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What Credit Unions Can Learn From BND

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

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

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

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

A Very Successful Year

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

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

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

A Bipartisan Embrace

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

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

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

A Lesson for Coops?

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

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

More History of BND

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

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

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

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

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

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

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

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

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

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

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

Crypto sales and Partner Brokers

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

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

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

Cannabis Sales

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

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

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

Gambling and Sports Betting

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

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

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

The full PSCU report is available here. 

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

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

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

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

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

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

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

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

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

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

The Need for Discussion: Never Value Neutral

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

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

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

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

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

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

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

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

Perhaps it is true that GDP growth is always desirable.

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

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

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

 

 

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When There Were Two National Credit Union Trade Associations

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

CUNA’s Letter on NCUA Leadership

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

Dear Mr. President:

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

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

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

Signed by the entire executive committee including Herb Wegner.

NAFCU Responds

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

Dear Mr. President:

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

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

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

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

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

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

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

The Credit Union System’s Challenge Today

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

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

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

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

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

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

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

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

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One Credit Union’s Simple Unique Act in 2023

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

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

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

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

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

A “No-Brainer”

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

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

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

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

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

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

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

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

 

 

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Do Americans Want or Need More Credit Union Charters?

The answer to the first question is easy.  On May 24, 2024 NCUA replied to Denise Wymore’s FOIA request for the number of new charters in any phase of the application process.

The response: “In June of last year it was reported there were 51. . .(Now) There are a total of 63 applications.”

Where is the Need?

NCUA did not provide details of the chartering efforts. Two broad examples of innovation by those looking for alternatives to the for-profit banking system have been covered in the genral press.

One example is the growing interest in “public” banks chartered by cities, counties or states to manage their funds and to support investments in local housing and other priority projects.  This is an example of an Oakland, CA based effort.

The second are those groups and/or communities not being served by existing financial options.

A long description of this demand is reported in this recent Washington Post analysis, Community crowdfunding is built on trust for immigrants.  The article gives two organic financial creations.  One is the Korean self-funding and self-help practice called Keh.  First developed in Korea following the Korean war, the financial practice was adopted in America by immigrants who were limited in the amount of funds they could take from to their new homes in this country.

The Post has followed this form of financing for the greater DC area over several decades.  In an article in 1990, it reported the Korean Association of Greater Washington estimated 80% of Korean American households belong to at least one keh.  It is the source of financing for local grocery and convenience stories, and more recently the ubiquitous food trucks serving the community.

The article states that Korean-American banks began to meet some of these local business finance needs in the late 1990’s with traditional SBA and other finance options.  “But the tradition of community-based microfinance has evolved and flourished in the years since-just as the economy has been reshaped by fresh waves of newcomers.”

“Unlike a traditional investment, the keh lenders earn no interest and no equity and have no say in the business. . .Instead, it is best understood as a trust-based financial support network that’s held together by concern over reputation.”  These efforts sound much like the original credit union model.

Financial Networks in the Latino Communities

The other example in the Post article is the creation of tandas among the Mexican community on both sides of the border.  Like keh, the immigrant communities rely on mutual trust; “the last thing they want is to be ostracized by their own community.”

One organization that is addressing the variety of financial needs of the immigrant community and those left behind is the Mission Asset Fund in San Francisco.  It is a 501(c)(3) tax-exempt organization that in 2022 had revenue of $7.7 million.  Its Annual Report describes programs of micro finance, startup funding and training programs involving almost 20,000 individuals.

The Credit Union Challenge

There are multiple organic, people-centered financial solutions for individuals and communities which are not part of America’s financial mainstream, including the credit union system.   They serve those at the outer boundaries of financial experience who lack the history and resources demanded by traditional institutions.

Instead, they rely on an individual’s character and local community when extending financial services.  The solutions are diverse, experimental, dependent on good will and trust.

In theory the credit union charter in all its diversity and potential should be an ideal fit for these circumstances.  But for that to happen there is going to have to be a reawakening of purpose and priority for the cooperative community.   The charter interest and economic needs are there—but is anybody paying attention to these groups and their potential  as new startups?

