What Credit Unions Can Learn From BND

Recently the Bank of North Dakota (BND) released its 2023 Annual Report of almost 80 pages.

The Report including the bank’s history (see excerpt below) is a creative example of an alternative financial institution thriving in the privately managed financial services marketplace in America.  Its ongoing success is the model for similar startups in other cities and states.

Founded in 1919, the bank is exempt from all state and federal taxes.  It is funded by receipts collected by the state government and its agencies.  There is no FDIC insurance but is backed by the state of North Dakota.

BND’s primarily lending activity is participation loans originated by the other financial institutions throughout the state.  It is a wholesale lender.   In 2011 when NCUA implemented new regulation requiring more member capital and reduced corporate operating and investment authority, the credit unions decided to close their corporate.  One of the factors was the option to receive much of the corporate’s  financing services from BND.

A Very Successful Year

The Dakota Credit Union Association has presented a summary of BND’s 2023 results. The highlights include total assets of $10.1 billion, record earnings of $192.7 million for a return on equity of 18.2%.

From the Association’s summary: The Bank originated and renewed 10,734 loans for more than $2.5 billion, bringing the amount of the total lending portfolio to $5.8 billion, a new record. The total portfolio increased by $394 million from last year. BND delivers both agriculture and commercial loans through 72 different financial institutions and their 218 branch offices. . .

In addition to these portfolios, BND administers more than $1 billion in legislative-directed loan programs, including school construction, state infrastructure, water projects and disaster recovery.
“Bank of North Dakota works closely with local lenders to ensure its programs are relevant and impactful,” said members of the Commission in a joint statement. The Commission, consisting of Gov. Doug Burgum as chairman, Attorney General Drew Wrigley, and Agriculture Commissioner Doug Goehring, oversees BND. “This attention to local needs is one of the reasons for the Bank’s success.”

A Bipartisan Embrace

Beyond the current success and its historical longevity, support for the Bank comes from leaders of both parties.  Gov. Doug Burgum is reportedly on Donald Trump’s short list of vice-presidential prospects.  Nowhere do we see opposition to this state-owned and managed financial institution that republicans or bankers in other states might call out as a “socialist enterprise.”  Its track record serving the agricultural, industrial and public financing needs across North Dakota has made it a vital component of state government.

The success of BND has spawned similar startups in other jurisdictions. The Public Bank of East Bay (PBEB) has hired a former Credit Union CFO, Scott Waite, to lead its fund raising and organizational efforts.  There is an attempt to pass state legislation for a city owned bank in Rochester, New York described in this June 3, 2024 article Why a Credit Union Wants the Local Government to Create Its Own Bank.

Both of these organizers cite BND as the model for their more focused local ambitions.

A Lesson for Coops?

BND’s longevity demonstrates the variety and innovative capacity of an open economy.   When NCUA closed down many financial options for corporates, other institutions were available.  Long time relationships and collaborative capacity were lost as the FHLB’s and other secondary market providers stepped up to serve natural person credit unions.

One might view these events as just the normal process of creative destruction that is a hallmark of competitive economies.  Or. it might illustrate that options are available or adaptable when existing institutions fail to fulfill their core purpose.

More History of BND

Page 11 of this year’s Annual Report provides a summary of the Banks founding.  Here is an excerpt:

If you lived in North Dakota in 1919, it is likely that you made your living as a farmer or rancher, or in a profession that supported farmers and ranchers. There wasn’t a great deal of economic diversity at the time.

When you put your grain on the railway to be delivered to an elevator in Minneapolis/St. Paul, you were given the most broken-down of the railcars, causing tons of grain to be lost along the way. You were paid for the grain that arrived in the Twin Cities, not the amount of grain you loaded in North Dakota.

You weren’t present when they tested your grain so you needed to rely on the elevator’s assessment, often thought to be more favorable to the elevator than the farmer. When a loan was needed, it most likely came from a bank in Minneapolis or Chicago, with interest rates in the double digits. It was unaffordable for most agriculture producers, and they barely squeaked by.

This set the stage for the Nonpartisan League to come into power, and as part of its platform, the 1919 North Dakota Legislature created the State Mill and Elevator, Workforce Safety Insurance, and Bank of North Dakota along with the Industrial Commission to oversee them.

North Dakota tax dollars would be used to support North Dakota residents. While it wasn’t the first or only state-owned bank to be created, it is the only one that has survived the test of time.

Do Credit Unions Have an Ethical Responsibility in Managing Members’ Money?

