First Lessons from a Credit Union’s CUSO’s Public Offering

Within 90 days of Safe Harbor, Colorado Partner Credit Union’s CUSO subsidiary becoming a public company, the December 2022 financial result showed a negative retained earnings of $39.7 million.

The company’s stock has fallen from a peak of over $10 per share in October 2022 to close at $.39 yesterday.  Auditors have raised a going concern footnote as a result of its December 2020 financial position.

Partner Colorado Credit Union the CUSO’s founder and owner, has restructured  its initial sale terms of $185 million in cash and stock.  This resulted in PCCU recording a $44 million dollar loss in the March quarter, to offset the gains from the sale recognized in the 4th quarter of 2022.

Except for ongoing revenue from its operating service agreements with SHFS, the credit union has yet to receive any payments from this sale closed in September 2022.

How could such an initial optimistic announcement turn south so quickly?

No one knows how this start up effort to transform a private, relatively small Fintech front-end platform for introducing cannabis related businesses (CRB’s) to financial partners will turn out.

However, CPCU’s effort to tap into the public market’s fervor for “Fin Tech-Cannabis” related startups has  multiple lessons for credit unions. One can see possible parallels in the continued interest and fund raising today in credit union for FinTech labeled businesses.

Is the Startup Scalable?

One topic is  scalability. Safe Harbor was started in 2015 with the full support of all of CPCU’s operational capabilities, especially branches.

The credit union offices were able to open accounts, receive cash deposits, make loans and provide transaction services.   Is this geographically based start up model scalable outside the jointly operated locally-incubated context?

Is the compliance process and technology support so unique, that other local financial institutions and FinTechs would be unable to develop their own capabilities?

“At the end of last year, there were 168 credit unions, 479 banks and 126 non-depository institutions that were serving marijuana-related businesses, according to FinCEN.”  (CU Times)

No Free Market

One observation at this stage is that there is no “free” market.  The credit union is learning that a private firm using the SPAC process has to “pay to play” to become publicly traded.

Reviewing some disclosures form the May 2023, 10-Q SEC filing suggest why this is the situation.

The first is to note that this sale was structured as Safe Harbor buying out the NLIT SPAC, not the reverse as suggested in the $185 million announcement.

Secondly it is impossible to tell which investors got paid what in this transaction.  Certainly the brokers, accountants, lawyers and other facilitators were paid fees.  But which SPAC shareholders were paid what return?

What is known is that the seller, CPCU, has not received anything from the sale.  Moreover It has converted a significant amount of the debt portion to stock and extended the much reduced debt payments further out.

The new entity’s first major transaction was to acquire in November 2022 another cannabis business for $30 million in  stock and cash.  The tangible assets in this acquisition were minimal.  The contribution to immediate earnings, unstated. It would seem to be a transaction negotiated  before the full financial impact of the CPCU sale was known.

SHFS continues to compare in its filings the current financials with its pre-public  quarterly results. This previous financial performance, under the credit union’s auspices, reveals a very modest business, albeit, with a positive financial bottom line.

The Impact on CPCU

The credit union appears well capitalized.  The cannabis business relationships from SHFS are important. About $35-40% of its deposit base appears to be from CRB’s-much probably  held in share draft accounts.

Prior to the public sale, CPCU recorded its CUSO investment at $8.0 million.  To date the credit union has not received any of payments, including the $3,143,388 in cash and equivalents held by Safe Harbor prior to the sale.

As stated throughout the SEC filings, CPCU is the SHFS’s primary banking partner.. “Currently the Company substantially relies on PCCU to hold customer deposits and fund its originated loans. As of this time, substantially all of the Company’s revenue is generated by deposits and loans hosted by its PCCU pursuant to various services agreements.

Concentration limits for the deployment of loans are further categorized as i) real estate secured, ii) construction, iii) unsecured and iv) mixed collateral with each category limited to a percentage of PCCU’s net worth. In addition, loans to any one borrower or group of associated borrowers are limited by applicable National Credit Union Association regulations to the greater of $100,000 or 15% of PCCU’s net worth.  Page 27

Further disclosures show that the credit union has limits on the amounts of total CRB related loans it will hold as part of its service agreements:  PCCU’s Board of Directors has approved aggregate lending limits at the lessor of 1.3125 times PCCU’s net worth or 60% of total CRB deposits.

CRB deposit limits: (page 27) Under the Support Services Agreement PCCU will continue to allow its ratio of CRB-related deposits to total assets up to 65% unless otherwise dictated by regulatory, regulator or policy requirements. Actual CRB deposits  at March 31, 2023  $214 million and $161 at December 31, 2022.

