Chip Filson
From an unknown source:
An observer of modern social movements has said: “Some men wrest a living from Nature and it is called work. Some men wrest a living from those who wrest a living from Nature and it is called trade. Some men wrest a living from those who wrest a living from those who wrest a living from Nature, and it is called finance.”
And cooperatives?
At December 31, 2023, there were 2,280 federal credit unions and 1,724 chartered by 45 different state authorities.
The broad operating authorities are similar. However, there is one major difference in the transparency of the two systems. This difference was noted in a NASCUS comment to NCUA on August 15, 2022 on bank conversions and mergers:
All FISCUs must complete annual Internal Revenue Service Form 990 filings. Part VII of those filings is public and requires FISCUs to disclose any compensation paid to directors and officers; the compensation paid to “key employees” (employees earning more than $150,000.00 in reportable compensation; and “highly paid” employees (the top 5 employees earning more than $100,000.00 in reportable compensation).
Without timely information member-owners cannot make reasonable decisions about the board’s role overseeing CEO and senior staff compensation.
Disclosure is required for all state charters as part of their special status as tax exempt organizations. Quarterly 5300 call reports provide only general corporate trends and broad dollar totals of some compensation programs.
Transparency of leader’s pay is an essential aspect of the member-owners’ governance role in cooperative design, via the election of directors. Full disclosure is standard operating practice in the public sector.
The value of reporting is not just the current level of compensation. Tracking trends over several years can show how pay correlates with the credit union’s financial performance. Unlike their competitors, there is no daily stock price passing judgement on management’s responsiveness to members or shareholders.
Moreover, the uniform reporting standard of the 990 is specific, by name and position. It is more useful than generic salary surveys in which asset classifications or by position and other criteria provide only general ranges.
When individuals aspire to positions of senior leadership in the management of other person’s financial resources, their own disclosures demonstrate their responsibility for the trust members have in their credit union.
The time to make this change is now, voluntarily showing proactive leadership, not after a law or regulation requires this level playing field.
Otherwise, the absence of comparable data may give an impression that senior leaders of federal credit unions are unwilling to be as accountable as their state counterparts. Which will just beg the question, why?
Change before you have to is a maxim FCU CEO’s should follow in this basic issue of transparency. It communicates basic respect for the member-owners’ role.
Frank Diekmann, CUToday Cooperator-in-Chief, described the benefits of transparency in a different context this way:
“Not only would disclosure be the right and ethical thing to do, it would make for an effective response to critics. . . that claim credit unions are just “profit-seeking enterprises masquerading as tax-exempt non-profits.
Transparency is a leadership requirement. It creates trust and confidence even when things go wrong. Doing the right thing should not require a rule or reg. It is a character trait. “
With the help of a young progressive, attorney Willard King, and several years efforts, the Illinois General Assembly passed the first Illinois Credit Union Act in 1925.
The Act’s purpose was “to safeguard the monetary deposits and other financial instruments of Illinois credit union members” through a system of supervision and regulation.
Bucky Sebastian was the internal counsel for the Illinois Department of Financial Institutions (DFI) from 1977-1981. One DFI responsibility was to charter and supervise the largest number of credit unions of any state system. At yearend 1977 there were 1,095 Illinois charters, managing $1.8 billion in assets for 1,274,732 members.
Sebastian and King became good friends discussing the legal history of the Illinois credit union system and their shared interest in the life of Abraham Lincoln.
In 1977 the bankers were challenging the Department’s authority to permit share draft (checking) accounts for Illinois state charters. There were also initial thoughts about how to update the Act to respond to deregulation. King’s knowledge of prior credit union legal changes was very useful in understanding the legislative politics for coops.
One of the stories King told was overcoming the opposition from established commercial and financial interests in 1925 to the new credit union option. King shared the position of the Chicago Association of Commerce which was: “This is a bill to permit a lot of ordinary people such as blacksmiths and bricklayers to go into the banking business, where they will certainly lose their money.”
To answer how long credit unions have been opposed by banking interests, there is a simple reply: Forever.
Worried about new fintech competitors? Liquidity tight and interest margins narrowing? Hard to find competent, affordable staff? Growth too slow? Delinquency rising? CFPB and NCUA about to cap fees-reducing ROA?
