A Case Study of a $96 Million Turnaround: Safe Harbor, Cannabis Banking, and Partner Colorado Credit Union

On year ago I described the announcement that  Colorado Partner Credit Union (CPCU) had arranged to sell its wholly owned CUSO (Safe Harbor), specializing in cannabis banking, to a Special Purpose Acquisition company (SPAC), or publicly traded company.

Serving the cannabis business has been a priority for some credit unions in states where the sale is licensed for several years.  This past week credit union leaders and trade associations announced their continued support of changes in  federal law to allow all financial institutions to serve the trade-which is now legal only on a state by state basis.

“CUNA said it supports the Secure and Fair Enforcement (SAFE) Banking Act, a bipartisan bill introduced in both chambers in April that would provide a safe harbor for financial institutions serving legal cannabis businesses.-from CU Today.

The Sale of Safe Harbor, a Cannabis CUSO

CPCU was to receive $185 million for selling its CUSO, $70 million in cash and $115 million in stock. Sundie Seefried – who created Safe Harbor cannabis business while the credit union’s CEO– would be the CEO of the new public company (NASDAQ: SHFS).

A $96 Million Turnaround In 90 Days

An immediate result of this September 28, 2022 closing was PCCU reporting a $55 million net income and an 8.7% ROA for the year ending December 2022.

This extraordinary gain occurred even as SHFS  reported a $35.1 million loss for the year ended December 2022, compared to net income of $3.2 million in 2021.  This result was described as “primarily due to the loss in value of several of the financial instruments placed in connection with the Business Combination.”

SHFS’s December 2022 balance sheet position  resulted in the following “going concern” comment by auditors:

Liquidity and going concern

As of December 31, 2022, the Company had $8,390,195 in cash and net working capital of ($39,340,020), as compared to $5,495,905 in cash and net working capital of $5,922,023 at December 31, 2021.

Included in the working capital deficit at December 31, 2022 is $25,973,017 current portion of the long-term payable owed to the seller, PCCU, from the aforementioned business combination, and $14,359,822 deferred consideration current portion related to the Abaca acquisition. The Company has also incurred a significant cumulative consolidated operating loss for the year ended December 31, 2022.

Based upon these factors, management of the Company has determined that there is a risk of substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the date these consolidated financial statements have been issued.

Results at March 2023

In  the March quarter of 2023 CPCU reversed much of the 2022 gain on Safe Harbor’s sale resulting in a $41 million loss.  The credit union’s net worth ratio between the two quarter ends went from 20.9% to 14.7% as of March 2023.  Its total assets were $699 million which included new subordinated debt of $3.1 million and notes payable of $27.5 million.

The loss was due to a restructuring of the sale terms  for CPCU as described in an SEC filing and company press release:

On March 29, 2023, the Company and PCCU entered into a definitive transaction (Refer to Note 22, “Subsequent Events,” of the consolidated financial statements) to settle and restructure the deferred obligations, including $56,949,800 into a five-year Senior Secured Promissory Note (the “Note”) in the principal amount of $14,500,000 bearing interest at the rate of 4.25%; a Security Agreement pursuant to which the Company will grant, as collateral for the Note, a first priority security interest in substantially all of the assets of the Company; and a Securities Issuance Agreement, pursuant to which the Company will issue 11,200,000 shares of the Company’s Class A Common Stock to PCCU.

This restructure was driven by the SHFS’ financial position.  CPCU is now the majority owner of voting stock (55%) and CEO Douglas Fagan  is  on the SHFS’s board.

SHFS’s First Quarter Earnings Call

On Tuesday SHFS reported its first quarter earnings with an 8-page press release.  The financial results show revenue of $4.2 million, operating expenses of $5.8 million and an operating loss of $1.6 million.

The release also provides operational highlights and a 2023 financial outlook.  During all of  SHFS’s nine years building the cannabis business, CPCU has been the primary banking partner.  This means revenue from all the deposits, loan funding and investment returns are shared with the credit union under a services agreement detailed in the company’s SEC filings.

Credit Union and banking partners are key to SHFS’s business model. As descried on the website, the firm is a  financial technology company, not a bank. Banking services are provided by contracted NCUA or FDIC insured financial institutions. Some non-deposit products and services are not covered by FDIC or NCUA.” 

On May 11, 2023 SHFS announced another  partnership with Five Star Bank in New York that it said will add up to $1 billion in additional deposit capacity.  SHFS plan  is to scale the business.

External Contexts & Cannabis Opportunity

SHFS’s future is uncertain.

The firm’s stock price is reported daily on its website.  The stock’s value since the “business combination” has declined from a peak of just over $10 to yesterday’s close of $.38.   The total market capitalization  of the company has fallen from over $300 million to $15.7 million at yesterday’s close.

However, SHFS is not alone in its extended financial condition.

SHFS’s  public offering via a SPAC transaction was a way to truncate the time, expense and investor scrutiny of a traditional public offering (IPO).   As reported in an April 27 WSJ article, SPAC’s Are Running Out of Money.”  The story’s lead reads:  ”The SPAC boom took hundreds of risky companies to the stock market. The next stop for many is bankruptcy court.”

The article’s implication is that the SPAC process to take a private company public, may short cut a more rigorous traditional IPO due diligence and valuation process.

Another external factor could also be important.  SHFS is the front end, or entry platform, for cannabis related businesses accessing financial services.  The following is SHFS’s business value proposition:  Our services allow Cannabis Related Businesses (herein referred to as “CRBs”) to obtain services from financial institutions that allow them to run their business more efficiently and effectively with improved financial insight into their business and access to resources to help them grow.

Due to limited availability of payment and other banking solutions for the cannabis industry, most businesses transact with high volumes of cash. Our fintech platform benefits CRBs and financial institutions by providing CRBs with access to financial institutions and financial institutions access to increased deposits with the comfort of knowing that those deposits have been compliantly monitored and validated. . .

A recent WSJ news story suggest that Legal Cannabis Can’t Compete  because licensed sellers are facing steep taxes and regulation.  In states like California (and New York) the article reported unlicensed sales were almost eight times licensed sales.

In many states cannabis began and still is an underground business. So even when either federal or state authorization is achieved,  suppliers may wish to retain their business  anonymity.