CPCU’s CEO and CFO are members of SHFS board; the credit union owns 55% of the voting stock from the restructuring.  The credit union’s current operations certainly benefit from SHFS’s clients apart from what may be received from the sale of the CUSO.

The Transparency Opportunity

SHFS’s SEC filings provide many details of its business history and financial twists and turns. The latest 10-Q filed May 15, 2023 can be found here; and the definitive proxy statement  Schedule 14 A, filed April 23, 2023 for the firm’s annual meeting is here.

Two financial questions are partially answered in these documents.  If the SPAC held $100 million in cash, how did the working capital become so depleted by yearend?   How did the SHFS end up with  over $39.7  million  in negative retained earnings at December 2022  requiring the complete restructuring of the transaction with CPCU?

Below are some excerpts from these documents.   The story is complex.  There is  not a single narrative point of view as the filings show different elements of the financials in various footnotes.

I have selected some to illustrate  the information available.  There is both quantitative and qualitative (business risk factors) information provided.

One positive note that may bode well for the future is that Safe Harbor’s web site and links are one of the most comprehensive examples of transparency I have reviewed.  The stock valuation information is detailed both currently and historically.  All of the required SEC and financial reports can be accessed on line at SHFS website.

On its investor relations page the firm makes this commitment: Safe Harbor Financial (Nasdaq: SHFS) seeks to enhance shareholder value not only through exceptional business performance and practices, but also through responsible and effective communication with its shareholders. The latest company information relevant to the individual and institutional investor includes stock price and history, upcoming events and presentations and financial documents. Safe Harbor Financial trades on the Nasdaq under the ticker symbol SHFS.

That is an example credit unions should totally embrace as well.

Selected Excerpts from SEC 10-Q filings

(emphasis added)

From Note 3, the Business Combination detailed in Note 1 above was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, NLIT  (the SPAC) was treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of SHF issuing shares for the net assets of NLIT, accompanied by a recapitalization.

For tax purposes, the transaction is treated as a taxable asset acquisition, resulting in an estimated tax basis Goodwill balance of $44,102,572, creating a deferred tax asset reported as Additional Paid-in Capital in the equity section of the balance sheet as of the date of the business combination.

In November, 2022 SHFS acquired Abaca together with its proprietary financial technology platform in exchange for $30,000,000, paid in a combination of cash and shares of the Company.

The November press release stated:  the acquisition increases Safe Harbor’s customer base to include more than 11,000 unique depository accounts across 40 states and U.S. territories; adds Abaca’s fintech platform to Safe Harbor’s existing technology; increases Safe Harbor’s financial institution client relationships and access to balance sheet capacity to five unique financial institutions strategically located across the United States ; increases Safe Harbor’s projected monthly revenue by approximately 40%; increases Safe Harbor’s lending capacity; and nearly doubles Safe Harbor’s team, adding to the existing talent pool of the cannabis industry’s foremost financial services and financial technology experts.  (note 4 10-Q provides the fair value presentation for the transaction page 20)

Page 20 in the 10-Q shows what NLIT’s fair value assets it offered to support the $185 million CPCU purchase valuation.  The key point is that $80 million was held in shares subject to possible redemption and the remaining cash of $19 million was held in trust.

It is not clear how many common A shares were redeemed, or how the money in trust was used.  The result is that at December 2022 SHFS had only $8 million in cash and negative working capital (current assets less current liabilities)  of  $39 million.

The details of the restructure of the $185 million for CPCU was reported  on March 23, 2023.  Page 26 shows that exchange of debt for common stock resulted in $38.4 million for issuance of common shares.  These are subject to a Lockup agreement restricting their sale.

Also CPCU acquired a first lien on all of the company’s assets as a result of the restructure. SHFS issued 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% and 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.

Contributing to the loss in 2022 from note 17 Forward Purchase Agreement page 35:

The trading value of the common stock combined with preferred shareholders electing to convert their preferred shares to common stock triggered a lower reset price embedded in the forward purchase agreement, or FPA. As of December 31, 2022, the Company had already called a special meeting to lower the make-whole price under the preferred share purchase agreement to $1.25/share. . . These events significantly reduced the FPA receivable to approximately $4.6 million, from approximately $37.9 million reported at the end of the September 2022 quarter. The loss in value resulted not only in a compression of the balance sheet, but also $42.3 million charge to other expense on the statement of operations in the fourth quarter of 2022.

