Category: Co-ops in Capitalism

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Needed: A Coop Pulitzer Award for the Credit Union Press

In America the press is often called the “Fourth Estate.”  The term places the press’s role as critical as the three branches of government: legislative, executive and judicial. It signals the watchdog role of the press, so vital to a functioning democracy.

What is the state of press coverage of credit unions?  Especially now that coops are the second largest depository system in the economy, serving over 100 million members and managing $2.2 trillion assets.

A Brief Credit Union Press History

 

Today’s independent coverage of the credit union system evolved from newsletters that emerged in the 1970’s and 1980’s as the credit union system become more coherent with national ambitions and organizations.

These startups included CUIS, Report on Credit Unions, NCUA Watch.  These newsletters relied on subscriptions versus the free in-house updates from league and trade associations.

In 1986 ASI established the first printed newspaper format called Credit Union Week.  Shortly thereafter Mike Welsh, former CUES President, launched Credit Union Times offering original reporting and commentary.  In following years Credit Union News and Credit Union Journal were launched as competitors.   All used a combination of advertising and subscriptions to support their free-spirited reporting.

Today the independent credit union news media is largely virtual, publishing daily online summaries relying extensively on press releases from the industry.

More than Aggregators

With small staffs, limited budgets and daily posts, opportunities for original reporting or even investigative efforts are limited.

But there are periodic examples of the traditional press role of speaking “truth to power.”   Power refers both to the actions of NCUA and other government agencies, as well as events within credit unions and trade organizations.

Peter Strozniak of the Credit Union Times has a talent for tracking legal proceedings involving credit unions.  His articles have provided valuable insight into NCUA’s regulatory shortcomings, as revealed in court records.  A recent example is his story of a credit union’s suing NCUA for failure to prudently manage its interest in taxi loan participations.  The opening paragraph:

The $390 million Nassau Financial Federal Credit Union is suing the NCUA for nearly $1 million for allegedly breaching an agreement to settle defaulted taxi medallion loans for a mere fraction of what they were worth.

Many observers questioned NCUA’s disposition of the taxi medallion loans sold to a hedge fund in February 2020.  The agency refused multiple FOIA requests for details.  This example further adds to the impression of an NCUA coverup in its actions in the $750 million sale  of loan participations to a Wall Street hedge fund.

The Members’ Interests: Sunlight as a Disinfectant

CU Today has published a series of original articles about member’s efforts to participate more openly in their credit union’s governance.

One series discussed the efforts of four members of Virginia State Employees Credit Union to seek nomination for open board seats.  Their efforts were totally ignored. The credit union elected the board’s self-selected candidates including the current chair with no outside nominees permitted.

More recently CU Today has followed the efforts of former directors and  CEO to challenge the announcement of Vermont State Employees to merge their very successful credit union into the larger New England FCU.

CU today publisher Frank Diekmann editorialized about his goal of “pulling back the curtains.” He explained why reporting the merger information provided members when charters are ended and the payouts to management that sometimes accompany such efforts matters.  It read in part:

We also got to see how many CUs opted to return net worth to the people who own it (in some cases, obviously, there was little to reserve from the reserves). We further got a peek into which were not offering any payout, with a few citing odd reasons such as the acquiring CU has more branches or, bafflingly, offers Apple Pay and Google Pay. Eh?

One CU did announce it would be paying out some of the excess capital, but in this case only to savers, with more than $2 million being distributed in all. I’m not suggesting the members of the board all had savings/CDs at the credit union and that few if any were borrowers. I’m just saying. 

Sunlight may indeed be the best disinfectant, but not if no one never opens the curtains. CUToday.info has made a commitment to reporting on all the merger disclosure forms sent to NCUA, meaning we will continue to give the curtains a pull. 

Needed:  A Pulitzer for Credit Union Reporting

At last week the White House Correspondent’s dinner the comedian Trevor Noah’s public roast of many public figures ended with this close about the never-ending importance of a free press.

While the international press coverage of the war in Ukraine was top of mind that night, a domestic event happened the following day proving Noah’s thesis.

The national press released a draft of a Supreme Court decision that would reverse the Roe vs Wade fifty-year precedent giving women the right to an abortion. The coverage took  the debate from behind the hermetically sealed Supreme Court process, to the public sphere.

If credit unions are to fulfill their purpose of bringing more economic democracy to their members and greater choice for all consumers, one of the most important ways to monitor this role is an independent press.  One that reports its successes and exposes its failures.

