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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.”

 

 

 

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An Homage:  Report on Credit Unions

An independent press is essential for democratic governance, whatever the scope or responsibility of an organization or political entity.

Report on Credit Unions was in its twenty-fifth year in 1982.  The editors and contributors to the monthly printed publication were a who’s who within credit unions.

The publication’s founder was Rudolph Modley who “was born in Austria and earned a Doctor of Law degree at the University of Vienna. He came to this country in 1930 and in 1937 published the first of several hooks, “How to Use Pictorial Statistics.” In 1940 he was the co‐author of a study of the American system, with Thomas R. Carskadon, entitled “U.S.A.: Measure of a Nation.”

As described in his New York Times obituary: “Mr. Modley was also interested in the credit‐union movement and in 1957 founded the monthly publication “Report on Credit Unions.”

The staff and contributors listed on the January 1982 masthead (vol. XXI no. 1) were Larry Blanchard, editor; Frank Wielga and Jo Ann Ewalt, assistant editors.  The contributors J. Deane Gannon (former Administrator, Bureau of Credit Unions), Mandy Hellie, League President,  Kenneth Marin (former CUNA Chair) and Harold Black, one of the first three members of the NCUA board.  All had senior positions in the movement.

The News In January 1982

The lead story was the departure of Larry Connell from the NCUA board to become president and ceo of Washington Mutual Savings Bank, a $2.3 billion thrift based in Seattle.  The story quotes Connell’s farewell comments, “I’ll be back” and Ed Callahan who said, “Larry had done great things with this agency during his tenure.  . . he will be sorely missed.”

The six-page newsletter announced the appointment of former NCUA Board member Harold Black as an associate editor.   In his first “commentary” he wrote why he opposed Senator Garn’s bill (S. 1721)  which would have combined the FDIC, FSLIC and NCUSIF into a single fund.  Many of his points are still relevant today as the current NCUA chair seeks to convert the NCUSIF to be more FDIC-like.

This first edition of 1982 included articles on the upcoming speakers for the CUNA and NAFCU governmental affairs conferences, updates on insurance for IRA accounts, NCUA’s “dramatic deregulation concept,”  CUNA’s capitalization study, the accounting practice of ICU’s two common trust investments, how credit union owned data processor USERS “outranked the competition,” and a full page of individual credit union updates, From the Grass Roots.

The Report’s Purpose

As stated in the Harold Black appointment, “the Report has adhered to a strict policy of independent coverage, focusing on operational, legal, economic and general news for credit union volunteers and professionals. Its editors, assistant and associate editors are all drawn from the credit union community.”

The editorial standard in the Report helped to spawn an era of industry focused newsletters included CUIS (Credit Union Information Service) weekly mailed updates from the trade associations and leagues and the occasional private newsletter.

The quality of writing influenced these other publications including the monthly Credit Union Magazine and later iterations such as Callahan’s Credit Union Report.

The Report stands out for its comprehensiveness, longevity and singular focus on the industry.   NCUA upgraded its own publications creating NCUA News as a monthly.

The NCUA Chair and senior staff would hold public press conferences after each board meeting to talk with reporters.  Topics were open ended.  For example in July 1982: how would the Agency respond to the closing of Penn Square Bank and the losses credit unions might have on CD’s over the $100,000 insurance coverage?

The Impact of Quality

The Report set the standard for relevant, in depth factual analysis and commentary for the credit union community.  Its writers knew their subject matter.  They had access to senior leadership when reporting on sensitive topics such as the accounting for ICU funds.

The Report is an excellent, high level chronology of key events and personalities on the credit union stage in each edition.  Its success was due to the quality of its staff. It is a tribute to Larry Blanchard who maintained this approach during his tenure.

Ultimately more colorful, more timely (weekly) and ad-supported entrants, Credit Union Times and Credit Union News, pushed the monthly subscription model off center stage.

But this example of dedicated focused journalism and independent reporting is still the standard even in today’s digital era.   The Report raised all credit union coverage to a higher level of excellence while becoming  the “go to” source for capturing the first draft of the movement’s history.

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Memorial Day 2024: Answering the Call of Duty

Two events of this past week reminded me of why America celebrates Memorial Day.  They are examples of persons responding to their sense of duty.