Tomorrow I will analyze what some of the learnings credit unions may take from this the effort to “spin off” this credit union created business to become a publicly traded company.

How did cash decline so quickly following the combination?  How dependent is the CPCU on SHFS’s business?

The details of SHFS’s history from SEC filings for this transaction and subsequent updates  offer, I believe, instructive insights for others who may harbor similar ambitions.

What Solid Cooperative Performance Looks Like

Recent bank failures, growing liquidity pressures, interest rate uncertainty and falling consumer savings have created uncertainty about  credit unions’ financial outlook.

The first quarter 2023 call reports are in.  There are a range of results, as usual.  Below is Wright-Patt’s CEO Tim Mislansky’s summary of the numbers for his team.  He opens with a one sentence conclusion.

Solid Performance

“We ended the first quarter with solid financial results.

Loans to members were up a whopping $70.7MM from February, were up $724.9MM from a year ago and are $177.8MM above our budget.

Member deposits jumped a big $182.8MM from February (due to the month end on a Friday payday), were up $445.7MM from a year ago and are $70.8MM over budget.

While both are results to be excited about, it is important to remember that we fund our loan growth with deposits. Continuing a pace where loan growth is significantly higher than deposit growth is not sustainable.

Net income for March was $8.7MM and year-to-date is $25.3MM. This is $6.5MM above our budget, but $2.2MM behind last year.”

He proceeds to review key items for the month and changes year-over-year including net interest income, non interest income, loan loss provisions and operating expenses versus budget.  He concludes: “We remain pleased with our early progress in financial results.”

How Were These Results Achieved?

The important issue is not what the results are, but how they were accomplished amidst so much  macro economic uncertainty.

To understand these financial outcomes, one must  look at the other parts of  CEO Mislanksy’s monthly report.  He opens with two recognitions.

The first honors a 47-year retiring employee, Kathy Denniston, in the Member Help Center. The credit union was chartered in 1932.  This employee has been serving members for more than half the credit union’s existence, and arguably during the most difficult  competitive time frame.  Sold performance starts with culture, the commitment of the employees.

The second comment relates a story which Tim calls Moments of Impact.  They are brief descriptions of exceptional responses by employees (partners), in this case the  Enterprise Risk Manager:

I often say that it is everyone’s job to take care of members and Corey did just that recently. Corey is a part of the security team that deals with incident reports – which are commonly sent through if a member or Partner has an accident, gets hurt in one of our centers, or if there is erratic behavior.

A couple of weeks ago, an MHC Partner submitted an incident report because a member who was declined for a mortgage started making some comments about depression and wanting to end his life. When Corey saw this, he replied to the larger group and asked what we typically do in these situations, because he wanted to help. Honestly, we do not have a standard protocol for this situation.

Rather than let it go, Corey took it upon himself to call the member to see if he was okay. He made sure the member had some resources and contacts that he could call for help. Taking that extra step just showed how much Corey cared and the type of people we have here at WPCU.”

The Performance that Really Counts

While financial numbers are one way of tracking performance, for Wright-Patt the focus is not on growing assets, loans or deposits. Growth results from doing the right things. Rather the credit union starts with impact, what it can do for its  members, potential members and  employees.

While over 90% of its deposit are insured, its share stability is due to member loyalty, not insurance. The credit union is trusted by members.  Their loyalty underwrites the credit union’s ongoing success that started  91 years ago and continues to expand quarter by solid quarter. member by member.

(I thank Tim for allowing me to use this example from his monthly report to his team)


Spring’s Abundance & Credit Union Bouquets

Cherry tree

Cupid keeps watch over his beauty.


Cherokee Dogwood


Plox with pansies, carnation and daffodils.

Redbud flowers growing on tree trunk.

Easter Lilly transplanted after church.

Spring Flowers from Government

On Monday April 10  U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) announced over $1.73 billion in grants to 603 Community Development Financial Institutions (CDFIs) across the country.

CDFI Equitable Recovery Program (CDFI ERP) grants are intended to strengthen the ability of CDFIs to help low- and moderate-income communities recover from the COVID-19 pandemic and invest in long-term prosperity.

The release said 203 credit unions received $590.3 million in awards.  Peoples Advantage FCU in Petersburg, VA and four Puerto Rican Cooperativas were  each awarded $6,197,097, the largest single amount to a credit union.

Also getting in on springtime action the NCUA on April 5, announced it would take applications in five categories to award a total of $3.5 million from its Community Development Revolving Loan Fund (CDRLF).  Amounts will range from $5,000 for training to $50,000 “Underserved Outreach and MDI Capacity Building.”

Subordinated Debt: The Fastest Growing Balance Sheet Account in Credit Unions

In 2022 subordinated debt issued by credit unions grew to $3.381 billion, a 257% increase from December 2021.

The number of credit unions using this form of temporary capital grew from 105 to 150. They represent about 7.3% of total system assets.

While still a very small percentage (1.4%) of the system’s total year end capital, its use is highly concentrated in a few credit unions.

NCUA is presenting a final rule on subordinated debt at this Thursday’s board meeting.  A point of interest will be how much detail is given the board and public about how credit unions used the funds, the various sources, and the reliance on this debt to meet capital compliance ratios.

These details are especially relevant today when bank failures wiped out not only all stockholder equity and retained earnings, but also all bond debt.

Rented Capital or Buy Now, Return Later

By rule subdebt is an unusual financial instrument.

Subdebt is reported as a liability, that is a borrowing, on the credit union’s books.  But because of the structure of the debt, NCUA considers it to be capital when calculating net worth for RBC-CCULR and low-income credit unions.

Subdebt can be sold to other credit unions as well as outside investors. Purchasers perceive it to be an investment, but technically it is a loan to the credit union which makes it as an eligible “investment”  for credit unions to hold.

In the event of credit union failure, the subdebt is at risk if all the credit union’s capital is depleted.

A Financial Growth Hormone

Unlike traditional retained earnings capital, subdebt is not free, with the interest rate varying depending on the structure and the credit union’s financial situation.

Because its inclusion in computing capital ratios is time-limited, the most common justification given by credit unions for raising the debt is to accelerate balance sheet growth.  Book the capital upfront, then leverage it for additional ROA to have increased earnings to repay the “borrowed” capital down the road.

