Category: Co-ops in Capitalism

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Becoming Part of a Bigger Story

(This is the second of two posts on the first and only National Examiner and Credit Union  Conference in December 1984 organized by NCUA. Part one is here.)

In March 1984 when NCUA announced its organization of the first ever National Examiners’ Conference in December in Las Vegas, much skepticism was heard.

The first concern was “You will need professional planners or you’ll never pull it off.”  But NCUA central, regional and field staff put the conference together piece by piece without hiring a single consultant.

To get the lowest possible hotel room rate, NCUA booked the MGM Grand Hotel for early December.  The critics were not optimistic.  “Credit union people will never come to Los Vegas two weeks before Christmas.”

And the ultimate quip, “You think credit unions are going to pay to meet with their regulator?”

Once the marketing started, a limit of two per credit union had to be imposed.   As one credit union explained, “I  knew it would be a sellout so I reserved 12 slots up front so I could take all my volunteers.  We’ve never been to a credit union conference  and a lot of things are coming down the line.  I thought it was extremely important for them to see what was going on.”

By October the conference limit of 2,500  had sold out.  No new registrations were possible.  A wait list was set up.

Examiners Come First

More than 900 federal and state examiners and regulators met from Monday through close of business on Tuesday.  The goal was sharing experience and expertise.   One theme of the conference was the changing economy.  America was moving into a new era transitioning from an industrial economy to an information one.

Financial transactions were about moving information for members. Credit unions were at the center of this change.  According to the most recent American Banker consumer survey, they had become America’s favorite financial institution.

Chairman Callahan opened these initial sessions saying, “Better trained examiners and better communication between federal and state regulators and credit union officials are essential in a deregulated financial environment.  This national conference is a chance to discuss current concerns and share problem solving techniques.”

Some examiners had been on the job for years; others for just months.  One commented about this joint effort:  “We’ve always been first cousins but never knew each other.  I was surpirsed to learn how much we have in common.”

One professional challenge was the increase in examiner responsibility.  NCUA had been delegating to the regions and their field staffs greater responsibility for safety and soundness.   The need as one NCUA executive stated was “to get close and stay close” to credit unions.

Case studies were presented in breakout sessions to practice analysis and problem solving approaches.   The Early Warning system of 1 to 5 ratings was reviewed.  NCUA was the first federal regulator to share its individual ratings with the institutions it supervised.  Not all agreed this was a good idea.   One regional director said some credit union managers used the ratings as a measure of personal performance and for negotiating higher salaries.

Dual chartering came up at several panels.  Private coop insurance representatives sat alongside NCUSIF examiners.   The focus on choice of charter was critical to the evolution of the credit union system.   Share insurance options were an essential component of  a meaningful dual charter choice which provided a check and balance on each system’s responsiveness.  It was pointed out that deregulation of savings accounts, field of membership options, and broader investment choices had occurred first in individual states before these were adopted in the federal system.

The Grand Convocation

On Wednesday 1,500 volunteers and professionals joined for panels, workshops,  and informal conversations.  There were over 300 speakers and 60 different breakout sessions.  While some of the sessions were repeated, the plenary sessions and many of the panel discussions were filmed, edited and then rebroadcast on the conference’s 24-hour video magazine.  These excerpts were shown over the MGM Grand’s in-house television giving attendees a chance to watch sessions they couldn’t make. The broadcasts also included live interviews and comments from attendees.

Major topics included the future of the common bond with a panel of both state and federal regulators;  how to monitor investments and find useful information; whether deregulation was beneficial for consumers and financial institutions. Breakouts covered mergers, the role and future of CUSO’s,  and changing examiner skills and new analytical data base resources.

Richard Breeden, the Vice President’s Deputy counsel for Financial Institutions, moderated the  panel Is the Regulator Obsolete?   Will technology and the speed of money transfers make it impossible to track critical changes in a timely way?

Federal Reserve Governor Martha Seeger described how deregulation had changed the role of regulators: “We must think of ourselves as business advisors, not as policemen.  To me, examiners and credit union mangers are partners in fostering depositor trust and we have just got to work together in this.”

Popular sessions at both parts of the conference were led by Rex Johnson, the president of a newly charter credit union in Illinois.  He had been deputy supervisor for the Chicago office of the DFI before taking over the cu startup.  His had provided training for NCUA examiners using actual examples of credit underwriting prior to this conference.  Rex’s unique collections of case studies generated a lot of interaction.  He noted,  “We had a lot of fun in the breakouts, but more important we learned a lot from each other”

The Bottom Line and Bigger Story

One of the guest speakers was former Marquette basketball coach Al McGuire.  He remarked: “You’re a family; you’re a team and there’s no “I” in team. Credit unions are on a fast break and have unlimited potential.  You must make the maximum effort and you must be together.”

The conference was a gathering where people could translate a belief in themselves and their credit union into practical terms.   Comments included: I’d give it four stars , , , because of the enthusiasm of the people and the direct involvement of NCUA  Chairman Callahan himself.  Usually people at that level don’t become involved.  He lit one hell of a fire in Las Vegas.”

That fire was because this first National Conference of examiners, supervisors and credit unions showed that their efforts were all part of a bigger story.  Everyone contributes, no matter their credit union’s size or time on the job.  What each does individually adds to the greater purpose of the cooperative system in America.

Selected Photos

Dick Ensweiler, President of the Illinois League, Callahan and Board Member Mack.  The League presented Ed with a framed motto on his departing for NCUA, that read We Don’t Run Credit Unions.  It was in the Chairman’s office at NCUA.

Larry Blanchard then editor or Report on Credit Unions.  He worked for Austin Montgomery at NCUA, ran a credit union and has been involved with multiple credit union firms from TruStage to Callahans–still to this day.

