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The Latino Community Credit Union-A Timeless Example of Cooperative Action

The 2003 Herb Wegner award for outstanding organization is perhaps even more significant today than when granted almost two decades ago.

Here is co-MC Annaloro’s description of the special nature of this award which had been given only 14 times before.

https://youtu.be/nqJORMMiFto

In 2003, Latino credit union was three years old, held $11 million in assets and had just 8,000 members.  Even then the credit unions was know for “punching far beyond its weight class.”

As Chair Chuck Purvis stated in his opening remarks, it is an example of the movement coming together to “effectively serve the needs” of the Hispanic market.  And those needs were clear and unmistakable as documented by the introductory 10 minute video from that evening. Why a credit union for the Hispanic community:

https://youtu.be/Hbjgz81jU5s

Latino Credit Union Today

This is a powerful example of credit union’s ability to respond to some of the most vulnerable persons in our society.  Few could foresee what the long-term results of this initial organizing effort would be.

Today Latino Community Credit Union has $663 million in assets and continues it focus on lending with a loan-to-share ratio of over 100%.  It has a below peer operating expense ratio even though it manages 13 branches with 157 employees serving in excess of 101,000 members.

Every aspect of its performance is exceptional with recent annual growth in shares (24%)  and loans (28%) at the very top of the industry.  It reported net worth of 11.2% at June 30 even with this high level of balance sheet growth.

Latino’s Meaning for Today

When passion and commitment meet human need, the opportunity for success is great.  This is the circumstances in which credit unions were begun in 1909.  Inequalities and vulnerable populations have not disappeared from American society.   The continued growth of payday lenders and check cashiers is an ongoing example of persons living paycheck to paycheck

Latino also shows the power  of new startups.  Some today disparage the efforts to form new credit unions.  They point out their small size forgetting that every credit union that exists today started small. Some point out the capacity of existing credit unions to serve more-and yet many parts of the their current FOM’s remained unserved or underserved.

Succeeding from scratch is not an easy thing to do.  Latino maximized its chances of success by getting inspiration from those who had already achieved what they want to accomplish.

We will learn in tomorrow’s acceptance speech, how these people became mentors-”family”-helping along the way.  Mentors increase the chance of success because they will have already confronted many of the questions that determine whether or not a start up will succeed.

We will see these people stand on stage with the Chair of Latino Community as he reminds us of a message-especially relevant today-why America needs more credit unions.

 

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COOPS: Collectively Honoring Individual Achievement

There was a surprise “gift” presented to Ed Callahan at his San Francisco retirement celebration after serving 15 years as CEO of Patelco. During this October 2002 event, a number of his peers and friends honored him by establishing the “Ed fund”.  All investments would become a component of the Community Investment Fund (CIF) of the National Credit Union Foundation.

The Fund’s name was a play on words.  For it honored Ed as a credit union leader and also recognized his early career in education and belief in lifelong learning.

The intent was that the earnings from these investments, split 50/50 between the credit union and the CIF, would provide a reliable source of income to support the Foundation’s education and grant programs.

This tradition of recognizing individual accomplishment by furthering cooperative enterprise is as old as the Herb Wegner dinner itself.

At this 15th Herb Wegner ceremony in 2003, this special effort was singled out for recognition.  The initiative had led to a tripling of investment balances in the CIF to $155 million just five months following the October launch.  The nine CEO’s who committed $10 million or more were recognized personally in the segment below introduced by co-chair John Annaloro, CEO of the NWCUA.

https://youtu.be/7kD8S31A2X4

Peers Reinvesting in the System that Gave Them Opportunities

The lead donors and 24 other credit union CIF supporters were a coordinated effort to provide seed funding for cu startups and programs to promote individual financial independence.

It demonstrated the willingness of all segments of the cooperative system to support collective, not just individual, responsibilities. Simply running your own shop well and supporting local communities, was not the end all for these leaders.  In the tradition of Ed Filene and many other system leaders, they believed in “paying forward” part of the success they had enjoyed.