This financial leverage requires raising more funds matched with earning assets to achieve a spread, or net interest margin, to make the process earning accretive. Buying whole banks is one obvious tactic to accomplish both balance sheet growth goals at once.

The process refocuses credit union financial priorities from creating member value to enhancing institutional financial performance through leverage.

Most Use Is by a Few Large Credit Unions

Community development credit unions are major issuers of subdebt.   The two charters under the Self-Help brand have together raised over $700 million.  Hope FCU in Mississippi and Latino in North Carolina have issued over $100 million each.

Bank purchases have been an important part of other credit union’s use of debt:  VyStar, GreenState, and George’s Own for example.

In other situations where the amounts are more modest, the intended use is less clear.  Is it just a form of “capital insurance” to meet the increased capital ratios of RBC/CCULR?   Is it to “test the waters” to see how the process works? Issuing subdebt is not a simple effort as for example, opening a FHLB account.

The Most Important Missing Rule Requirement

Subdebt has been bought by banks, insurance companies, investors and even other credit unions.

Sometimes the events are announced publicly either by the broker facilitating the transaction or the credit union.   The purpose is rarely specified other than to seek new opportunities for. . .  and then fill in the blank with a generality.

It is the members who pay the cost of the debt. The interest on the debt is an operating expense that comes before dividends.  If the only use is capital insurance or assurance, then the members should be informed as to the terms, cost and role of this approach to meeting regulations.   It is a management and board responsibility to be transparent and accountable to their owners.

If the goal is more ambitious, to capture new growth possibilities, the disclosure is even more critical.   Financial leverage, especially non-organic growth, increases risk.

In both instances the commitments undertaken can extend as far as ten years.  That term reinforces the need for full disclosure so members are aware of the commitments being made on their behalf.

The most important requirement that should be part of the revised subdebt rule is for full transparency for each transaction.  The purchasers of the debt are given all the details of the borrowing as their funds are at risk should the credit union fail.

Shouldn’t the member-owners also be informed of the commitments and terms made using their long-standing loyalty which, in reality, is underwriting the transaction’s terms?

It’s an opportunity for credit union members to be treated as actual owners, not just customers.





Differing Outlooks for SECU’s Future (Part II)

At the October 11, 2022 members’ Annual Meeting, SECU CEO Jim Hayes had been in his role since  August 2021. He arrived with 25 years of  senior credit union  and NCUA leadership experience.  He succeeded Mike Lord who in turn took over from  Jim Blaine in 2016.

All the persons involved were obviously  aware of Hayes’ “outsider” status. The hiring decision must have reflected a desire for a fresh look, and/or strategic change.

Here’s how SECU’s chief culture officer, Emma Hayes, explained the board’s choice in a talk to the AACUC conference in September 2022 in a CUToday report:

“We hired someone not only from outside the organization—there had never been for 85 years an external hire for CEO—but also someone who came from the wrong coast (the former Wescorp in San Dimas, Calif.) by way of somewhere up north (Andrews FCU in Maryland) to come down to North Carolina to lead the second-largest credit union,” explained Hayes, drawing laughs from the audience.  “The strategy for SECU for 85 years had been to grow talent from within. They had done that and done it well. Now they decided to open the organization and take a peek and see if there is someone out there.

‘Never Been Heard of Before’

“SECU runs like a well-oiled machine,” she continued. “But (Hayes) had new ideas for how to do things. One of the first things he did was send an email to all staff. In 85 years, no one who sat in that seat ever sent an all-staff email. In that email he says, ‘Let’s get rid of our ties.’ Imagine the shock and awe! Nobody believed this was real, like someone had hacked into his email address. We don’t take off our ties. We sleep in them. We go to the gym in them. It was unheard of! But Jim was like, ‘Let’s do something a little different.’ He then said, ‘I’d love to hear from you. Send me an email.’ People stared emailing him and he responded back. With his own hands he typed out messages! This also had never been heard of before!”

Shaking Things Up

The result, said Hayes, was word began to spread in the state of North Carolina where SECU is a highly visible and well-known brand that the new CEO was “shaking things up.”. . She said the changes created a “little rumble” within the organization and community.”

Those little rumbles culminated in the two resolutions , described yesterday, that members approved in the October 2022 Annual meeting

The 20 Credit Union Paladins (not a video game)

As of December 2022, twenty credit unions reported assets over $10 billion.  This threshold  subjects them to the scrutiny of the CFPB, reduces their debit card interchange, and includes special oversight by NCUA.

These twenty manage 23% of the industry’s assets, 24% of its loans and serve 23% of credit unions’ total reported 137 million members.  But they are just .4%  of all 4,495 credit union charters.

Their roles in the movement make them objects of emulation.  They are also, at times, examples of unveiled ambition.  Overseeing billions can sometimes lead to feelings of “cooperative triumphalism” and unlimited  growth aspirations.

Their business models vary widely.  Several have bought banks, sometimes more than one. Others have programs to acquired other credit unions across the country. Some have defined FOM’s; others say anyone can join.

Operating expense ratios vary widely:  Star One reported a 1.11% and Alaska USA 3.67% for 2022.  SECU’s was 2.16%.

SECU’s Rare Accomplishment

There are as many models in this group. However another factor distinguishes SECU’s performance.

There are state employee field of membership credit unions in almost every state.  These  charters share the same member economic profile of stable employment and a range of member demographics.  The motivations of state and local employees closely align with the not-for-profit service culture of credit unions.

But only SECU, the second largest credit union, achieved the market dominance serving this common employment group.

How Did SECU Become So Consequential?

SECU combined a unique strategy and culture which for some observers claim  is grounded in the 20th century.  It developed over decades.  The elements were highly  integrated and carefully chosen. Among the factors were these:

  • A limited North Carolina operational FOM with a branch in every county, and a statewide ATM network.
  • Branches were assigned local responsibility and accountability: for example, loan originations and collection, advisory boards for visibility in the community, local employment and personal service including routing member calls to their local branch;
  • A product and service profile that serves each member equally: same loan rate for all members (no tiered savings, no risk based pricing or indirect auto loans);
  • Staff receives only salaries, with no commissions or incentives for performance. Promote as much as possible from within.
  • Be low cost with a simple financial model: 3% net interest margin, 2% operating expense ratio and 1% ROA.  Minimize member fees.  No paid advertising.  Rely on word of mouth and the earned publicity from SECU’s Foundation grants.
  • Mortgage loans are the primary means for members to build financial security. 80% of SECU loans are first mortgages or real estate secured.
  • Provide a complete menu of low cost financial services beyond traditional consumer banking products. These include life insurance, a broker dealer for access to no load mutual funds at Vanguard, a 529 program open to all state residents, tax preparation,  trust services and even a CUSO for housing rehabilitation.
  • Avoid mergers; instead provide help to smaller or struggling credit unions.