Over a decade ago, I asked a potential senior employee how he had first become aware of credit unions.  His response was when he was turned down for a loan after getting his first job out of high school.

He had gone to the credit union to finance his first purchase of an auto.   The credit union told him he could not afford his dream car, denied the loan and then showed him how much he could pay.   He found a different car.

This was not an uncommon example when I first began working with credit unions. Today’s credit union system is more complicated.  Every organization faces multiple decisions about what member activities and even industries they should be supporting with loans and business partnerships.

The following is a brief summary of some of these “opportunities.”

Crypto sales and Partner Brokers

Prior to the covid shutdown, the facilitation of crypto purchases was the latest and growing expansion of financial services.  Partnerships with crypto exchanges were announced with credit unions lending their reputation and operations for members purchase of this new form of financial instrument.

A recent article has summarized the numerous critiques of the crypto industry and the intense lobbying efforts to make these options part of the financial mainstream:  Crypto Just Got Exponentially More Dangerous.  Or in Charlie Munger’s (Warren Buffet’s longtime partner) immortal assessment:

“…A cryptocurrency is not a currency, not a commodity, and not a security. Instead, it’s a gambling contract with a nearly 100% edge for the house, entered into in a country where gambling contracts are traditionally regulated only by states that compete in laxity.”

Cannabis Sales

Another groundswell of credit union interest is in financing and supporting the growing legalization and distribution of medicinal and/or the recreational marijuana sector.  Political leaders such as Janet Yellen and Chuck Schumer have spoken publicly of the need to pass federal legislation taking marijuana use off the list of prohibited drugs.

One report from Marijuana Moment shows a total of 812 banks and credit unions reported actively working with marijuana companies in the second quarter of the 2023 fiscal year

Almost 30 states have approved some form of marijuana use.  Sometimes this is seen as an effort of social equity where a certain number or percentage of licenses are reserved for minorities to offset their disproportionate legal convictions prior to legalization.  NCUA board members, credit union trade associations and numerous credit unions have supported some form of a SAFE act by Congress to allow controlled distribution of cannabis.

Gambling and Sports Betting

With betting on sporting contests now legal in almost all states, credit unions have become involved in these transactions.   A report after the Super Bowl betting surge in CUToday discussed the increasing member use of online gambling sites,  As reported in the Article  Why Credit Unons Should Place a Bet on Paying Attention to Gambling from a PSCU analysis: 

Gambling, fueled by further expansion of government-licensed Internet gambling to a total of 38 states, posted strong results in February, the analysis added, noting debit purchases were up 39%, while credit purchases were up 11%.

The top three merchants (FanDuel, DraftKings and BetMGM) represented over 70% share of purchases in this single category that peaked in February, with Super Bowl LVIII occurring in Las Vegas, PSCU/Co-op Solutions said.

The full PSCU report is available here

There are multiple other sectors or activities that credit unions have been or could be involved with that might raise ethical questions.   These include financing of gun purchases, liquor licenses, interval level vacation home ownership and perhaps more recently certain kinds of medical care including abortions.

Some would maintain that these are not credit union issues, but rather decisions for how members choose to spend their money.  Yet for every loan there is a “purpose” section stating how the funds would be used.

In defense of their crypto relationships, several credit union CEO’s have justified their partnerships by saying members want this service and if we don’t provide it, they will just go elsewhere.   It is strictly members’ choice.

Others, as PSCU describes in its review of gambling activity, would maintain these are situations for financial counseling:

“While online gambling was once viewed negatively, it now represents a growth segment opportunity, particularly among younger demographics. This growth presents an opportunity to keep internal staff informed about this evolving transaction trend, as well as provide members with financial wellness education.”

Other credit union leaders would decide that these areas of transactions and for financial loans are inconsistent with both the purpose and values of the cooperative.

Many want to avoid the controversy altogether.   Each credit union, and each member, should be free to do whatever they decide to act upon with their charter or with their personal savings.

This quasi-libertarian view is appealing to many until one recognizes that each of these areas is controversial because there are enormous and proven downsides to both members and society in each of these activities.

Crypto investors do lose money.  In  online gamblng, once the winners are paid out, online sportsbooks keep between 5% and 25% of all the money users wager. In other words, online betters typically lose 5 cents to 25 cents for every dollar they spend on a sports bet.  Marijuana usage can become addictive.  Its long tern usage consequences are still not known.  America’s gun culture is unique in the world and the consequences in mass shootings and suicides are just one aspect of this worship of the second amendment.