In addition to Herb Wegner awards honoring credit unions leaders who exemplify the best in cooperative commitment, I believe an equally important moment would be to award “Coop Pulitzers” to press coverage of credit unions.

These would recognize the writers and stories from within and without the industry who take the risks and invest the time to hold those in positions of leadership to public scrutiny.  Especially for those with public authority. For unlike the White House Press, in credit union land there is only one estate, the NCUA.

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A Member Raises an Abiding Question Both Topical and Troubling

While traveling yesterday I was copied on an email between two credit union members.  The sender asked in part: 

“ I belong to five different credit unions.  I’ve clawed my way onto the supervisory committee of one of them. . . Alas, the Board of one has recently approved a deal by which it will be swallowed up by the biggest credit union in the state. . . When the deal was announced I wrote asking for whatever merger documents they could disclose.

I heard back directly from the CEO, who cheerfully explained they would be disgorging absolutely no documents.  It appears to me that the board and management actually expect the membership to ratify this deal entirely on a “trust me” basis. . . literally every justification that has been publicly offered comes down to some version of “bigger is better.”

His request:  “I am wondering if you would refresh my memory about what specific questions a concerned member ought to be asking about a deal like this.”

Topical and Troubling

If the situation is familiar, it is because it  happens  weekly.   Not mergers, but member-owners cut out of the process entirely.  Private deals supported by rhetorical promises and void of any objective facts.

Takeovers are an everyday event in capitalism and its anything-goes world of buyouts and mergers enabled by the financiers.

Here is how one long serving capitalist CEO described the process in his Annual Report:

Acquisition proposals remains a particularly vexing problem for board members.  The legal orchestration making deals has been refined and expanded (a word aptly describing attendant costs as well). But I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it.  And yes, include me in that category.

Overall, the deck is stacked in favor of the deal that’s coveted by the CEO and his/her obliging staff.  It would be an interesting exercise for a company to hire two “expert” acquisition advisors one pro and one con, to deliver his or her proposed views on the a proposed deal to the board—with the winning advisor to receive, say, ten times a token sum paid to the loser. 

Don’t hold your breath awaiting this reform:  the current system whatever its shortcomings for shareholders, works magnificently for CEO’s and the many advisors and other professionals who feast on deals.  A venerable caution will forever be true when advice from Wall Street is contemplated:  Don’t ask the barber whether you need a haircut.   (Source 2019 Annual Report, Berkshire Hathaway Inc. pgs 12-13)

A Game without Rules: Credit Unions Become Commodities

Mergers are being undertaken by sound, well established and stable credit unions not to better serve members.   But rather to make life easier for their leaders.

Instead of cooperative communities expanding long-time member relationships, these transactions treat credit unions like a commodity.  Leaders who give up their fiduciary positions to an outside third party without  engaging the owners prior to the decision and who must approve this charter cancellation.

This is the situation the member’s email describes.  And hundreds of thousands more members who end up becoming just consumer accounts to be bought and sold.

This is worse than the acquisition games Buffett describes in his Annual Report.  Credit unions and cooperative design is supposed to protect member-owners from self-dealing leaders and board toadyism.

Mergers lack transparency, public disclosures of strategy or benefits, and certainly no post acquisition accountability.  These are private deals negotiated by CEO’s putting their interests first and then announcing their intent to members.

The member vote is merely an administrative process without substance where very few members even bother to participate. All the messaging, resources and formal requirements are under the complete control of the persons benefitting from the transaction-not the members who must approve the decision.

What can members do?  How can the supposed democratic one member one vote governance model be revitalized to ensure member interests are front and center in these self-dealing transactions?

That is what the member is asking.  I will share your thoughts, and offer a few of my own.   Where is the Kristen Christian   when  members now need her to  save their own credit unions?

Buffett’s Merger Conclusion

“I’ve concluded that acquisitions are similar to marriage:  The start, of course, with a joyful wedding–but then reality tends to diverge from the pre-nuptial expectations.  Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes.  In other cases, disillusionment is swift.  Applying those images to corporate acquisitions, I’d have to say it is unusually the buyer who encounters unpleasant surprises.  It’s easy to get dreamy-eyed during corporate courtships.”

 

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A Person for the Ages

As long as there are credit unions,  persons of incredible talent, generosity and conviction will be drawn to leadership roles.  An example of this cooperative character is Marvel Eberhahn of Community Credit Union, New Rockford, North Dakota.

