock, dairy, fruit, and botanical (herbs, flowers, plants) production;
  •  Across the state from York County to Aroostook County; and
  •  Funded by depositors like many of you who share our mission.

 

Borrower Spotlight

Providing Access to Farmland:
Start-up Farmers Ruth & Jonathan Bayless of Knock Knock Farm

“Working with Maine Harvest Federal Credit Union was a better experience than I could ever have imagined. They guided us through the financial process with what felt like unlimited patience and kindness. I know we would not be on our farm right now without them. We are so glad that they and their mission exist.”

Ruth Bayless, July 2021
Member Spotlight

Susan Kiralis and David Shipman
“The focal points of our China, Maine, home are the garden and the kitchen so when Maine Harvest Federal Credit Union opened it seemed only natural to put our money where our hearts and mouths were.

We have lived in China for the last 35 years, much of that time working at Fedco Seeds and getting to know the farmers and growers who can now benefit from MHFCU.

Working at Fedco, volunteering at MOFGA, serving on its board and at the Common Ground Fair, and now putting our money to work at Maine Harvest, we think we’ve done a small part toward making Maine the way life should be.”

 

 

 
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The Credit Union Movement In Five Phases

For some time I have followed the writings of Father Richard Rohr.  He is a Franciscan friar, wisdom teacher, and founder of the Center for Action and Contemplation in Albuquerque, New Mexico.

His spirituality concepts are universal, informed by all denominations and spiritual traditions.  His focus is the search for unitary conscience.   Recently he summarized five stages that religious and cultural developments have historically followed.  He calls these the five M’s: human, movement, machine, monument and memory.

I have paraphrased his approach below to apply it to credit union evolution.  I believe the framework is useful for understanding the different motivations credit unions draw upon with cooperative design.  (Adapted from Richard Rohr, The Wisdom Pattern: Order, Disorder, Reorder )

The Five Stages

“It seems that many great things in history start with a single human being. If a person says something full of life that captures reality well, the message often moves to the second stage of becoming a movement. 

That’s the period of greatest energy. Credit unions greatest vitality  as a “cooperative  movement,” resulted in thousands of new institutions formed annually.  Each was an expression of a larger vision for community. The movement stage is always very exciting, creative, and also risky.

It’s risky because the movement in history is larger than any city, state, country or economic system. Society is unable to foresee its full scope or meaning. We feel out of control in this stage, and yet why would anybody want it to be anything less?

Yet we move rather quickly out and beyond the risky movement stage to the machine stage. This is predictable and understandable. Systems are developed to support individual often independent firms.

The Dominant Machine Stage

The institutional or machine stage of a movement will necessarily be a less passionate manifestation. This is not bad, although it is always surprising for those who see credit unions as the end itself, instead of merely a vehicle for the original vision.

There is no other way; but when we don’t realize a machine’s limited capacities, we try to make it into something more than it is. We make it a monument, a closed system operating inside of its own, often self-serving, logic. By then, it’s very hard to take risks for those most in need following core values that inspired the movement phase.

Eventually these monuments and their maintenance and self-preservation become ends in themselves. It is easy just to step on board and worship their success without ever knowing why they came to be.

At this point, we have jumped over the human and movement stages, becoming like the for-profit institutions we were meant to supplant. There is little hint of knowing who we are meant to serve. Members are often frozen out of any meaningful role other than consumers.

In this stage, credit unions are a platform for building ever larger financial firms while holding on to a memory of something that once must have been a great adventure. Credit unions are no longer serving a distinctive role. Rather they mimic the priorities of the existing capitalist, market driven competitors.

Overcoming the Monument-Memory Entrapment

Increasingly credit unions avoid addressing the most disadvantaged segments of society we were organized to serve.

To avoid becoming trapped in the monument stage with the initial vision merely memory, renewal is needed. Innovative efforts are necessary to keep in touch with the human and movement aspirations. This is not  being naïve about the necessity for machine-like competencies and the inevitable human drive to embrace monuments.