No one can deny that members will always borrow for activities and purchases that others might disapprove of or seem over the top, just examples of life’s numerous “fascinators.”

The Need for Discussion: Never Value Neutral

One of the fiduciary responsibilities of leadership  is knowing what issues to bring to the fore and how these are to be presented in the context of an organization’s purpose.

For some the topics above are not an issue.  Credit unions are value neutral.  There are no issues of right or wrong, but rather just the pragmatic questions of whether activities are legal and can we make money?

This debate about the ethics of organizational activity is never ending.  Here is an excerpt from a discussion similar to the above, about whether teaching economics at a university is “valueless.”

One of the first things that the over 500 students who take Economics 10: “Principles of Economics” are taught each fall is the distinction between normative and positive statements; the distinction between stating how things are and stating how things ought to be

Giving undergraduates the impression that economics is a value-neutral discipline, and that studying it will entail no further moral judgment or inquiry on their part, is not only dangerous but also intellectually dishonest.

The notion that calculus is more important to studying the economy than ethics, history, or psychology still ignores just how socially constructed our current economic system is.

Perhaps it is true that the price people are willing to pay for a good is the best estimate of their marginal utility.

Perhaps it is true that it is rational for a consumer to always prefer more to less.

Perhaps it is true that GDP growth is always desirable.

But those are assumptions about the world. And students should be invited to question them.

An economics degree ought to, in our normative opinion, entail a genuine reckoning with the moral stakes of the field. A discipline that studies human behavior and the distribution of resources was never value-neutral to begin with.

I agree that credit unions are a “normative” activity and in the management of member resources require a reckoning with the moral stakes of their actions.  So let the debates begin.



When There Were Two National Credit Union Trade Associations

If you have ever speculated about what is lost in a merger of credit unions, leagues or trade associations, the following example may be a helpful reminder of why choice matters.

CUNA’s Letter on NCUA Leadership

The Credit Union National Association’s August 6, 1973 letter to the White House:

Dear Mr. President:

The members of the Executive Committee of CUNA, Inc respectfully and unanimously urge you to replace Herman Nickerson, Jr as As Administer of the National Credit Union Administration.  . .

We are urging General Nickerson’s replacement because we feel that his actions as Administrator are creating growing bitterness and antagonism throughout the credit union movement, and this is causing a serous loss of confidence and trust in his administration.  . . we would particularly like to call your attention to the following:

  1. General Nickerson’s arbitrary and authoritarian attitude in deail with credit union problems. . .
  2. General Nickerson’s excessive issuance of burdensome regulations. . .
  3. Diminishing morale among employees at the NCUA. . .
  4. General Nickerson’s refusal to cooperate on legislative matters. . .
  5. General Nickerson’s poor public image. . .

Signed by the entire executive committee including Herb Wegner.

NAFCU Responds

On August 10, 1973, NAFCU’sExecutive Vice President Jim Baarr wrote the White House:

Dear Mr. President:

We have received a copy of  the August 8, 1973 letter from CUNA  . . . signed by all members of the Executive Committee.

The letter contains a series of five charges against  General Nickerson. . .

We totally disagree with the five allegations contained  in the  August 8 letter.  . .

Allegation (4):  He has always cooperated whenever possible with this Association. . .

Allegation (5);  “General Nickerson’s poor public image.”  . . .I was not aware that  Mr Jack Anderson (and his column The Washington Merry-Go-Round) was the final authority in assessing an individual’s public image. . .

In conclusion, may I add that as a representative of the credit union industry, I am appalled that a letter of this type would be directed to you by a sister trade association .  . .  may I state on behalf of the officers and directors of NAFCU that we continue to give an unqualified endorsement and support to General  Nickerson.  . . 

(Source of letter excerpts:  NAFCU’s  Washington Line, October 1973,  pages 15-16) 

The Credit Union System’s Challenge Today

A current echo of this concern  of a single administrator is the ongoing political debate about the structure of the Consumer Financial Protection Bureau and its lone Director.

The above debate on NCUA’s single overseer was real. The situation was resolved in 1977 when legislation was passed creating NCUA as an independent agency with a three-person board.  No more than two members could be from the same party.  The board structure was intended as a check and balance on the chairman’s power and to facilitate different points of view on policy and oversight.

As mergers continue to reduce the number of independent voices in the cooperative system, how are different and sometimes opposing points of view getting voiced?   The credit union community values relationships.  Public disagreement is rare.  Internal board dissent is even more likely to go unaired.