Federal Reserve Governor Martha Seeger speaks to the full conference.

NCUA Executive Director Bucky Sebastian with regional directors Carver, Riley and Skyles.  

Texas credit union Commissioner Pete Parsons and NASCUS Chair on a panel on dual chartering.

Carmen Hyland, credit union attorney, mother of Gigi. (corrected from first description) Her daughter became counsel for a corporate credit union, NCUA board member and President of the National Credit Union Foundation.

At a reception:  Ted Bacino, NCUA Director of the Office of Administration, Laura Rossman, Senior Advisor to PA Mack, and Callahan.

There are two NCUA videos of the conference plus more than 300 more photos if someone wants to use in a more detailed report on the event.

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A Credit Union Christmas Story

The problem of debt and Christmas is a theme of literature.  Who does not know the story of Scrooge and Little Tim by Dickens?  The play is presented every year at this time at Ford’s Theater here in DC.

The vignette that follows shows this reality for members still exists today.  The story as told by a credit union employee:

I’ve Been There

Yesterday I had a member call in asking to refinance her auto with us to get a better rate. I let her know about our interest rate reduction product and made her aware there is a $100 fee associated with this. After speaking with her and getting to know her circumstances, I learned she is a single mother with two kids. She is working multiple jobs.

She has several credit cards that she is struggling with and really trying to get these under control so she can one day purchase a home.  The cards had 0% interest rates because her husband was active military. But they got divorced and now the interest rates are extremely high and she is stuck with all the debt.

 She also told me she couldn’t afford gifts for her girls for Christmas. I told her it sounds like she doesn’t have the $100 right now to even do the interest rate reduction.  So let’s start with a Trinity referral and get her debt under control and hopefully put her in a better financial situation.

 I also referred her to my church which does a Christmas store at which I volunteer.  I told her we could get her kids some Christmas presents. She was beyond grateful.

I said I could relate with her as I’ve been there, and we at Day Air will help her through this. Our short term goal is to get her debt down to raise her credit score. Then she can get a better rate on her auto loan. Our long-term goal is to eventually get her and her girls in a home they own.

The Opportunity for Goodwill

How will your credit union help debt burdened members who are struggling and feel anything but cheer this time of year?

 

 

 

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Learning from the Past:  NCUA and Credit Unions During a Change in National Political Leadership

The 1980 election of Ronald Reagan brought a spirit of hope and joy for some.  For others , deep concern about the future of the federal government’s role.

Recall Reagan’s policy priorities:  Supply side economics-tax cuts, defense spending to counter the Soviet Union, tighter money supply, reducing the rate of government spending and deregulation.   In August 1981, one of his first dramatic actions  was firing 11,345 striking air traffic controllers and banning them from federal service for life after they refused to return to work following a contract dispute.  Federal agencies and employees were worried about their future.

A specific initiative that has parallels with Trump’s appointment of  the Musk-Ramasamy duo to reduce government spending was the Grace Commission.  Here is a summary of its role:

The Private Sector Survey on Cost Control (PSSCC), commonly referred to as the Grace Commission, was an investigation requested by  President Reagan authorized in Executive Order 12369 on June 30, 1982. In doing so President Reagan used the now famous phrase, “Drain the swamp“.[1] The focus was on eliminating waste and inefficiency in the United States federal government. The head of the commission, businessman J. Peter Grace,[2] asked the members of that commission to “Be bold and work like tireless bloodhounds, don’t leave any stone unturned in your search to root out inefficiency.”[3]  (Wikipedia) 

A year later when the Commission issued its report it called NCUA Board Chairman Edgar Callahan a “role model” for government agency executives.  It noted that, “in one year, NCUA cut Agency staff 15% and its budget by 2.5% while maintaining their commitment to preserving the safety and soundness of the credit union industry.”  (NCUA 1983 Annual Report page 3).  What was this transformation like?

How NCUA and Credit Unions Fared During Reagan’s First Term

When Reagan took office, inflation for the prior year 1980 was 13.5%.  The short-term Fed Funds rate was 13%.  Federal Reserve President Volker’s goal was to drive inflation down by raising rates further if necessary.

The NCUA’s new Chairman was Edgar Callahan, whose immediate prior responsibility was over five years as Director of the Department of Financial Institutions in Illinois. DFI supervised over 1,000 state chartered credit unions.  At the February 1982 GAC conference, the primary concern for the audience of national attendees was industry survival.  Callahan said the response was to put responsibility for fundamental business decisions in the hands of credit union boards and managers, not the regulator.  He called this multi-faceted change “deregulation.”

During the next three years NCUA became what the Grace commission described as a model for effective governmental performance.

The following are highlights of how NCUA changed from a November 15, 1984  agency press release titled: FCU Operating  Fee Scale Slashed 24%; Third cut in Three Years

The excerpts from this two-page, detailed release describe how this unprecedented reduction was achieved.

The NCUA Board today slashed by 24% the operating fee scale for federal credit unions in 1985, bringing to 64% the fee scale cuts over the past three years.

The dramatic 24% cut will save federal credit unions more than $4.3 million in 1985 and has saved them $14 million since 1983, the first year in NCUA’s history that the fee scale was cut. 

“For the third straight year, the efficient operation of the Agency has allowed us to put money into the pockets of federal credit unions, “ said NCUA  Chairman Edgar Callahan.  “It’s an impressive track record, one that the agency and entire credit union system can be proud of.”

“NCUA is the only  federal financial regulatory agency that is assessing its constituents less this year, than it did three years ago and I think that is a tremendous accomplishment,” said NCUA Board Vice Chair P.A. Mack. 