 

 

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What the State of Credit Union System in 1944 Means Today

As the 80th Anniversary of the June 6, 1944 Allied landings at Normandy draws to a close, we listen with great interest to the living participants’ stories of that consequential event. They did their part. Now it is up to us that their examples of duty, service and honor be carried forward for freedom’s fight

One might also ask about the state of the credit union experiment at this time.  Are there any lessons relevant for today from four score years ago? What examples might inspire current cooperative leaders?

The first surprise is that there is a very comprehensive analysis on the cooperative system including details that are directly relevant for today’s priorities.   The source for this information is Bulletin #850, from the Department of Labor titled:  Activities of Credit Unions in 1944. 

This 16 page report contains historical tables, state and federal totals for numbers of credit unions, total assets and members, number of loans made and dollar amounts outstanding in each state and for national totals.  One table records the number of state and federal charters that are active from 1925 through 1944.  The cost of the report was just five cents.

Observations on 1944 Credit Union Trends

The impact of the war on credit union lending is central in this analysis:

The entry of the United States into the war was followed by a sharp decline in the credit union movement. Many associations were liquidated, membership fell off, and credit union loans showed a precipitous drop.

This was caused by a number of factors. Among them were the issuance by the Federal Reserve Board of Regulation W (limiting to 18 months—later to 12 months—the period of repayment of installment purchases or loans made for that purpose), the disappearance from the market of higher-priced consumer goods (automobiles, refrigerators, etc.) for which many credit union loans had previously been made, the restrictions on the use of building materials, the emphasis on repayment of debts and the inadvisability of incurring new obligations of that nature, and the increased wartime earnings of wage earners which resulted in a lessened need for credit.

However, some trends were looking better:

Reversing a trend that has been sharply downward since the beginning of the war, both the membership and business of credit unions showed an increase in 1944, although the number of associations was smaller than in 1943.

At the end of 1944 the number of associations on the register totaled 9,099, as compared with 10,373 in 1943. The 8,702 associations active and reporting for 1944 had 3,027,694 members and made loans aggregating $212,305,479. These represented increases, as compared with 1943, of 0.1 percent in members and 1.7 percent in loans.

Total assets which have continued to increase all through the war years, even while number of associations, membership, and business were declining, mounted to $397,929,814, or 12.0 percent above 1943.   

The Bulletin also provides a brief history of credit union chartering.  Here is one excerpt: 

. . .in 1934, therefore, a credit union act was passed by the Congress of the United States and the Credit Union Division was created in the Farm Credit Administration to oversee the carrying out of the law and render various services to the associations formed under it.

From that time onward, until checked by wartime conditions, the credit union movement expanded at an accelerated pace. Not only did the associations with Federal charters spring up and grow, but the older State-chartered movement also seemed to be stimulated to growth considerably faster than its previous pace. The rate of growth of the Federal credit unions, however, was consistently higher than that of the State-chartered associations, and by the end of 1944 the Federal credit unions accounted for 43.1 percent of the members, 36.9 percent of the loans made, and 36.3 percent of the total assets of the credit union movement.

The FDIC Supervises

In 1942 the federal Credit Union Division which was first placed under the Farm Credit Administration was transferred to the FDIC.  The FDIC administered the Federal Act but did not insure credit unions, only banks.

What makes the financial details in this report so remarkable is that the totals for the 9,099 credit unions were all maintained by hand.  Credit unions used only hand posted card ledgers and total tapes run on mechanical adding machines. There were no databases for quick comparisons, summaries and trends.  Given these conditions, the report’s historical tables and graphs are even more remarkable for their thoroughness and timeliness. (the Bulletin is dated October 16, 1945)

The Status of Negro Credit Unions

One of the most enlightening analysis is under a section called Experience of Federal Credit Unions.  Here are the details:

The Federal Credit Union Division of the Federal Deposit Insurance Corporation has made available to the Bureau of Labor Statistics certain information on Negro credit unions and on all liquidations of associations organized under the Federal Credit Union Act. Unfortunately, similar data are not available for the State associations.  