One hope is that the competition of ideas will occur in the “free market” and different points will automatically arise.  Rarely happens.  Mergers are often of competing organizations as in CUNA and NAFCU’s recent combination.  The same occurs in many credit union tie-ups.

Another hope is an independent press, but the structure and resources of oversight of these organizations are limited.  The general press rarely follows credit union events, unless there is a crisis. There is no requirement that institutions respond to press queries.

Finally, some put their hope for dissenting views in  external oversight by Congress or state regulatory or legislative activities.  The current effort to amend the federal credit union act to accommodate Navy’s management of a military bank, has found sponsors and opponents submitting their views to Congressional committees-which are then reported publicly.

When any industry is marching to a single drummer, sooner or later that approach will be found wanting.  Ensuring there is open and full consideration of differing points is how change begins. Defending the status quo can lead to irrelevance or worse,  purely self-dealing decisions.

Mergers at their core, are anti-competitive.  Anyone doubt that motivation?

One Credit Union’s Simple Unique Act in 2023

The $46 million Solutions First Federal Credit Union was founded in 1964 to serve members of the International Association of Machinists and Aerospace workers at Fort Novosel (formerly Fort Rucker).

Its main office is in Enterprise, AL with a branch in Ozark.  Over time the credit union has expanded to a community charter for  Dale, Coffee, Covington, and Geneva Counties, Alabama with an FOM of over 170,000.  Today its ten employees serve  5,000 members.

One event makes this credit union unique in the three decades since the turn of the century. It is the first and only credit union to borrow from the movement funded Central Liquidity Facility (CLF).

During the 2008/2009 financial crisis the NCUSIF borrowed $10 billion from the CLF on behalf of two corporates.  There was also an effort to create a special program for credit unions to refinance members home loans that never got off the ground.

So Solutions First is the first stand-alone CLF loan this century.  This unusual borrowing was noteworthy enough that it was mentioned by Chairman Harper in the December 2023 board meeting, but without any details.

A “No-Brainer”

At yearend 2023 credit unions continued to face liquidity demands due to the uncertainty caused by bank failures earlier in March and the Federal Reserve’s raising short term rates to almost 5% to fight inflation.

At the 2023 yearend 1,267 credit unions reported total borrowings in excess of $137 billion versus only $44.8 billion at December 2022.

Following the sudden failures of Silicon Valley Bank and two others, the Fed in March 2023 established a special borrowing facility, the Bank Term Funding Program.  This became the go-to source for credit unions.  The special facility was used by hundreds of credit unions as described in this analysis. The Fed ended the program in March 2024.

Frank Garrett is the CEO at Solutions First, having arrived eleven years earlier from a banking career.  He said the approach for a CLF loan had been suggested by NCUA examiners. The credit union was facing ongoing loan demand especially from its indirect lending program.  The credit union  was funding this with overnight borrowings costing as much as 7%.

By taking a short-term fixed rate $1.0 million CLF loan, the credit union was able to save almost 2%.   The process took about thirty days to become a member and receive the loan which was fully collateralized .  He called the decision a “no-brainer.”

Since that event,  loan demand has diminished dramatically, the credit union has curtailed indirect loans, shares have stabilized and investments yielding as low as 1% matured and been reinvested at 4.5% or more.   He was able to prepay the loan in the first quarter of this year.

In this first quarter, the credit union like many others, has slowly started a comeback from a difficult 2023.  The prior year saw staff cutbacks, expense reductions and above average delinquencies.

The  CLF loan was done with NCUA encouragement, a positive sign.   The critical question Is whether this an example to be emulated by others, or merely the last “bird of summer” ?



An Homage:  Report on Credit Unions

An independent press is essential for democratic governance, whatever the scope or responsibility of an organization or political entity.

Report on Credit Unions was in its twenty-fifth year in 1982.  The editors and contributors to the monthly printed publication were a who’s who within credit unions.

The publication’s founder was Rudolph Modley who “was born in Austria and earned a Doctor of Law degree at the University of Vienna. He came to this country in 1930 and in 1937 published the first of several hooks, “How to Use Pictorial Statistics.” In 1940 he was the coauthor of a study of the American system, with Thomas R. Carskadon, entitled “U.S.A.: Measure of a Nation.”

As described in his New York Times obituary: “Mr. Modley was also interested in the credit‐union movement and in 1957 founded the monthly publication “Report on Credit Unions.”

The staff and contributors listed on the January 1982 masthead (vol. XXI no. 1) were Larry Blanchard, editor; Frank Wielga and Jo Ann Ewalt, assistant editors.  The contributors J. Deane Gannon (former Administrator, Bureau of Credit Unions), Mandy Hellie, League President,  Kenneth Marin (former CUNA Chair) and Harold Black, one of the first three members of the NCUA board.  All had senior positions in the movement.