Federal credit union operating fees, which are pegged to a sliding scale based on federal credit unions’ assets, are the primary source of funding for the Agency’s operating budget.  The fee pays for the Agency’s annual examinations of each federal credit union as well as its chartering, supervisory and administrative activities.  NCUA receives no tax dollars.  Operating fees, the earnings on the investments of those fees, and insurance premiums are the sole sources of funding for the agency. 

(The next six paragraphs show the specific dollar  impact on credit unions of different asset sizes including Ft Shafter, Hawaii Federal and State Employees and Navy Federal Credit Unions.)

Continued cost cutting efforts at NCUA, coupled with a projection for robust federal credit union asset growth and increased earnings on NCUA investments are the key elements that made a third consecutive operating fee scale cut possible. 

The NCUA board attributed the Agency’s success in keeping costs down to high productivity by NCUA staff, personnel reductions and the shifting of resources from the central offie to the field where they are needed most.

For example, NCUA for the second consecutive year has completed an annual examination of each federal credit union, and achievement not seen since the mid-1970’s.  Although total agency employment has been reduced by 15%, the number of examiners has increased to an all-time high (369).  Getting back to a once-per-year exam cycle exemplifies the Board’s desire to promote safety and soundness while leaving the management decisions in the hands of each credit union.

The resulting gains in efficiency enabled the Board to reduce the Agency’s fiscal 1984 budget by 4.9%-the biggest cut in the Agency’s history.  It was the third straight year the Board approved a total agency budget that was below the previous year’s request. 

Federal Credit unions in the six months ended June 30, 1984 had grown 12.5% from $55.5 billion to $61.3 billion. 

Taken together, the budget cuts, investment income and credit union growth are expected  to leave NCUA’s operating fund with substantially more than it needs to meet its expenses. By slashing 24% from its operating fee schedule, the board is effectively eliminating a $3.4 million surplus.  “We believe in returning as much as possible to credit unions,” Chairman Callahan said. 

This action is another in a series fiscal and operational improvements the NCUA Board has approved of in the past three years. . . most recently the adoption of rules to revitalize the National Credit Union Share Insurance Fund (NCUSIF) transforming it from the lowest reserved to the strongest of the three federal deposit insurance funds. (End quote) 

Some of the Lessons

Chairman Callahan’s leadership at the agency was based on professional competence, experience and pragmatic solutions.  Some of his colleagues had worked with him on credit union issues for over five years. Internally Callahan placed responsibility for problem solving with the six regional directors.  The agency had become top heavy in D.C. where issues got bogged down between 16 separate offices.  He streamlined this structure into two primary responsibilities: an office of administration and the office of programs.

Resources were moved to the field so that an annual exam became the minimum standard for performance. Competence, not seniority or appointment status, were the criteria for responsibility.  Mike Riley went from head office to become RD of the largest and most problem challenged region as the youngest RD ever.  Rosemary Hardiman was board secretary and Joan Pinkerton, and Sandy Beach led public information and congressional affairs—all were appointees chosen by the previous Chair Larry Connell.

Money was not the most critical resource; it was management talent and willingness to innovate to resolve problems with effective supervision.  Staff was provided enhanced training that included Video Network recordings such as Rex Johnson of Lending Solutions, leading sessions with  examiners to identify sound and  unsound loan underwriting.  Another video session was a case study of an actual credit union problem for the agency led by a business school professor.

These efforts were supported by disciplined research, constant dialogue with credit unions and open, frequent communications.  New data analytical tools (financial performance reports) from the call report were provided for both examiners and credit unions.  NCUA board meetings were taken on the road so credit unions could attend and speak directly with senior staff and board members.

NCUA and credit unions worked collaboratively to transform both the agency-the  CLF, the NCUSIF and the exam program-and the credit union system to the new world of open market-based competition.  These institutional changes have endured even when subsequent Chairman were chosen from individuals with no coop experience, and several who had just lost a recent election (Senator Jepsen and Congressman Norm D’Amours).  The agency staff and administration were comfortable working with the industry even when board members had little or no relevant credit union, regulatory or leadership experience.

Celebrating Success

The high point of this collaborative approach was the largest ever regulator-credit union conference held in December 1984 in Las Vegas, organized by NCUA.  All state regulators and examiners and NCUA staff met with over 2,500 credit union attendees to hear from experts and debate the future.  I will write more about this seminal event that has never been repeated.

The conference demonstrated the power of cooperatives to share and learn from each other. This was a summit that ushered in over three decades of credit union expansion and resilience as the S&L industry failed and the banking system and FDIC went through multiple bailouts.

The bottom line: as shown by this 1981 transition, new faces can be opportunities for creative leadership and strategic change. The 1981 selection of Ed Callahan as chair enabled NCUA and credit unions to become financial pacesetters for their members and the country.  It is the quality of the appointee, not the party, that matters.

One should advocate for a similar considered appointment and proven leadership in this coming transition.

 

 

 

 

 

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The Strategic Advantage of Being Local

The Institute for Local Self Reliance (ILSR) has turned 50 years old.  Its mission is to build local power and fight large corporate control through research, advocacy, and community assistance to advance vibrant, sustainable, and equitable cities and towns.

This 11-minute video below provides its history from founding in 1974 in D.C. to its present multi-faceted efforts.   The organization became national in the early 1980’s when it  opened its head office in Minneapolis.

(https://www.youtube.com/watch?v=Wp_DNUXVDt8&t=108s)

In the 90’s It was an outlier in the world of “bigger is better” and the pull of the global economy on large corporate growth ambitions.  However, its focus on local self-reliance regained momentum and focus as the power of monopolies became increasingly questioned, especially its impact on local economic communities.