Negro credit unions 

By the end of 1944 a total of 91 credit unions had been organized, under the Federal Act, among Negroes. Of these, 74, or 81 percent, were in active operation at the end of the year, and the remainder were inoperative or had had their charters canceled. For the entire group of Federal credit unions 74 percent were active.  

The following tabulation compares the 72 Negro associations for which data were available with the whole group of 3,795 reporting Federal credit unions. As it indicates, the Negro associations, although smaller than the average for all Federal credit unions and less well financed, were holding their own very well and even excelled the showing of the whole group as regards bad loans that had to be written.

Liquidation Information

Information for 1,109 Federal credit unions that were discontinued during the period from June 26, 1934, through 1944 indicates that the liquidated associations were in the main small. Over a third had share capital amounting to less than $500, and 68 percent less than $2,000. Only 18 (1.6 percent) had capital amounting to $20,000 or more.

Of the 1,109 credit unions, 785 (71 percent) returned to the members all of the share capital they had invested and some paid back even more; altogether the members of this group of associations received back $164,955 (or an average of about $2.60 per member) more than they had put into the organization.

The members of the 234 associations that paid less than 100 cents per dollar of share capital sustained an aggregate loss of $20,889 (about $2 per member). Some 65 percent of this loss was accounted for by the associations with capital of $2,000 or less, and 97 percent by those with capital of $5,000 or less.  

Sixty-three percent of all cancellations, mergers, and revocations of charter made in the 9 ½ year period took place during the war years of 1942-44.

What This Report Reminds Today

This remarkably candid and thorough report concludes with two pages of updates on Developments in the Credit Union Movement in 1944.  This section describes changes in league and CUNA organization and in state chartering regulations.

In just a few pages one finds an important factual and analytical record of the emerging credit union system by 1944.   In wartime we rightly honor the contributions and sacrifices of all who serve.  How in moments of extreme challenge, ordinary people do extraordinary deeds.

But these same contributions occur on the home fronts, unheralded and frequently taken for granted by their successors.   This unique Bulletin is a valuable document about the early contributions of the founders of the credit union system.  It is their efforts and commitment, the seeds they planted, that created the foundation on which today’s credit unions built their success.

Ordinary people doing extraordinary things for their communities in the past, now and into the future.

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A Student-Organized Startup On the Credit Union Runway

University incubators supporting startups and often incentivized through innovation contests are found at many higher institutions.  The story of Emory University’s  The Hatchery Center for Innovation is being repeated across the country.

Called a sandbox for experimentation, here is how Emory’s role is described:

A sizable selling point of university-based incubators is the freedom for early-stage testing and experimentation. Before startups become startups, products must be designed, development methods must be established, team dynamics need to be organized, and workflows adjusted. University incubators provide a longer runway to build a startup before student entrepreneurs enter into a competitive market and grapple with life’s constraints post-graduation.

This February 24, 2024 article describes the fourteen Best University Incubator and Startup programs from the prior year.  The list is a Who’s Who of leading institutions. Students are looking for ways to implement the oldest of American dreams, starting one’s own business.

A Credit Union Startup on the Runway

As part of the 1984 CU-Expansion effort  celebrating the 50th Anniversary of the passage of the Federal Credit Union Act, NCUA supported the chartering of student run credit unions around the country.

The story is told in this post from 2021 which includes this introduction:

The New York Times in a lengthy 1986 article, Credit Unions Boom On Campus, opened with this brief history of student charters:

“The first student credit union was formed in 1975 at the University of Massachusetts. Students at the University of Maine formed one in 1978 and at the University of Connecticut in 1979. But it was not until 1983, when the National Credit Union Administration helped to organize its first conference for colleges, that today’s credit union movement began. Four were formed that year.”