There is one surefire solution to all these ill winds every credit union faces. It is touted and practiced by CEO’s of all credit union sizes. Consultants are marketing their multiple processes for implementing this universal solution.
The magic formula is Merger. And incidentally, if you are not the surviving credit union, the payoff can be even greater than keeping your regular “day job.”
As this siren song travels across the cooperative waves, two skeptics have written critiques. One humorous and one listing what member-owners should know when asked to vote on this event. Here are their thoughts on this all encompassing panacea being touted by credit union saviors today.
A story-metaphor by Ancin Cooley, Principal , Synergy Credit Union Consulting and former OCC examiner.
Grandson Hey, grandma. How are you doing?
Grandma: I’m good, baby. How are you doing?
Grandson: Grandma, I was wondering… I heard you did something with the house?
Grandma: Yeah, baby, I went ahead and let the next-door neighbor merge with my house. Now we are all together in one big house.
Grandson: When did you decide to make that decision?
Grandma: Oh, baby, we decided a couple of days ago.
Grandson: The house had $500,000 in equity, Grandma. You just gave that away?
Grandma: Yup, they didn’t give me any money.
Grandson: What!?!?
Grandma: I got better cable and better air conditioning.
Grandson: Services?!?! Grandmother, with your equity, you could’ve bought cable and air conditioning. You didn’t have to give it all away.
Grandma: I know, but this nice person came over and said we’d just be better together.
Grandma: I’m happy. I can watch Judge Judy as many times as I want now.
Grandson: Who presented you with this idea?
Grandma: It was our property manager. He said the cost of keeping the house maintained was going up.
Grandson: Let me see the contract…. Grandma, the manager got $50k of your equity when you merged. That’s why he brought up the idea.
Grandma: Baby, you are blocking the TV.
CEO Daryl Empen of Gas and Electric Credit Union (GECU) in Rock Island, Illinois sent comments motived by multiple merger announcements in the state.
In addition to his CEO longevity, Daryl’s entire leadership team posts their pictures and direct phone numbers on the credit union’s home page under the heading: Meet Your Credit Union. His thoughts.
I cannot recall a merger in any industry that has led to better member service. That’s not to say that mergers can’t bring benefits. But more often than not, it means that consumers lose a voice and a say in things.
Credit Unions are one of the last 100% member-owned industries. As a member-owner, you should have a voice in your credit union, and certainly be fully informed about all of the areas below when asked to vote in a merger transaction.
The Minimum Disclosures Member-Owners Should Receive
Credit union mergers have been happening for decades. Some forced by regulators, some voluntary. There are a multitude of legitimate reasons. But as I celebrate 32 years in this industry, it is still sad to see the pace of mergers pick up every year.
When we lose our small credit unions, we are losing the heart and soul of our movement and the multiple earned legacies that make credit unions special. No matter the size, credit unions are still member-owned, not-for-profit financial institutions. But as we grow larger, whether organically or through mergers, members have less of a voice than at most smaller institution. I fear that we are becoming just another industry, instead of a movement.
If I was a member of a credit union being merged into a larger credit union, what questions should I be asking? Merger announcements tend to use generic statements like “economies of scale, synergies, shared philosophy of member service”. These all may be true, but are incredibly generic and tell you nothing about specific benefits.
Based on my experience, as both the President of a credit union, and a member-owner, here are some of those areas I would ask about.
1.Additional services. Some credit unions cannot afford today’s technology and electronic services. So this is a legitimate issue. What makes the surviving credit union’s version of your products better?
2.Operating expense ratio. If the larger CU has a higher expense to assets ratio, that’s not a sign of economies of scale. If the argument is the larger you are, the more efficient you are, then your operating expenses should be lower. This is not always the case – size doesn’t always equal efficiency.
3.Personnel. Will employees from the merging credit union be offered employment with the surviving credit union? What will their new positions and salary be after the merger is completed?
A list of all post-merger promotions with new position and salary should be provided.
Describe the details of any retirements or severance packages because of the merger.
4.Average Salary Expense. This is directly tied to average operating expense, as salaries and benefits are usually the largest component of our expenses. What are the wages of the top management? Are they reasonable? All state-chartered credit unions file IRS Form 990 tax return which are public and contains the salaries of the CEO and highest paid employees. This information is should be included in the merger information, whether state or federal charter.
