Category: Local Effect

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Credit Unions and Community Impact Lending: A Gold Mine

For decades Vancity Credit Union has been a leading innovation of cooperatives in Canada. US credit unions have traveled north of the border to visit this creative center of credit union evolution.

Today, Vancity is Canada’s largest community credit union, with $27.4 billion in assets plus assets under administration, more than 534,000 member-owners and 59 branches in Metro Vancouver, the Fraser Valley, Victoria, Squamish and Alert Bay.

As one element of its strategic plan, the credit union developed the concept of “impact lending and investing.”

Vancity also provides stories to illustrate how these concepts apply in both traditional and non-traditional lending programs.

The Need and a US Example

A number of credit unions have also explored this “impact” approach for their communities. This focus has become more critical as companies of all sizes are finding it harder to get loans. In a Pepperdine/Dunn & Bradstreet survey only 28% of small business reported success in getting bank loans during the September quarter, down from 32% in the second quarter.

California Coast Credit Union has tried to increase its community impact in several ways, with small business lending a more recent area for focus.

Robert Disotell, Chief Lending Officer, sent me a case study of how this opportunity is being implemented:

The business owners (husband and wife) had been individual members for many years. They decided to leave their jobs and form a company that leveraged their many years of experience as employees of other companies. They opened several business accounts with CalCoast, but no loan products since they didn’t have an immediate need. And we did not offer business loans or lines of credit at that time.

 Fast forward 18 months. The members happened to mention to one of our tellers that they may need an equipment loan. Good timing, since we had just rolled out our equipment term loan and line of credit products. The teller contacted our Commercial Services Officer and he in turn set up a meeting with the members. He and I met with them to find out more about their business.

I should mention at this point we were somewhat skeptical. The company was less than two years old, they were a contractor, and most of their work was through the government. All high risk red flags. But we took the time to meet at their facility, and we were impressed. Here is what we found:

  • They had excellent revenue growth their first full year of operation
  • Their expenses were extremely well-managed
  • They had grown with no debt, completely unleveraged (except for small trade balances)
  • They had accumulated significant cash balances in their business accounts (on a daily average basis)
  • Their Accounts Receivable and Accounts Payable were in great shape and well-managed
  • They managed to do all this without a line of credit. This is almost unheard of for a contractor, where cash cycles tend to be longer than other businesses.

We felt their story was compelling enough to go forward and provide them with an equipment loan ( a basic five year amortizing loan) and a one year line of credit at Prime +2%. They still haven’t used the line of credit, but they said they believe they will soon because revenues are on track to almost triple this year!

From a community impact standpoint, the additional equipment has given them the ability to bid on larger, more profitable jobs. It also meant hiring additional employees to form a crew to operate the machinery. So certainly helpful for the local economy. Also, this is a woman and minority-owned (Hispanic) company.

The lesson is this. There are so many opportunities to work with your local businesses. They are being abandoned by not only the big banks, but also smaller regional and community banks. This is a gold mine for CUs. Take the time to learn their business. Understand and assess their character. Ask probing questions. Be one of their key partnerships. Learning and understanding how your local businesses operate – it is extremely fun and rewarding (and profitable!).

 Robert Disotell | Chief Lending Officer

California Coast Credit Union | 858.636.4282 | calcoastcu.org

 

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Doing What’s Right for Our Members

An earlier blog I wrote (August 1) discussed the harm done to local communities and members when sound, well run credit unions are merged into firms outside the traditional community or market areas being served.

The poster child for this concern was the announced merger between two credit unions over 1,200 mile apart:  Infinity in Westbrook, Maine, and Vibrant in Moline, Illinois.

On September 24, the merging credit union Infinity FCU reported that the deal was off, stating in part:

“The merger process brought some important differences to light and it became evident that the integration was simply not a good fit. The talks ended amicably, with both sides agreeing to work as collaborators rather than partners going forward. Infinity FCU continues to be a strong and financially sound organization and we are committed to achieving our vision for the future of doing what’s right for our members, our communities, and our employees.”

