Category: Cooperative Design

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The Second Expression: Credit Unions Member-Facing Value Stories

Yesterday I  compared credit union’s public personas  to the tragedy-comedy masks of ancient Greek theater.

The face I discussed was that of credit union’s institutional achievements:  the growing sponsorship of stadiums and sports teams, the continuing mergers of long standing organizations with no member benefit, and the rebranding from legacy origins to aspirational names (Bethpage FCU to FOURLEAF FCU).

Today’s alternate face is member focused.  They celebrate the many ways credit unions are sharing and enhancing their value for members and communities.

It is for the reader to decide which credit union expression may be tragic or life affirming.

Sharing the Annual Financial Harvest

The most frequent member-centric announcements this time of year are the numerous bonus dividends credit unions pay members.  This is a pattern of member value sharing that goes back decades.  Some examples.

The largest  yearend bonus in credit union history.  That is how the Ogden, Utah Goldenwest Credit Union described its recent $3.5 million  bonus dividend.  It added, “During the last 21 years, Goldenwest has returned more than $30 million to its members.”

These distribtutions are is not new or unusual.   If one types “bonus dividends” into the search box on CU Today’s  home page, 2,482 matches are listed.  Some stories go back decades of coops sharing success their with member-owners.

These payments can be structured in many creative ways.  On December 2, 2024 CEFCU (Peoria, Il) announced a $55 million Extraordinary Dividend:  $52.25 million shared equally between borrowers and savers, and $2.75 million going to CEFCU Debit Mastercard users. The video announcement  states the credit union has distributed over $500 million in bonus dividends since 2000. Listen to CEO Matt Mamer’s explanation for why and how this bonus was paid.  You may view one of many member’s stories featured on the site, that of a single women buying her first home.

The $1.9 billion Tyndall CU paid $1.6 million using the following formula:   To get their holiday cash, members had to participate in everyday banking activities, such as online banking, bill pay, direct deposit, card usage, e-statements, and loans. Each member had the opportunity to receive up to $700.

More Than Special Dividends

Being part of a community is more than sharing financial success.  It is leaders’ personal participation in special events as described in these LinkIn posts:

From the CEO of Desert Financial:  My family and I had the opportunity to volunteer with the Desert Financial team at a special Hometown Heroes event last night at the Phoenix Zoo. The highlight of the night was seeing the kids’ faces light up as they picked out gifts and met Santa. This initiative is a small gesture of gratitude for the sacrifices these veteran and first responder families make for our community and country.

From San Francisco Fire’s CEO: This is my favorite time of year when SF Fire Credit Union staff volunteer alongside members of the San Francisco Fire Department and others to give out toys to children in our local community as part of the annual SFFirefightersToyProgram. Thanks to all who joined us and everyone who supports this amazing program.

Special Community Investments

From the December 11, 2024 Youngstown Business Journal:

YOUNGSTOWN, Ohio – The city has selected 717 Credit Union to administer $13 million in American Rescue Plan Act funds across three programs to improve housing. 

As part of the Youngstown Affordable Loan Program, the city allocated $8 million for the construction and/or rehabilitation of quality affordable housing. The credit union proposed to parlay the $8 million into not only funding for housing development, but also $35 million worth of discounted mortgage financing.

To begin development, 717 will create a $5 million revolving commercial development fund to be used for developers to rehabilitate vacant downtown buildings into residential condos, to build homes on vacant lots and to develop neighborhoods. After renovation or construction, the units will be sold to individual buyers and the funds recuperated to be invested in additional projects. 

A press release yesterday from SECU North Carolina:

SECU Foundation Initiates Phase Two Disaster 
Relief Package of $1.75 Million for Western North Carolina 
RALEIGH, N.C. – SECU Foundation’s Board of Directors approved a phase two disaster relief package with an additional $1.75 million in grants to three organizations, providing intermediate assistance to the hardest hit residents and communities impacted by Hurricane Helene. Funds awarded will help address temporary housing needs, financial crises, and food insecurity. Grantees include:

  • Baptists on Mission – a $1 million grant to support its Essential Rapid Repairs program.
  • The Salvation Army of the Carolinas – a $500,000 grant to expand its capacity and help ensure impacted families receive financial aid to recover effectively.
  • MANNA Food Bank – a $250,000 grant for a six-month produce distribution pilot program beginning December 2024 that will expand accessibility of fresh fruits and vegetables to impacted communities.