5.Net Worth. It is common that a smaller credit union will have a higher net worth or capital. If your net worth is significantly higher than the surviving credit union, will a bonus dividend occur before the merger? If not, why?
6.Cost of Funds/average dividend per member. A larger credit union should be able to pay better rates on savings products, especially if they are touting “economies of scale.” If the larger credit union’s rates are not better, what is the benefit to you as a member?
7.Average Loan Rates. Again, the surviving credit union should be able to charge lower rates on their loans with better economies of scale. If their average loan rates are higher, ask why.
8.Member Service. To some members, personal service is not important To others, it is THE most important item. Does the surviving credit union have a call center? Use ITMs not personal tellers? How easy is it to talk with a live person?
9.Costs of the merger. There are costs involved with any merger – paying out of the remaining terms of vendor contracts can be huge. Communications and advertising is another cost. Are there any bonuses or incentives being paid? How much will the merger cost?
10.Repesentation. Will you be represented on the new Board of Directors. Will your credit union have a seat ?
11.The Process. Who reached out to start the merger discussion? Did someone research other credit unions to make sure they were finding the best fit? If they didn’t, why not
We find it is often the larger credit union that makes an unsolicited proposal, or uses a third party to seek merger partners. In my 30+ years at GECU, we have never approached another credit union about merging. They have all approached us first. I always encouraged them to research other credit unions, as they have an obligation to their membership to find the best fit and best value.
When asked to give up their long serving credit union charter with its multiple legacies of goodwill and accumulated collective wealth, members-owners should be provided specific details as to why they should approve ending their independence. This is not happening today. Transparency is critical for trust in a member-owned institution.
For over 15 years, the public-private credit union designed liquidity lender, the CLF, has had no activity. The last major loans were to the NCUSIF for $10 million to pass through to US Central and WesCorp as part of the stabilization efforts when they were conserved by NCUA in 2009.
In April 2024 an $800 million credit union reported to the board their return on its two primary liquidity lender relationships as follows:
The FHLB declared and paid a 9.0% quarterly dividend last month. Our capital stock value there is $1,884,000.
Corporate One FCU declared and paid a 5.75% dividend on all Perpetual Contributed Capital last month. Our PCC there is $1,283,000.
In contrast, the CLF reported its first quarter dividend as 4.54% which was down from 4.62% from the prior quarter. That return is approximately 1% below the overnight rate credit unions are earning on risk free investments.
At March 31, 2024 the CLF’s $895 million balance sheet was composed of $859 million in member shares and deposits and $41 million of retained earnings. There were no loans.
The CLF’s primary assets are investments in Treasury notes ($819 million) and cash ($95 million). At yearend the portfolio was $9.0 million underwater. Why would a liquidity facility ever invest longer than one year, let alone the $45 million extended beyond five years?
Moreover, the CLF has investment authority similar to FCU’s. Why is it limiting its portfolio to just Treasury securities-generally the lowest return option in the market? Does NCUA lack the investment expertise from staff who routinely evaluate the soundness of credit union portfolios?
The below market quarterly dividend means every credit union member is subsidizing the CLF. The dividend decline is even more puzzling when the CLF reports adding $869,000 to retained earnings which now total over $41.1 million.
The CLF has no risk and no loans so why shouldn’t all net income be paid to its shareholders? In the same quarter of 2023, for example, the CLF added only $3,000 electing to send all net income to shareholders.
The numbers show that the CLF has played no role in a year which saw record credit union borrowings and liquidity pressures from rising rates and banking failures. CLF investments report below market returns. The dividends paid are not competitive. That fact alone shows how detached CLF and NCUA leaders are from managing a facility that would actually serve the members who loyally fund it.
Contrary to NCUA board members’ entreaties for new Congressional legislation, the lack of credit union support for the CLF is not a statutory shortcoming. It is a management one.
Over decades the CLF has evolved to become a regulatory vestigial organ serving no purpose. As shown above, credit unions have liquidity options which they also own and which provide real value.
Isn’t it time the CLF decided to do the same? Or at a minimum pay a competitive dividend before shareholders decide there is no reason to continue “bankrolling” a moribund facility.