Congratulations to the CEO Elizabeth Hayes and the Infinity Board for this change of direction. It is hard to reverse course when an initiative is publicly announced. As noted above “doing what’s right for our members” is always a fail safe policy touchstone.

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The Job Outlook for US Manufacturing – the GM Strike

In no other sector of the “post-war” economy, has the impact of automation, robotics and AI been more important than manufacturing. This is one of the factors underlying the current GM strike. Not only are jobs being lost to automation and outsourcing, the demand for more simply-assembled electronic vehicles may further reduce the need for skilled auto workers.

Real manufacturing output has grown consistently through greater productivity while total employment in this sector peaked in the late 1970s. This long term trend (1947-2014) is shown in this graph by economics professor Alan Gin:

More Jobs Being Created

Employment keeps expanding, but the allocation of jobs between sectors is changing. The bureau of labor statistics publishes an annual ten-year forecast of job growth by sector. Its latest projection https://www.bls.gov/emp/ is as follows:

Implications

The implications for credit unions serving communities or SEGs are many. The fastest growing job segments tend to be lower paying as indicated by May 2018 salaries.

Two of the fastest growing sectors are driven by the response to climate change and energy production. Higher paying jobs would appear to require more college than lower paying ones. Both wholesale and retail trades show shrinking levels of employment.

The manufacturing sector is the one industry with the highest rate of projected job decline.

Credit unions have traditionally done a good job of knowing much about their members. However, as more credit unions seek ways to have a positive impact and influence the economic direction of the communities they serve, monitoring local job trends will be increasingly critical when making loans and future infrastructure investments.

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A Credit Union Member Takes a Stand After a $40 Million Loss

In an 18-page complaint filed August 7, Victor Webb filed suit against the board and supervisory committee of the failed CBS Employees FCU seeking over $40 million in recoveries for members.

According to press reports the loss was first discovered on March 6, by an employee who raised questions about a $35,000 check the CEO, Rostohar, had made out to himself.

NCUA’s audit as of February 28, 2019 said the loss could be as high as $40.5 million for an embezzlement scheme that Rostohar admitted carrying out over two decades. In the credit union’s last call report as of December 31, 2018, it reported $21 million in assets, $2.6 million in capital and 2,798 members.

A Member Acts

The federal credit union was chartered in 1961 to serve CBS employees and related companies. In the complaint Webb stated he joined the credit union in 1970 while a CBS employee. He remained a member until the credit union was liquidated in March, although he retired from CBS in 2014.

His suit names the board and supervisory committee members at the time of liquidation and prior members who served in similar capacities during the two decades of defalcations.

As a class action, Webb seeks damages of $40 million on behalf of all members, by stating that the benefits of membership were devalued by this amount which should have been available so members could benefit from lower fees and loan rates or higher dividends—that is the lost benefits of credit union ownership.

“A Fiduciary Relationship”

The core argument for suing the Board and supervisory committee members is summarized as follows:

“By reason of Individual Defendants’ positions with CBS Employees (FCU) as members of the Board of Directors, they are or were, at all times herein relevant, in a fiduciary relationship with Plaintiff and other CBS Employees (FCU) members and owe them a duty of highest good faith, fair dealing, loyalty, as well as a duty to maximize member value.” (Page 3)

The fiduciary responsibility of directors and committee members is well documented in NCUA regulations and letters, but rarely is their conduct formally challenged by a member. But this is a case of extraordinary loss equal to almost 10% of the last reported assets, or $2 million per year, for over two decades. Both the amount and length suggest a complete breakdown in both internal and external, regulatory oversight.

How Could This Happen?

This suit focusing on the fiduciary duties of the Board and Supervisory committee could be a very important milestone in cooperative governance and oversight.