At March 30, 2023, SHFS’s balance sheet shows negative retained earnings of $47 million offset by $91 million of additional paid in capital from the restructure of the $180 million initial terms and other stock transactions.

81% of SHFS’s March 2023, $89 million  assets are $19 million in goodwill, $10.2 intangible and a deferred tax asset of $42.6 million. 


The Legacy Effect of Credit Unions

I’m 78 years old.  Many  requests for donations to support various organizations from prior years now come with a special option: Become a legacy member.

These institutions cover the entire spectrum of public and civic service: hospitals, colleges and universities, churches, choral groups, and local theaters.  The appeal here in D.C. even includes the many public museums, National Archives, Smithsonian institutions, Library of Congress et. al.  that are part of the Washington community.

A legacy commitment means that an individual will make a bequest to the organization in their will or via an estate planning vehicle such as a trust.   It is not an immediate contribution, but rather a commitment made upon passing to support an endowment-like fund for the organization’s continued operations.

These legacy commitments are shown separately in donor listings to recognize this future intention.  Last Sunday was Legacy Sunday at our local church.  The bulletin insert asked Are You a Member of CCPC’s Legacy Society, listed the names of both living and deceased members who had made a commitment along with statements of support by individuals such as:

“I pledge every year.  None of us know when we will pass away, but I feel like this is a last commitment to the church.  Think of it as my last pledge.”

Credit Unions’ Legacy Commitment

A credit union recently sent me their founding story from 74 years ago.  It reads:

On April 29, 1949 ten tire factory floor workers set their names together in a bond of common trust that lives today as the cornerstone of the credit union.  

Long on hope, but short on cash, the credit union charter members carried a few dollars around between work shifts in a lunch box distributing $5 and $10 loans for the small essentials of life.

On a factory floor or at a cafeteria table, in a quick exchange of papers and promises between shifts, the hushed request for a $10 loan for groceries, the nod of a head in answer, a review meeting after hours, a handshake-this was Local 310 Credit Union in action in the founders’ first days.

A plink of quarters in a metal lunch box carried from shift to shift sounded the word: here is a resource created by workers for workers, that feeds families, futures and trust.

That credit union still thrives today.   Those founders met not just current needs, but created a legacy that continues to serve members and communities generations later.

The Legacy Impact from a Lunchbox

Like all founders, these credit union incorporators created a perpetual legacy not just a financial intermediary for the present.  Today this credit union’s  board and members carry on the founders’ belief in serving their community through an organization “where they know your name.”

Some current members are the grandchildren of the first organizers.   Their legacy is to continue to “pay forward” what they inherited to their children’s children.

These members will soon celebrate their 74th Annual Meeting.  Almost 300 have signed up for the event with dinner. They are witnessing to the power of service, hope and trust that a cooperative brings to  members. Far beyond the current economic uncertainties or the latest fiscal year outcome.

These individuals both continue and increase the legacy they now celebrate, so the credit union can continue to be there for future members.

As stated in the credit union’s founding story:  we stand on the shoulders of legends who carried a crumpled dollar bills from lockers, to cafeteria, to work stations in a steel lunch box-symbol of a special bond between people who care about people.

That is a Living Legacy we should all want to support.  A unique benefit of cooperative design.



A Priest, a Barrio and a “Credit Union that Should Have Continued”

The story below is by a local El Paso reporter. It portrays a special credit union that served its community for four decades.  Its work mattered.

The coop system is more than current assets and member numbers. We are also the experiences and memories that we pass down.  This example raises the challenge today, who will remember our story?

The Forgotten Credit Union that Served Thousands of Unbanked El Pasoans

By Christian Bentancourt.  Published April 9, 2023 by El Paso Matters and  Next City


If you walk around El Paso’s Segundo Barrio neighborhood, it’s hard to avoid the legacy of the city’s beloved bicycle priest. Father Harold Joseph Rahm came to the city in 1952 and served as an assistant pastor at the historic Sacred Heart Church for 12 years.

In that short time, Rahm created a legacy that is still celebrated by residents: founding the Our Lady’s Youth Center to serve impoverished locals, creating outreach programs for low-income youth, working with gang members to clear their differences in the ring instead of the streets, riding his red bicycle around to reach community members in need.

Today, his efforts are memorialized in this Mexican and Mexican American barrio through several iconic murals, as well as a street that’s been named after him.

But one of Rahm’s most critical contributions to the neighborhood has been largely forgotten: Creating the Tepeyac Credit Union, a pioneering financial institution to serve Segundo Barrio’s unbanked residents and protect them from loan sharks.