Campus Protests-A Long Tradition of Commitment

The multiple current campus occupations and graduation disruptions over the war in Gaza are not a new form of student activism. Here is a description of an earlier one.

In April 1969, Harvard University students protested the Vietnam War and other social and political issues with a two-week strike that included the occupation of University Hall. The strike began on April 9, 1969, when about 70 students entered the building, evicted administrators, and searched through files. The next day, at the request of President Nathan M. Pusey, police and state troopers forcibly evicted the students, arresting over 100 protesters for trespassing. 

I was present that April working at Harvard in the financial aid office.  As my colleague (a WWII veteran) and I walked through the Yard during the initial occupation, we wondered how it would end.

Ten days later I drove to Newport R.I. to begin four plus years of active duty in the US Navy.  (below at Pier side, spring 1970, Yokosuka, Japan on the USS Windham Cty, LST 1170)

Do you Know a Man Named Karl Marlantes?

That was the question my grandson, Emmett, texted from college.  I did not recognize the name.  He thought our paths might have crossed at some point.

His Wikipedia entry:  Karl Arthur Marlantes (born December 24, 1944) is an American author and Vietnam War veteran. He has written four books: Matterhorn: A Novel of the Vietnam War (2010), What It Is Like to Go to War (2011), Deep River (2019), and Cold Victory (2024).

This six minute Youtube video is a brief summary of his life as a Yale student, Rhodes Scholar and Marine Platoon leader, and his call of duty.  You would never suspect from his easy manner that he was awarded a Bronze Star, two Navy Commendation Medals for valor, two Purple Hearts, and 10 Air Medals.

The military draft caused generations of men to confront early in life, often as students, what duty means. Campus protests and military service are  two classic examples of how individuals answered what many knew instinctively-the call of duty.

A Moment to Decide One’s Duty

At some point in life we feel morally inclined or face circumstances where we have to pick a side.

We try to discern what we believe the right, the just and the good thing to do.  Informing this decision is the example of others-family, colleagues, and community leaders-from the numerous organizations that have shaped our lives to that moment.

What is our duty to others? All of us face this human summons at some point. Today a very small percentage of citizens will join the military. I believe Memorial Day should remind all Americans of the commitments we are asked to make in a democracy. Not just those who enter the military but those who fight for peace and justice in society.

Every person will be faced, at some moment in some arena, to answer their call “to pick a side.”  Memorial Day is a time to respect and honor all commitments, civilian, military and civic centered intended to help this country create a better life for all.

 

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NCUA May Board Meeting:  Vice Chair Hauptman Finds His Voice.  Harper Cancels June Meeting

(Note correction to spelling of board member Tanya Otsuka’s name from the initial post)

With Chairman Harper on extended medical leave, May’s board meeting was expected to be a routine quarterly review of the financial status of the NCUSIF.

Instead, Vice Chair Hauptman opened with a ten minute critique of NCUA’s new collection of NSF and OD fees from credit unions in future call reports.

Hauptman’s remarks can be heard early in the Board video.  He is articulate and energized. The proposal was not discussed at any board meeting. He had not heard about the effort till January.  All his suggestions for how to use the information were rejected.

Most importantly he believed the policy implications were intended to push fees downward.  This regulatory action would be contrary to the federal credit union act to serve the underserved.

In his view, when a person is short on cash, there are no good options.   In many instances, having the payment go through and charged a fee may be best of limited choices.  He gave several personal examples of being in this situation.

In addition to adding to regulatory burdens, he believed the effort was prompted by two  groups not looking out for credit unions’ best interests:

  1. The press looking for clickbait headlines;
  2. Political groups with an agenda.

Board member Otsuka’s response urged that the collection effort’s impact not be prejudged.  Members have a right to know this information. This is about safety and soundness and consumer protection.

The Meeting’s Outcome

This is the first time Vice Chair Hauptman has been so outspoken in response to Chairman Harper’s priorities.  He has loyally supported new rules, spending initiatives, and staff reports that could have been critiqued on both policy and substantive grounds.

While it is not clear why he chose this topic at this time, the response from Chair Harper absent on medical leave was immediate.  He announced the cancellation of the June board meeting.  This is after cancellation of the March meeting and a very “light” April agenda which the Chair attended virtually.

The power of board members comes from their participation at public board meetings and from the political process provided by the three person board oversight.   This legislative change from a single administrator in 1977 was to ensure no single person had total control over the agency.