The result was a no frills, plain vanilla product selection (no rewards cards) and long term member loyalty.  The focus was intentional—serve those demographic segments that have limited  financial choices. More simply, those that know the least or have the least.   Well to do members might find better loan or savings terms elsewhere.

By design SECU avoided imitating other financial providers.  Its purpose was to create a unique cooperative alternative for middle and low income Americans.  They wanted to avoid a strategy of becoming the competition to beat the competition.

The Issues Raised in the Annual Meeting

The six topics or business questions presented as the basis for the resolutions.

  1. SECU’s efforts to achieve an open field of membership.
  2. Merger discussions with Local Government Employees FCU, that would end a 40 year business partnership.
  3. Introducing risk-based lending for loans.
  4. Expanding business/ commercial lending.
  5. Elimination of the $75 per member tax preparation service.
  6. Regional expansion beyond North Carolina.

The full description of each topic is in the presentation. Blaine subsequently set up a web site blog which continues to expound on these points in almost daily posts.

Since the meeting, SECU has continued the ongoing implementation of the topics mentioned.

The tax preparation service has been discontinued.  Changes in loan administration are on going shifting responsibilities from branch to more centralized oversight. The volunteer, non-employee credit review committee is no more.

Recently Local Government FCU announced its decision to go on its own and dissolve their partnership with SECU.

The credit union continues its technology overhaul with a priority on digital services.

The issue dominating subsequent Blaine communications to the board is risk based lending. These multiple messages cite a number of studies showing the disparate impact of FICO score based loan pricing.

The credit union conducted a series of dialogues with staff and advisory board members.

 SECU’s December 2022 VisionPlan

Early in 2023 the credit union posted its  Strategic Plan, “Leading with Care” fulfilling the second resolution’s request.  It is 15 pages with four goal areas and key success factors.  The goals are generic, like many plans, and primarily descriptive.

It is well written.  Almost academic in structure. There is nothing controversial.  Many current public themes are included such as environmental awareness, DEIB, affordable housing and investing in staff.

If it had been available at the 2022 Annual Meeting, the presentations of the Chair and CEO would have been much enhanced.

The plan could be a prototype for almost any billion dollar credit union. There is no market analysis or history of prior trends.  No future financial projections were included.

The document has one statement referencing current events: Our commitment to embracing different perspectives creates the positive tension required to weigh business decisions and their potential outcomes.

It omits SECU’s traditional vision statement:  Send Us Your Moma.  And its former mission: Do the Right Thing.  It largely ignores  the policy issues raised in the Annual meeting such as a broader FOM and relationships with fellow credit unions.

The Plan presents settled decisions, such as  the ongoing implementation of RBL, without any explanation of how this benefits members.

An Earnestness of Views

How do these different judgments about business strategy get resolved– Blaine’s dominating logical critiques versus incumbents’ asserting the power of position.

Continued public debate will cause cleavages in the 7,800 employees, and among  advisory board volunteers,  directors, and ultimately members. The credit union’s financial and market momentum could falter.

The internal dynamics of SECU’s decisions are unknown. Had the board a plan ready and then tell Hayes to move quickly? Or did he understand his remit as move fast and address priorities as he assessed them?  Whatever the circumstances, did it consider the “wisdom of elders” as the plan was developed?

Or, is the fundamental difference in approach elsewhere? The new Plan states: “As a financial cooperative, we take to heart that prudent stewardship of our member’s money is of utmost priority.”   Is that all a financial cooperative is about?

Can a solution or process accommodate both points of view?   That’s the subject of tomorrow’s post.






Two Positive Updates & a Disheartening Decision

Callahan’s Trend Watch industry analysis on February 15 was a very informative event. It was timely and comprehensive.

Here is the industry summary slide:

The numbers I believe most important in the presentation are the 3.4% share growth, the 20% on balance sheet loan growth and the ROA of .89.

The full 66 slide deck with the opening economic assessment and credit union case study can be found here.

The Theme of Tighter Liquidity

A theme woven throughout the five-part financial analysis was tighter liquidity and the increased competition for savings.   Slides documented the rising loan-to-share ratio, the drawdown of investments and cash, the increase of FHLB borrowings, and the continuing high level of loan originations, but lower secondary market sales.

These are all valid points.   However liquidity constraints are rarely fatal.  It most often just means slower than normal balance sheet growth. That is the intent of the Federal Reserve’s policy of raising  rates.

Credit Unions’ Advantage

I think the most important response to this tightening liquidity is slide no. 24 which shows the share composition of the industry.  Core deposits of regular shares and share drafts are 58.3% of funding.  When money market savings are added the total is 80%.

This local, consumer-based funding strategy is credit unions’ most important strategic advantage versus larger institutions.  Those firms rely on wholesale funds, large commercial or municipal deposits and regularly  move between funding options to maintain net interest margins.  These firms are at the mercy of market rates because they lack local franchises.

In contrast, most credit unions have average core deposit lives from ALM modeling of over ten years. The rates paid on these relationship based deposits rise more slowly and shield institutions from the extreme impacts of rapid rate increases.   In fact the industry’s net interest margin rose in the final quarter to 2.86% (slide 56) and is now higher than the average operating expense ratio.

Rates are likely to continue to rise.  There will be competition at the margin for large balances especially as money market mutual funds are now paying 4.5% or more.  If credit unions take care of their core members, they will take care of the credit union.

The February NCUA Board Meeting

The NCUA Board had three topics:  NCUSIF update, a proposed FOM rule change, and a new rule for reporting certain cyber incidents to NCUA within 72 hours of the event.  The NCUSIF’s status affects every credit union so I will focus on that briefing.