Phase two funding builds upon the Foundation’s $3.75 million relief package announced in October to help expedite provisions of water, food, supplies, shelter, and other emergency services to Western North Carolina.

Credit Union Teams Having Fun Supporting their Community

The annual polar plunge with purpose video from Affinity Plus FCU (St. Paul, MN) for the Special Olympics program.

Polar Plunge With A Purpose

(https://creditunions.com/features/polar-plunge-with-a-purpose/)

A Credit Union’s Example of It’s  a Wonderful Life

Every day in numerous communities, credit unions put their members’ well being first in all they do.  They are the current expression of  George Bailey’s mutual savings and loan in Frank Capra’s memorable film .

Here is one real life example from Wright-Patt Credit Union in Dayton, Ohio:

(https://www.youtube.com/watch?v=yMJT0nneRaM&t=18s)

The Credit Union Challenge

Which mask, the corporate or the member facing one, will the American public see in  credit unions today?

Will it be the continuing acquisitions fueled by payments to senior leaders, the public branding campaigns and naming rights on buildings, suplemented with continued efforts to purchase banks?   Or, wlll member-owners recount stories of goodwill, shared financial success  and innovative projects with partners to advance their communities?

If institutional success dominates public discussion and headline events, the results could be tragic for a separate, member-owned cooperative system.  Does American really need more growth maximizing financial firms fueled by internal and external acquisitions?

If special member value delivered results are the lead story, America could certainly benefit from these modern day George Bailey-like coops.   Ones where purpose for member and community progress are the priority.

I believe it is clear which expression members prefer; but will their leaders meet this moment for their institution’s choice?  And the movement’s future?

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The Two Faces of Credit Unions Today

 

In  theater comedy and tragedy are a pair of masks, one crying and one laughing. Originating in the theatre of ancient Greece, the masks were said to help audience members far from the stage to understand what emotions the characters were feeling.[1]

Today these two masks are a metaphor for two contrasting public faces of the credit union movement.  One is the corporate face. The other the member one.  I will present one persona today of the corporate face; tomorrow the member one.

The reader can decide which of the Greek interpretations might apply to their credit union face.

A Critique of the Credit Union’s Corporate Persona

Here is an excerpt from an October 2024 article by Aaron Klein a senior fellow and financial regulatory commentator with  the Brookings Institute.  The full article is called Why Are Non-profit Employee Credit Unions Spending Members’ Money on Stadium Naming Rights?   An excerpt of one example in his analysis:

Northwest Federal is quite small, America’s 91st largest credit union. Two years ago it spent a total of $2 million on advertising. But in August, it secured naming rights to the Commander’s home stadium – now Northwest Stadium. According to news reports, the deal runs eight years at a higher cost than the roughly $7.5 million a year that previous rights-holder FedEx paid.

How is this a safe and sound decision in the best interest of Northwest Federal’s members? Why would CIA employees want their credit union’s name on a football stadium? How can one argue that money is better spent on the side of a building than on serving the needs of Northwest’s members, particularly those living paycheck to paycheck? 

I asked the nation’s top credit union regulator, NCUA Chairman Todd Harper, about credit unions buying stadium naming rights. His response was spot on: “If I were on a credit union board, I would be advocating that rather than spending that money necessarily on naming rights, I’d be pointing in the direction of what can we do to lower the prices of our loans and increase the service to our members”. 

But Klein could have chosen many other examples of this growing marketing practice. In October Dort Financial Credit Union announced a ten year extension of naming rights to the Dort Financial Center Flint Firebirds hockey team through the 1934-35 season.  The first sponsorship agreement was signed in 2015.