How NCUA’s reported audited shortfall of $40.5 million in a $21.3 million asset size credit union could occur is hard to fathom.

The credit union’s December 2018 call report shows $18.4 million in shares for 2,798 members, resulting in an average share balance of $6,576. The credit union’s assets consisted of $14.7 million of investments and $6.1 million in loans with a reported delinquency of only 0.33%.

The credit union’s $18.4 million in member shares would seem to be more than adequately covered by the $21.2 million (with $2.6 million net worth) in easily verifiable assets if a liquidation were ever necessary.

Internal processes to monitor the credit union’s management are mandated in both bylaws and by rule and reg.

Every federal credit union is required to complete an annual audit under the auspices of its Supervisory Committee. Such an audit, whether internally conducted or outsourced, would entail a verification of member accounts, selected confirmations of investments and loans, and a review of internal controls. The results are reported to the Board.

The Regulatory Review

Additionally, NCUA has conducted annual audits of every FCU since the 2008-09 financial crisis. This review would review the credit union’s own supervisory committee’s audits, including member confirmations, plus a complete examination of investments and loans. In addition, the examiner would review all settlement accounts against the latest bank statements to ensure up to date postings and that the credit union’s general ledger is in agreement with external financial confirmations.

If the assets reported by the credit union are correctly reported, then that would mean the total loss caused by the CEO’s fraudulent activities would be the $40.5 million shortfall plus the $2.6 million in net worth for a total of $43.1 million.

NCUA’s obligation to member shareholders is to pay up to the $250,000 per account insured limit. A $43.1 million payment on top of the $18 million in reported shares would mean that over 6,500 more accounts (using the average share balance from reported members) would have been kept in a second set of off-the-book records.

There are only two explanations for NCUA’s reporting a $40.5 million loss after its February 28,2019 audit:

  1. The reported asset values were widely inaccurate, which raises the question, what kind of annual regulatory examination was done; or
  2. The assets are properly recorded, which means that from $40.5-$43.1 in off balance sheet shares were being managed by the corrupt CEO.

If the second option is the explanation, this suggests the CEO was running a shadow credit union with almost three times the number of members and shares as the reporting credit union. How could this activity be hidden from employees, the directors or supervisory committee, since these members must have received statements and conducted business transactions regularly with the credit union?

If the reported assets are phony, which would account for half of the loss, the only question is what type of annual exam had NCUA conducted over the two decades that this theft occurred?

Time for a Real Accounting

I salute member Webb for standing up and asking that responsible parties be held to account. This is more than sending the former CEO to jail and then covering the tens of millions shortfall out of NCUA’s “rainy day insurance fund.”

All the public evidence suggests that the problems are much more extensive than a corrupt CEO and a hoodwinked and a deleterious board and supervisory committee. The regulatory oversight that is supposed to assure the industry’s safety and soundness through onsite examinations would appear to have been negligent as well.

When a member takes a stand against ineptness, self-serving conduct and dereliction of duty, the whole democratic movement will benefit. Cooperative governance requires that fiduciary duty have real meaning, not just good intentions. Hopefully this suit will bring out the full story and create a much-needed precedent along with a correction of examination shortfalls.

I salute Victor Webb and say with him, “Enough is Enough.” Stop paying out losses, let’s correct the problems letting these occur.

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When Credit Unions Aligned with Communities of Faith for Social Progress

Catholic Energies is a non-profit, five-person organization that helps churches and schools convert to solar energy. Based in the District, the key capability they offer is collaboration with church owned properties, solar companies and investors seeking solar tax credits

In D.C. the group worked with the Catholic Charities of the Archdiocese of Washington to build a solar array on a church owned field that will light 260 homes by feeding into the local power grid. The energy credits will offset the costs of electricity across twelve of the charities’ properties in the district.

Catholic Energies is a subgroup of the non-profit Catholic Climate Covenant. This national initiative was launched to educate and engage US Catholics in caring for the environment. The sub group, Catholic Energies, was also responding to Pope Francis’ release in 2015 of Laudate Si, which argued for partnerships between religion and science to respond to climate change.