We learned the fund set a new goal of holding at least $4.0 billion in overnights which it is projected to reach by summer.  Currently that treasury account pays 4.6%.  With several more Fed increases on the way the earnings on this $4.0 billion amount alone (20% of total investments) would potentially cover almost all of the fund’s 2023 operating expenses.

Hopefully this change presages a different  approach to  managing NCUSIF.  Managing  investments using weighted average maturity (WAM, currently 3.25 years) to meet all revenue needs, versus a static ladder approach, means results are not dependent on the vagaries of the market.

At the moment the NCUSIF portfolio shows a decline from book value of $1.7 billion.  This will reduce future earnings versus current market rates until the fund’s investments mature, a process that could take over three years at current rate levels.

Other information that came out in the board’s dialogue with staff:

  • Nine of the past thirteen liquidations are due to fraud. Fraud is a factor in about 75% of failures;
  • More corporate AME recoveries are on the way. Credit unions have been individually notified. The total will be near $220 million;
  • If the NOL 1% deposit true up were aligned with the insured deposit total, yearend NOL would be about .003 of lower at 1.297% versus the reported 1.3%. Share declines in the second half of the year will result in net refunds of the 1% deposits of $63 million from the total held as of June;
  • Staff will present an analysis next month of how to better align the NOL ratio with actual events;
  • The E&I director presented multiple reasons for NCUSIF’s not relying on borrowings during a crisis, but instead keeping its funds liquid;
  • The E&I director also commented that the increase in CAMELS codes 3, 4, 5 was only partly due to liquidity; rather the downgrades reflected credit and broader risk management shortfalls;
  • NCUSIF’s 2022 $208 million in operating expenses were $18 million below authorized amounts;
  • The funds allowance account ($185 million) equals 1.1 basis points of insured shares. The actual insured loss for the past five years has been less the .4 of a basis point.

Both the Callahans Trend Watch industry report and NCUA’s  insured fund update with the latest CAMELS distributions suggest a very stable, sound and well performing cooperative system.

A Disappointing NCUA Response

Against this positive news, is a February 15  release from the Dakota Credit Union Association.   It stated NCUA had denied claims of 28 North Dakota credit unions for their $13.8 million of US Central recoveries from their corporate’s  PIC and MCA capital accounts.

These credit unions were the owners of Midwest  Corporate which placed these member funds in the US Central’s equity accounts, a legal requirement for membership.   The NCUA claimed that the owners of Midwest Corporate had no rightful claim, even though a claim certificate for these assets was provided by NCUA.

Nothing in this certificate says that the claim is no longer valid if a corporate voluntarily liquidates.

Under the corporate stabilization program corporate owners were forced to choose between recapitalizing after writing off millions in capital losses in 2009, merge with another corporate, or voluntarily liquidate.

Both the Iowa  and Dakota corporates chose to voluntarily liquidate versus facing the prospect of further corporate capital calls.

The NCUA oversaw the liquidation of both Corporates in 2011. The NCUA’s liquidating agent knew  that claim certificates were issued, that there was no wording that voluntary liquidation would negate future recoveries for the corporates’ owners and that NCUA’s legal obligation is to return recoveries to the credit union’s owners, whether in voluntary or involuntary liquidation.

The claim receipt specifically states: “No further action is required on your part to file or activate a liquidation claim.”  Yet that is just the opposite of what NCUA is now saying the credit unions must do.

For example NCUA continues to pay recoveries to the owners of the four corporates who were conserved and involuntarily liquidated by the agency.

According to Dakota League President Olson, NCUA has failed even to inform the league  in what accounts these funds are now held.  Are they being distributed to all other US Central owners? To the NCUSIF? Or held in escrow?

“This is a clear case of obstruction through bureaucratic hurdles and complicated language where the process is the punishment, and does not provide justice,” stated Olson.

These funds  ultimately belong to the member-owners of these credit unions  The NCUSIF is in good shape.  This is not a legal issue.  It is common sense.

NCUA controlled all the options for every corporate through through its stabilization plan. It took total responsibility for returning funds-no further action required. No one will critique returning members’ money.  But failure to do so undermines trust in the Board ‘s judgment, its leadership of staff, and its fiduciary responsibility for credit union member funds.

The NCUA board should do the “right thing” for these credit unions and their members.


Credit Unions & Risk Based Capital (RBC): A Preliminary Analysis

From the June 30, 2022 call reports, NCUA reported:

  • 399 CUs opted into the Complex Credit Union Leverage Ratio (CCULR) framework with an average CCULR of 11.35%, or 26% higher than the 9% floor.
  • 304 CUs reported under the Risk-Based Capital (RBC) framework with an average RBC ratio of 15.39%, or 54% higher than the 10% minimum.

The 500 page, RBC rule and its almost 100 ratio calculations became effective January 1, 2022.  Just two weeks after NCUA board approval.

It was intended to provide greater insight about a credit union’s risk profile and capital adequacy. What can an analysis of the RBC adopters tell us from this initial implementation?

The Macro Totals

The 304 credit unions plus 4 ASI-insured who adopted RBC, manage $822.7 billion in assets.  But the risk weighted assets total only $479 billion.  That 58% ratio  is the NCUA’s discounting of total assets total by assigning relative risk weights.  For example some assets have zero “weight” (cash, treasuries) or negligible emphasis ( GSE’s 20%).

Compared to the traditional well-capitalized 7% of assets standard, this group holds $20.5 billion in excess capital above this ratio.

Using the minimum RBC ratio of 10%, this same group holds $26 billion in excess of the minimum.  As shown above, their average RBC is 15.4%.

The bottom line is that this group of credit unions is well capitalized whether using the 7% traditional level or the new RBC 10%.

Other Initial Findings

One intriguing fact is that 149 of these credit unions, or almost half, have traditional net worth exceeding 9%.  That  suggests most could opt out of the RBC calculations as they exceed the CCULR 9% compliance minimum.

For example, one credit union with assets between five and ten billion dollars, reports standard net worth of 12.5% and an RBC ratio of 48.3%.   Why did they report RBC versus CCULR?

One way CEO’s can use RBC is to show that even with a low traditional net worth  they are still more than well-capitalized.  A CEO holding 7.5% net worth may want to allocate future earnings for greater member value and avoid the 2% tax on net income  to maintain the 9% CCULR minimum.  Showing a high RBC to your board and members is a powerful defense of the lower traditional net worth measure.