The News In January 1982

The lead story was the departure of Larry Connell from the NCUA board to become president and ceo of Washington Mutual Savings Bank, a $2.3 billion thrift based in Seattle.  The story quotes Connell’s farewell comments, “I’ll be back” and Ed Callahan who said, “Larry had done great things with this agency during his tenure.  . . he will be sorely missed.”

The six-page newsletter announced the appointment of former NCUA Board member Harold Black as an associate editor.   In his first “commentary” he wrote why he opposed Senator Garn’s bill (S. 1721)  which would have combined the FDIC, FSLIC and NCUSIF into a single fund.  Many of his points are still relevant today as the current NCUA chair seeks to convert the NCUSIF to be more FDIC-like.

This first edition of 1982 included articles on the upcoming speakers for the CUNA and NAFCU governmental affairs conferences, updates on insurance for IRA accounts, NCUA’s “dramatic deregulation concept,”  CUNA’s capitalization study, the accounting practice of ICU’s two common trust investments, how credit union owned data processor USERS “outranked the competition,” and a full page of individual credit union updates, From the Grass Roots.

The Report’s Purpose

As stated in the Harold Black appointment, “the Report has adhered to a strict policy of independent coverage, focusing on operational, legal, economic and general news for credit union volunteers and professionals. Its editors, assistant and associate editors are all drawn from the credit union community.”

The editorial standard in the Report helped to spawn an era of industry focused newsletters included CUIS (Credit Union Information Service) weekly mailed updates from the trade associations and leagues and the occasional private newsletter.

The quality of writing influenced these other publications including the monthly Credit Union Magazine and later iterations such as Callahan’s Credit Union Report.

The Report stands out for its comprehensiveness, longevity and singular focus on the industry.   NCUA upgraded its own publications creating NCUA News as a monthly.

The NCUA Chair and senior staff would hold public press conferences after each board meeting to talk with reporters.  Topics were open ended.  For example in July 1982: how would the Agency respond to the closing of Penn Square Bank and the losses credit unions might have on CD’s over the $100,000 insurance coverage?

The Impact of Quality

The Report set the standard for relevant, in depth factual analysis and commentary for the credit union community.  Its writers knew their subject matter.  They had access to senior leadership when reporting on sensitive topics such as the accounting for ICU funds.

The Report is an excellent, high level chronology of key events and personalities on the credit union stage in each edition.  Its success was due to the quality of its staff. It is a tribute to Larry Blanchard who maintained this approach during his tenure.

Ultimately more colorful, more timely (weekly) and ad-supported entrants, Credit Union Times and Credit Union News, pushed the monthly subscription model off center stage.

But this example of dedicated focused journalism and independent reporting is still the standard even in today’s digital era.   The Report raised all credit union coverage to a higher level of excellence while becoming  the “go to” source for capturing the first draft of the movement’s history.

Alternatives to the Credit Union System

The traditional view of market competition is that it is a zero-sum game.  There are winners and losers.  Acquirers and the acquired.  A credit union gains member deposits, or they go somewhere else.

But endgames do not always happen with clear winners and losers going out of business.  Sometimes the losers just limp off the field in irrelevance.

Substitutes slowly absorb earlier organizational efforts with new ones.  In credit unions this evolution is already occurring.  Two updates from these alternatives were recently announced.

The Federal Home Loan Bank System

This week, the members of the Board of Directors and Executive teams from the Federal Home Loan Banks and the Office of Finance are in Washington DC for their annual conference.

For some time, they have been the primary source of liquidity for the credit union system.  Their self-description:

The FHLBanks are 11 regionally based, wholesale suppliers of lendable funds to financial institutions of all sizes and many types, including community banks, credit unions, commercial and savings banks, insurance companies, and community development financial institutions. The FHLBanks are cooperatively owned by member financial institutions in all 50 states and U.S. territories.

The Banks’ regulator the FHFA issued a report last year on their mission and is following up with a request for comments.  The primary issue is how well the Banks are fulfilling their mission of increasing affordable housing options in America.

At the conference, the Council announced the Banks anticipate “a record-breaking $1 billion in support for affordable housing and community development initiatives in 2024. This significant commitment reflects our unwavering dedication to our mission and promoting access to safe, affordable housing.”