At the pinnacle and critical to the CIF’s success was US Central.  It managed the funds, helped collect donations via the corporate network, kept the bookwork and provided the best return available given investment limits on credit unions.  In addition to making a $10 million investment, the corporate also contributed $700,00 in direct donations to the fund.

This special role is acknowledged by Annaloro in this brief clip:

https://youtu.be/0wPXlfgS0nE

Leaders Insuring a Legacy—for the Cooperative System

The unique advantage of credit unions is cooperation–the capacity of leaders to join with each other for system benefit.   CUSO’s are one example driven by economics and scale.   The Ed fund is another example of this talent to work for common purpose.

These initiatives require leaders who have the instincts and will to make change happen.  When there are leaders there will be followers. No matter a credit union’s size or status, all members current and future, benefit when cooperatives share their success beyond their own firm’s boundaries.

(editor’s note)

These glimpses of past credit union events are done in the spirit of historian Will Durant who wrote:

we of this generation give too much time to news about the transient present, too little to the living past. We are choked with news, and starved of history. We know a thousand items about the day or yesterday, we learn the events and troubles and heartbreaks of a hundred peoples, the policies and pretensions of a dozen capitals, the victories and defeats of causes, armies, athletic teams. But how, without history, can we understand these events, discriminate their significance, sift out the large from the small, see the basic currents underlying surface movements and changes, and foresee the result sufficiently to guard against fatal error or the souring of unreasonable hopes?

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The Community Investment Fund: A $1 billion Challenge and a Lesson for Today

The 2003 Herb Wegner award dinner was both celebration and challenge. While almost two decades ago, there are important lessons from that evening for today’s cooperative industry.

In his opening remarks, Foundation Chair Chuck Purvis described the mission of the Community Investment Fund (CIF) which was designed to be a stable revenue source for the National Credit Union Foundation (NCUF.)

In his welcome message, Purvis mentioned the CIF’s current size of $155 million and recounted two projects which embody the spirit of creating financial independence for low- income consumers.  This video is 2.30 minutes.

https://youtu.be/RiGn7AMZLAc

The $1 Billion Challenge

The current CIF balance of $155 million was just a beginning.  Purvis issued a challenge to raise the CIF to $1 billion in the next two years.  This would create a revenue stream of $10 million for annual Foundation grants at the current level of interest rates.

He noted that this goal is just .5% of the industry’s total investments of $200 billion.  By contrast at June 2021 credit unions hold $700 billion investments.  He described the importance of the goal in this excerpt.

https://youtu.be/jBMCYDYaqwo

What happened to the CIF and the Billion Dollar Goal?

CIF investments were managed by US Central which was closed by NCUA in 2010.  Other excerpts from this 2003 dinner will show how donations honoring credit union leaders were a critical part of the effort.  In that year this campaign was called the “Ed Fund,” both honoring Ed Callahan and the Foundation’s educational role.   That campaign will be the subject of blog later this week.

The history of the CIF following this dinner is unclear. One participant from this period recalls the CIF situation as follows:

The ED Fund, the Larry Johnson fund in NC and others pushed committed funds to over $300 million. Interest rates had been in a sweet spot around 6% in earlier years, so that after splitting the earnings with the Foundation, credit unions still received a decent return. After the 2003 $1 billion challenge, the CIF investments peaked in the $450-$475 million range.

 Overnight federal fund rates were quite low in 2003, but reached 5.25% in June 2006. That was probably the fund’s highest point. When rates fell to zero during the financial crisis, the CIF was no longer an effective option. With rates since, the 50/50 sharing of interest revenue with the Foundation could never reach an attractive level.

 Several corporates such as CorporateOne still offer these shared-interest CIF certificates.  But unless rates on term CD’s rise to 1.5% or so, credit unions find it easier to donate directly to the Foundation.   When CorporateOne held some CIF investments after the Great Recession, it added .30% to the CD rate as its contribution.