A Look at Ratio Methodologies

However as shown by the banking example below, RBC captures very few risk factors. Its focus is solely on potential credit and/or principal losses on loans and investments.

One example: 250 of these 308 credit unions reported unrealized declines in the market value of investments that exceeded 25% of net worth.   Four credit unions reported a decline greater than 50% of capital.  This was before the five additional Federal Reserve’s  rate increases through the end of the year.  This situation is not recognized in RBC.

To compare peers and their capital performance is very confusing.  RBC credit unions can choose four different ways of calculating the ratio’s denominator.   Seventy two credit unions opted for a ratio  that did not use June quarter ending assets.  They chose one of three other options that  results in a lower total asset amount, and therefore a higher RBC outcome.

RBC ratio comparisons are further complicated when 152 of the RBC credit unions had a combined risk weighting of less than 60% of total assets.  In one case the risk weighted assets were just 24% of the total balance sheet.

Another difficulty in  comparisons is that there are other options for capital creation than retained earnings.  Seventy-six credit unions report that less than 95% of their “capital” came from their own earnings.  Twenty-four reported subordinated debt as capital and the majority of the remaining group were from equity acquired in a merger.

As a result RBC net worth ratios  reflect different capital strategies.  There is a difference in operating capabilities between institutions who rely solely on retained earnings and those who purchase capital.

Performance Outliers

The RBC spread sheet easily identifies those near the 7% minimum requirement-one is below 7% and 12 between 7 and 7.5%.

Using the 10% minimum RBC net worth, eight credit unions fall below this ratio and 15 have 10.5% or lower, and are close to the minimum.

These screens would be one way of assigning exam priorities.

Initial Observations About RBC

From both the macro numbers and the micro analysis, RBC does very little to inform about safety and soundness.

  1. The calculation is a backward looking indicator of soundness. It is at a point in time and includes no dynamic ratios.
  2. Comparisons of peer capital adequacy using ratio analysis is virtually meaningless because of the range of calculations possible and distribution of risk weighted assets.
  3. No current, critical performance indicators are included. No delinquency, no expense ratios, no liquidity indicators, no IRR or ALM measures, and certainly no growth factors of any kind.

Ironically, is it possible that a very high RBC ratio indicates very poor value creation for members? The very opposite outcome for a credit union to sustain success?   Are the 33 credit unions with RBCs in the 20%, 30% and 40% ranges really serving members as their below average  loan/share ratios leads to higher reported RBC?

A Preliminary Look

The above analysis is as of June 30, 2022.  I will revisit the RBC reporting credit unions at December 2022  to see if the numbers have significantly changed.  For example, how many of  the 148 above 9% net worth opt for CCULR?  Credit unions will then have a full year’s and four quarters experience exploring the pros and cons of using RBC.

At this preliminary analysis, RBC looks like an exercise for credit unions to select their most favorable capital presentation. It may even create perverse regulatory incentives  that undercut initiatives for enhanced member value.

A Case Study of RBC and Bank Reporting

The following is an excerpt of RBC analysis of a bank serving the crypto industry and its reported capital adequacy.  This was written by Todd Baker, 1stSenior Fellow, Richman Center at Columbia University. (#capital #regulation)

Silvergate Bank has officially reported, and there is a big lesson there for regulators about the failure of risk-based capital standards to adequately address the risks of #banks serving the #cryptotrading gambling emulation of finance.

The wisdom of hard equity leverage capital requirements for banks is clearly demonstrated. They lost a billion dollars and their risk-based capital ratios increased! . .

Again, kudos to whomever managed the process of securities sales, reclassifications, borrowings, etc. at Silvergate. He/she did an amazing job bringing the plane onto the landing strip with one engine in flames and half the tail falling off while keeping the Tier 1 leverage ratio over the 5% “minimum” (which is actually way below the minimum in practice). . .But they still have the need to raise new capital, and fast, because their Tier 1 leverage ratio is way, way too low for the inherent risk from the business, as everyone now knows.

Despite losing a billion dollars (likely more than the company made cumulatively in it’s entire history) in the quarter, driving its holdco ratio of common equity to total assets down to 3.61%, from 8.84% at the end of 2021, and immolating half of the bank’s Tier 1 leverage capital, the bank’s risk-based capital ratios are actually higher (!) than they were at the end of the prior year.


Why? Most of Silvergate’s assets were and are still government securities that are treated as riskless (0% risk weighting) or GSE securites that carry a 20% risk-weighting. Riskless, that is, until you have to sell them in a rising rate environment…

Compare these two disclosures, from year-end 2022 and 2021:

“At December 31, 2022, the Bank had a tier 1 leverage ratio of 5.12%, common equity tier 1 capital ratio of 53.89%, tier 1 risk-based capital ratio of 53.89% and total risk-based capital ratio of 54.07%. These capital ratios each exceeded the “well capitalized” standards defined by federal banking regulations of 5.00% for tier 1 leverage ratio, 6.5% for common equity tier 1 capital ratio, 8.00% for tier 1 risk-based capital ratio and 10.00% for total risk-based capital ratio.” Versus,

“At December 31, 2021, the Bank had a tier 1 leverage ratio of 10.49%, common equity tier 1 capital ratio of 52.49%, tier 1 risk-based capital ratio of 52.49% and total risk-based capital ratio of 52.75%.”






Digital and Branching Options

As credit unions expand their market footprint, branches remain an important investment for growth.

Recently Credit Union Times reported on this effort by five credit unions across the country. Expanding their existing 75 branch network was Suncoast Schools, Tampa FL which is opening  three new branches in Orlando.  Truliant, Winston Salem, NC is investing in a South Carolina expansion involving five new offices in three years.

The Times story also described new branch openings by Blue FCU, Cheyenne, WY; Utah Community in Provo; and Brooklyn Cooperative FCU in New York.

In Person Matters

If digital transactions and virtual platforms are the future of financial services, why are these and other credit unions continuing to invest in real estate and a physical presence?

Part of the answer is that opening new markets is very difficult to do with a virtual only strategy.  Platform solutions bring individual responses to promotions.  However “seeing is believing” if credit unions want to have a continuing community presence and impact.