The chart below shows the membership of the banks by state at December 31, 2023.  The system serves roughly 6,500 members nationwide with a regional, custom approach from FHLBanks in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, and Topeka.

Since the 2008/2009 financial crisis, the FHLB cooperatives have effectively replaced the lending functions the CLF and corporates were designed to provide the credit union system.  Corporates still serve critical payment and short-term liquidity roles. However, the FHLBs have taken over almost all term lending.  They do this using a cooperative design.

New Public Banking Legislation

The digital web site Next City has reported on multiple efforts to create publicly owned banks following the model of the North Dakota State Bank.  Here is their latest update:

At Next City, we’ve covered efforts to create city-owned banks in PhiladelphiaNew YorkLos AngelesSan Francisco and the East Bay. We’ve also covered efforts to create state-owned banks in CaliforniaMassachusetts and New Mexico. Sometimes, as in the case of New York or California, state legislation has been proposed (and passed in California) to authorize local governments to create their own banks — but none of those efforts have yet reached the point of obtaining a bank charter, accepting deposits and making loans as envisioned.

This month in New York, there’s a new iteration: state legislation that, if passed, would create the Bank of Rochester, a bank that would be controlled by the local governments of Rochester and the encompassing Monroe County. 

Technically, the bank would still need to apply successfully for a bank charter from the state’s Department of Financial Services, just like a private-sector bank, before it could accept deposits. Per the legislation, the bank would serve “the public purposes of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities.”

It would not be a bank that accepts deposits directly from members of the public. As laid out in the bill, the Bank of Rochester would be modeled largely after the century-old state-owned Bank of North Dakota. Nearly 90% of the Bank of North Dakota’s deposits come from the state government, which is required by law to use the Bank of North Dakota as its primary bank.

Similarly, the Bank of Rochester would only be authorized to take deposits from government bodies, including local or state government as well as federal offices. It would be restricted from retail banking and raising deposits from individuals and businesses.  

Change is the Lifeblood of a Market Economy

These evolutions of financial service providers may seem to nibble only at the margins of the credit union system.   However, the relatively recent CDFI option (September 1994) is both a wholesale and consumer response to unmet local borrowing needs for communities throughout the country. Its creation was inspired by Cliff Rosenthal, a credit union and cooperative advocate.  Today some CDFI’s are established financial charters; others are stand-alone lending organizations.

The strategic implications for credit unions remains constant: to differentiate their business and service models by focusing on the members they seek to serve.  When credit unions  look and sound like all other options in a market, members and customers will just look for the best deal, not an owner relationship.

Credit unions have learned the art of tapping member and organizational funds to create large balance sheets.  That same skill and funding attracts fintech startups and encourages multiple efforts at public banking.

Raising funds is just the beginning-how those resources are used thereafter is what matters.  Is it to make a profit or to serve a community? When community needs are not being met, newcomers will find a way to create options for those underserved. That is what the FHLB and the public banking models are trying to do-serve where others have failed to do so.

Deciding on a Merger Partner Shouldn’t Be Like a Blind Date

Edited excerpts from this Second Quarter 2017 column in The NCUA Report provide a perspective on current merger discussions.

Scientific brainteaser of the month: “This man-made creation is defying the normal rules of science by both expanding and contracting at the same time.”   The final Jeopardy answer is: The U.S. credit union system.

In a streak now extending for decades, the number of credit unions in American continues to shrink while credit union membership and assets continue to expand.  . . no other issue is as perennial as the discussion of consolidation within the credit union system.  Many bemoan the erosion of the small credit union fraternity, while others cite the ever- increasing tide of financial services competition for making the erosion inevitable.

Protecting Member Interests

Whatever your perspective, climate change in the credit unions system is real. . . our focus is on ensuring member interests are protected, through the regulatory process and that the merged entlty meets safety and sourndess requirements.

The value proposition of mergers is, as it properly should be, left to the members of those institutions to weigh and then decide. . .

Really Acquisitions

But, while the term “merger” has a distinctively collaborative ring to it, make no mistake many mergers are really acquisitions.  For some credit unions, their growth strategy is defined by pursing acquisitions.  On the surface there is nothing inherently wrong with such an approach by either the acquirer or the acquired as long as sunlight permeates the pathway from boardroom to membership. 

Transparency: a Cornerstone Principle

Throughout my tenure, transparency in governance has been a cornerstone principle my colleagues and I have committed to build upon.  As we are constantly reminded, “every dollar is ultimately a credit union member dollar.”  . . .it is equally valid and important to remember that the same responsibility falls upon boards to be open and forthright with their member-owners when it comes to the merger process.