The Institute’s  approach is decentralization emphasizing local control and resisting corporate displacement of independent options. The goal is enhancing freedom and democracy with self-reliant economic projects  and political control.  Today it has four areas of focus:  community broadband efforts, composting, energy democracy and promoting independent locally owned businesses.

While the advocacy and research efforts would seem to make the ILSR a natural ally of credit unions, there appears to be no overt participation in this cooperative financial sector.

Why Local Matters

In an era in which many tout scale as the most important competitive necessity, the real sustainable advantage for most credit unions is their “local” character, identity and related service advantages.

At September 2024, the industry’s call report data suggests that over 87% of credit unions offer some form of on online transaction access.  The Internet advantage, no matter how sophisticated, is rarely a sustainable or unique delivery channel or even special user experience. However, being local is.

An Example of a Large, Local Advantage

Recently Jim Blaine has posted several articles on the founding of the country’s second largest credit union, State Employees of North Carolina (SECU).  The post below details the founding character and common bond of the credit union.

Almost every state in the country had at least one or multiple credit unions with state employees as their core FOM.  But only SECU made the breakout to record this growth achievement versus many states with much larger potential in their employee base.

How was this breakout accomplished?  As the credit union’s operations expanded to locations and counties throughout the state, the critical advantage was keeping local input, oversight and responsibility at the branch level.  Loans were made and collected by each branch; local advisory boards and committees were formed; employees were local; and the various aspects of community involvement were locally determined.  Out of this local self-reliance, the second largest credit union in America was constructed.

Here is SECU’s brief founding story from a post on November 19, 2024 SECU Credit Unions as An Employee Benefit:

“No one questions that credit unions were created in the U.S. to provide access to credit for working men and women – particularly those of “modest means”. Why? Because “back then” many payroll offices were confronted with regular, recurring employee requests for “a short-term advance” prior to payday. Money is always in short supply for most folks – both “back then” and now.

“Not helping an excellent employee in a time of need was “bad for business” and employee relations. Sending them to a loan shark was worse. “Payday lending” at rates usually exceeding 100+% – both “back then” and now – creates a death spiral of financial dependency for a consumer. Shackles not made of iron, but shackles just the same.

.

. …” I owe my soul”... that can be a problem, … beware.

“Employers embraced “company credit unions” as an added benefit which could be used to assist and retain employees. Employers liked having an independent, employee-owned and led lender making the decisions on which employees qualified for loans – choices the employer did not want to make. Employers didn’t want to be in the lending business, nor have to “advance” company funds. To help out, employers frequently provided back office support, payroll deduction, office space and assisted employee-member volunteer leadership of the credit union.

“SECU, although a separate, independent organization, was “the company credit union” for North Carolina state government and the North Carolina school systems. The idea of a credit union as an important employee benefit caught on! 

“Other N.C. companies also formed credit unions – R.J. Reynolds, AT&T, IBM, Champion Paper for their employees – as did many municipalities, local post offices, our military, and churches. At its peak, there were 360+ different credit unions in North Carolina, today just 60 remain. 

“Is SECU still “the company credit union” for North Carolina state workers? What has changed?  In order to know where you’re going, it often helps to know where you have been.”

(End Quote)

SECU’s Relevance for Today

Some of the companies and many of the 360 credit unions referenced in Jim’s blog no longer exist.  However, the local communities and their residents are still present—even if now in separate lines of work.  Local does not go away.

Local does not mean an effort must remain small.  No, local wins because it is built on the ultimate credit union advantage of relationships and self-reliance.

A billion dollar credit union’s car loan, savings account or even mortgage are often a commodity, no different from similar products offered by a ten million dollar institution.  The difference is personal, being able to talk with a real person who is familiar with your community and circumstance.

The ILSR has continued to present the power of local solutions and control in its newsletter.  A recent article was on grocery prices:  High prices are a problem. Here’s how to solve it.  Perhaps its opportune for credit unions to align and participate with the work of the ILSR.  For it appears to capture the ultimate advantage of a member-owned cooperative-its local identity. control and focus.

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What Impact Might the Trump Administration Have on Credit Union Oversight

Writing about the future is easy. Rarely do readers look back when events have unfolded.  Moreover such forecasts often reflect, not insight or wisdom, but rather one’s own efforts to protect vested interests.

However there are some reference points which can help us think about what a credit union might do going forward into a possible disrupted regulatory future.

Today I will review what Project 2025 says about federal regulation.  I could find no direct reference to credit unions although I did not review all 900 pages.

Published in 2023, President-elect Trump has denied association with the ideas presented in the document.  More than 100 conservative organizations were involved in its creation.  I found the brief section I cite below had over four pages of extensive reference notes.

IMPROVED FINANCIAL REGULATION

From page 705: One of the priorities of the incoming Administration should be to restructure the outdated and cumbersome financial regulatory system in order to promote financial innovation, improve regulator efficiency, reduce regulatory costs, close regulatory gaps, eliminate regulatory arbitrage, provide clear statutory authority, consolidate regulatory agencies or reduce the size of government, and increase transparency. 

Merging Functions. The new Administration should establish a more streamlined bank and supervision by supporting legislation to merge the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Federal Reserve’s non-monetary supervisory and regulatory functions.

U.S. banking law remains stuck in the 1930s regarding which functions financial companies should perform. It was never a good idea either to restrict banks to taking deposits and making loans or to prevent investment banks from taking deposits. Doing so makes markets less stable. All financial intermediaries function by pooling the financial resources of those who want to save and funneling them to others that are willing and able to pay for additional funds. This underlying principle should guide U.S. financial laws.