A Credit Union Social Action Precedent

The Catholic church’s involvement in issues of social progress embraced the credit union movement in the past. According to an article in the Grand Rapids Press from December 20, 1926, the National Catholic Welfare Conference intends to establish “a nationwide system of credit unions to lend money to wage earners. These short term loans will be extended to the 36 states with credit union laws.”

The article described the “parish credit union as a cooperative savings and loan society. Depositors buy shares at the par value, usually $5, and get a 6% a year interest. The capital thus obtained is loaned out at 8%.”

To understand the importance of this organizational effort, one need scan an alphabetical listing in any state in the following 50 years to see all the credit unions starting with “St.” followed by the parish name. In Massachusetts today there are still nine credit unions listed by parish names.

And like solar energy today, this effort had formal church support. Fr. Otto Thiel wrote an article in the December 1941 issue of Franciscan Studies explaining the church’s involvement.

It begins: “The religious and economic are the two predominant influences which have moulded man’s character and the world’s history. Religious motives are more intense than economic, but their direct actions seldom extends over so large a part of life (as do the economic ones).” After surveying the history of pawnbrokers or usurers to meet the economic needs of people of small means, he continues, “a way was discovered by which honest and responsible working people could supply themselves credit from within their own ranks. That discovery properly marked the origins of the movement which has produced the credit union of our day. . . It is neither a purely charitable nor a mere business organization, but one of self-help or co-operation. Its origins might be traced back to the Mons Pietatis of the later Middle ages, an organization to provide credit facilities for poor borrowers.”

More Than Catholics

Even prior to this national effort, other faiths promoted the credit union solution. In the January 1920 Annals of the American Academy of Political and Social Science, an article described multiple efforts to create new thrift organizations to serve the needs of both rural and urban borrowers.

As reported in the article The New American Thrift Loan: “According to the latest report of the Jewish Agricultural and Industrial Aid Society, several of the rural credit unions in New York have been obliged to wind up their affairs. In place of the eight credit unions among farmers reported in 1916, only three now exist. . . and no mention is made regarding the present status of credit unions among Jewish farmers in the states of Connecticut and Massachusetts. “

A Current Day Example

In June I met Greg Truex, the manager of the two year old, $16 million ELCA FCU. It is remarkably successful as a new startup relying on a largely virtual operating model. The credit union is sponsored by Evangelical Lutheran Church in America. The mission statement : God’s Work. Our Hands.

To succeed credit unions need more than capital. The hundreds if not thousands of credit unions sponsored by religious organizations, show the importance of both purpose and collaboration. And that heritage is still an invaluable coop advantage in today’s ever more crowded financial arena.

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Why Closing a Newspaper is Like Merging a Healthy Credit Union

This July 7 article in the Washington Post described the impact on the community of the decision to close Youngstown, Ohio’s only local newspaper, the Vindicator, after 150 years of operations.

Some reactions and consequences described in the article were the following:

“Mere moments after the start of the hastily called community forum, the tears started to flow.

“Gobsmacked,” was how one Youngstown reader described her horrified reaction to the surprise announcement,

“The Vindy connects us all. A community without a strong, central newspaper is missing leadership — and a big part of its identity.”

With the Vindicator’s closing, Youngstown will become an unfortunate first: a good-size city with no daily newspaper of its own.

For Mark Brown, the Vindicator’s general manger, the loss is personal, devastating.

His family has owned and run the paper for 132 years. His mother, Betty Brown Jagnow, the publisher who is well into her 80s, still comes into the office regularly and has called the decision “gut-wrenching.”

“It’s all we’ve ever known and all we ever wanted to do,”

The Vindicator’s 44-member newsroom staff digs deep into local issues, and has won plenty of state awards for general excellence, for reporting and commentary, and for its website, which has no paywall.