Two months later, Credit Union Times on December 17 reported that Flagler CU Signs Major Naming Rights Deal With Florida Atlantic Athletics.  

The article points out that the $2.3 billion Dort Financial’s head office is in  Grand Blanc, MI.  In 2023 the credit union  purchased the $513 million Flagler Bank in West Palm Beach.  CEO Brian Waldron in the purchase announcement noted. “This is a big step in Dort Financial’s strategy, allowing us to better serve our members who spend winters in Florida.”

When completed  the bank was renamed Flagler Credit Union, a Division of Dort Financial.  Dort also shows over $68 million of goodwill in its latest call report, presumably the premium paid the bank’s owners in excess of its net book value.

Dort gave no data to support the number of members who visited this part of Florida.  However it follows a pattern of two other Michigan credit unions, Dearborn and Lake Michigan, who purchased banks with a similar rationale.  It makes one wonder what Michigan members who vacation in Arizona think of these justifications.

Subsequently, CBS News reported in a December 16 article that:  Florida Atlantic’s board of trustees is expected to approve a $22.5 million, 15-year deal that would give Flagler Credit Union the naming rights to the school’s football stadium.

The deal — both in terms of total and average value — would be the biggest publicly known naming rights agreement for any school in the American Athletic Conference currently with an on-campus stadium.

The Flagler bank purchase and naming rights with FAU means that the Michigan based Dort will have invested almost $100 million of members’ money in their Florida expansion.

Reversing the Plot Line of It’s a Wonderful Life

 

The most memorable movie replayed again and again this time of year is the story of George Baily’s savings and loan.  It is the story of a local financial institution which served its community faithfully, only to face a takeover by Potter, a financial predator to whom George owed money.

Credit unions are increasingly reversing this whole story line.  It shows Potter’s fundamental negotiating error.  Instead of just paying off George in a private deal, he tried to take the mutual direct from its local owners who turned up to support George when he most needed their cash.

Here’s how the reversal plays out in credit union land now. Two days ago the $2.6 billion Addition Financial Credit Union in Lake Mary, Fla., and the $871 million Envision Credit Union in Tallahassee, Fl announced their intent to merge by the end of 2025.

As reported in the Credit Union Times article the reasons for this $3.5 billion  combination according to each CEO include:

“This merger will significantly increase the ability of Addition Financial to serve more members, and support both communities,” Addition Financial President/CEO Kevin Miller said in a prepared statement. “By joining forces with Envision Credit Union and the people-first culture they have cultivated for 70 years, we can provide even greater value to our collective members and team members and continue our shared mission of supporting our communities.”

And, “This merger enables us to provide more access to services, broaden offerings of innovative products, and deliver personalized support to every member and future member.” 

The final paragraph of the article may best describe the motivation behind the rhetorical flourishes in the announcement:

If the consolidation is approved, Worrell is expected to continue on in a strategic role with Addition Financial through his planned retirement in 2027, according to an Envision spokesperson.

Just another example of a CEO who reached the peak of credit union leadership, and then pulled up the ladder so no one else will have the same opportunity.

It should be noted that in this as in most mergers, members are promised nothing that they don’t already have the capacity to receive from their own independent cooperative. 

An even larger merger announcement of two successful credit unions was announced earlier in this Christmas, Wonderful Life, season.

On December 5, the members of LA Financial Federal CU were sent a formal letter by the Board chairman announcing the credit union’s intent to merge into the Credit Union of Southern California, creating a $3.9 billion combination.  LA Financial’s official Member Notice can be read here.

Members will receive nothing from the merger that they do not already have.  However, the CEO Carol Galizia, who has worked at the credit union for just 11 years will receive a 7-year contract for giving up her leadership role. Her new title: Chief of Strategic Initiatives. Four other senior executives will receive various bonus amounts for helping complete the merger, but the member letter makes clear they are “at-will” employees.   A term that undoubtedly extends to all other employees of the credit union.

Chartered in 1937 the member-owners will receive nothing for their 87 years of loyalty, their collective shavings of $483 million, $409 million of performing loans and accumulated net worth of over $ 47 million.