We must also be honest: all of us love monuments when they are monuments to our human ambition, our movement, or our machine.”  (End paraphrase)

Applying Rohr’s Insights to the Credit Union Movement

It is feasible to align the different phases of credit union history with this model.  The more powerful application however may be to help  leaders or institutions recognize that all five stages can be present and called upon at the same time.

Can the machine success be augmented with the human passion of the creation phase? I saw one credit union CEO attempt to connect these seemingly contrasting impulses.   He organized a public member meeting each week at a different branch of the credit union.  Fifty visits led by a senior staff person for every branch over the year.

Videos were made of the visits and shared with staff and board.   The results were not, I believe, some dramatic new product or service concept.  Rather it reinforced respect for the members and  their opinions  as well as supporting staff in scattered branches.

I believe the model’s usefulness is most helpful if not seen as linear, trending in a single direction.  Rather it alerts us to the multiple motivations which contribute to success.

If we focus only on the competencies of the machine stage leading inevitably toward monuments, then we lose the important advantages of the initial creative era.   For it is human needs and relationships that were the origins of every credit union and, still today, its most important foundational advantage.

 

 

 

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Jack Kerouac, Credit Union Member, Coming Home after a Life On the Road

Last Saturday, March 12,  was the 100th anniversary of American novelist Jack Kerouac’s birth in Lowell, MA.  He was an alter boy and member of St Jean Baptiste Church.

He and his family were also members of the credit union whose first office was in the same church.   Jeanne D’Arc Credit Union was organized years earlier  by the local priest.

In February 2022 Jeanne D’Arc celebrated its 110 anniversary.  The credit union’s safe is still in the church building.

Alison Hughes, Jeanne D’Arc Credit Union

The church is now closed, but the building remains. The credit union and a new community foundation are transforming the structure to become the Jack Kerouac museum and performance center.

It is an ironic embrace for Kerouac whose peripatetic lifestyle is characterized as offbeat. His artistic legacy now has a home.  A venue both to honor the past and present his continuing popular appeal.

Jeanne D’Arc and Lowell are reaffirming the power of Kerouac’s roots.

The credit union and Kerouac started  in the same sacred place.   Both shared common purpose to  support individuals  in all their diversity.

In this latest contribution, Jeanne D’Arc is adding to its ever-expanding legacy in the community by honoring one of its members.  A conversion of an historical  space into a homecoming for someone most remembered for exploring life on the road.

Christopher Porter, President. Jack Kerouac Foundation

Alison Hughes. Jeanne D’Arc Credit Union

Sylvia Cuhna, Executive Director, Foundation

Jim Sampras, CEO. Foundation

 Kerouac’s Lowell Roots

 

Jean-Louis Lebris de Kérouac[1]  March 12, 1922 – October 21, 1969), known as Jack Kerouac, grew up in Lowell, played high school football well enough that major colleges recruited him. Church and family were deeply embedded values even though his later lifestyle might be considered bohemian.  

 His parents were French Canadian;  Kerouac did not begin to learn English until he was six, and remained bilingual in his work.

A 1959 television interview with Steve Allen in which Kerouac briefly  reads from On the Road is a helpful portrait of him at a peak of his fame as a member of the  Beat generation.

Three Appraisals of Kerouac’s Work

His 100th anniversary has resulted in articles that take different views of his literary output and continuing relevance.

An article in the Guardian newspaper explores why his counter-cultural mage still resonates in contemporary society, calling him a symbol whose meaning is still not understood. “Nature-loving mystic or proto-dudebro? Untameable free spirit or reclusive mama’s boy? On the centenary of his birth, it is time to look past the icon at the ‘bleeding ball of contradictions’ behind it.”

The Wall Street Journal’s tribute celebrates his reverence for the natural world while his  characters want to abandon traditional social constraints.