The Winning Entry

Yesterday, students at Seattle University posted this announcement on LinkedIn of their first prize in the school’s business plan competition.  The listing of administration, faculty and student supporters is impressive.

We are honored to announce that Seattle University Credit Union Initiative received🌟1st place🌟in the Harriet Stephenson Business Plan Competition for the grand prize of $20,000. This award is a testament to our team’s dedication and exceptional hard work. Thank you to the Seattle University’s Innovation & Entrepreneurship Center for organizing such an incredible event!

The HSBPC was established by Dr. Harriet Stephenson (SU faculty member) in 1998. It was designed to help students and alumni in launching new business ventures, providing participants with the chance to enhance their Seattle University learning experience, gain feedback on ideas, develop networks, and expose their ideas to potential investors.

 We extend our deepest gratitude to the five esteemed judges:

Kathleen Baxley, Lindsey McGrew, MBA, John J. Ostlund, Dave Parker, and Peggy Smith, SCRP, SGMS-T (she/her), and to our coach Chris Medina.

As well as President Eduardo Penalver for allowing us to start this journey at Seattle U, Dean Joseph Phillips for giving us unwavering support in Albers, and to CMO Robin L. Meeks for your incredible guidance.

We’d like to recognize Cisco Malpartida Smith, our Chairman, who has been an invaluable mentor leading the team every step of the way.

And our team; Ana Giordano (CEO), Julian M. (COO), Ethan Sue (CIO), Emma Nguyen (Future CMO), Jonathan Tran (CFO), and Dora Becker (Acting CMO), for all their hard work, as well as the remaining cohort of student who have put incredible work into this initiative.

We also want to express our heartfelt thanks to our community and supporters who have believed in our vision and mission. This victory is not just ours but a shared success with all who have contributed to our journey.

As we look forward to the future, we remain committed to our mission of positively impacting our community and continuing to strive for excellence in all our endeavors.

We ask that you assist us in reaching our goals by Donating, Making a Social Impact Pledge, or if you’re a student, join the initiative!

Two examples of reactions to the announcement:

Emma Nguyen

Student at Seattle University | Passion for Artistic Creativity and Entrepreneurship

Still in disbelief of this accomplishment! So much hard work and dedication went into this accomplishment, and i could not be more thankful and proud of the entire team who contributed towards this milestone!! Excited to see what comes next for the Seattle University Credit Union Initiative

Cisco Malpartida Smith

Credit Union Executive | Adjunct Professor @ Seattle University

This is one of my proudest moments at Seattle University. Literally 20 years in the making. We are launching a new credit union! It’s getting exciting! 

Engaging the Next Generation of Coop Entrepreneurs

This and other examples such as the George Washington Credit Union Student Initiative suggest the interest and enthusiasm by students to chart their own financial course.

Shouldn’t the cooperative movement be taking advantage of this generation’s interest and enthusiasm?  It is not the size of the startup that matters, but the passion of the founders.  That is something from which we could all benefit.

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A Relevant, Insightful Economic & Industry Update

Callahan’s May Trendwatch with first quarter 2024 data opened with an economic update from Alloya Corporate Federal Credit Union.

This opening analysis was one of the most thorough, well documented presentations on macro economic issues, credit union trends and Alloya’s own recent financial experience I have seen.

Todd Adams, CEO and Andy Kohl, Chief Investment Officer were the presenters of over 20 slides.  They covered trends in consumer spending, interest rate volatility and future outlooks.  They showed how Alloya navigated the dramatic inflows and then liquidity shortfalls in 2022/2023.

Below I excerpt several slides to provide examples of their analysis.   The full Trendwatch slide deck from May 14 can be accessed from Callahans here.

A key macro economic trend

The mortgage fixed interest rate advantage

Lower income groups most affected by price increases

Alloya’s balance sheet flows 12/19 to 4/24

Alloya’s lending to members in 2022/2023

The outlook for short term rates.  A Fed Funds of 2.5%?

So that you don’t overlook the rest of the industry analysis, here is Callahan’s opening slide on credit union’s core balance sheet growth trends as of March 31, 2024 versus one year earlier.

