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Baseball and the Four Stakeholder Credit Union Model

A credit union’s relationship with its local minor league baseball team became more than a promotional opportunity.  It evolved into a strategic expression and expansion of its mission.

The Dayton Dragons (Dayton, Ohio) have the longest continuous sellout streak in North American sports history –1,441 games.   The team is the High-A affiliate of the Cincinnati Reds and plays in the Midwest League.

The team’s 2023 promotional video clearly highlights the credit union’s naming rights: the Day Air Credit Union Ballpark.  However the relationship with the Dragons goes much deeper than naming one of the most iconic venues in Southwest Ohio.

Both organizations have created a partnership that grows Day Air, the Dayton Dragons, and the economic vitality of the region.

Joe Eckley, Director of Marketing for the credit union, describes some of their joint activities:

  • Weekly meetings throughout the season to align strategies and prioritize promotions to drive fan engagement for the Dragons and member growth for the credit union.
  • Each year the two organizations develop a new promotion to meet a credit union-specific goal. The Dragons utilized their vast reach in the community to support this initiative.
  • During the off-season, the Dragons and Day Air work together on numerous events and promotions to benefit the community to enhance  key performance metrics for each organization.
    • College Prep Night
    • Business speaker seminars
    • 50/50 Holiday Raffle fundraisers
    • Annual 5k event.

  • The Dragons utilize their reach and community reputation to drive promotions for Day Air.
    • Special jerseys were only available at the credit union.
    • Food trucks and incentives for Day Air associates.
    • Sponsored donations to numerous organizations on the credit union’s behalf.
    • Mascot visits to Day Air locations.
    • Special ticket pricing for members
    • Discounts at the Dragons team store for Day Air members
    • Early access to exclusive events
    • Special service booth at Day Air Ballpark.

  • Day Air provides Dragons Associates, a SEG group, special member benefits.
  • Day Air supported the the Dragons throughout the pandemic when games were cancelled.

Building Community

The Dragons are a Dayton entity–they draw from the outskirts of the region to provide family friendly entertainment to all comers.

Day Air serves the greater Dayton area– people doing good for friends and neighbors. All the big banks in town are headquartered elsewhere (New York, Cleveland, Pittsburgh).

CEO Bill Burke says that from a strategy perspective, the naming rights partnership made sense because of the close alignment of both organizations for the community.

As a result the credit union changed its three stakeholder model to add a forth criteria when it obtained the naming rights.  All decisions are now run past the lens of the Credit Union, members, associates (employees), and the community.

The opening day on April 11 will continue the record sell out streak.  For the credit union, the Dragons and the Dayton community, it is a local celebration of two great American pastimes—alive and well in America’s heartland.

 

 

 

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

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

Mike Riley, December 1984

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

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

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

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

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

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

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

Ongoing Mergers

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

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

NCUA’s Role

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

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A Gen Z Story About Money Management in the Digital Era

(by Marit Hoyem, a junior  at Williams College)

Last summer I interned for Callahan and Associates where I wrote blog posts about my generation’s financial outlook and spending habits. As a Gen Z and local Credit Union member, I provided a perspective how credit unions can better serve their next generation of  members.

Currently I am studying abroad in Edinburgh, Scotland where I faced new financial challenges and learned valuable lessons about spending, budgeting, and saving money.

The Venmo User

During this time, I found myself reflecting on a prior  post, “Hello Venmo (Goodbye, Checking Account)”.  This discusses how Gen Z sees P2P payment services as de facto checking accounts, sharing money back and forth without ever using their credit union account.  Please see that piece for information  on Venmo and how phones facilitate Gen Z spending.

I first got Venmo in high school. What started as a way to split the cost of movie tickets or dinner through my phone has gradually evolved into a form of social media with friends. On the app we can see who our friends are paying and leave little messages with our payments that appear on a Twitter-like feed.

As I have gotten older, I have continued to do more transactions with the app, for much more money. Next semester I will split groceries and utilities as well as pay my rent using Venmo.

From Physical to Digital Spending

While I have done my fair share of splitting costs using Venmo while abroad, what has resonated during my experience in Scotland is how digital money affects how I budget and spend.