Jack Kerouac lives in pop culture memory as a writer on a perpetual road trip, a shooting star riding the highways and rails of postwar America alight with Catholic mysticism, booze, bebop and outlaw liberation. That’s the milieu of his breakout novel “On the Road,” a masterpiece of widescreen travel writing populated by eccentrics “who are mad to live, mad to talk, mad to be saved, desirous of everything at the same time…who never yawn or say a commonplace thing, but burn, burn, burn like fabulous yellow roman candles. . . ”

In our time of ecological destruction and climate change, Kerouac’s Buddhist observation in “The Dharma Bums” that “One man practicing kindness in the wilderness is worth all the temples in the world” is a fine starting point for understanding that there really is a divine order to the natural world.”

An article on the Poetry Foundation’s website summarizes his literary output while alive and published posthumously, along with critical and public reaction of his counter cultural  themes.

Why Kerouac Still Resonates

Wikipedia’s describes his work as both stylistically and substantively inventive:

Kerouac is recognized for his style of spontaneous prose. Thematically, his work covers topics such as his Catholic spirituality, jazz, travel, promiscuity, life in New York City, Buddhism, drugs, and poverty. He became an underground celebrity and, with other Beats, a progenitor of the hippie movement, although he remained antagonistic toward some of its politically radical elements.

In 1969, at age 47, Kerouac died from an abdominal hemorrhage caused by a lifetime of heavy drinking. Since then, his literary prestige has grown, and previously unseen works have been published.

On the Road (from Wikipedia)

“Kerouac completed what is known as On the Road in April 1951, while living at 454 West 20th Street in Manhattan with his second wife, Joan Haverty.[39] The book was largely autobiographical and describes Kerouac’s road-trip adventures across the United States and Mexico with Neal Cassady in the late 40s and early 50s, as well as his relationships with other Beat writers and friends.

“Kerouac wrote the final draft in 20 days, with Joan, his wife, supplying him with benzedrine, cigarettes, bowls of pea soup, and mugs of coffee to keep him going.[

” Kerouac said that On the Road “was really a story about two Catholic buddies roaming the country in search of God. And we found him. I found him in the sky, in Market Street San Francisco (those 2 visions), and Dean (Neal) had God sweating out of his forehead all the way. THERE IS NO OTHER WAY OUT FOR THE HOLY MAN: HE MUST SWEAT FOR GOD. And once he has found Him, the Godhood of God is forever Established and really must not be spoken about.” 

“According to his biographer, historian Douglas Brinkley, On the Road has been misinterpreted as a tale of companions out looking for kicks, but the most important thing to comprehend is that Kerouac was an American Catholic author – for example, virtually every page of his diary bore a sketch of a crucifix, a prayer, or an appeal to Christ to be forgiven.[44]

“Kerouac’s literary works had a major impact on the popular rock music of the 1960s. Artists including Bob Dylan, The Beatles, Patti Smith, Tom Waits, The Grateful Dead, and The Doors all credit Kerouac as a significant influence on their music and lifestyles.”

The early home to both Jeanne D’Arc and Kerouac will now be used to ensure that his literary light continues to inspire.

 

 

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Going Public: Colorado Partner Credit Union, their CUSO and a SPAC

In March  2021 Colorado Partner Credit Union announced that Sundie Seefried, its 20 year CEO would step away to lead a new cannabis banking company called Safe Harbor Financial.

Safe Harbor was a CUSO formed through the combination of the credit union’s cannabis banking arm and its division that licenses those services to other financial institutions.

At December 2021 yearend Partner Colorado reported $575 million assets, six branches and serving 36,000 members.   Its CUSO investment, presumably all Safe Harbor, was valued at $8.2 million up from $3.8 million the prior year.   These valuations were achieved with a  reported total cash outlay of only $750,000.

In February of 2022 there was a new transaction announced: Safe Harbor CUSO’s cannabis industry-focused financial services would be acquired by ”Northern Lights Acquisition Corp, a special purpose acquisition corporation (SPAC).  

A special purpose acquisition company (SPAC) is a “blank check” shell corporation designed to take companies public without going through the traditional IPO process.

A $185 million Purchase Valuation

The terms according to one news report were that Northern Lights will pay $70 million in cash and $115 million in stock. Sundie Seefried – who created Safe Harbor – will be the CEO of the new public company.