 

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Crossing the Bar For Mortal Stakes

This 1889 poem, Crossing the Bar, by Alfred, Lord Tennyson has been quoted on many occasions in life’s passages:  graduations, changing vocations, marriage/divorce, and the obviousreference to life’s end.

I just attended my granddaughter’s college graduation at which a musical setting of the poem was sung.

(https://www.youtube.com/watch?v=H5FlS76eTVs)
Sunset and evening star,
      And one clear call for me!
And may there be no moaning of the bar,
      When I put out to sea,
   But such a tide as moving seems asleep,
      Too full for sound and foam,
When that which drew from out the boundless deep
      Turns again home.
   Twilight and evening bell,
      And after that the dark!
And may there be no sadness of farewell,
      When I embark;
   For tho’ from out our bourne of Time and Place
      The flood may bear me far,
I hope to see my Pilot face to face
      When I have crost the bar.

Student Observations on Crossing the Bar

The poem’s sentiment certainly matched the setting for those leaving the familiar shared college experiences to venture out on individual journeys. The two senior speakers spoke of this challenge when “putting out to sea.”

One asked: How do we locate ourselves in the big picture questions confronting society and hold ourselves accountable?

Another:  As we pursue our individual paths we underestimate the power of community; yet that is how we are able to emerge with the confidence to go forth. 

There was an aspiration in their words best captured in the final stanza of Robert Frost’s poem Two Tramps:

But yield who will to their separation,

My object in living is to unite

My avocation and my vocation

As my two eyes make one in sight.

Only where love and need are one,

And the work is play for mortal stakes,

Is the deed ever really done

For Heaven and the future’s sakes.

All of us will cross several metaphorical bars in our lifetimes. Often this arises from the never ending effort to find in Frost’s phrase work that is play for mortal stakes.
I believe that is why so many enjoy the credit union movement as a profession and doing good works serving members, “where love and need are one.”
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Three Observations on Sound Credit Union Mergers

Members Vote Against Merger

From the May 24th CUToday story:   In a rare development, members of Hoosier Hills Credit Union have rejected a merger with Centra Credit Union. The two credit unions had announced in January  their plan to combine to create a CU with more than $3 billion in assets. 

The credit unions said in a joint statement that “despite extensive communication from Hoosier Hills outlining the factual details of the merger, the vote was impacted by the circulation of misinformation.”

The credit unions did not say what that misinformation consisted of. The vote tally was not released.  

Why did members reject this merger? Here is a post on LinkIn by Hoosier Hills CEO Travis Markley, based on a Forbes article dated June 20, 2023 about the credit union.  The merger was announced six months later.

“Amazed and humbled to be a part of this organization and everything we do for our members, and so proud of the dedicated staff that make it possible!

“Hoosier Hills Credit Union is honored to be recognized by Forbes as one of the three Best-In-State Credit Unions in Indiana for 2023, joined by our friends at Interra Credit Union and FORUM Credit Union.

“This award, the result of an independent survey conducted by Statista, was based eighty percent on feedback from 31,000 US consumers, who rated their credit unions on criteria such as trust, branch and digital services, customer service, fee transparency, and financial advice. Twenty percent of the scoring was attributed to publicly available Google Reviews from the past three years.

“We are honored to serve our members, and appreciate this special recognition, which we could not have achieved without the dedication and character of our team at all levels,” states Travis Markley, CEO at Hoosier Hills. “Our knowledgeable and caring staff is committed to carrying out our company’s mission and continues to put the needs of our members and communities at the center of every decision we make and every action we take.”

This Merger Process Seems Suspect

Very soon after this positive external recognition, the merger process started.  The CEO would become the Chief Experience Officer of the new combined entity.

What is even more curious is that the merger proposal posted on NCUA’s website for comment says that Centra is merging “with and into” Hoosier Hills Credit Union, not the other way round as implied in the CUToday article. The Centra Chairperson, Jim Bickel signed the merger plan sent to members (whose?) on November 1, 2023 or five months after the Forbes “best” ranking for Hoosier Hills.