One participant estimates the CIF generated over $100 million in donations to NCUF and the state foundations during this decade.

The CIF’s Lesson for Today’s Cooperative System

The CIF with its fund-raising tributes like the Ed Fund are a premier example of the 3-tiered cooperative system working for common purpose.  The Wegner dinner was a collective celebration of a charitable process that was simple, coordinated and easy for all credit unions to join.

Today this collaborative effort has been replaced by Charitable Donation Accounts (CDA) approved as an incidental power by NCUA in 2013. Multiple credit union organizations including CUNA Mutual, CUES, and Members Trust Company offer programs for managing these accounts.  While limited to 5% of net worth, their advantage is they can invest in securities outside those permitted for credit unions themselves by rule 703. Their only requirement is that 51% of the total return must be donated to 501C3 organizations over a five-year period.

As of June 30, 2021 there were 187 credit unions which have established CDA’s with a total value of $1.084 billion.

There is no total for the charitable contributions made from these accounts.  The CDA option is disaggregated in both fund raising and donations versus the CIF process.  Individual accounts range in size from Pentagon FCU’s $136.4 million to Temple-Inland’s $1,000 balance.

The total in these accounts equals Purvis’s original 2003 goal of $1.0 billion. However today that coordinated system approach has been muted or even lost.  Individual credit unions organize and disburse grants to various 501C3 as they each decide.

Chuck Purvis’ framed his request for support as part of credit union’s “inherent social mission.”  He stated it would send a collective message to Capitol Hill with grants funding low income credit unions with revenue from this $1 billion challenge.  That public benefit is missing in the CDA alternative.

The Wegner Dinners are about more than awards or fund raising.  They are an expression of the collective capabilities of a cooperative system.   Understanding how this vital activity functioned in prior decades can hopefully reaffirm the importance of these common endeavors today.

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The Festive Cooperative Spirit: The Night CUNA Saluted NAFCU

The 2003 Herb Wegner Memorial Award Dinner was memorable for many reasons.

There was an atmosphere of collective celebration and aspiration. The Foundation Chair, Chuck Purvis, set a goal of $1 billion for the Community Investment Fund. Leading CEO contributors were called on stage and thanked. That year’s award nominees, Ed Callahan and Latino Credit Union, were representative of some of the best features of cooperative accomplishment.

But first it started with a “grace note.”

This moment of collective harmony is best illustrated by a 1.34 minute shout out that CUNA President Dan Mica gave to his counterpart at NAFCU. Here is the video:

https://youtu.be/jyKJSh_Jcgk

Blogs later this week will feature other uplifting moments from this historic evening—and some important lessons for today’s leaders.

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My Favorite Headline this Week.

No, this is not from the Onion or other satirical pub.  It is from the English newspaper the Guardian.

United Airlines reminds crew not to restrain unruly passengers with duct tape

The story opens as follows:

United Airlines has asked its employees to not use duct tape to restrain unruly passengers.

In a memo sent to employees last Friday, United flight attendants were urged to “please remember that there are designated items onboard that may be used in difficult situations, and alternative measures such as tape should never be used”.

The article then lists examples of duct taping unruly passengers over the years at other airlines. Apparently the technique is not unique to United.

United then encourages its employees to use the “huddle process” instead:

In instances of disorderly behavior, United said, employees should resort to standard de-escalation measures, including using “the huddle process … which involves discussing the situation with the captain, customer service representative and ground security coordinator for evaluation and solutions”.

All I might say is that it is far better to use duct tape on passengers than for aircraft repairs.