While many mergers germinate from the ability of the acquired credit union, generally a smaller institution, to adequately serve its members, some voluntary mergers have involved medium to very larger credit unions with relatively strong balance sheets.  In such instances, boards of director should be comprehensive in their disclosures to their members.

If an acquiring institution is tapping the net worth of an acquired credit union to pay for the acquirer’s’ cost of the merger, that reduction in net worth should be transparently, completely and fully disclosed to the members of the acquired institution before they vote on the proposed merger.

Certain disclosures of executive compensation and boards of directors’ benefits are already required under some circumstances, but the threshold for disclosure many not be adequate to provide true transparency to members.

Many board directors initiate the marriage dance long before the merger nuptials are finalized.  Pay and benefit enhancements for the acquired credit union’s leadership are sometimes finalized prior to triggering the current window of disclosures. Members also may not be given adequate opportunity to digest the information before the final merger vote. . .

Merger Windows and Frosted Glass

In the final analysis, it will, and should be, the members who will rightly make the ultimate decision, not the NCUA.  But, as members peer through the merger window, it is imperative their view not be obscured by frosted glass. 

By Rick Metsger, NCUA Board Member



Chairman Harper’s Medical Leave and Agency Leadership

In Monday’s public letter to the NCUA staff, Chairman Harper announced he was “stepping away from daily duties” for back surgery.   He expects to return to “my full duties in July.”

His only reference to how the Agency would be led was that “I know the NCUA team will not miss a beat” and “will continue executing the Agency’s mission.”

The extended withdrawal by a Chair from his daily duties for an open-ended period is unprecedented. The statement left unclear what, if any role, Harper will play while on leave.

The Critical Questions

The uncertainty about this unusual self-managed absence raises many questions about the Agency’s leadership.

The demands on any senior executive are tough.  Some organizations build in predetermined sabbaticals for top officials to recharge and reflect.  It Is critical that senior, public officials be proactive as Harper states in “addressing their physical and mental health needs.”

It is important however that the Agency has ongoing decision making and clear responsibility assigned for critical roles, such as:

Who will determine the board schedule and meeting agendas?

Who will represent the Agency in testimony before Congress? On the FSOC and other interagency roles?

How will programs, projects and priorities be overseen in the absence of the Chair?

What is the process for taking supervisory actions that require board approval? 

NCUA has had a two-person board several times in the past.  Chair McWaters and board member Metzger is the most recent example.  They made several momentous decisions including the merger of the TCCUSF with the NCUSIF.  This resulted in raising the NCUSIF’s NOL above 1.3% for the first time in its history to accommodate the new surplus funds.

The question is not about function, but how important internal decisions (personnel, spending, organizational alignment) and external responsibilities are being carried out.

An Opportunity for “Team” Members

For some time, the role of the NCUA board has been downplayed.  In February, the board for the first time since 2017 ignored past policy and practice to set an NOL above 1.30% without any supporting documentation or modeling.  This was a commitment that Chairman McWaters said future NCUA boards should follow after the 2017 merger of the TCCUSF when raising the NOL.

The 2024 March board meeting was cancelled.  The 30-minute April public meeting had only one item, a proposed rule, which Chair Harper attended virtually.

When the CEO is absent in any organization, there should be a continuing chain of command and authority.   This role initially falls to Vice Chair Hauptman and member Otsuka. May’s Board will be the first demonstration of their response and how they see their expanded responsibilities.

One approach would be to have more public reports on the many areas that fulfill the Agency’s core safety and soundness functions. They could request staff to present timely reports on the financial status of the NCUSIF and the Operating Fund (March data is still not available on the web).

There could be updates on the state of the examination program, the single most important Agency function monitoring credit union performance.  Will an annual exam be completed for all  FCU’s over $1.0 billion?  How do onsite results compare with quarterly filings?

There could be a discussion of the effect on culture and performance of the Agency’s policy requiring in-office attendance only two days per pay period.

In short, the two board members could take the lead in showing how they are “watching the store” and that staff continues to complete essential responsibilities in a timely manner.  Moreover, it would give both board members a platform to state their views and request input from credit unions on other issues.

A Vacuum of Power and Accountability

Harper’s  absence leaves a vacuum at NCUA.  The Chair is the primary spokesperson for the multiple constituencies to which NCUA is accountable.  The Senate banking committee approves all board members and, with the House, provides periodic oversight hearings.  The Administration nominates all NCUA board members and establishes policy priorities.