The full February 14, 2022 press release projected the equity market value of the post-sale closing company to be $327 million.

In an interview the CEO Seefried described Safe Harbor’s competitive advantages in managing the financials for businesses conducting legal marijuana transactions:

“The amount of work necessary to manage that BSA risk is expensive,” Seefried said in July. “And the resources are demanding, in terms of the monetary system that you have to purchase. 

“We did cannabis and we did it thoroughly,” she added. “We think we have the compliance program to a good state of stability here.”

The only financial information I could find about the Safe Harbor CUSO was the following;

The company had almost 600 accounts across 20 states and $4 billion in transactions in 2021. It would appear to be a fee intensive business model in return for its compliance expertise and financial transaction management.

What Does this Example Mean for Credit Unions?

Credit union sale of all or partial ownership of a CUSO business is not a new event.  Several major examples include the sale of CUSO Financial Services (CFS) a broker dealer, with minority credit union ownership, sold to Atria Wealth Services in 2017.

Prime Alliance Solutions was a significant national CUSO offering first mortgage services to an estimated 1,900 credit unions.  It was developed by BECU, the majority owner with a limited number of other credit owners and Mortgage Cadence. The CUSO venture was sold to Accenture, in a private sale, in 2013.

Another industry CUSO model that is a frequent target for acquisition is data processing.  The largest credit union owned processor USERS was sold to Fiserv in the 1980’s.  A number of other regional DP firms have also been acquired by private companies.

What make the Safe Harbor-SPAC transaction unique is that the business will now be publicly traded.

At this time several aspects of the transaction seem noteworthy.

  1. The Safe Harbor sale is unique in that the stock will now be publicly owned.  In the past some credit unions converted to stock banks such as HarborOne, but this is the first CUSO to be traded on a public stock exchange.
  2. The creation and development of this unique financial intermediary is a tribute to the CEO who has worked on this business model since 2015. You can listen to her discuss the intricacies  in  podcasts posted on the CUSO website.  Her biography says she has served in the Credit Union industry since 1983 and became CEO at Partner Colorado in 2001.   She holds a Bachelors in Business Management from the University of Maryland and an MBA in Finance from Regis University.
  3. If the CUSO is indeed wholly owned, the transaction should produce a windfall for Partner Colorado and its members. In the FAQ’s on the Safe Harbor web site this relationship is described as: Yes! Your accounts are held at Partner Colorado Credit Union and will be insured through the NCUA Share Insurance Fund.  This would indicate an ongoing business relationship.

Wall Street Is Discovering Main Street Coops

My biggest takeaway is that this is another example of wall street firms discovering  credit unions as a source of new business.   In addition to this public listing, brokers, hedge funds and investment advisors are actively soliciting credit union purchases of banks, placing subordinated debt financing to enhance capital ratios and increasingly bringing wholesale financing and other funding opportunities to the industry such as fintech startups.

In subsequent posts I will review some of these other activities and what we can learn from them.

The Need for Transparency

One purpose in writing about these events is so they can be fully and openly talked about.   At the  moment most of the investment banking activities  are private with limited or no public disclosure.

For example two credit unions closed on subordinated debt capital  with identical structures in December 2021.   But the rates paid by the two credit unions appear to be significantly different.  Both are sound institutions but even they must rely on what their brokers and advisors privately tell them about the market which may not be indicative of other options.

The second reason is so that member owners, whose funds are used, will know how they  benefit from these transactions.   Rarely have credit unions discussed these transaction with members.

The annual meeting’s business report and election of directors would seem to be an ideal moment  to explain the financial impact and member payback on these investments.  I have yet to hear of this being done.

A Payday for Members?

Hopefully the members will be the big winners in SafeHarbor’s public offering.  The history of this effort was that it was all done with the credit union’s resources.

Partner Colorado valued its CUSO investment on the 5300 report for December 2021 at $8.3 million while reporting  a total cash investment of only $755,000.   With a SPAC cash and stock purchase of $175 million, will the members be in for a big payday?