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SECU’s Mike Lord: Two Remarkable Accomplishments

The CEO of the $50 billion State Employees’ Credit Union (SECU), Mike Lord retires at the end of this month. His career is noteworthy for two remarkable achievements:

  1. He successfully navigated 30 years of intellectual contrarianism with Jim Blaine, his boss. Jim’s motto is “often wrong, but never in doubt.” His public name-image-likeness (NIL) brand is an animal of the horse family, but typically smaller than a horse with longer ears and a braying call.
  2. Against all odds, he sustained and expanded SECU’s exceptional level of leadership and member well-being as Blaine’s successor in 2016.
    Succeeding a legend and then taking results to a new level whether in business, coaching a sport, politics or any field of public endeavor, is an incredibly rare event.

“Don’t Mess It Up”

The management consultant Peter Drucker stated, “the most common source of mistakes in management decisions is the emphasis on finding the right answer rather than the right question.”

For Lord and SECU that question has always been how to enhance member service. The mission and vision of the credit union are folksy truisms: “Send Us Your Mama” and “Do the Right Thing.”

When Lord became CEO in 2016 his stated goal was just as straight forward: “Don’t mess it up.”

In today’s individualistic culture that celebrates personal achievement, choosing a leader where the mission supersedes personal ego is a tribute both to the organization’s values as well as the leader’s character. Especially so in the second largest credit union in America.

An example of these values is SECU’s compensation practice. The credit union follows the “Mondragon model” to assure balance among all staff. There are no perks, no bonuses, no incentives and all staff receive the same benefits (health, retirement). This means that SECU CEOs are not paid the multi-million salaries prevalent at many smaller, less complex, less successful CUs.

Focus and Consistency

Several decades ago, SECU’s Board decided to “limit” SECU’s FOM to North Carolina. Those members who moved out of NC or lived in foreign countries could remain, but if they wanted loan services they were referred to a local CU. This focus on the core members who “brung us to the dance,” makes SECU a formidable force against major national banking competitors, several of whom call North Carolina home: Bank of America and Truist.

Today SECU serves 1 in 4 North Carolinians. Rather than trying to be a “national” credit union, its statewide focus has improved economic prospects for individuals and communities that are little more than an afterthought for large competitors.

Sustaining success following the iconic 30-year tenure of Blaine required an underrated leadership trait, consistency, one of Lord’s strengths. While he may have had to go outside of SECU for some expertise, Lord continued to promote from within for employee advancement. Front line staff are much more than transaction providers. Some even receive training in multiple areas of financial service, including tax preparation, life insurance and investment counseling, while earning the appropriate license for each discipline.

Traditional media advertising was shunned. The credit union relied on word of mouth and its foundation’s public philanthropy to keep the SECU name in the press. The funding of scholarships for every local education agency in the state, contributing to teacher housing, new hospice facilities and dozens of other projects projected a “brand” deeply involved in members’ communities.

A Cooperative Financial Conglomerate

Describing SECU as the second largest credit union in the US does not begin to define the scope of its member services. With the credit union at its core, the credit union also oversees the following organizations-CUSO’s:

  • SECU Life is the only CU-owned life insurance company in the US. Other CUs which offer insurance do so as an agent for an outside firm;
  • A broker dealer and investment advisor that developed a unique partnership with the low-cost Vanguard mutual fund family for members seeking off balance sheet investment options;
  • A 501(c)3 Foundation that donates over $15 million per year for community needs in North Carolina;
  • A property management company (SECU*RE) that owns and manages 1,500 properties to provide housing, and improve declining neighborhoods, sometimes even selling homes to members. This company is for-profit, taxable and was begun as SECU’s response to the 2009 housing crisis. Its purpose is to reinvest in neighborhoods, prevent bottom fishers from underpaying for foreclosed properties, and provide renters a better choice than local slum lords.

With these multiple business lines come many regulators: NCUA’s ONES and North Carolina’s Credit Union Division of the Department of Commerce, NC Department of Insurance, CFPB, FINRA/SEC, and of course the IRS for the Foundation.