Policymakers should create new charters for financial firms that eliminate activity restrictions and reduce regulations in return for straightforward higher equity or risk-retention standards. Ultimately, these charters would replace government regulation with competition and market discipline, thereby lowering the risk of future financial crises and improving the ability of individuals to create wealth.

From page 706: Direct government ownership has worsened the risks that government-sponsored enterprises (GSEs) pose to the mortgage market, and stock sales and other reforms should be pursued. Treasury should take the lead in the next President’s legislative vision guided by the following principles:  

  • Fannie Mae and Freddie Mac (both GSEs) must he wound down in an orderly manner.
  • The Common Securitization Platform57 should be privatized and broadly available.
  • Barriers to private investment must be removed to pave the way for a robust private market.
  • The missions of the Federal Housing Administration and the Government National Mortgage Association (“Ginnie Mae“) must he right-sized to serve a defined mission.

(End Quote)

The text also states that Congress should repeal titles of the Dodd-Frank Act that created the Financial Stability Oversight Council (FSOC), a federal government organization which identifies risks, promotes market discipline and responds to emerging threats. Project 2025 defines the FSOC as a “super-regulator tasked with identifying so-called systemically important financial institutions and singling them out for especially stringent regulation.”

A Learning Event: The S&L Dissolution

In the late 1970’s the S&L industry held the largest deposit market share in California, much larger than banking competitors.  This was before deregulation.  Most depository firms were limited to operating in a single state or in some cases, a single location (Illinois).

Today S&L’s no longer exist as a separate industry even though 555 savings institutions with $1.2 trillion in assets still operated at June 2024.  All deposits are FDIC insured.  Of the total institutions, 241 are supervised by the OCC, 276 by the FDIC and 37 by the Federal Reserve.   While state and federal chartered institutions still function, the system is under federal direction.

While there are many reasons for the loss of the S&L’s as a separate, independent financial segment, the dominant factor was that many of the causes were self-inflicted.  These included a loss of special purpose, rapid multistate expansion through acquisitions, and balance sheets weighed down with fixed rate mortgages in a deregulated deposit funding environment after 1981.

After the mid 1990’s, there was no separate FSLIC insurance fund, no Federal Home Loan Bank Board to oversee the industry, and the FHLB liquidity system survived by serving all real estate lenders including credit unions.  In most states the mutual charter exists as an anachronism, with no new charters being issued.  At the  state level supervision is provided by a single banking/financial institutions department.

While external financial events did contribute to the industry’s collapse, competitors did survive and thrive, especially credit unions.  At the February 1982 GAC in D.C., CUNA President Jim Williams told new NCUA Chairman Callahan there was only one topic on credit union’s minds: survival.

Together credit unions and NCUA embraced deregulation and the changes in structure and oversight the new environment would require.  Hunkering down , protecting existing ways and asking for more funding to address problems was not the approach.

Whether the new administration will be as disruptive of federal regulators as indicated in campaign rhetoric, remains to be seen.  The lessons from an earlier era can be helpful:  remember  who you are and build on what brought success to this point in time.

Many of the factors in the S&L demise were self-initiated with leadership failures.  Cooperative success in navigating external changes was accomplished though enhanced collaborative efforts between credit unions and their regulators. not each trying to go their own separate ways.

 

 

 

 

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Gettng Back to Work: A Member with a 536 FICO Score

Every day credit unions cause miracles to happen for members.  You and I may not always see it from the recipient’s point of view.  It may seem like just another transaction. But these events are miracles for persons often in extended circumstances and feeling without options or hope.

Following is a miracle story.  It may seem small in the overall scheme of things, but it is everything to this member’s family.  

Being Treated “Like a Human”

(Used with permission)

This story is about Corey who was assisted by our Financial Coach Ashley, who works at the Wilmington Member Center. While working the lobby on a busy Monday, Ashley met with Corey who had come into to talk about a car loan. 

When they started talking about the loan details, Corey told Ashley that he was not even sure if this would be possible. He stated they had some life altering changes a while back and their credit took a major turn for the worse. He was not in desperate need of a new vehicle, but he wanted to try. Corey had been working on their family’s credit for a while and wanted to see where they stood. 

Ashley encouraged the member, and after pulling his credit report she took a deep dive. The report showed his credit score of 536. (Note: this is a “below average” credit rating; the average American consumer has a 714 score.)

She recognized that Corey was hesitant  to even talk about the credit score and that it was weighing on his mind.

She explained that if we have a reason “Why” behind what happened, that can give us the full picture. We are aware that “life happens.” She asked him to clarify what life changing circumstance occurred. Let us just say the member and their spouse were put though something we hope no one will ever have to go through.

While typing up her notes, Corey asked if she was putting the details of what happened in the loan file. Ashley realized that Corey had just re-lived a traumatic event in his life. 

When they were finished with the application, Corey got up, shook Ashley’s hand and said thank you. Ashley replied, “No problem, it is what we are here for.” The member responded with, “No, thank you for treating me like a HUMAN.” Corey stated he had been to several banks and was just given a hard no. Without asking questions, without seeming like they care, they just saw a terrible credit score and not a person and valued member. 

The next step was for Ashely to review the details and give the full picture of the situation to the underwriter. The next day Ashley learned the loan was approved.  She was so excited to call Corey and share the great news. When Corey came into the member center for the loan closing, he gave Ashley a big hug and thanked her repeatedly. Ashley is now working on a share secured credit card to help him improve his credit even more!! 

To quote Ashley, “This is one of the most genuine interactions I have ever had with a member. I will most definitely be their person at the credit union going forward!! Even when we learned a tough “why” as to what happened, we were able to serve with the best possible solution. “ 

This story represents the hope we provide through our caring financial partner-employees.  I love that Ashley recognized bad things happen to good people. Congrats and thank you Ashley for demonstrating why we exist!  