A Forgotten Legacy

It’s a legacy that has largely been forgotten by El Pasoans. . . But through archival research and an interview with one of the credit union’s early board members, El Paso Matters and Next City have begun to unravel that history.

It’s a history that illustrates community-based financial institutions’ power to support unbanked and impoverished people – and shows how such economic initiatives were a core part of major movements for social justice in the city.

The historic neighborhood in which Rahm served was known as South El Paso until several pockets were designated as Segundo Barrio, Chihuahuita and Duranguito in the 1970s. Banks redlined the community, making it challenging for residents to obtain financial services.

“People needed loans, and the banks at that time discriminated against South El Paso,” local historian David Dorado Romo says. “There were redlining maps in the 1940s that deliberately neglected areas marked in red. Since people couldn’t qualify for any kind of loans, especially not for home improvement…the community had to create its own credit union.”

The 1961 Founding with a Chicano Cheerleader

In 1961, Father Rahm banded together with a group of local residents and activists to create the Tepeyac Credit Union. According to historian Romo, one of these collaborators was Abelardo “Lalo” Delgado, the prominent Chicano poet from El Paso, who served as one of the credit union’s first presidents.

“He was one of the people that would go throughout the community and let them know that these kinds of services were available,” says Romo. . .  “Lalo, he was a great activist and also a very well-known poet.”

Delgado, who died in 2004, is considered the “abuelito” (grandfather) of the Chicano literature movement, pioneering writing that reflected a commitment to social justice and illuminated Mexican American heritage and struggles.

“He was our cheerleader,” says Felipe Peralta, an early board member of Tepeyac.  Peralta had been a youth worker at the Our Lady Youth Center when he was invited to serve on the credit union’s board. “He was always motivating us to do more things.”

Father Rahm and Delgado collaborated at the Our Lady Youth Center. The center, created in 1953 and located at 515 S. Kansas, served as a home to programs for Segundo Barrio residents, including an employment center and the Tepeyac Credit Union.

“That was a place that generated a lot of social movement,” Romo says. “They had a lot of outreach projects for youths, they had the employment center — they would find jobs for people at Segundo Barrio — and they created the Tepeyac Credit Union. It was a religious, social work project in South El Paso.”

An Unusual Creation

Today, the notion of creating a credit union is unusual. In the past decade, only 25 credit unions have been chartered in the United States. . .Before 1970, it was common to see 500 or 600 new credit unions chartered every year.

Tepeyac only had two employees, according to former director Peralta: office manager Teresa Cordero and Mr. Flores, who was in charge of debt collection.“(Cordero) did a lot of work for the credit union,” Peralta says. “Mr. Flores, whenever he was around the neighborhood … you would not see anybody else because his job was to collect delinquent accounts. I can’t remember too many people defaulting on their loans.” Indeed, a 1971 El Paso Times article records that only 18 of 1,448 loans had gone uncollected.

“I remember even borrowing money for my second car,” Peralta says. “If I remember correctly, at one point, we had over a million dollars. It helped a lot of people to generate their credit. Once they establish credit with us, we will trust them with a little more money. It really helped a lot of people.”

 Making the News

A March 1961 newspaper article from the El Paso Herald-Post showed the Tepeyac Credit Union had potentially 30,000 members, between congregants in the parish at the Sacred Heart Catholic Church and employees and staff of Our Lady’s Youth Center.

“Much time, effort, and sacrifice went into the organization of this unique credit union,” the article reads. “Realizing the problems involved in setting up a credit union which serves a large low-income group, volunteer workers, El Paso Chapter of Credit Unions personnel and many others devoting themselves to the task of solving those problems.”

”Father Rahm and a man named Ed Morrisey raised interest amongst the potential members,” the El Paso Herald-Post article reads, “while others held workshops to explain the idea and principles of operation of a credit union.”

“Tepeyac Federal is considered a pioneer type credit union,” the news clipping says. “Prior to organization, its potential members had no access to credit union benefits and services. Experienced credit union workers now believe Tepeyac Federal Credit Union will not only succeed but will serve as a model … for the organization of similar credit unions elsewhere.”

The efforts of these activists helped create El Paso’s Chicano Movement for Mexican American civil rights, Romo explains: “They were serving the needs directly of the community that this local city government or state or federal governments were not meeting.”

“In 1972, when the La Raza Unida Party was organized, (Delgado) stood up and read his poetry to begin the whole conference.”

Building on a Legacy

In El Paso, the credit union built upon the legacy of Mexican American sociedades mutualistas. These mutual aid societies focused on economic cooperation and community service, flourishing from the 1890s onward.