In Europe cashless payments are becoming the norm. In restaurants, grocery stores, and pharmacies, to make a payment all I do is double-click my power button and let Apple Pay do the rest.

After my first month in Scotland,  I checked  if I was sticking to my expense budget  I was shocked to see I had gone way over the amount of planned spending. One of the issues was that I was paying in a new currency, pounds, and wasn’t always doing the mental math to see the amount in American dollars.

Although there are ways to check my payments daily on my credit union app, it was difficult for me to follow just how much was leaving my account while paying for food, bedding, and other necessities.  I see the issue now–growing up in the era of digital money, I never had to take cash out of my wallet, physically count out dollars, or go to the ATM when I ran out.

This isn’t to say that my generation is irresponsible with their money or careless spenders and borrowers.  Rather, our perception and experience  of money is fundamentally different from older generations.

We grew up using phones, cards, and apps to pay for things, not cash. Credit Unions should note this difference in spending habits and offer money management solutions for digital transactors.

Better Money Management

Something that helped me understand my budgeting issue was to go on my credit union app, look back at my recent transactions, and add up how much I was spending each week on necessities (such as groceries) versus indulgences (like eating out with friends).

I think a great service for Gen Z members would be to make this categorization easier. For example, splitting up purchases on a mobile app by month, by location, or by dollar amount to help members track their spending habits.

In a world of cashless transitions, seeing the money available and visualizing the cost of something is harder for everyone, especially those who only make purchases with their phone.

Credit Unions have an opportunity not only to be a checking account, but also to serve as an educational and budgeting resource for their members.

Empower and encourage members to track spending.  Give them an opportunity to learn from moments of spending exuberance (as I did).

 

 

 

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Is “Creative Destruction” the Future of Credit Unions?

One of Austrian-American economist Joseph Schumpeter’s descriptions of capitalism was called “creative destruction.”

This refers to a competitive economy’s relentless efforts to innovate for advantage and market dominance.   He described the process as: “the old way of doing things is constantly getting destroyed or supplanted as it is replaced by a newer, better.”

Some would suggest that business failures in a competitive economy are an inevitable and necessary event, even when they cause local hardship or dislocations.

The cooperative system is supposed to be immune from some of these economic forces. Credit unions are owned by their users, they have no traded stock, cannot be bought and sold as private firms, and reflect the values necessary for a communal, versus for-profit, enterprise.  Their founding, focused on a ”local” constituency with a common bond, is intended to improve the welfare of a community, not just individuals.

Local Destruction Where Dreams Become Reality

One example of this “creative” process is in neighborhood across the street where I live.   There is no home sold for less than $1.5 million and when offered, most list for at least twice that amount.

Even with this going-in price tag, Edgemoor is not a place for old homes.  No matter the asking price,  every purchase becomes a tear down.   Here is an example from across the street this past week.

The builder, entrepreneur, risk taker and innovator.

The destruction phase.

The front view.

This home built during  the depression was sold as is for $2.0 million.  About five or more large white oaks were cut down before the demolition started.  The land and location are so valuable that the builder will put up a mac-mansion of enough square feet to justify a new sales price at least double his cost.

Obviously, whoever buys this new home will believe this is progress, just what they were looking for. This is the free market at work.

Credit Union Destructions

We can debate the social and political implications of tear downs to build back bigger and more expensive homes, office buildings or condos.   But the example is not limited to real estate.  It happens in credit unions.  It is called mergers.

The key question is whether mergers are helping or hurting the credit union system–to be more precise, the mergers of sound, well capitalized long standing credit unions which have served their markets for generations.

Everyone undertaking a merger believes their new creation will be bigger and better.  Any downsides will be temporary.   Mergers are just a way of getting to the future faster especially when asset size is believed to be THE essential for competitive competence.

No Creativity, Just Destruction

Now to be fair, the house across the street had not been well maintained.  The owners had lived there for four or five decades.  The yard and landscaping were totally neglected.   The 80 foot tall oak trees made the property look like an unkempt urban jungle.

So whatever goes up after this tear down, will certainly be a visual and living enhancement-except for the missing trees.

Similarly, some sound credit unions have not been well maintained.  Leadership is just holding on until retirement; the board has given up leadership responsibility.   Selling out looks like an easy way to take care of members when the motivation has gone.