Some Financial Context

This midwestern credit union serves a market that largely lives paycheck to paycheck.  In other parts of the CEO’s staff update, he reported on the increase in charge-offs this year:   

For the year, we have expensed $52.3MM for credit losses which is $16.6MM more than we budgeted for the year and $26.8MM more than in the same period of 2023. Credit loss expense remains one of our primary concerns for the short and longer term. It  is the #1 reason we are missing our net income target in 2024.

Even with this drag on financial results, the credit union reported loan growth of 8.3% and share growth of 8.8% or almost three times the national average at September 2024.  ROA is .80% and networth 10.9%.

Most importantly, this increase in defaults did not stop employees from doing the right thing for members, especially those in financial difficulty.

Taking care of members, even those on the financial margins, is good business.  And that’s how cooperatives make real miracles happen in people’s lives every day.

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Post Election Back to Work:  The Change in Employment Patterns in Communities

As consumer focused financial providers, changes in local employment patterns can have a profound impact on members’ and their credit union’s financial outlook.

Credit unions have always walked toward members and communities in difficulty, not away.  The importance of a local credit union option is especially critical for those living in areas of slower growth and/or  lower paying job opportunities.  Now a study has tried to identify those cities whose economies trail national averages.

In the FDIC’s Second Quarter report, there is an article U.S. Industrial Transition and Its Effect on Metro Areas and Community Banks (pgs 45-74).

The study covers fifty years from 1970-2019 in the shifting employment patterns from higher paying industrial occupations,  such as manufacturing, to an economy based on service industry and technology.

The study uses Metropolitan Statistical areas (MSA’s) and developed a “transition score” for ranking the areas showing those most impacted by the decline in higher-paying to lower-paying employment.

Of the country’s 387 MSA’s (cities over 50,000) those with higher transition scores had slower economic growth, were mostly smaller in population, and located in the Northeast and Upper Midwest.  The two study tables below show the MSA’s with the highest employment transition scores along with the change in total employment over the past fifty years.

Of the 54 MSA’s in states with the highest number transition scores, Pennsylvania led the states with ten.

(note:  for highlighted MSA’s above the study presents analysis of each showing why they reported high population growth)

Additional tables and graphs illustrate both the distribution of the highest scores and the lower impact scores among the largest MSA’s which tend to have a more diversified industrial employment base (table 3 page 55).

As one would surmise, MSA’s with high employment transition scores had slower income growth than the nation as a whole.  (chart  4, pg 57)

In the four metro areas with the highest scores above, there were a number of other negative economic factors in addition to the erosion of manufacturing.   These included total employment and population declines, slower per capital and GDP growth versus national averages, natural disasters and a lack of amenities such as universities and favorable weather.

Impact on Community Bank Performance

The report’s final pages analyze the performance of banks whose headquarters were in one of the 54 MSA’s with the highest transition scores, that is communities impacted by the greatest change in employment patterns.  Following are some of their conclusions.

While overall performance is generally lower, these banks performed better than other community institutions in periods of high economic stress.  In terms of structure, consolidation occurred as in the industry at large, such that only 31% of high transition communities were left with a local institution by 2019.  New charters were less frequent in these MSA’s.  But bank failure rates were lower.

In the highest transition scored MSA’s, banks had weaker branch and deposit growth, slower overall financial activity including pretax ROA.

The reason for these banks better performance during the two periods of economic crisis, was that their balance sheets contained more single family residential loans and lower exposure to commercial and industrial loans than institutions located in a less impacted MSA’s.

The Takeaways for Credit Unions

Credit unions are no strangers to changing employment patterns in their market areas.  Many were originally chartered with employer based FOM’s.  The deregulation of the early 1980’s allowed both state and federal charters to diversify their member base and seek other growth options.

The banks that were most resilient during these employment transitions focused more on first mortgage lending and less on commercial. Credit unions are almost exclusively consumer and real estate focused lenders.  Even when an industry or local employer closes, the members tend to stay local. And need their credit union more than ever.

The study shows the external context matters in overall performance.  It shows the obvious–that slower economic growth tends to correlate with lower financial performance.   It also reinforces the critical and crucial role locally-focused financial firms have in these community transitions.

There is a cyclical pattern in much economic change.  A high growth area becomes crowded, expensive, and loses appeal versus communities with lower home prices and more stable institutions.  The role of credit unions as local economic actors is vital in both communities.

Many commentators suggest the latest election outcomes were driven by voters’ dissatisfaction with their economic situation, especially inflation.

Credit unions have the chance to take the lead in giving these members a hand up.

As other firms may rush to the high growth market attractions, the study shows that sustainability in times of deep transition is not only possible, but critical to the bringing the time closer when good fortunes return.

 

 

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Getting Back to Work:  The State of the Credit Union System at September 30, 2024

As the new administration’s post election appointments and policy directions are implemented, the credit union system is on a stable foundation.

There are still latent issues of vital importance, most of which the NCUA board has adeptly avoided.  But the macro-financials reported in Callahan’s 3rd Quarter Trend Watch overview yesterday are strong and heading in the right direction. This is the link to the 72 slide deck. The full recording is available here.

Some observations  I noted:

Improving liquidity: In Alloya Corporate’s economic summary they presented their balance sheet trends to show the industry’s improving liquidity position as demonstrated by the growth in members’ deposit balances.

For all natural person credit unions, total borrowings have fallen and are now only 5.2% of assets, loan and share growth are in even balance, and the market value in underwater investments has recovered another $9 billion in value.  Liquidity is coming back.