“It worked a little bit like credit unions,” Romo says. “Whenever people had an emergency sickness in the family, definitely for funerals. They were almost like community insurance groups. There’s a long tradition that goes back to the late 19th century, here on the border of Mexican American communities looking out for each other.”

Information on key figures within the credit union is difficult to come by, but a few names stand out . . .Former director Peralta remembers John Falke – the credit union president in a 1967 . . . as a vital part of Tepeyac.“He was a veteran or involved in the military and did a lot of the groundwork. He would go out of his way to set up the whole thing.”

Another leader of Tepeyac was Henry Rayas, who served as president and is showcased in newspaper clippings from the early ‘60s . . .“He and his wife had 18 children,” Peralta recalls. “Once the children grew up and were a little bit more responsible, they would come and volunteer there.”

No Longer Operating

Today, the credit union is no longer operating. Tepeyac’s last statement of financial condition filed with the National Credit Union Administration was dated Dec. 31, 2003, showing $194,730 in total assets, 220 members and one part-time employee.

In December 2003, the Texas Credit Union Department received an application for Tepeyac to be absorbed into El Paso’s West Texas Credit Union, which had been chartered in 1964 to serve state employees in the area.

The state-chartered credit union “made a special effort to reach out to minority populations by offering a range of products that meet their particular needs,” according to a May 2002 hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. . .”These products including low-cost remittances back to Mexico, an affordable housing program and Individual Development Accounts, a form of savings account aimed at helping low-income individuals save toward assets and build long-term financial stability through matching funds.”

The CEO said that “credit unions like West Texas recognize that consumers and their members must give viable options to avoid the traps of predatory lenders. Credit unions have stepped up their efforts to combat predatory lenders in neighborhoods by offering affordable alternatives for both payday loans and mortgage loans.”

West Texas CU Liquidated

But after the credit union was “hammered by bad indirect loans,” per a Credit Union Times report, the National Credit Union Administration announced in 2009 that West Texas Credit Union had been liquidated “after determining the credit union was insolvent and [had] no prospects for restoring viable operations.”

San Antonio’s Security Service Federal Credit Union purchased the assets that year and assumed the member shares of West Texas, which had had $78 million in assets and was serving 25,000 members at that point.

“We Should Have Continued”

Peralta himself continues to be active in the community. . . “Everything that I have been fortunate to do, it has been because of El Segundo Barrio.”

After moving on from the credit union, he was involved with the Chicano movement. “My degree was in education. My goal was to teach at the public schools in South El Paso. But when I did my student teaching, I realized I was in over my head. Those kids were doing so badly that I knew that I couldn’t help them. So I went to try to help them with other stuff like housing.”

He looks back at Tepeyac’s board meetings, which also served as the credit union’s committee to approve loans, with nostalgia. “It was a really effective operation. It was one of the best things that we had going.”

“Now that I look back, it’s something that I feel we should have continued with.”

D. Michael Riley’s Observations on “Creative Destruction”

In response to last week’s post on the impact of mergers on the future of the cooperative system, this former NCUA senior executive sent the following comment.

Mike Riley, December 1984

“Creative destruction” is uncomfortable to see in print. But it existed before Adam Smith, Malthus, Marx. Keynes, Schumpeter, and others began to try to explain the economic drivers and motivations that shape our world.

Cultural changes seem to be the main driver today. The personal seems to have switched to the impersonal, i.e. give me what I want on my terms with not  much regard to others. Fast and low cost are the motivators. (disclaimer: I love Amazon.)

We have to deal with what we have.  I am concerned about sound credit unions merging.  When I was a new examiner, I had 30 -40 credit unions who were below $100,000 and none of the rest I had were over a million. And no, I did not start in 1934.

This was in the seventies. They were basically in small towns or in rural areas where there was a factory of some sort. As I visited them (most were happy to see me, albeit a regulator, to hear about the outside world), it was obvious that the Board and Committees were involved in the credit union. Their members and the Treasurer were most involved of all. They were making loans on washers, dryers, refrigerators. Most of their members had no real access to credit except at an exorbitant rate. No savings accounts available to the members.

The credit unions really cared about their members. I remember one credit union was trying to decide on whether to make used car loans. They wanted some advice from me.  About 8 months later I came back and before I could start the exam they wanted me to go out and look at this used car and meet the borrower.

They were so proud of this accomplishment. (As a good regulator, I did check to see if the loan was to a Board member or family member.)  It seemed to be a good loan. Not to get maudlin, but this shaped my views of what credit unions are. And fortunately, the larger credit unions were much the same.