Most importantly over 100 million member-owners through their 4,600 credit union organizations depend on clear rules of the road and assurance the money they send to the agency is used wisely.  Credit union professionals are constantly reacting to market changes.  Is NCUA paying attention to their concerns about meeting member needs?

Harper’s communication to NCUA staff addressed none of these accountabilities.  A leadership vacuum may  tempt some to exercise long sought ambitions.   For others, it will be an excuse to do nothing, to just get by, while waiting for the boss to come back.

Others will see an opportunity “for the next man up.” That is the phrase used when a teammate is injured and unable to play; or in conflict when the assigned leaders go down.  This challenge happens for many in everyday life. When a spouse (breadwinner or homemaker) leaves or dies-the family must learn new responsibilities.

Harper’s statement left all options open for stepped up Agency leadership.  Who will take on new roles?   How do credit unions monitor and to whom do they communicate their concerns during this time of NCUA uncertainty?

The essence of cooperatives, is that we are all in this together.  How will this unique credit union capacity for cooperation show up in this new circumstance?

The Strategic Opportunity of a Shred Day

The post card came to us although we are not a members of the credit union.  It announced a “community shred day” at the main office parking lot last Saturday.

From time to time we receive these notices from realtors or sometimes a local government office.  But not a credit union.  It arrived as we were doing some spring house clearing and wanted to dispose of older financial records.  So we dropped a box off, and learned why this may be a simple solution to a perennial business problem.

The Last Mile

The term last mile summarizes the constant business challenge of closing a sale, usually from a distribution or supply chain point of view.  This last leg of the process is often least efficient, comprising up to 53% of the total cost to move goods.  It is the critical final step in retail for a customer to buy goods.

A similar challenge in service industries, such as credit unions, is how do I find my next new customer/member?

The short brief Ten Ways to Get New Customers is summarizes every method used by credit unions.  Todays most likely tactic is for  a strong social media presence with  a defined brand voice across platforms like Instagram, LinkedIn, Facebook and Twitter.

This makes perfect sense. Digital marketing is the preferred way to find digital members. No local presence needed. But why a shred day?  The effort seems so retro?

The Experience

So we pulled into the parking lot of the credit union’s head office.  The branch was closed and the parking area marked by tents with credit union personnel serving breakfast of donuts, coffee along with  credit union literature and tchotchke.  Staff took the boxes, checked for anything other than paper such as plastic binders and filled up big 40-50 gallon containers to wheel over to the shredding truck.

Even though we were late in the three hour period, there was a steady flow of people and boxes so much so, the coffee had ran out.  The following shows the setting.

Why This Makes Sense

How does a community shred day help find the next best customer? Several thoughts.

A person bringing records to be shredded suggests an individual or household conscious about proper management of financial accounts.

Driving to the location where there is a branch, introduces the non-member  to where one of the credit union’s offices is located.  The public made the journey on their own initiative. Local is an advantage almost every credit union can build on versus larger institutions.

The people dropping off records experienced instant hospitality and service.  No charges, no sales pitch. Staff offered  food, gave away branded desk pens and entered person’s names and email into a drawing for four $100 cash giveaways.

And that drawing is the hook.  Here was the message waiting for me when I returned home later on Saturday:

Hi there Chip,

Thanks for chatting with us at our Shred Day! We wanted to follow up and send over some additional information about our organization.

At Lafayette Federal, we offer nationwide membership eligibility with a mission to serve, support and empower you by understanding your financial needs, delivering products and services to achieve your financial goals and offering solutions to assure your financial well-being.

Below are a few offerings that we believe you may benefit from. Please feel free to contact us should you have any questions!

The email cited their 2.02% checking account and a 5.09% certificate for savers as well as other services.

I have no idea how many leads the credit union received.  But I did go to the website. It presents a special focus on members and the community.  I was told the credit union does this once a quarter at different branches as a “community” service.

For me it was the most intriguing introduction to a local credit union in the many years we have lived in Bethesda.  It made many traditional marketing emails from our existing credit unions seem like all the other marketing emails that fill an inbox every day.

This shred day service broke through this communication clutter and got my attention.  Maybe it is not so retro after all.  In its simplicity the effort showcased the traditional credit union advantages of service, local and community.  Hard to do in an email.








Work, Trade, or Finance?

From an unknown source:

An observer of modern social movements has said: “Some men wrest a living from Nature and it is called work. Some men wrest a living from those who wrest a living from Nature and it is called trade. Some men wrest a living from those who wrest a living from those who wrest a living from Nature, and it is called finance.”

And cooperatives?