It becomes time for a new generation of leaders to take over the credit union’s legacy and continue serving members in the future.

An Existential Vortex

These easy-exit examples are becoming more numerous.  Personal advantage, not member value, appears to be the motive.

The systemic risk is creating an “existential vortex”  where all credit unions, not just the small, the poorly led or even the ambitious, are caught up in a system that is  increasingly circling the drain.

There are no new charters.  Industry assets are more concentrated. The leadership purpose  is more and more institutional growth and success.  The members, are not owners in any sense of the term, but merely customers used as the means to greater financial glory.

Credit unions competitive advantage has been collaboration and interdependence.  This is how the cooperative system was created, their regulatory institutions were differentiated, and why purpose justified a tax exemption.

Creative destruction destroys legacies, whether buildings, companies or credit unions.   New brands emerge.  Old locations closed.  New markets and business models tried.

Credit unions are not rebuilding on their old foundations.  Instead large mergers are just the age-old, typical financial market strategy of buying up competitors to become more dominate and survive.

I don’t think the merging of well run credit unions is sustainable.    It will take over two years before the new home is ready on the now demolished site and the new owners move in.   This  is also about the operational transition timeline of a large merger when members start to look for other options.

Unfortunately the creative destruction in credit unions is not putting new homes in place of the old; it is just moving all the occupants into the existing one.

Schumpeter believed that capitalism would gradually weaken itself and eventually collapse. Specifically, the success of capitalism would lead to corporatism and to values hostile to capitalism, especially among intellectuals.

In an historical irony, cooperatives intended as an antidote to the excesses of capitalism, are instead succumbing to the allure of free market takeovers.

Everyone wants to own a bigger house.

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In Journalism, Three Is a Trend

The following are three examples of a slowing economy.

In a call this week a CEO said he had budgeted 5% share growth and 3.5% loan growth for 2023.  For the first quarter  share growth is negative; loans increasing slightly.

The following is a message from the Vestry of a local church about their budget challenge

On March 14, the Vestry passed an Interim Budget of $1,540,665. We call this an “Interim” budget because it falls short of the money needed to run St. John’s in 2023.

Why is that? First of all, our expenses have increased significantly since 2022. Inflation has driven up many of our operating and building expenses. And we are now better staffed on both the programmatic and operational side – a result of intentional decisions to support the functioning of our vital ministries – which has increased our personnel costs.

Second, while the average pledge has increased for the past two years, we have seen the number of pledges drop by more than 10 percent in the same time frame.  In other words, while the average dollar amount of pledges has increased, the number of people/households making those pledges has decreased.

Our financial situation is further hindered as the church ended 2022 with a deficit, due primarily to unrealized pledges. Without a course correction, this does not bode well for St. John’s in the long run and in the short term it has left us with a critical “gap” between anticipated pledge income and church expenses for 2023. 

The “gap” is a minimum of $250,000 at this time.

At Disney: Recently reinstated CEO Bob Iger announced plans for 7,000 layoffs that will take place in three “waves.”

Federal Student Loan Payments to Restart

Sometime in June, the Supreme court will announce its decision whether President Biden has the legal authority to forgive up to $400 million of the approximately $1.8 trillion outstanding federal student loan debt.

Whatever the decision, the three-year payment moratorium on payments and interest accruals begun during the Covid lockdown, will expire.

Regardless of the legal outcome on Biden’s debt cancellation proposal, millions of borrowers will find their monthly income reduced by payments that must now be made.

 

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What Is Purpose?

From a philosopher:

As a species, we can’t choose whether we worship — it’s built into us. However, we can choose what we worship. 

Purpose and worship-two sides of the same coin.

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A Former Fed Regulator On Reasons for SVB Failure

A segment from the March 14, Marketplace daily report on NPR follows.  The interviewer is host Kai Ryssdal and the guest commentator is  Daniel Tarullo who teaches at Harvard Law School.

Between 2009 and 2017, Tarullo was on the Federal Reserve Board of Governors; specifically, he served as oversight governor for the supervision and regulation committee.

Silicon Valley Bank (SVB) analysts are looking for situations where there are balance sheet or business model parallels that could lead to more bank failures. Tarullo asserts that management will always be first in line when  blame is assessed.