Staying Local While Becoming Larger

With a branch in every county of the state, the credit union’s over 270 locations operate like small credit unions. They provide local employment, knowledge and expertise for every part of the state. Branch managers consult with local advisory boards and often make recommendations for SECU services or foundation grants for their areas.

Lending decisions are all made at the branch level. Branch personnel are intimately familiar with local economic conditions and politics, even in the smallest community. This gives SECU deeper insight into all things economic when making loan decisions and keeps charge-offs way below peer averages.

A Simple Product Profile

The primary purpose of each SECU product is to help members become financially stronger. The credit union’s primary product for helping members build wealth is a variable rate home loan to encourage home ownership. Its loan portfolio is 74% first mortgages.

For over a quarter of a century SECU has made 100% mortgage loans with negligible losses to help lower income and young folks achieve home ownership. Underwriting was based on the common-sense idea that if members pay rent reliably they can be counted on to pay the same amount on a mortgage to own their home. These mortgage loans also invested billions in communities throughout North Carolina’s economy, not just in wealthier big cities.

There is no risk-based loan pricing: each product has a single rate whether a credit card, auto or other lending need. Each loan is based on individual underwriting, not credit scores. SECU’s Salary Advance loan has made billions in payday loans to members at APRs less than 15%. The program, which also has a savings component, fights for-profit payday lenders who prey upon the least advantaged in the economy.

In addition to traditional savings and share drafts, the credit union has $170 million in a 529 college savings plan, $67 million in HSA accounts, and $ 4 billion in IRA/Keogh retirement savings. SECU’s 529 plan is a financial “safer option” for all participants in North Carolina’s college savings program, not just SECU members. That selection says much about the confidence in SECU within the state.

As with loan pricing, there are no savings tiers based on account balances–all 2.6 million members receive the same rate on each product.

Serving the Cooperative System

SECU’s influence extends far beyond its 2.6 million members. Within North Carolina’s cooperative system, the credit union supports others who might reach out for mergers to offer mentoring and resources so they might continue their independent journeys. These operational alliances continue today with Local Government FCU, Latino Community CU, North Carolina Press Association Federal Credit Union and Greater Kinston Community Credit Union.

Greater Kinston is the last survivor of 55 credit unions chartered by the black community during the Jim Crow era when financial services were not open to them. SECU was also a leading fundraiser for the Martin Luther King memorial in Washington, DC.

At a time when many peers proclaim institutional growth as the critical performance objective, not members’ financial well-being, SECU adamantly asserts this is a false dichotomy. Members are the credit union.

As many leaders focus on innovation and the allure of the self-service virtual future, SECU continues the traditional embrace of a face-to-face relationships– for all ages from the newborn to the retiree.

The bedrock of its strategy is the cooperative model with all its inherent design advantages versus other firms. Member-ownership is the unmatchable competitive difference. It implements what writer Ken Wilber calls “good power” in which organizations protect the many who are often at the mercy of the firms they use. He contrasts this “good power” with the instinct of “dominant” organizations that use their position primarily to protect, maintain and promote their success at the expense of others.

SECU proves that size does not dilute cooperative values or purpose. It is a powerful example of the ability to achieve mission and counter the prevailing tendencies of credit unions to become more and more bank-like.

SECU demonstrates that economic, social and political influence can be accomplished by implementing and innovating traditional cooperative principles. Its success validates the credit union system’s contribution for both its members’ financial health and for co-ops as an essential part of the American economy.

Sitting in the Same Place Where He First Began

SECU has been developing system leaders, not only by hiring at the entry level and promoting from within, but also by sending leaders to over 30 other credit unions. Some–Tom Dorety, Terry West, Maurice Smith, and Tom Feindt– ran billion-dollar shops while others migrated to smaller but no less vital firms.

Lord’s career exemplifies this leadership development capacity. In a 2016 interview after becoming CEO, Lord pointed out his office was at the same location where he first began his career 46 years earlier. Albeit in a very different building. Lord’s career exemplifies a critical life lesson, awareness of one’s “true home.”