Now while physically on leave, Harper is trying to retain his political control by canceling normal board functioning.  With a two-person board, both members have to agree on the board’s agenda and concur for any motion to pass. The check and balance still exists.

However  Harper’s cancellation of public board meetings stakes away the most important power and venue board members have.  He is undermining the Board’s oversight responsibilities and other agency priorities.

Leadership Uncertainties

Harper’s efforts to hold onto his authority while absent raises critical questions for credit unions and NCUA.   For credit unions, the reputation and political standing of the Agency is at risk.  Who speaks for NCUA? Who is leading the staff?    Who sets priorities?   With no public meetings, how are the multiple constituencies to which the agency is accountable, supposed to know what is going on?

For NCUA staff, do they respond to queries raised by board members concerning internal and external events-policy and otherwise or just ignore?   Does the newly created Office of Business Ethics or the IG have a role in this exercise of absentee leadership?   The cancellation of board meetings?  The lack of the Chair’s public presence and accountability?

Hauptman may have thought he was just providing an alternate perspective on an Agency data collection effort.  But his critique, and Harper’s response,  raises a whole new set of consequential issues about the board members’ role in a time of Chair vacancy.

In recent years within NCUA and the broader federal government. when there have defaults of leadership (vacancies and personal management failures)  it has been individuals dedicated to their Agency’s mission and the proper exercise of authority that have stepped into the vacuums.  Did Hauptman just start this process for NCUA?

 

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Alternatives to the Credit Union System

The traditional view of market competition is that it is a zero-sum game.  There are winners and losers.  Acquirers and the acquired.  A credit union gains member deposits, or they go somewhere else.

But endgames do not always happen with clear winners and losers going out of business.  Sometimes the losers just limp off the field in irrelevance.

Substitutes slowly absorb earlier organizational efforts with new ones.  In credit unions this evolution is already occurring.  Two updates from these alternatives were recently announced.

The Federal Home Loan Bank System

This week, the members of the Board of Directors and Executive teams from the Federal Home Loan Banks and the Office of Finance are in Washington DC for their annual conference.

For some time, they have been the primary source of liquidity for the credit union system.  Their self-description:

The FHLBanks are 11 regionally based, wholesale suppliers of lendable funds to financial institutions of all sizes and many types, including community banks, credit unions, commercial and savings banks, insurance companies, and community development financial institutions. The FHLBanks are cooperatively owned by member financial institutions in all 50 states and U.S. territories.

The Banks’ regulator the FHFA issued a report last year on their mission and is following up with a request for comments.  The primary issue is how well the Banks are fulfilling their mission of increasing affordable housing options in America.

At the conference, the Council announced the Banks anticipate “a record-breaking $1 billion in support for affordable housing and community development initiatives in 2024. This significant commitment reflects our unwavering dedication to our mission and promoting access to safe, affordable housing.”

The chart below shows the membership of the banks by state at December 31, 2023.  The system serves roughly 6,500 members nationwide with a regional, custom approach from FHLBanks in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, and Topeka.

Since the 2008/2009 financial crisis, the FHLB cooperatives have effectively replaced the lending functions the CLF and corporates were designed to provide the credit union system.  Corporates still serve critical payment and short-term liquidity roles. However, the FHLBs have taken over almost all term lending.  They do this using a cooperative design.

New Public Banking Legislation

The digital web site Next City has reported on multiple efforts to create publicly owned banks following the model of the North Dakota State Bank.  Here is their latest update:

At Next City, we’ve covered efforts to create city-owned banks in Philadelphia, New York, Los Angeles, San Francisco and the East Bay. We’ve also covered efforts to create state-owned banks in California, Massachusetts and New Mexico. Sometimes, as in the case of New York or California, state legislation has been proposed (and passed in California) to authorize local governments to create their own banks — but none of those efforts have yet reached the point of obtaining a bank charter, accepting deposits and making loans as envisioned.

This month in New York, there’s a new iteration: state legislation that, if passed, would create the Bank of Rochester, a bank that would be controlled by the local governments of Rochester and the encompassing Monroe County. 

Technically, the bank would still need to apply successfully for a bank charter from the state’s Department of Financial Services, just like a private-sector bank, before it could accept deposits. Per the legislation, the bank would serve “the public purposes of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities.”