However that is not the full story.  He believes the proximate cause is closer to home–a regulator with a light touch.

I believe  his last comment highlighted below describes NCUA’s approach to supervision.  How else do you explain a credit union CEO and Chair giving themselves a $10 million fund under their sole control or $1.0 million dollar credit union CEO bonus upon merger, among other abuses?

Interview Excerpts:

Ryssdal: All right, so look, that’s why we got you on the phone. You ran, among other things you did at the Fed, the committee on supervision and regulation. And I am not the first person to ask, nor will I be the first person to ask, where were the regulators? Why did this come out of the blue?

Tarullo: That’s a huge question, isn’t it? There are two places to look: One is to supervision and the other is to regulation. Now, of course, we’re stipulating that there’s a management failure, but I think everybody would agree with that. So in terms of the government, the debate publicly has been, “Gee, were the 2018-2019 changes in the [Dodd-Frank] law and Fed regulations respectively to blame?” And, as I think you know, I was opposed to both the [rollback of the] law and the changes in the regulations.

But I don’t think there’s that direct of a connection between those specific changes and Silicon Valley. And so what that tells us is the failure was in the oversight by supervisors — people who were supposed to be watching whether things like the proportion of uninsured deposits was creating some unusual risks for that particular bank.

Ryssdal: That’s not terribly reassuring, I gotta tell you.

Tarullo: No, it’s not. And I think that the review that the Fed has launched — and it’s significant that it’s headed by the vice chair for supervision, Michael Barr, who is, you know, relatively new — I think the significance of having him run that rather than staff is precisely because they want to find out where the supervisory failures lay. Were they with the specific team that had responsibility for Silicon Valley? Or were the failures more widespread in the sense that Washington was providing kind of a light touch supervisory direction to them?

Ryssdal: What do you think?

Tarullo: I suspect that it’s a combination of the two. But given the signals that the Fed was sending, you know, in the last several years, I believe that part of it is just the “don’t be too tight in your supervision, you need to find legal problems before you tell the banks to change what they were doing.”

 

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The Wisdom of Elders

In talking with a retired CEO who still follows credit union events, I asked how his perspective had changed.

“I don’t feel the intensity or nuances from the grind of the day to day.  . . or the tactical lust for short term passions.”

Without an organization’s boundaries, the retiree tends to be more observant of general trends.

An example of this capability is John Tippets,  who retired as CEO of American Airlines FCU in the first decade of this century.  In retirement he continued to consult in strategic planning sessions and speak at credit union events. During the 2008/9 financial crisis he was the interim CEO for three years at the troubled North Island Credit Union, which he saved from a regulatory closure.

Before his credit union roles John spent about 25 years in the for-profit world of American Airlines.  Most of that time he was an Officer with Sky Chefs, an American airport restaurant and concessions, and airline catering, subsidiary.

He has had multiple retirements and career involvements.  He and his wife Bonnie have written a book, Hearts of Courage published in 2008, the story of his father’s survival from a plane crash in Alaska in 1943. The story behind the book is in this 2009 article.

There have been two CEO’s since John at the credit union. The airline sponsor has gone through much turmoil including bankruptcy, mergers and leadership changes.  The relationship of the credit union and its sponsor has continued strong even through numerous board changes.

The one strategic change John made as CEO was to take advantage of the TIP field of membership option.  This permitted the personnel of other employers, co-workers at the airports, to become members of AAFCU. Airports in many ways became the credit union’s communities.

Speaking on Leadership

A favorite topic for John is his Principles of Leadership which he developed into a 50 slide presentation to the Aerospace conference in 2018.

The speech summarized his multiple professional and personal interests in a diagram similar to the UCLA basketball coach John Wooden’s nine principles of leadership.  Here is John’s organizational template using a similar framework for credit unions.

The slides develop each of the nine points using examples from his numerous life experiences.  The speech summarizes his approach to leadership.  It also characterizes how he sees meaning in his multiple organizational and personal responsibilities.

The Underutilized Resource

John is now working on a book about his 25 years in credit unions.   His activities are just one of multiple examples of credit union leaders who have stepped down but continue to follow credit union events.  For many, these professional years are the most satisfying responsibility they have had.