Recently a CEO reported on a new event for his credit union:
Earlier this month the Executive Leadership Team and the Chairman hosted the First Annual Credit Union Alumni Breakfast with 17 retired employees and volunteers. Special thanks to key staff for their work in putting on this special event.
Today we stand on the shoulders of these employees who have come before us as they laid the solid financial, operational, and philosophical foundation upon which we are building today.
We asked each attendee to share their favorite credit union memory. They can be summarized simply – the PEOPLE. To a person they shared that it was the members and/or colleagues that made this the best place they have ever worked.
They shared story after story about the changes in members’ and employees’ lives, and in many cases, how these interactions changed their own lives. We know that for so many of these retirees this was not just a job, but part of who you are. So we will continue to cultivate that community, even after you have retired. These Alumni are some of the best Ambassadors in our community.
Yesterday was May Day, an informal, country-wide celebratory event in England. My daughter sent several pictures of how the Day begins with the ringing of the bells and singing by the boy’s choir from the tower of Magdalen College. Oxford.
The event commemorates not only the beginning of spring, but the common destiny we all share with nature.
Merry Makers on the way to the Tower:
Bells ringing and boy’s choir singing to bring in Spring-with 14,000 early risers.
In Ed Callahan, Bucky Sebastian and my first year at NCUA, Sam Rizzo who was the CEO of ASI (then NDGC) made a special effort to bring to D.C. the last living attendee from CUNA’s founding at Estes Park, Colorado in 1934. Louise Herring spent her entire life promoting, leading and founding numerous credit unions and supporting firms (such as ASI). She had to travel attached to an oxygen breathing cylinder.
Her mind and commitment were as sharp as ever. Field of membership for FCU’s was a hot button issue. Her belief was that all Americans should have credit union access. In her memorable phrase, “Poverty is not a common bond.”
The incredible chartering and organizational efforts of her era and the passion for the movement were apparent to everyone.
Louise is just one example of the pioneers who devoted their lives to lay the foundation for credit unions today. Her commitment was a memorable experience for everyone she saw.
Recognizing past credit union regulatory leaders was an integral aspect of Chairman Callahan’s role. Just one example. He honored his predecessors at NCUA and in the HEW’s Credit Union Bureau by asking them to come to D.C. to celebrate the 50th anniversary of the Federal Credit Union Act in 1984.
Earlier that year Ed presented the Agency’s highest honor, a gold medal, to recognize many whose tenures were only recorded in official reports. (see Dean Gannon’s medal award)
Current and prior federal credit union regulators, General Counsels, and Executive Directors reunite at NCUA’s headquarters, 1776 “G” Street, Washington D. C. on the 50th anniversary of the Federal Credit union Act.
The Past Makes the Present Possible
It is always tempting to believe when one achieves a position of great responsibility, that the future begins with their arrival. The past is gone. Those are the achievements of others. Now it is our turn to pivot with new beginnings. After all who wants to just carry forward the success of others when every impulse is to put one’s own imprimatur on events?
However, without a knowledge of the past it is difficult to sustain a sense of common purpose or community with others. Each leaders turn at the wheel becomes a unique episode. The lessons of prior efforts are overlooked. The successes are taken for granted, because they seem just to endure naturally.
But that is not how lives or even organizations are remembered. When individuals are at their best, their work and example transform the moment. There is a moral component that recognizes the worth of each person, and a commitment to common good, not merely individual or organizational momentary success.
Every society has its May Day celebrations. They create a shared heritage that goes back generations in England.
Current leaders and CEO’s of organizations may not know or even be interested in their predecessor’s success or viewpoints. The past leadership is gone and I am now in charge. Some CEO’s are uncomfortable even talking with their forebears.
Knowing the history of any organization is vital to continued relevance. That is why I believe this credit union’s inaugural Alumni breakfast matters. Honoring leaders from different eras and circumstances, gives meaning and context to current events and decisions. How a leader remembers their predecessors is a good indicator of how one’s own tenure is likely to be recalled.
Yesterday the $4.7 billion TDECU announced its intention to purchase the $1.2 billion Sabine State Bank and Trust whose head office is in Many, LA
The joint press release states: Founded in 1901, Sabine has a footprint of 51 branches across Louisiana and east Texas and had approximately $1.2 billion in assets as of March 31, 2024. Sabine is an active lender in its markets and specializes in lending to the oil and gas, forestry, timber and agriculture sectors.