However another factor may be the reality that Stores Aren’t Dead, according to a February 10 article in Axios.

According to data from Coresight, “physical store openings exceeded closings on an annual basis in 2022 for the first time since 2016.”   Retailers are on a pace to open more stores at an even faster pace in 2023.

Why?   “While e-commerce platforms helped retailers manage the pandemic — but both retailers and consumers realized the limitations of doing business entirely online.”

Bargain hunters like to shop in person.  The top six retailers opening stores in 2022 were dollar chains and discounters, including Dollar General, Family Dollar, Dollar Tree, Five Below, TJX Cos. and Aldi, in that order.

Those customers would seem an attractive demographic for credit union services as well.

Digital transactions for existing members are an important option for supporting these members efficiently.  But a physical presence is what communicates commitment to a community.  And being there for an ongoing relationship.

Epitaph for THE Cooperative Book of Discovery

This post is a eulogy.  For 36 years credit unions were provided a comprehensive report on their collective progress.   That publishing effort grew in scope, analysis and detail while keeping the same title: The Credit Union Directory.  It is no more.

The Credit Union System’s Essential Resource


In 1986 Callahan’s introduced the first complete Directory of all active credit unions for the industry’s and general public’s use.   It was a complete census by state of every credit union, a task never accomplished in the eight decades since the first charter.

One reason for this gap was there was no centralized source for information.  NCUA’s call report included only federally insured data. There were approximately 1,800 cooperatively insured credit unions in over 20 states that offered a choice of share insurance.

Prior directories were periodically attempted.  One listed the  4,000 largest credit unions by assets.  Some state leagues published listings, but they were not for public use.

A Calling Card

The Directory was Ed Callahan’s  idea.  At great expense, Callahans had established a database of all NCUA data, augmented with cooperatively insured information. We believed the industry and public would beat a path to our door for the latest, most complete data on credit unions.

The company had an outstanding invoice for over $100,000 with a local service bureau that managed the information.  No one came knocking.  Ed decided we needed a “calling card” to let people know about our analytic capability.  Hence the first Directory, with 1985 data listing every credit union, was released at the  February 1986  CUNA governmental affairs conference.

The initial product was a literal directory organized by state listings in credit union alphabetical order.  The single line of information with the credit union was the CEO’s name, contact information and summary financial data:  total assets, loans, members and capital.

As the Directory became an annual effort, the content expanded.  Advertising was added to support production costs.  The concept of  a one stop information resource  became widely valued.  At least three other competitors entered the market:  NCUA printed and gave away a  state listing of its insured; Thompson’s added a credit union volume to their bank and S&L publications; and CUNA attempted its own version.

All subsequently dropped their “directory”  efforts.  For Callahan’s, this calling card expanded with more analysis and industry listings.  It demonstrated the firm’s software capabilities that eventually led to the development of Peer to Peer as the premier industry analysis product.

Annual  Publications:  The 2006 Example

The listings remained central, but the annual analysis expanded in multiple ways.

New reference material was included to give added value and market reach.  For example, the top 100 Canadian credit unions were listed in the belief this might open up a northern market.  It didn’t.  World Council information was presented showing the US totals in a worldwide context.

An example of this ever expanding effort is the 2006 edition which totals 646 pages in four tabbed sections.

Each year, the Directory’s cover was redesigned. A theme summarizing the movement’s progress was introduced .  In 2006, the message was Communities United by the Cooperative Difference.

The first tab, State of the Industry, presented the industry’s consolidated balance sheet and income statement, key trends and auto  loan share by state; 30 “best in class” leader tables;  an analysis of the corporate network;  a listing of CUSO’s, credit union auditors, leading technology providers and a list of mergers.  Contact information for all state and federal regulators, leagues and trade associations and Canada’s largest 100 credit unions were provided in just the first 125 pages.

Tab two was  the traditional listings provided by state.  Each state was headed by a five year performance summary and a top 50 by assets table preceding the alphabetical list of all the credit unions.  Seven pages were devoted to comparing state by state performance on key ratios.

The third tab was a cross reference listing where a user could look up credit unions alphabetically by name,  by city, or by the manager’s last name.  For example, seven Carlsons and 65 Johnsons.  Buffalo, NY, reported 42 credit unions with home offices in the city; Carmel, IN, had just two.

If one wanted a quick summary of credit unions by employment, the reader could look up credit unions that had Post Office or Postal, IBM, State Farm as a first name.  Or, if looking for parish-based credit unions, one would find 185 credit unions whose name began with St. (Agnes, et al ).

The final section was a buyer’s guide which showed 115 vendors serving the credit union community.   And helped to underwrite the Directory’s printing costs.  The sponsor for 2006 was Charlie MAC.  For those not familiar with US Central, this was a secondary market initiative for credit unions to compete with the government sponsored GSE’s.

The Incalculable Resource

Each edition attempted to list the major system components and the businesses serving credit unions.  To address concerns about timeliness of the data (publication occurred about 4-5 months after the financial information), Callahans in 2006 created a “Directory Online” with 24/7 access.  This digital version was updated with the latest financial as well as contact changes.

By publishing annually, the industry had a comprehensive set of performance benchmarks in one volume.   Who had moved in or out of the top 200?  How many credit unions have home offices in DC?  Or,  what states have the fastest growing coop system?  While the information was at a point in time, it was a starting place for limitless stories and analysis, then or in years later.

Leaving the Scene

Callahans last annual printed Directory was volume 36, published in 2021 using December 2020 data.  This edition had 221 pages including a 29-page buyer’s guide.

There was industry analysis with ten-year trends, leader tables, and peer group comparisons.  There was still a state-of-the-state section in which all the individual credit unions were listed.  Contact information was also provided for CUSO’s, Corporates, regulators, and trade associations.

There was no introductory analysis or theme, undoubtedly hindered by the Covid lockdown and recovery during the production cycle.

In 2022, there was no printed edition.  The industry trends, top 50 or 100 listings, the corporate network and state summaries are available online.  If printed, the  information would  total 132 pages.  There is no advertising or buyer’s guide.

Does It matter that there is no longer a printed Directory?