Look around.  There are examples of professional experiences and resources in every community, often like John, willing to provide perspective and an occasional assist.   They see the world differently, often with more clarity than incumbents might assume.

And sometimes they are even delightful guests for the board, employees and members to hear from when those occasions arise.

In his book, John talks about his father’s  recounting his story to youth leaders.  Joseph would encourage them to keep teaching the lessons, because even though they might not seem to care, “kids are hearing and someday they may really, really appreciate what they learned.”

Life stories are not just for kids. For the past is never past, but always present.

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Two Thoughts from Other Writers

 Part of the job—arguably the job—of good journalism is to expose that brokenness. It’s to shine a light in the dark places.

However by focusing so much on what isn’t working, we sometimes forget what is. 

If ours is an era of building and rebuilding, what things are worth saving? What things are worth elevating? What things are worth remembering?

And:

America won’t be saved by politicians

or money

or technology

or celebrities.

It can only be saved across the land by “character.”

 

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Respecting Cooperative Owners: The One Thing Essential

This past week’s financial runs show how fragile consumer confidence can be.

A critical distinction in credit union design is democratic ownership-one member one vote.

One of the challenges however is that it is easy to treat owners only as customers.  The fact is that many “owners” today are ordinary consumers attracted by a competitive rate or other marketing message.  In some cases, the customer is just an indirect loan borrower who had minimal voice in the selection of where the loan was made.

There is a difference between customers and owners in a financial institution.

Customers do not vote for directors at the annual meeting;

Customers do not vote on merger proposals for their institution;

Customers do not have a residual interest in the reserves of their firm.

Ownership is traditionally honored in other communications such as members’  founding stories or recognizing those who have played special roles in the credit union or cooperative system.

The One Thing Essential

Transparency is one critical leadership characteristic that acknowledges the owner’s role.

Without full, continuous and open communications, the default is to treat owners as customers.  That unfortunately is the attitude of many in positions of leadership today.

Most importantly lack of transparency on specific credit union commitments means the owners have little or no basis for their responsibility of electing directors.

A Regulatory Shortcoming

An example is from last week’s subordinated debt rule approved by NCUA.  Every party to the transaction is provided full information:  Senior management/boards, the brokers, the consultant, NCUA, and most importantly the individuals and entities (including other credit unions) that buy the debt.

Debt issuance of $100 and $200 million have been completed in the past 12 months. The only persons not provided the details of these events are the owners.  It is their loyalty that is the basis for issuing these borrowings that can now extend as far as 30 years.

Without transparency, there is no possibility of accountability.  The owners are removed from any role in governance.  NCUA presumes its in loco parentis role if something doesn’t go according to plan-a distinct prospect with terms of 10, 20 and now 30 years.

Senior Management and Board Compensation

Only state-chartered credit unions are required to file IRS form 990 which discloses senior management and board compensation, political donations and other activities such as grants for all non profits.

These disclosures are essential for owners to know the incentives and circumstances board and management have agreed to in leading the credit union.

Compensation consultants today are plentiful  with four part plans and multiple ways to structure payments now or later.  There are increasing references to a “change of control” clause which would trigger executive payouts no matter other merger bonus and benefits negotiated by the CEO.

Without compensation transparency there can be no accountability.  State charters have disclosed this for decades.  The same logic applies to federal charters.  This information is an important step in owner oversight, even consumer protection.

The Place and Time to Start Showing Trust in Owners

In the months ahead, most credit unions will hold their annual meetings-in person and virtual.  In preparation the annual audit will be available, a Chairman’s report prepared and other required business conducted including election of directors.

Some meetings will include updates on projects such as a new building or branch expansion, a report by a foundation or community activity.  Others will include an educational presentation, an outside speaker and even a meal.

The annual meeting is a primary opportunity for leadership to engage with owners in open and full conversations.

It is especially important in light of recent examples about the resilience of regional and smaller banks.   Confidence in an institution is based on trust.   Trust is not created in a day or by a special press release about a firm’s financial standing.  It is a relationship founded on open communication as both customers and owners over years.

Nothing could be more important this year than showing coop owners that the CEO and board  deserve their trust by being fully transparent with facts and open to the members’ questions and points of view.

That is how free markets are supposed to function in a competitive economy. That is how democracy is supposed to work.