At her retirement celebration in December 2016 CU Today wrote a profile of her six-decade career as CEO.

Accompanying the story was an 8-minute video that shows the North Dakota setting and an extended interview with Eberhahn.   The video captures her personality formed by the prairie farmland which the credit union served.    The words demonstrate her spirit, practicality and love of community.

Her performance expectation for the credit union was straightforward:  “If we can’t be different, why are we here.”

Watch the video.  It provides  examples for how she implemented this belief, from saving a WW II veteran from a bank’s equipment foreclosure to keeping farmland in the family.

When she left her CEO role, the credit union was $!66 million in assets, a 9,000% growth from the $18,000 when she assumed her role.  Today Community is $192 million with three branches serving almost 5,000 members.

Here is the CU Today story, used with permission:

NEW ROCKFORD, N.D.–For the first time in 65 years, Community Credit Union here is preparing for a new CEO.

But before that happens, a new video shares Marvel Ebenhahn’s extraordinary history in credit unions, of days when the “credit union” was a filing cabinet, of difficult times trying to hold the family farm together, of tough times in a tough place, and through it all, of becoming an indispensable part of a community and overseeing 9,000% growth.

Ebenhahn will be retiring effective Jan. 1, 2017, after more than six decades on the job. Barb Messner, who is currently the CU’s operations manager, will take over as the second president in the credit union’s history.

Ebenhahn, however, is not fully retiring, and will be staying on at the credit union in an advisory capacity while also working as a loan officer with a less demanding schedule, which will allow her to spend more time at her retirement home in Arizona, according to the Credit Union Association of the Dakotas.

Few people in credit unions have ever overseen the kind of asset growth that Ebenhahn has seen during her career. When Ebenhahn joined the credit union, which serves rural Eddy County, N.D., it had $18,000 in assets and 250 members. Today it has $165 million in assets and nearly 6,000 members.

Founded in 1942, what was once operated out of a filing cabinet in the corner of a farm cooperative store now has three branches. Ebenhahn joined the CU in 1952 when it was known as Eddy County FCU.

“Marvel has been a mentor and inspiration for many credit union leaders throughout the decades here in North Dakota,” stated Jeff Olson, president/CEO of the Credit Union Association of the Dakotas (CUAD), in a statement.  “Not only does she embody the cooperative spirit of putting members first, she really epitomizes our wonderful, traditional ‘small town’ rural values of faith, family, community, and hard work,” he continued.

Unique & Inspiring

To illustrate what it is calling a “unique and inspiring story,” the Credit Union Association of the Dakotas has created a short documentary video that records in Ebenhahn’s own voice, the evolution of the credit union and the community.

“I think’s a safe bet that there aren’t very many credit union CEOs anywhere today that can boast a 9,000% increase in assets or a 2,000% increase in membership in their career,” remarked Olson, who’s voice provided the narration on the video.  “Nor can many match a span of 65 years of helping so many people in a small rural community.”

Marvel’s father was one of the original founders of the credit union, and she grew up with first-hand knowledge of the cooperative principals, the CUAD noted. Established in 1942, from its humble beginnings serving members of the Farmers Union Co-Op, the credit union evolved to a community charter so it could serve anyone who lived within a 50-mile radius of the town of New Rockford.  In 1962, 10 years after Ebenhahn joined the CU, it had grown to the point of needing its own building.

“The credit union soon gained a reputation for helping people that the banks had refused,” said the CUAD. “‘Go see Marvel’ became a common phrase in the community.”

Serving a rural farming community can mean tough times, and as the video makes clear the credit union has also had to make tough decisions, especially during the 1980s when agricultural markets hit hard economic times.

In the video Ebenhahn shares that it’s “not fun” to take away a farmer’s land. She said the CU’s policy has always been in cases where it had to foreclose to attempt to find someone else in the farmer’s family who might be able to take it over in order to “keep the family farm together.”

But in all cases the credit union’s interests had to be protected she said. “You can’t just charge off a loan because you like a guy,” Ebenhahn says in the video.

Olson, a 10-year veteran employee and president of CUAD, said he has had the opportunity to visit with Ebenhahn on many occasions.

“I would love to drop in on her credit union just so I could listen to some of her many stories of how the credit union was able to help so many people over the years,” he said in a statement.  “What is even more amazing is that she is making loans and doing business with grandchildren and great grandchildren of the people that first started the credit union. That’s why I thought it was important that we (CUAD) record Marvel so we could share her amazing story with today’s credit union leaders.”