There are certainly virtual substitutes for some of the data listings and contact information.  One can search on NCUA’s site for peer information and trends.  Pulling other categories of information (CUSO’s, trade associations) would require someone with a knowledge of relevant  resources.  If interested in a year’s key industry events such as large mergers, charter conversions, bank purchases, or even newer data sets such as subordinated debt or goodwill, one would have to find a credit union database resource such as Peer to Peer.

The Directory’s function expanded assembling  performance and individual credit union data to serve as a starting point for insight and analysis.  At a macro level, the Directory was the only source for  ten-year financial trends and a two-year balance sheet and income statement that includes all credit unions, not just NCUSIF insured.

But the Directory was more than a useful compilation for quick reference.  It presented the industry’s multiple connections and comprehensive participants.  Each volume was a census of all key movement participants (by name and organization) and  an almanac of the  year’s trends.

Each edition presented the collective industry’s performance, information missing from all other yearend reports.  For example, NCUA’s Annual Report records its activities and financial audits, not credit unions’ role in the economy.  Trade groups report  their advocacy, education and  information services.  Individual credit unions promote their own success and accomplishments.

What is lost is the sense of cooperative identity, a shared destiny and a system with special purpose that serves over 100 million member-owners.   If one were to understand the history of the credit union system, especially the post deregulation era, the Directory would be the major resource.

This bridge connecting the past to the present no longer exists.  Each future writer or researcher will have to find their own way to the history.

The Directory memorialized multiple national, state and local  milestones for a movement whose future should be more consequential than its past.

Without this collective benchmarking, can there be a shared purpose? If one fails to celebrate birthdays, anniversaries or other key events, life goes on.  So will credit unions but with less of a sense of who they are and where they have come from.

A movement without a collective memory can slowly disintegrate into individual contemporary stories.   The shared destiny is lost as firms follow their own independent journey. A Community United by the Cooperative Difference no longer has a record of who they are.




Searching For Credit Union History

Three weeks ago I received a unique document.  It was John Tippet’s 2001 speech to Navy FCU’s board at their annual planning conference. John Tippets was then CEO of American Airlines FCU, now retired.

The presentation was typed in full along with the slides used.   John presented his credit union’s strategy and how he believed this implemented credit union’s unique design.

Ten years later (2011) Navy’s planning COO requested a copy. Now twelve years further on, I will share some of his thoughts. I believe they are an important example of a leader’s vision and provide important perspective today.

History Matters

The American historian David McCulloch wrote over a dozen books and countless speeches on transformative events (1776) and the people who played important roles.  His accounts are lively and compelling.  He drew upon stories from his subject’s diaries, letters, speeches as well as second hand press accounts recreating these past scenes.

As an author, he believed history was larger than life.   A country’s stories, he believed,  are its most critical  resource.  When well presented, often from original records, they enlarge the spirit and shape our understanding of who we are.  And what we aspire to become.

If one reads the Congressional Record transcript of Ed Callahan’s last testimony as NCUA chairman on April 24, 1985, there can be no question of his impact.  His eloquence, factual knowledge and even humor with the committee shows their respect of his leadership of NCUA during this very vital time for financial services.  The words recreate the event and provide, still today, insight into a leader’s talent.

Or read the July 16, 1982 hearing transcript of NCUA General Counsel Bucky Sebastian’s testimony before Chairman Rosenthal’s House Committee on Government Operations.  The Committee was investigating the failure of Penn Square Bank and its impact on credit unions. It had occurred just two weeks earlier. The back and forth between Sebastian and the Committee chair jumps off the page.  It shows clearly two very different understandings of the event and the role of government.   Bucky’s powerful argumentative style is on full display!

The Absence of Credit Union Records and Original Documents

The years 1981-1985 were pivotal in credit union evolution.  Their response to the economic crisis and the deregulation of America’s financial system was critically important for their members’ future.

These major events unfolded just as NCUA was still organizing itself as an independent agency with a three-person board appointed by the president.   Prior to this federal credit union oversight had been by a single Administrator housed within HEW.

In response to these changes, a separate credit union press of weekly or monthly newsletters was begun. These included CUIS (credit union information service), NCUA Watch, Report on Credit Unions and smaller commentaries. The trades wrote current stories in their weekly updates mailed to members.

These critical original documents from this period are hard to find.   I have contacted CUNA Mutual, CUNA, the Credit Union Museum and even the Library of Congress.  No copies of any of these written sources seem to be available.

Even more vital would be recorded speeches.  In this era all major credit union conferences would make cassette recordings of the keynote speakers and sell them to attendees to take home to boards and staff unable to attend.

A major event was CUNA’s Governmental Affairs Conference held every February at the Hilton Hotel. The NCUA chair’s speech would be a highlight.  I found a copy of Callahan’s 1983 and 1984 presentations.  But the most pivotal ones from 1982 and 1985 are missing.

State leagues and other conference organizers routinely recorded presentations by NCUA personnel as well.  Finding copies of these tapes is very difficult. The firms organizing the events have long ago moved on.  These live recordings are often seen as yesterday’s news when found in office records.

In this pre-internet period, NCUA communicated with its staff in six regional offices and the credit union community with a new media, VCR.   NCUA’s Video Network issued 21 productions over three years.  No copies can be found for many episodes. Neither NCUA nor the National Archives have the tapes of these critical updates.

Telling the Credit Union Story

Contemporary leaders are focused on creating their story rather than learning about the past.  Many of the participants from this critical 1981-1985 era have retired years ago.  Memories fade.  When their boxes of credit union experiences and keepsakes are opened by children or grandchildren, they rarely have any personal meaning for the family.  So out they go.

The founders of these earlier newsletters and conferences leave no legacy of their vital role of credit union events now forgotten.

But somewhere in a closet, garage, or basement storage area I believe some of these original records (newsletters, recordings, VCR’s) exist kept by those as memories of an important part of their lives—but even more consequential, I believe, as original sources of credit union history.

Can reader’s provide suggestions where some of this trove of credit union history exists?

I will be glad to digitize any records that a person wishes to keep.  The years of 1981-1985 are a turning point.

Parts of John Tippet’s 2001 statements on his credit union’s strategy will spark controversy.  It did then and it will today.   Some of the same challenges remain.  For the credit union story is always being updated.

Can you help me fill in some of the missing parts from an earlier era?  It will be entertaining, illuminating and educational.   Please let me know what you find or where I might look.