“I’m scared for the community” the paper quoted Mark Brown.

What this means, said Joel Kaplan, associate dean of Syracuse University’s Newhouse School, “is that no one in that community will be covering, on a regular basis, school board meetings, city council meetings, the cops and the courts. Democracy, as we know it, is about to die in Youngstown.”

“Scared for the Community”

The facts of the Vindy’s demise are not unusual. Decades of declining circulation, $23 million in accumulated financial losses, and no local alternatives for the community to turn to.

Whenever a locally-focused, community-based organization is closed whether by merger, failure or sell out, the community’s future is undermined. Some may respond that there are multiple mass media and social news sources to keep the community informed. But that misses the point of local ownership and focus. Local ownership matters: leadership is responsible to local priorities, not a faraway corporate business model. Local employees bring expertise and commitment to success; a legacy of  pride, community well-being and knowledge is created and sustained.

While newspapers and credit unions have very different business models, the continued merging of strong, well-managed and long-serving credit unions into much larger organizations often hundreds of miles away or even out of state, sacrifices one of the most important leadership and economic factors underwriting the viability of local towns, subdivisions and even small cities.

The myth of “expanded services” used to justify management’s surrender of a charter and assets created over generations undermines cooperative principles critical to credit unions remaining the alternative to for profit financial firms. These “voluntary” mergers violate the fiduciary, democratic foundation of cooperative governance. They are little more than commercial transactions benefitting not members, but individual and or corporate ambitions.

Like the loss of a town newspaper, every time I read about the merger of well run, established and successful credit unions, I too become scared for the community: in this case the cooperative option.

P.s. added 8/2/19

Today’s press announced a merger of two credit unions 1,200 miles apart with no historical sponsor or other connection. The $754 million Vibrant Credit Union, chartered in 1935 to serve the employees of John Deere is located in Moline, IL. Infinity FCU ($333 million) is located in Westbrook, ME, and was founded in 1921 to serve telephone workers. Why would members in Maine want to use outlets or services in Illinois? How does having an East Coast hub in Maine benefit members in Illinois? The reasons for the combination raise the question: whose interests are being served by combining two well run, strong community charters with no common heritage or prior relationship, and literally time zones apart? This disclosure should make interesting reading for the members of Infinity who must vote to give up their 100 years of local control of policy, resources, and leadership in the state of Maine.

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An Example for Today’s Credit Union Pioneers

In 1925 Michigan passed its first credit union act. A November 21, 1925 brief article in the Grand Rapids Press reported on efforts to implement this new authority with the following lead:

Roy F. Bergengren, Boston Secretary of the Credit Union National Extension Bureau conferred with several business men and Association of Commerce officials Saturday regarding organization of credit unions in Grand Rapids.

The article then describes what a credit union is and its purpose: “to help members and give them good credit standing.”

The final paragraph records a powerful example of the cooperative’s appeal Bergengren used in his talk. “15 telephone girls in Boston organized a credit union with $4.50 in total funds. The credit union now has 13,000 members and $280,000 in total funds.”

From Small Seeds

While learning the immediate reactions to his pioneering proselytizing would require more research, today Michigan has 225 credit unions headquartered in the state, serving over 5 million members and managing $67 billion in assets. Credit unions hold 20% of all financial deposits making Michigan one of the most heavily credit-unionized states in the country.

From a small seed mighty results have emerged. How might Bergengren react to the fruits of his labors almost a century later? With satisfaction? Or perhaps with questions such as:

  • Where are today’s credit union pioneers?
  • What seeds are they planting?
  • What partnerships are they building in their communities?
  • How have the members benefited from the growth of credit unions?

My sense is that he would be asking questions knowing that the answers will condition the future of the credit union movement in Michigan. While brief, the article illustrates several timeless factors necessary for today’s cooperative entrepreneurs who seek to further the work of the original Credit Union National Extension Bureau.