After I moved on, I tried to keep track of these credit unions. Around 1990 I put together a list of where these credit union were. I couldn’t find a few; but a little other 20 had liquidated because the factory closed down or the key people left or retired. Another 30 or so had merged either voluntarily or involuntarily. About 6 were still alive and functioning. To be fair, at the same time the American economy was undergoing a major transformation and jobs and manufacturing were moving overseas.

Ongoing Mergers

This ongoing march continues. The merger of two sound credit unions without some legitimate reason doesn’t seem to be member oriented. I still think of the members of those small credit unions who received services such as buying a washer that no one else would do.

Bigger is not better if the member does not benefit.  How many of these mergers produce lower loan rates , higher dividends, or distinctly better products at a lower price? Carried to the extreme we will be left with 20 credit unions that are no different than large banks.

NCUA’s Role

Schumpeter opined “If someone wants to commit suicide, it is a good thing if a doctor is present.”

A Return of $250 for Each $1 Invested

I recently received the best return ever on an investment: $250 in value for each $1 sent.

Late last year I read about a 501 C3 nonprofit (RPI Medical Debt) that bought unpayable medical debt using  donations and then retiring all the acquired debt for consumers.  Several news articles gave details about churches and local governments using this method to help members of their communities.

A December 20, 2022 New York Times’ article Erasing Medical Debt described how the program had extended to major cities such as Chicago and Pittsburgh.  The story stated that 18% of Americans have medical debt turned over to a collection agency.

I decided to test the RPI Medical Debt’s concept.   Was the payoff “leverage” as great as claimed? The 100 to 1 debt abolishment standard sounded too good to be true.

I also wanted to learn how targeted the program could be as a potential initiative for credit unions. Credit unions are significant originators of consumer debt.  They know how past due delinquencies on a credit report can undermine anyone’s financial options.

Contacting RPI Medical Debt, I asked to purchase and cancel all debt from Jasper County IN, whose county seat is Rensselaer.   Our family lived there for over five years while I was in high school.  The town is primarily a farming community, neither wealthy nor poor, but one where the population today is the same as when we were there 60 years earlier.

The Debt Fulfillment Report

Based on my pledge commitment, RPI retired all the available outstanding delinquent medical debt for 423 residents of Jasper Country totaling $264,878.  They had no more access to debt available in the country right then, although more debt certainly exists.

However, with the funds remaining the non-;profit acquired debt from at least one resident in every Indiana county.   The total consumers helped were 2,291 with over $2.532 millions of their debt erased.

RPI had acquired the debt for less than a penny on the dollar.  The total accounts closed (not individuals served) was 4,396.  Of these 9.3% (409) were bought directly from hospitals.  The balance was from the secondary debt market.

Much of the debt (86%) was 5 to 10 years old– specifically 1,812 accounts with balances of $1.9 million.  Only 1.8% of the debt was less than five years;  1.2% of the debt had originated over 20 or more years earlier.

The average debt extinguished had a face value of $846. For me, an overwhelming proof of concept!  A financial “loaves and fishes” story.

The Consumer ‘s Experience

Consumers cannot apply to RPI for relief.  Rather the non-profit seeks to buy debt in the open market on behalf of funders who donate or make pledges to support their goal of abolishing medical debt for individuals and families burdened by the payments.

To qualify a “soft credit report” is run to determine each individual’s eligibility for relief.  Potential  portfolios are  prescreened by holders to identify those who qualify for  abolishment of debt.    A person must earn less than four times the local poverty level  (nationally an amount of  $111,000 for a family of four) or have debt that exceeds 5% of annual income determined by pulling a soft credit report.

With these qualifications, the debt is excluded from income and not subject to IRS taxation.  The transaction is considered an act of charity by donors who support RIP’s mission.

Each consumer is sent a letter announcing the relief.  The total debt abolished, number of accounts and  creditor are identified.

The “good news” letter says there are no strings attached and  encloses a  page of FAQs  to answer  questions.   Recipients may, but are not required, to share their story about what this relief means to their circumstances.

The RIP Organization: People helping People

This nonprofit was founded in 2014 with a threefold mission:

  • Initiate a high volume of debt relief to reduce financial and mental stress for individuals;
  • Offer health care providers a way to strengthen their communities;
  • Highlight the problems of medical debt to seek a more affordable and transparent health care system.

Since inception the firm has provided $8.5 billion of debt relief helping 5,493,000 individuals and families.

The Credit Union Opportunity

The immediate possibility is straight forward: strengthen members of their primary communities by offering to retire consumers medical debt. When fulfillment data are known, celebrate the relief impact.  Invite  consumers to learn more about another people-helping-people organization, the credit union.