If this privately negotiated deal had been a public transaction at true market value as in the Flagler Bank purchase by Dort credit union, the owners would have been paid upwards of two times their net worth in cash.  Or one can compare this to the member-owners of  Thrivent FCU which received their entire collective reserve plus a premium at 12% of each members total savings in selling to Thrivent Bank.

Instead, the CEO gets a 7 year contract, at an undisclosed amount, for turning over the entire credit union’s resources and members to a credit union they know nothing about and had no role in their success.  This change of control is the exact opposite of the Wonderful Life outcome.  Potter’s approach was all wrong—all he had to do was to payoff George and he could have controlled the mutual for free.

Except in this case Credit union of Southern California is getting paid almost $50 million for merging this very stable, long serving and successful credit union.  The member-owners get nothing.

Which Credit Union Mask Will the Public See

Both tragedy and comedy are present in Greek theater.  But which face will the public see in these corporate announcements? Is Aaron Klein’s critique fair?

Tomorrow I will describe some of the member facing announcements by credit unions.  Then the reader can decide which mask best expresses their credit union’s circumstances.

For the stories that resonate with the public, professional analysts and ultimately political leaders are the ones that will shape the future of the cooperative option for America.

 

 

 

 

 

 

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Was the CLF’s Mini-Budget Discussion a Prelude to Today’s Omnibus Spending?  We Should Hope Not

I had the opportunity to listen to a very small slice of NCUA’s Board’s public budget process for 2025-26 by watching the video of the November 21 discussion of the CLF’s spending requests for the next two years.

Although extremely small in the agency’s overall spending totals, I fear we see clearly in this simple example, the board’s inability to substantively assess spending requests.

A Brief Background

Several items from the CLF’s  board action memorandum for November 21 provide some background for the hearing including these two points:

The purpose of the CLF is to improve the general financial stability by providing member credit unions with a source of loans to meet their liquidity needs and thereby encourage savings, support consumer and mortgage lending, and provide basic financial resources to all segments of the economy. and, 

“(CLF) is owned by its member credit unions and managed by the NCUA Board”

CLF’s  budget proposals were for $2,307,863 for 2025 and $2,448,263 for 2026.  Salaries and benefits are 96% each year’s requests.

Several facts put this credit union owned public-private effort in perspective.

Total membership is 430, an increase of 32 in 2024, and 9.4 %  of all credit unions.  CLF’s balance sheet is $966 million and includes $44 million of net worth/retained earnings.

The Board’s Policy Failure

Each board member remarked on some aspect or other of the financials.  Otsuka had no questions.  She made an unexplained reference to “protecting the insurance fund.” Hauptman called the CLF a “buffer for the American taxpayer” and cited a vague reference to $18 billion of loans sometime in the past.

He reverted to his standard routine of demonstrating how to improve the “user experience” when contacting the CLF.  He showed how staff had “made it easier to access” the CLF by removing the on-hold music replaced by an automated telephone routing message.  He confirmed that a credit union inquiry would ultimately end at the CLF President’s desk, if no one else picked up the call before then.

He also pointed out that 3,300 credit unions (95% of those under $250 million in assets) had lost access when the special CLF-Corporate membership authority expired.  Hauptman opined that credit unions should have multiple liquid cash sources which is how he arranged his personal financial management: “a credit card, home equity line and  a margin loan established with a broker.”

As Chair Harper led off the discussion, one would have hoped for a focus on CLF policy and whether its purpose above was being carried out. Instead, he supported the budget in full and noted the 31 increase of members. He did ask about the cost of membership.  The 4.46% third quarter member dividend was the only recognition that the CLF’s return to the owners was below market rates including the overnight Fed Funds yield. He again complained about Congress not renewing the special CLF authority for corporates to join by funding only a subset of their members.

Business as Usual While Failing the Owners

A critical capability of any NCUA board member is discernment.   What is their understanding of the key issues in a staff presentation, especially when focused primarily on budgets?  Is It really about numbers? Or should it be about whether the CLF is serving its owners?