Slow Growth

The overall theme for this quarterly  update was balance sheet growth much less than the industry’s CAGR over the past 20 years.  The September 2024, 12-month share increase was 3.2% versus  6.3% over the past two decades.  For loans, the latest 2.59% growth is less than half the 20 year average of 7%.

An interesting statistic about the 2.5% in additional members is analysis showing credit unions with organic growth grew faster than those institutions relying on third party loan originations, a common means of adding members.

The upside of this modest growth was that the various measures of total capital and net worth(10.8%) have all increased versus one year earlier.

Takeaways In a Changing Administration

The credit union system was financially strong before the election.   Nothing has altered this fact.  A change in regulatory leadership is coming.   Questions credit unions might consider as this political turnover occurs might be:

How will this change affect your members’ lives?   Will the direct governmental assistance of the COVD era and programs such as student loan forgiveness end?

How will reliance on market outcomes affect lending opportunities such as climate related projects or electronic vehicle sales?

Will the new normal in the Fed’s overnight rate settle in an expected range of 2.5-3.0%–or will fiscal policy drive a higher or lower level?

With a more market-oriented administration, will the unique role of credit unions be sustained, or will the industry just be seen as another option in an ever expanding lineup of fintech, bitcoin and other financial providers.

In a future blog I will explore issues of regulatory policy and present a case study of a prior time of major change in administration.

The Good News

The good news for credit unions at this moment of national policy changeover is that they are in a sound position to deliver for members on all of their traditional service options.

They can continue to help members who feel vulnerable or overlooked.  And maybe they can bring to those struggling with inflation or even bigger goals such as buying a home, even more responsive financial solutions in the four years ahead.

 

 

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After the Election:  Serving Members One at a Time

A critical  strategic advantage for most credit unions is location, a place members can see and access as necessary.  A local office serves a  different and broader role than just convenience.   While telephone or virtual web access are necessary, they are not the same as a unique presence.

A credit union office serves notice to the community that the credit union is theirs. Members not only have interaction with employees but also with each other.  Many credit unions use signage and participation in events to reinforce being part of the community.  Local emloyeess and directors provide real time market knowledge that are impossible to acquire in other delivery channels.

Following are two examples of service experiences, one remote and one in person.  Both involve a member trying to resolve an issue.

A Remote Service Experience

Even before I read your article on Credit Union 1, I have been preparing to leave for another credit union.  The credit union has become just a computer Bot.  Call member service and it takes 15 minutes to get around the automated phone responder “LUNA”. You can repeatedly ask for a member service rep but she always has another set of buttons for you to press.  I’m not against automation and use it often to transact much of my personal business.  But when you need to talk to a person that is not an option.

Recently the credit card company they use overcharged me.  I called CU1.  Immediately they put the transaction on hold and referred the problem to the Credit Card Bank. After filling out several reports to file with the card bank and months (June to October) of waiting for them to remove the charges I was notified that they were going to go ahead and put the charge on my credit card as they did originally. 

Contacting CU1, they gave me instructions on how to deal with my credit card bank and the airlines to maybe solve the issue.  We’re talking about $775 and no help from the credit union.  And I do not like the card processor.  More electronics and fewer personal assistance.

I know this sounds like someone from the past not being up to date with what is going on in the present; but really I make many of my daily transaction payments with my Apple watch; having connected voice over internet protocol for my home phone service; and many more.  I do like the speed and direct processing that the new electronics offer, but it can’t replace a person for everything.

Remote Islands, Microsites and Personal Service

Tongass FCU, Ketchikan, AK serves Southeast Alaska with locations in a region of islands (the Alexander Archipelago) and the Tongass National Forest.  No roads connect these islands!

At September 30, 2024, the credit union reported $228 million  in assets from 13,710 members served by 13 branches and 85 employees.

CEO Helen Mickel has worked at this 61-year old credit union for 22 years.  For the credit union the distance to the nearest branch often requires a small plane or ferry.

It has developed Community Microsties to meet the financial  needs of remote coastal villages.  Microsites are built upon a relationship between TFCU and the local community. The community invests in TFCU by opening accounts and providing a free space to operate, while TFCU provides an ATM, lobby hours, and local jobs.

The future:  TFCU seeks to build community-microsites and branches to promote prospering communities. We believe that a financial institution is a pillar of a community. It brings education, opportunity and financial access to the remote villages and towns of our beautiful state.

Here is a story with  pictures from Helen of what this sometimes requires in practice.

 A Grumpy Member

It started with a very grumpy member threatening to close her account, to one of the best visits I’ve had with a member!💯 

The mail is tricky in southeast Alaska and our statement vendor is in the lower 48.  

This grumpy and worried member told me over the phone she was going to pull her money out on Monday because she still hadn’t received her monthly statement for August. I told her I’d like to meet her when she comes in and asked what time she would be at the credit union. 

She said she heard the weather was going to turn and maybe she wouldn’t come down after all. She uses a cane and has 45 stairs to navigate when she leaves her home.  

I offered to bring her a printed statement and introduce her to our assistant branch manager, Sabrina, so she wouldn’t have to leave her house.  She liked that idea.😊

When I called to make sure she was okay with us stopping by, she said, “Yes! I’ve been waiting for you!”

The Member’s Museum

What a wonderful time we had! We worked out our business problem and then got a tour.  

She had a “museum” of artifacts she had dug up on beaches and old community sites all over southeast Alaska! We talked about the good old days of early Ketchikan and shared stories.  