Such an effort is a “win” on many levels:  for the consumer, the credit union, the community and even medical providers with outstanding debt.

If interested  contact RIP Medical Debt and make a pledge for a test project.    I would be glad to share my contact and the reports and information I received.  My project was completed in under 45 days from initial contact  to finish.

Credit Unions Ringside

As vital consumer lenders credit unions are at ringside knowing the debt burdens members carry.

Three days ago a Washington Post article reported the story of a 72year old still struggling to pay off his $5,000 student debt from the 1970’s.  This is just one area where a similar approach for  relief may be prudent and desirable.  An example from the article reported:

Years of administrative failures and poorly designed programs have denied many borrowers an off-ramp from a perpetual cycle of debt.

There are nearly 47,000 people like Hamilton who have been in repayment on their federal student loans for at least 40 years, according to data obtained from the Education Department. . . About 82 percent of them are in default on their loans, meaning they haven’t made a voluntary payment in at least 270 days. . . 

The Supreme Court will shortly hear a challenge to the Biden administration’s efforts to forgive up to $20,000 per borrower in federal student loans. The Court many not allow the initiative to proceed.

Why not design a program similar to RIP Medical Debt and approach the Department of Education about purchasing the loans with the intent of  extinguishing them?

Credit unions would  be helping resolve the financial and mental stress of longstanding student debt for eligible borrowers (to be defined).   Even at a penny or two on the dollar, the government would be receiving more versus 100% forgiveness.

The program could be targeted where relief is most needed.   It could happen fast.  A  “scholarship-in-reverse” plan  where college debt continues to burden individual’s lives.

Can the cooperative movement demonstrate their collaborative entrepreneurial capacity and address a critical public need?

Two final data points from the Post article on student debt:

From the time student loan borrowers’ first loans enter repayment, the median length of time it takes to pay in full is 15½ years. .  . Federal student loans are discharged upon death.  

Must individuals wait till death for common sense relief?




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.


A CEO’s Outlook at mid-October

On a recent trip I talked with a CEO to find out how the credit union was responding to four events:  Covid, interest rate hikes, liquidity and the regulatory environment.  Here are my notes.

On Covid

CU still on hybrid work model.  Employer sponsor went all remote, but is now back in person, with little remote.  The community around the head office, especially retail shops, became a ghost town.  Kept all branches open, but  back office staff is still mostly remote.

Expect hybrid work to continue. Commute for head office is a minimum of 30-60 minutes. Labor market extremely tight especially for retail.

Have re-evaluated every customer facing position including  salaries, variable incentives, paid lunches and increased job tiers.

Interest Rates

The 30-year fixed rate mortgage is now at 7.5%.  Member interest has evaporated and don’t see it coming back until late 2023.  Increase in second mortgage demand.

Member spending is still strong and credit card volume has surpassed pre-pandemic levels.  Will recession hurt consumer spending?   Labor market great for employee, but creates inequities with current staff.

Biggest concern is inflation’s impact on costs and operating expense structure.   Large increases in vendor contracts which have the ability to pass through costs based on  a CPI index.   In some cases this will be 8.5% to as high as 15%.  Fortunately, we have caps in our contracts but many credit unions do not.

We are a unionized shop with approximately 70% of employees covered under a labor contract.  Sponsor negotiates contract and we will have to see what happens to those costs.


Have difficulty selling to secondary market.  Rates are extremely volatile day to day.  Our mortgage pipeline is down 60%.  Refinancing has all but stopped.

In ’20 and ’21 had share growth of 20% and 13%.  Money stayed with us.  This year members feel it’s time to spend.  Grown only 2% in shares so far, but may end up flat at the end of the year.

Even though originations are lower, loans are staying on the balance sheet because there is no refinancing.

Paying up for CD’s:  11 month at 3.25% and 15 month at 3.5% with a minimum of $5,000.

Actively monitoring our wholesale funding sources.  FHLB is about 100 basis points more expensive than CD’s.  Also have brokered CD’s with SimpliCD.

So far this year ROA is at 80 basis points down from 92 bps in 2021.   But for our 28 state peers over $500 million, the average is closer to 50 basis points.

Our top operational priority will  be managing expenses.

Regulatory Environment

State chartered.  All exams remote.  The beginning of the year I was really concerned about the NEV test that would put us in the extreme risk category.  But they have backed off with just a “high” rating.

Definitely a different level of NEV risk now and more pressure on liquidity.