All three board members stated that the CLF existed for the benefit of NCUA and the NCUSIF, not for the credit union funding owners.  What are credit unions getting for their direct support of the CLF?  In the presentation the number one productivity indicator and primary 2025 Planned Activity goal is to  Provide CLF Advances as needed.

However, the CLF has not issued a loan to credit unions since 2009. Almost all of those advances, 15 years earlier, were to two corporates via the NCUSIF.  They were very short term and not part of any overall recovery plan.  I am ignoring a token $1.0 million mini-advance made to a small credit union in December 2023 and paid off early in 2024.

A Time of System Stress

The lack of credit union support and CLF membership is not a statutory shortcoming. It is a management one, an NCUA responsibility as stated in the staff memo above.  During the 2022 and 2023 rising Fed rate cycle, liquidity pressures increased throughout the system.  This concern peaked when the Silicon Valley and other bank failures occurred. However the CLF was totally missing in action this entire cycle.

Instead, credit unions borrowed in record amounts from the Federal Reserve’s Bank Term Funding Program (BTFP) and the FHLB’s.  For example, the September 2023 call reports show 307 credit unions with Federal Reserve borrowings of $34.9 billion, an average of  $114 million.  For these credit unions, the Federal Reserve represents 66% of their total borrowings.  For 112 of this group, the Federal Reserve is their only source.

Credit union total assets of $2.25 trillion at 3Q 2023 were just 9.7% of total banking assets.  However, their participation in the special emergency Federal Reserve lending program equaled 27% of the BTFP’s loans at yearend or three times cooperative’s share of total industry assets.  And this Federal Reserve borrowing was only a quarter of all credit union borrowings at the quarter end of $130.3 billion.

During this entire liquidity crisis, the CLF was nowhere to be found, or even heard. No programs, no outreach, no public discussion.   And it was not due to a poorly designed website or failure to target market.  Rather the CLF’s credit union owners were completely left out and shut out of any role except sending in capital—for a below market return. The agency made no effort to assist credit unions because the board and staff view the CLF as a liquidity partner for the NCUSIF, not the industry.

Why the CLF Has No Interest is a post from May 2024 which shows that the credit union owners have been subsidizing the CLF due to its below market dividends.  The CLF’s return is much less that paid by the FHLBs and corporates on their capital accounts.  Even though the CLF has investment authority similar to FCU’s, its own portfolio was underwater at 2023 yearend and its yield trailed the overnight FF rate the entire year.  But the board ignored those facts.

Credit unions do not view the CLF as a reliable partner in times of balance sheet stress.  They have plenty of tested alternatives.  Ones that don’t impose supervisory judgments on top of collateral security. The Board’s view of the CLF to serve the NCUSIF has made it a “vestigial organ” within the NCUA body serving no credit union owner-members.

What the Board Could Have Asked Staff

Following are some questions that board members might have asked if they had really focused on the CLF’s policy failures in this most recent period of liquidity need.

  • How many of CLF’s current members have outstanding loans elsewhere? How much and for how long?
  • What unused lines do CLF members report on the latest call reports?
  • Has the CLF developed any proactive lending programs in the two years since the Fed began raising interest rates in 2022? If yes, how were these communicated to owners?
  • Given the dramatic increases in credit union borrowing in both total dollars and numbers as shown below, what did the CLF do during the crisis? The chart below would be updated as context for the question.

Total Credit Union System Borrowings    (June ’22 to June ’23)

  • Why should the CLF continue as a separate department with a staff of six and overhead charged by the NCUA board, when it could easily be a collateral responsibility with other senior examination and supervision staff?

The failure of NCUA board members to ask the most basic questions about CLF’s non-activity while routinely continuing to increase its spending is disappointing.  It undermines the NCUA’s capacity to serve the owners of the fund.

The board has failed in its policy oversight role. With zero lending productivity, why is there any reason for a staff of six to keep lights on?  The entire system shows increased liquidity demand and draws but relied entirely on every other contingency funding source while its own funded resource was moot.