It would not be a bank that accepts deposits directly from members of the public. As laid out in the bill, the Bank of Rochester would be modeled largely after the century-old state-owned Bank of North Dakota. Nearly 90% of the Bank of North Dakota’s deposits come from the state government, which is required by law to use the Bank of North Dakota as its primary bank.

Similarly, the Bank of Rochester would only be authorized to take deposits from government bodies, including local or state government as well as federal offices. It would be restricted from retail banking and raising deposits from individuals and businesses.  

Change is the Lifeblood of a Market Economy

These evolutions of financial service providers may seem to nibble only at the margins of the credit union system.   However, the relatively recent CDFI option (September 1994) is both a wholesale and consumer response to unmet local borrowing needs for communities throughout the country. Its creation was inspired by Cliff Rosenthal, a credit union and cooperative advocate.  Today some CDFI’s are established financial charters; others are stand-alone lending organizations.

The strategic implications for credit unions remains constant: to differentiate their business and service models by focusing on the members they seek to serve.  When credit unions  look and sound like all other options in a market, members and customers will just look for the best deal, not an owner relationship.

Credit unions have learned the art of tapping member and organizational funds to create large balance sheets.  That same skill and funding attracts fintech startups and encourages multiple efforts at public banking.

Raising funds is just the beginning-how those resources are used thereafter is what matters.  Is it to make a profit or to serve a community? When community needs are not being met, newcomers will find a way to create options for those underserved. That is what the FHLB and the public banking models are trying to do-serve where others have failed to do so.

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Deciding on a Merger Partner Shouldn’t Be Like a Blind Date

Edited excerpts from this Second Quarter 2017 column in The NCUA Report provide a perspective on current merger discussions.

Scientific brainteaser of the month: “This man-made creation is defying the normal rules of science by both expanding and contracting at the same time.”   The final Jeopardy answer is: The U.S. credit union system.

In a streak now extending for decades, the number of credit unions in American continues to shrink while credit union membership and assets continue to expand.  . . no other issue is as perennial as the discussion of consolidation within the credit union system.  Many bemoan the erosion of the small credit union fraternity, while others cite the ever- increasing tide of financial services competition for making the erosion inevitable.

Protecting Member Interests

Whatever your perspective, climate change in the credit unions system is real. . . our focus is on ensuring member interests are protected, through the regulatory process and that the merged entlty meets safety and sourndess requirements.

The value proposition of mergers is, as it properly should be, left to the members of those institutions to weigh and then decide. . .

Really Acquisitions

But, while the term “merger” has a distinctively collaborative ring to it, make no mistake many mergers are really acquisitions.  For some credit unions, their growth strategy is defined by pursing acquisitions.  On the surface there is nothing inherently wrong with such an approach by either the acquirer or the acquired as long as sunlight permeates the pathway from boardroom to membership. 

Transparency: a Cornerstone Principle

Throughout my tenure, transparency in governance has been a cornerstone principle my colleagues and I have committed to build upon.  As we are constantly reminded, “every dollar is ultimately a credit union member dollar.”  . . .it is equally valid and important to remember that the same responsibility falls upon boards to be open and forthright with their member-owners when it comes to the merger process.

While many mergers germinate from the ability of the acquired credit union, generally a smaller institution, to adequately serve its members, some voluntary mergers have involved medium to very larger credit unions with relatively strong balance sheets.  In such instances, boards of director should be comprehensive in their disclosures to their members.

If an acquiring institution is tapping the net worth of an acquired credit union to pay for the acquirer’s’ cost of the merger, that reduction in net worth should be transparently, completely and fully disclosed to the members of the acquired institution before they vote on the proposed merger.

Certain disclosures of executive compensation and boards of directors’ benefits are already required under some circumstances, but the threshold for disclosure many not be adequate to provide true transparency to members.

Many board directors initiate the marriage dance long before the merger nuptials are finalized.  Pay and benefit enhancements for the acquired credit union’s leadership are sometimes finalized prior to triggering the current window of disclosures. Members also may not be given adequate opportunity to digest the information before the final merger vote. . .

Merger Windows and Frosted Glass

In the final analysis, it will, and should be, the members who will rightly make the ultimate decision, not the NCUA.  But, as members peer through the merger window, it is imperative their view not be obscured by frosted glass. 

By Rick Metsger, NCUA Board Member