The Ultimate Compliment

The CUAD reported several of its member credit unions have recently incorporated the video into their employee training programs – the ultimate compliment to Ebenhahn and her legacy.

“It’s amazing what people can do when they work together,” Ebenhahn says in the video. “I think I’ve been pretty lucky to have this job. To tell you the truth, I don’t think I’d want to do anything else. I’ve been blessed.”

 

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Money Changers and Temples

In his first inaugural address  March 4, 1933, Franklin Roosevelt called out financiers.  Here are some of his remarks about that segment of society.

“This is a day of national consecration. . .

“This is preeminently the time to speak the truth, the whole truth, frankly and boldly. . .our distress comes from no failure of substance. . . Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. . .

“Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. . .

“Faced by failure of credit, they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They only know the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.

“Yes, the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of that restoration lies in the extent to which we apply social values more noble than mere monetary profit.

“Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy, the moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days, my friends, will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves, to our fellow men.

“Recognition of that falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing.”

One initiative to bring more options was passage of the Federal Credit Union Act in 1934.

FDR’s Biblical Reference: A Holy Week Sonnet

Cleansing the Temple   by Malcolm Guite

Come to your Temple here with liberation

And overturn these tables of exchange

Restore in me my lost imagination

Begin in me for good, the pure change.

Come as you came, an infant with your mother,

That innocence may cleanse and claim this ground

Come as you came, a boy who sought his father

With questions asked and certain answers found,

Come as you came this day, a man in anger

Unleash the lash that drives a pathway through

Face down for me the fear the shame the danger

Teach me again to whom my love is due.

Break down in me the barricades of death

And tear the veil in two with your last breath.

The Question:   Where are credit unions today with this ever lasting challenge to cleanse the temples of finance?

 

 

 

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How One Co-op Conducts Board Elections

Democracy is difficult to practice, especially when incumbents mange the process.

No one likes to give up positions or power, even if one is a volunteer.  This is true for local and national elections and in credit unions.

The press has reported on the attempt by four members of Virginia Credit Union to be considered for nomination to stand for election to the board.  Their efforts were ignored, and they were denied the chance to raise the issue at the March Annual meeting.

“The four people seeking to run for a board seat—Frank Moseley, Richard Walker, Tori Jones and Kati Hornung—have called the election a “sham” and alleged the process protected incumbent board members or their hand-picked candidates. The group said in earlier remarks that the CU’s chairman selects members of the Governance Committee that selected members to run for board seats, including the same CU chairman.”

An early account of their efforts can be found in this post,  The Fix is In.

A Shining Example of Democracy in a Coop

Shared Capital Cooperative is a lending and investment fund for co-ops of all types and sizes. They are cooperatively owned and managed by the co-ops that borrow from and invest in the firm. Borrowers and investors experience genuine cooperative finance—generating grassroots community wealth while building social, environmental, economic and racial justice.

The Coop’s vision is “building economic democracy.”

Founded in 1978, it is a Certified Development Financial Institution (CDFI) located in St. Paul, MN.   Its staff of 10 manages approximately $14 million in loans.  The board has eleven members elected from coops across the country.

The coop has both individual and 265 organizational members.  One board seat is voted by individuals and is not up this election.  There are six candidates for the three open board seats, each with a three-year term.

Board Election Ends Today

Voting is electronically from March 28 and ends today.   The link sent to me via email goes to an eleven-page listing of the candidates’ biographies.  The second link provides current board members’ backgrounds.   Here is an excerpt from the email:

Meet our candidates! For biographies and candidate statements of this year’s candidates please click here. For more information on our existing board, click here.

Cooperative members eligible to vote (not individual members like me) receive an email with their voting credentials. Annual meeting details are also given.

Shared Capital Cooperative’s Annual General Member Meeting and Cooperative Forum. It will be held virtually on Thursday, May 12th, from 12:00 pm to 1:30 pm CT.

The event will be free and open to the public. All are welcome! More details will be posted at www.sharedcapital.coop.

This relatively small, $16 million total assets organization, practices the democratic principles it committed to when formed.

Following Shared Cooperative’s Footsteps

This is an example of a board election/annual meeting that any credit union could emulate.   The process might prove enlivening and a confidence builder with members.  Especially as some credit unions struggle to involve members in this required annual democratic voting ritual.

This approach might result in more than a pro forma election; it could enhance member engagement and belief in the credit union!

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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.