The CU Today article quotes TDECU’s CEO’s ratiionale for the purchase as: “TDECU is on a growth journey to expand across the state of Texas and beyond.”
The transaction is for cash. No financial details except broad asset totals were given.
The size of this $1.2 billion transaction (25% of TDECU’s balance sheet) the probable cash outlay of several hundred million if the price is in the 1.5 to2.0 times book value, and the operational/business expansion (51 more branches added with the 34 already), plus new risk exposure to commercial lending raise critical questions: What is the members’ role in this $1.2 billion purchase? What should board and senior management be informing them about an action that could transfers as much as 50% of TDECU’s $465 million of collective savings to the bank’s owners?
TDECU’s 2023 yearend performance shows slightly negative loan (-2.19%) and share growth (-2.55%). External borrowings total $310 million, a 14% increase over 2022. The credit union’s loan to share ratio has hovered around 100% for the past several years. Delinquency is at 1.59%, ROA is .70% and net worth 10.06%. Steady but not superior performance.
The credit union reports 386,000 total members out of a potential of 30 million.
TDECU held its annual members meeting on March 23. Was the CEO’s ambition of embarking on “a growth journey in Texas and beyond?” outlined there. Or, were members not informed about board and management’s efforts to commit a significant portion of their net worth to a bank purchase?
The members are the owners. It is their collective savings accumulated over decades that has provided the ability to consider such an acquisition. But what is in it for them? What will be the return on their equity as TDECU’s ROE historically is in single digits? How will this out-of-market expansion better serve their needs? How will the “cash” be raised–will the credit union have to increase expensive external borrowings or seek subordinated debt to complete this transaction?
The financial size and business scope of this transaction puts the future of TDECU on the line. Members should be given full financial details including how large the intangible Goodwill asset created by the event will be.
Without full disclosure, the customary process in public bank to bank transactions, the members are left in the dark. Management is not being held to any performance outcomes. The traditional member-focused core service model is being put at risk to underwrite an expansion that has yet to be explained in any relevant detail.
Presumably full financial projections are being presented to the regulators who must approve this deal. Shouldn’t the member-owners who are bankrolling this transaction be given the same details?
This transaction is not just a financial event; it is an obligation for TDECU’s board and senior management to be fully responsive to THEIR owners’ interests in this most consequential step.
A reader sent the following after reading Ed Callahan’s last interview as Chairman of NCUA. In that conversation he focused on the relationships between the agency and credit unions.
Hey Chip – I am just reading this. My husband and I were camping in the wilds of Utah with very sketchy service. In the “old days” it truly was a partnership with the Agency.
Being a CEO my entire career, I was always highly engaged with the Examiners when they were in my credit union. It was always a very positive relationship where we learned from each other. Unfortunately, it devolved over the years into an “I GOTCHA” encounter. . .
Greetings Chip! I continue to read your blog . . . After the latest news about more Illinois credit unions merging, I finally felt compelled to write down my thoughts on this issue.
I will publish his thoughts in the future. These are his opening paragraphs:
Credit union mergers have been happening for decades. Some are forced by the regulators, some are voluntary, and there are a multitude of legitimate reasons. But as I celebrate 32 years in this industry, it is still sad to see the number of credit unions that disappear every single year, and to see the pace of mergers pick up every year. When we lose our small credit unions, we are losing the heart and soul of our movement that makes credit unions special.
I know that no matter the size, credit unions are still member-owned, not-for-profit financial institutions. But it is difficult to argue with the fact that as we grow larger, whether organically or through mergers, that members have less of a voice. . . And I fear that we are becoming just another industry, instead of a movement.
There is no doubt credit unions are becoming more and more “mainstream.” They tout their promotions with professional sports franchises, stadium naming rights and multiple business partnerships.
Growth is the dominant success indicator. Credit union lobbyists argue in tandem with banks against the consumer protection initiatives of the CFP. NCUA’s Chair cites the FDIC as a financial model for the NCUSIF and positions his supervisory initiatives because that is how banking regulators act.
In becoming an important component in America’s financial sector, have credit unions also embraced the status quo? Are they more concerned with protecting their achievements than addressing the economic inequities members face in the economy?