In this Centra notice to members there is an effective date of the merger of July 1, 2024. However, the credit union being merged is North Park, not Hoosier Hills.

This entire episode needs a good hard look by state and federal regulators as the documentation and explanations appear questionable.  There is reference to a detailed merger plan by Centra, but it is not included in the required posting even though the letter states it is enclosed with the Notice to Members.

This example reminds me of a recent post by credit union consultant and former OCC examiner Ancin Cooley.

Mergers are Feeling “Icky”

By Ancin Cooley

Is anyone else beginning to feel a little “icky” about the current merger frenzy in the credit union industry? Something about these transactions just doesn’t sit well in my spirit. . . what do credit union members get for their capital and assets when they merge?

Here’s an excerpt from a recent merger disclosure:

“Members will have access to more branches, a 24/7 call center, industry-leading online and mobile banking services, and will still receive the personal service they enjoy from the same employees they rely on every day.” 

This feels “icky” to me. The credit union I mention below is giving the acquiring credit union 7 million dollars in exchange for no board seats.

Would you give me your house in exchange for my cutting your grass?

The Game

And let me be clear: I do not think the individuals involved are bad people. The game is the game. If the cooperative movement is ever going to survive, it needs to be “guarded” by individuals who believe in its purpose. If your credit union or any cooperative has “unguarded” capital, someone will come and take it.

A Case Study

I’m reviewing the financials of a credit union set to merge as of May 1, 2024. The CEO, who has been there for over 20 years, inherited a credit union with over 16% in capital. By 2015, they ventured into indirect lending, and by 2019, it represented 60% of their total loan volume.

This credit union’s financial health started heavily declining two years ago. I’d be willing to bet that is right around when this CEO started looking for a merger partner. Indirect charge-offs were well over $600,000 last quarter. . . ending with a 7% capital ratio. This credit union was not lost due to technology, costs, or economies of scale. This was bad management and weak governance.

So, this person drives the credit union into the ground, receives a hefty retirement payout from the acquiring credit union, and retires happily. Ick… If you couldn’t earn a performance bonus payout while functioning as the CEO, getting one on the backend of a merger you brought to your Board doesn’t sit well with me.

Where are all the other voices? Where are all the credit union governance experts? Even if you disagree, please point out any errors in my logic or perspective. Don’t discuss this in small circles over dinner. Stop treating credit union capital like you invested in the organization with money out of your pocket.

What Are the Principles?

The evolving landscape of credit union mergers should invite deep personal introspection and discussion on the future of cooperative movements. Are these mergers truly beneficial for all stakeholders involved? Do they warrant a closer examination of the principles guiding such transactions?

Lastly, humans in general, often value relationships with people in close proximity to them vs. folks they don’t know. This manifests itself when directors, close to management, struggle to hold their executive teams accountable.

In the example of this post, if I named that CEO, I’d face more backlash than him or her for running the credit union into the ground.

Why is all this happening?

1) Because we value personal relationships over the member-owners of the cooperative movement. Some very smart and shrewd folks realized this years ago. Once the “old school” credit union folks passed away, it became a market free-for-all.

2) Where else are you gonna get 7 million dollars on a promise for better services? There’s too much money involved and not enough incentive to stop.

The only thing that could turn the tide is if some well-respected CEOs (and consultants) in the industry begin speaking up more. We may well continue to lose at least 15 credit unions per quarter for the next year or so. On my end, I’ll focus my energy on helping credit unions that want to grow, turn a profit, and keep their charters.    END

Another Interpretation of Credit Unions’ Personal Deal-making

The motivation for these so-called mergers of sound credit unions may have been best summarized by the well-known American entrepreneur, Al Capone who said: “This American system of ours, call it Americanism, call it capitalism, call it what you will (cooperative mergers), gives each and every one of us a great opportunity if we only seize it with both hands and make the most of it.”