I took pictures and told her I would be posting them and she was okay with that. She has lived in her home for 80 years – her whole life. It was the “cabin” for the first house that was built by her family on the side of a mountain.⛰️🌲

Pioneer members are some of my favorites. I love it when something difficult turns into a blessing for everyone! I couldn’t have started the week off better! ❤️

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Post Election Back to Work:  Members’ Affordable Housing Needs

In addition to consumer inflation concerns as in the price of groceries, another economic topic on voters’ minds was affordable housing.   High interest rates have brought the home purchase market to almost  a standstill except for the well-to-do.

The average home price in the United States in 2024 is around $420,400, a 25% increase from 2020. Home prices vary widely by location. For example, the average home price in Iowa in 2024 is $205,988, while the average in Alabama is $217,75.  Even with candidate Harris’ $25,000 down payment assistance for first time buyers, many would still see the aspiration as very difficult.

Today an update on the median home price for every state as of August 2024 was published by the Visual Capitalist website.  The overall median (not average) for the US was $385,000.

Credit unions have been innovators in assisting members first home purchase efforts. These changes often go outside the standard secondary market underwriting requirements as many credit unions hold non conforming loans on their balance sheet.  Product initiatives include low or sometimes no down payment,  waiving transaction closing costs,  and structuring variable rate loans with initial lower short term fixed rates followed by variable price reviews to ease the first years of payments.

This video is an example of how Community First (WI) structured their home lending to meet a family’s unique circumstances.

(https://www.youtube.com/watch?v=d6AQbDYSmpg&t=15s)

FHLB grants and other forms of community assistance are sometimes available.  But given the continual rise in home prices even in the current slow markets, the prospect of a higher normal level  interest rates, and the lack of affordable supply in many markets, is another approach required?  Housing is also a market where technology would seem to have limited potential to change the cost side of the problem.

New approaches rethink the structure of home ownership by separating the cost of land from the house built on the property.  Here are two examples of this approach.  The descriptions are largely from the linked websites.

Neighborhood Housing Trusts

The first example is the Community Housing Trust (CHT) based in Ithaca, NY.   CHT helps people with modest incomes buy their first homes. Since 2009, all of Ithaca Neighborhood Housing Service’s (INHS) home sales have been part of the Community Housing Trust. By using a special ownership structure, It is able to keep CHT homes affordable for the first buyer, and all future buyers as well.

INHS got its start by trying a new way to reverse the decline of downtown Ithaca: fixing homes up rather than tearing them down. In the 1960s and 1970s, Ithaca faced the problems challenging urban areas across the nation: a depressed economy, deteriorating housing, and the flight of homeowners to the suburbs.

Most of the homes in Ithaca’s downtown neighborhoods were more than 100 years old and owners could not get bank loans to buy new ones or didn’t have the skills or financial resources to make repairs.

In late 1976, inspired by an urban renewal program created in Pittsburgh which relied on a partnership between residents, businesses, and local government, Ithaca joined a network of successful Neighborhood Housing Services (NHS). Recognized by Congress in 1978 and known today as NeighborWorks® America, the national network of NHSs continues to recognize and nurture local solutions to local community development.

The Program’s Structure

The CHT is a “shared equity” program: the homebuyer purchases only the house and the Trust owns the land. The homeowner has a 99-year lease on the land, with a small monthly land rent. This arrangement greatly lowers the purchase price of the home.  Because most CHT homes receive a special tax assessment, the property taxes can be much lower than a market rate house. INHS ensures that all CHT homes are built or renovated to be energy efficient and environmentally sustainable, another way that operating costs are kept low.

In exchange for these financial benefits, CHT homeowners agree to limit the amount of profit they can take from their homes when they are sold. CHT homes have a resale value that is capped at 2% increase per year. This allows the homeowner to build wealth in their properties, while ensuring that the home remains affordable for future owners.

The Funding

CHT homes cost on average more than $400,000 each to develop.  The homes are sold for only about half that amount—between $150,000 and $210,000. INHS receives grant funds from a variety of sources to help fill the gap between development cost and selling price.

The permanent affordability of CHT homes means that the grant funds utilized to build them will benefit many lower-income households for generations to come!

The Durham Community Land Trustees

The timeline of this second example begins in 1987. The development of this  North Carolina affordable housing initiative can be found here.  This video, from 2017, shows a before and after  look for one neighborhood built with members’ self-help.

How It Works

Similar to to Ithaca, a community land trust nonprofit organization retains land ownership, ensuring future housing affordability.  Purchasers buy DCLT homes and lease the land these houses sit on for a low monthly fee for 99 years.

  • Owners can improve and maintain their homes.
  • They can leave their home to their children.

If a homeowner decides to sell, DCLT retains an option to repurchase the home to sell or rent to a future low-income resident or to assist the homeowner in identifying a new income-eligible purchaser.

The key feature: Homeowners share the equity they earn on their homes with future buyers, thus fostering long-term affordability even as surrounding neighborhood property values grow.

Credit Union’s Enhanced Role

Cooperatives are critical mortgage lenders in their local communities versus the nationwide all-comers model such as Rocket Mortgage.  Many credit unions also sponsor foundations for local grants.   Partnering with local housing agencies can  facilitate  oversight of land trusts or gain zoning support for both building and then managing the subsequent turnover with foundation land ownership.

Credit unions creative lending with on balance sheet solutions are a start to home ownership for some situations.  But the broader challenge of affordability requires a collaborative effort that brings multiple resources and a different ownership design to the economics of single home ownership.  A design that is partly cooperative but also combines with individual ownership responsibility.

If you are aware of credit unions participating in efforts to develop new ways of organizing home ownership and address affordability, I would welcome examples.

If one looks at the amounts of foreclosed property reported on the quarterly 5300 call reports, this suggests credit unions are already vested in home ownership turnarounds.   Why not go the next step and create CUSO’s or other organizations that will restore neighborhoods and members’ ability to build financial well-being from home ownership?