If credit unions are to get their money’s worth from the CLF, the agency must show leadership by working with the owners. Contrary to one board member’s assertion, CLF effectiveness does not depend on its members; rather it depends on the management by NCUA.  Otherwise, just merge the shop back into the bureaucracy from which it came. Save the credit unions money.

Editor’s footnote:  If you want to see how another cooperative designed liquidity lender communicates with  its owners, read this latest update from the FHLB’s newsletter.

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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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The Connection Beetween Politics and Co-op Democratic Governance

Trump’s election victory has reawakened concerns about whether the checks and balance essential to America’s  democratic institutions will hold.

I believe that credit union’s unique design for member-onwer governance offers a helpful example of the fragility of democratic oversight.

As the chasm between credit union’s original destiny and today’s  performance and compliance shortcomings grows, purpose and practice may appear further and further apart in the public’s eyes.

Nowhere is this chasm greater than the failure to encourage member-owner participation in the formal annual meeting elections. Additionally, in daily communications rare are appeals to the special role of being owners versus messages common in all financial customer appeals.

Here are two recent  observations on the delicate nature of democratic processes. And why credit union’s example might influence our perception of how political democracy functions.

America-An Experiment

A personal story. When I was in grammar school, our history book was titled, “The United States of America, An Experiment in Democracy.”

I froze. I got goose bumps. I was 8 years old.  An experiment? I knew enough that some experiments worked, and others didn’t.

It felt like the bottom fell out. All sense of permanence left.

That day was life-changing. I have never seen this country the same since. (source: unknown)

The Transfer of Power

“The genius of democracy is its self-correcting nature. But the problem, of course, is if the person (or persons) being elected into office is (are) the kind of threat that intends to disrupt this happy self-correcting logic of democracy.” ( Daniel Ziblatt, co-author of  How Democracies Die)

How  do these observations about national political concerns apply to credit union’s democratic model?

Richard Rohr comments:  We quickly and humbly learn this lesson in contemplation: How we do anything is probably how we do everything. 

 

 

 

 

 

 

 

 

 

 

 

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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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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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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?

 

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On the 2024 Election Results

November 5th’s outcome  is not the end but just the next stage in our country’s political life. Regardless of the final party balance in Congress, for credit unions our work is cut out for us.  We will find more ways to help members in need thus beginning to heal political divides in our communities and country.

While credit unions are rarely overtly partisan,  their  purpose is inherently political.  The collective resources managed on our members’ behalf are intended to address member circumstances  in ways for-profit market forces may overlook.

The role for the cooperative spirit has never been greater.  Our mostly local focus is a critical advantage. Credit unions can again be leaders bringing light and hope to those who feel left out, or left behind, by economic events.   Let’s get to work.

 

 

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A Credit Union CEO’s and a Kellogg Professor on the Perfect Mission Statement

In former AT&T CEO Anne Chow’s best-selling book, Lead Bigger, she describes how to inspire an actionable purpose statement.  Chow is now  a senior fellow and adjunct professor of executive education at Northwestern’s  Kellogg Management School.

Here are brief excerpts from the book’s chapter on purpose: 

What purpose will sustain you and your people through a commute in bad weather, or after your baby kept you up half the night? 

I’ve found it helpful to go beyond the focus on what you’re doing. Ask yourself and each other: Why? Why you? What makes your how the optimal choice and different from current or future competitors in the market?

No matter the size of your team or the work you’re doing, you’re on a mission to reach a destination. . .. If you’re still struggling to express what you do differently, ask yourself, What if we didn’t exist? Who would care? And why?

This chapter provides several examples from large firms such as Ikea, Nike and Apple along with advice to use words that ensure actionability.  

 A CEO’s  One Minute “Lecture”

If you don’t have time to read the book or take a course at Kellogg, here are virtually the same ideas from a credit union CEO.  Now retired, this leader’s brief explanation is noteworthy because of the results the credit union achieved during his tenure.

Moreover his statement predates the professor’s work by 15 years.  An example of wisdom in action, not in hindsight.

(https://www.youtube.com/watch?v=tE_3-ipOiPE)