An observer might give examples on both sides of the “movement” issue. However, I believe credit unions are not alone in their constant temptation to be seen as fully engaged participants in the so-called “free market.”
Franciscan scholar Richard Rohr describes the ever-present allure of America’s economic system this way:
Most of us have grown up with a capitalist worldview which makes a virtue and goal out of accumulation, consumption, and collecting. It has taught us to assume, quite falsely, that more is better.
It’s hard for us to recognize this unsustainable and unhappy trap because it’s the only game in town. When parents perform multiple duties all day and into the night, that’s the story line their children surely absorb. “I produce therefore I am” and “I consume therefore I am” might be today’s answers to Descartes’ “I think therefore I am.” . . .
The course we are on assures us of a predictable future of strained individualism, environmental destruction, severe competition as resources dwindle for a growing population, and perpetual war. Our culture ingrains in us the belief that there isn’t enough to go around, which determines most of our politics and spending. . .
F. Schumacher said years ago, “Small is beautiful,” and many other wise people have come to know that less stuff invariably leaves room for more soul. In fact, possessions and soul seem to operate in inverse proportion to one another. Only through simplicity can we find deep contentment instead of perpetually striving and living unsatisfied. . .
St. Francis knew that climbing ladders to nowhere would never make us happy nor create peace and justice on this earth. Too many have to stay at the bottom of the ladder so some can be at the top. . .
One permanent change from Covid’s impact is that organizations now live in a hybrid world. There is the continuing day to day in person contacts and multiple virtual options for meetings and corporate events.
For example, most churches no matter the size, continue to provide both in-person and simultaneous zoom or YouTube broadcasts. Restaurants continue to promote takeout options in tandem with full dine in re-openings.
In some instances I have found even local persons reluctant to meet in person, preferring the remoteness of a zoom conversation.
The virtual interactions are now a routine part of high school curriculum options. I recently received a link to the InfoFlow morning news show from Montgomery County’s Blair High School. This virtual broadcast replaces the morning home room announcement over the PA system.
The episode shows a news desk with two student anchors presenting daily updates. About two minutes in there is an external report on a local historical project recorded by a school reporter in which I participate. The full broadcast can be viewed here.
The next generation is living and practicing this hybrid reality as a normal part of their activities.
This past Friday I virtually “attended” Patelco’s Annual Meeting. The video was primarily the Chairman and CEO talking at desks with senior staff members available.
The format was fully scripted, as are most annual meetings. The minutes and numerous reports were referred to as being available on the website. The CEO Erin Mendez gave a short update including graphs showing Patelco’s key trends versus its California peers and the top 30 credit unions nationally. They showed Patelco’s 10.07% net worth and ROA of .77% for 2023, significantly stronger than the two peer groups.
The directors ”election” was a formality since there were just three candidates and three openings .
The most interesting point was the Q&A at the end of the prepared agenda. There were perhaps ten questions posted in the chat that were answered by the CEO, staff and even the chair. These included CEO and board succession planning, priorities for 2024, questions on investments etc.
This was the one chance for members to interact, even though under the control of the virtual operator.
My overall impression of the meeting was a feeling of “formal awkwardness.” Opening comments were read. There were motions to move and accept minutes and reports, but no visuals of the members doing so, just head shots of officials leading the meeting.
Patelco now has over 500,000 member-owners. Several decades ago, the credit union made an attempt to connect with members by holding 50 “town hall” meetings, or one a week, at branch and other locations in their market area. These conversations with members were led by senior staff. In at least once case the meeting was recorded on video. The goal was to update members and to listen to their issues or needs. But most importantly, to be seen and be available.
Such public interactions take practice. Once a year formal meetings with Robert’s Rules of Order are not a substitute for ongoing, open conversations with owners.
Such contacts are the grassroots of democratic governance. Leaders have a chance to demonstrate their skills and accountability; and most critically to earn members’ confidence for the entire leadership team.
An additional start to develop this competence might be quarterly hybrid town halls with the latest business updates and outlooks. It is standard operating procedure for public and even private companies. Just follow any of the quarterly reports being presented daily in this “earnings season.”
Credit unions have an even more compelling reasons for engaging in open member dialogues. It is not about supporting the stock price or analysts’ ratings; it is a much simpler reality: “They own us.”