Looking past current events there are two items.   Should we move beyond our sponsor’s brand and FOM to open up markets for further growth?   We have several special loan programs, credit card  and provide financial literacy events.  Sponsor brand is ours as well. So not a simple issue.

Secondly, we have always been a state charter; would a federal charter be an option for the future?

However our biggest challenge going forward is to control operating costs.


NEXT CITY-A Site Worth a Visit

One of the traditional advantages of credit unions is their local knowledge.   This includes members’ circumstances, critical business trends in the area and continuing reinvestment to improve collective and individual opportunity.

As credit unions expand their market aspirations and growth ambitions, knowledge of and commitments to local communities can wane.  The local knowledge and the resulting advantage of  loyalty and member trust can be forfeited.

Next City  is a nonprofit news organization that believes journalists have the power to amplify solutions and spread workable ideas from one city locale to the next.

It features actual projects.   Case studies are the core of its reporting.   It publishes an almost daily blog.

Here is a portion of the October 19 email update  featuring mutual financial firms.  It asks a critical strategic question about credit unions.

While reporting a few years ago, I came across this startling fact: In 1986, the number of community banks across the country peaked at 15,717, but today there are fewer than 4,500.

Now I can’t remember the last time I went a whole day without thinking about it. I vaguely recall, as I’m sure many others do, the wave of bank mergers that really took the country by storm in the 1990s.

Maybe some of those mergers made sense, given changes in technology and the world. But the rising tide of mergers went along with a drought in the formation of new banks and credit unions.

I still don’t think we’ve fully processed what this shift in the banking system has meant for our cities and communities.

Even today I don’t think we have a full picture of what was once possible, why it’s no longer possible, and maybe why we should make it possible again. I hope today’s story helps make that picture more complete, if not more clear.

Banks With No Shareholders? The Curious Case Of Mutual Banks

Ponce Bank, founded in 1960 in the Bronx and currently New York’s only Latino community bank, shows the possibilities of lending as a mutual bank.


Shouldn’t credit unions be in this reporting?

On the Fire Line-Again

Seeing the flames on the news ravaging the New Mexico countryside and park forests  is an unusual event for this scale of catastrophe. Sudden and destructive;  no prior notice.

This brief update yesterday is from Denise Wymore, a coop evangelist:

“It’s been over a decade since New Mexico has experienced a major wildfire.

In June of 2011, a wildfire that would consume over 155,000 acres in New Mexico erupted.  The Las Conchas Fire began around 1pm on June 26, when a gust of wind blew a 75 foot tall aspen into a power line. From that ridge top began the largest wildfire ever in New Mexico. During the first 14 hours, the fire raced eastward, consuming more than 43,000 acres (an acre per second) of forest and destroying dozens of homes.

Today a disaster of similar scope is occurring. The Calf Canyon and Hermit’s Peak fires have combined – burning over 60,000 acres in Northern New Mexico. Today it is only 12% contained with 817 personnel. The cause is unknown at this time.

The three employees of Rincones Presbyterian Credit Union, $5.45 million in assets providing financial services to almost 300 members, in and around Chacon, New Mexico had to evacuate its sole branch location yesterday.

Guadalupe Credit Union, founded in 1948 by Father Ed McCarthy to serve the parishioners of Guadalupe Church in Santa Fe, NM stepped up. They offered space for the staff of Rincones Presbyterian in their Taos and Las Vegas, NM locations.

Remembering a Prior Emergency

This isn’t the first time credit unions in New Mexico have helped each other during wildfires. The  Las Conchas Fire in 2011 caused the entire town of Los Alamos to evacuate for a week.

The Los Alamos School Employees Credit Union was able to “keep their doors open” with the help of Del Norte Credit Union in Santa Fe. Del Norte (DNCU) served the Los Alamos National Laboratory Employees. Matt Schmidt, Los Alamos School Employees CU CEO remembers his relocation at that time:

Del Norte provided a conference room off the main lobby to setup our servers, computers and printers.  Kim Currie with DNCU met me after hours to open the branch doors and help unload our office equipment. My dog, also an evacuee, watched from the truck.   That moment personified the meaning of “credit union movement.” I felt supported and cared for in a time when the future was uncertain.”

To assist  credit unions like Rincones maintain member service, contact Denise Wymore, Marketing Manger, Qcash Financial at 503-805-4424, or





A Person for the Ages

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

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

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

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

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

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

Here is the CU Today story, used with permission:

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

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

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

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

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

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

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

Unique & Inspiring

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

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

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

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

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

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

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

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

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

The Ultimate Compliment

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

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