In a poem called “Little Gidding,” T.S. Eliot ends his quartet by writing:

We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.

Lord is the rare exception to Eliot’s observation of human nature. For without exploring, he knew the place he belonged, from the very first time he arrived.

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A CEO’s Current Analysis—and How to Respond

As I write this, we’re deep into preparations for our 2022 business plan and budget. We’re in the mood to look forward and say, “yesterday’s numbers are yesterday’s numbers.” And, as of June 30, yesterday’s numbers are spectacular.

I could wax on about all of the effort, the good luck, and the wonderful contributions of everyone involved. Credit unions put forward the capital and embrace our alliance; we go about our day-to-day business; and the results are great.

But I have a nagging feeling about the future. We all have the sense that we’re making money by hunkering down, by avoiding aggressive investment, by just riding the wave of a national COVID approach that will leave us hanging in the future.

American citizens will all have to wake up and face the day after all the free money expires. As American businesses, that means we are going to wake up to consumers being resentful about how hard life is, the day after the COVID relief funding ends.

I wonder what a marketplace of resentful consumers means to credit unions. I wish I had a crystal ball and could tell you exactly what it means, but I don’t. I can only tell you what we’re planning for 2022 and how we hope that will pay off in the coming years.

    • We’ll have to be more aggressive about investment and think hard about what we’re committed to as a community of credit union operations. We need to fuel the future with investment. The hunkering down is over.
    • While we have a bit more time to analyze business trends related to the COVID pause, we’ll have to quickly identify the game-changers that will last, versus the over-reactions and over-estimates of how things like remote work will affect our future. We can’t throw out the baby with the wash based on an interruption in economic models. What will we count on? What will we bet on? What will we make work? I’m not sure it’s going to be as radical in the next two years as most people think. We have options if we’re patient. We have a future if we don’t shoot ourselves in the foot.
    • We’ll have to avoid being disappointed by the fact that COVID might not end as cleanly as we all hoped. We’re making progress, but that progress may not be without some setbacks. Things like vaccines, wearing a mask, and social distancing might not just end, never to be seen again. It may feel like these issues linger right through 2022 and 2023, like a bad hangover after New Year’s Eve. Optimism, and a realistic evaluation that things are getting better, will have to rule the day for business planners.

Wow! These three marketplace realities confront every in-place or new leadership team.

The pressure will be high to pick the right investments, to choose the right trends to run towards, and to maintain an optimistic viewpoint, when pessimism is all around. No easy missions for any CEO.

The pressure is not on a single individual; it’s on a network. For a network to work, we all have to help our peers be successful by contributing to each other’s success. If you want to contribute to our CUSO’s success, spend a few minutes thinking about how each of us can be the person who helps us all avoid dropping the ball.

The numbers as of June 2021 are great. The predictions for September 30 are as positive as any year I can remember. My faith in the future is constant, given my faith in all of you.

Source: Randy Karnes, CEO, CU*Answers, used with permission

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“The Best Damned System in the Country”

NASCUS members’ Annual State Summit meeting  begins today.  It includes a “fireside” chat with new NCUA Chair Harper.  Hopefully this dialogue will be enlightening.  For two of his recent proposals pose an existential threat to the dual chartering system.

The first would fundamentally alter the legal framework of the unique, cooperatively designed NCUSIF, by removing all the guardrails on expenditure.  Harper defends these changes by reference to the FDIC, a premium based fund that has failed repeatedly since the NCUSIF 1984 redesign.

The second Harper initiative is a new three-pronged capital structure for all NCUSIF insured credit unions.  Some credit unions would be allowed to follow the current risk based net worth (RBNW) model. Others would be required to follow the 2015 risk based capital (RBC) rule, yet to be implemented.  A third group of so-called complex credit unions could elect a new CCULR ratio that would raise their well-capitalized requirement by 43% from the current 7% to 10%.

All of these capital changes would take effect on January 1, 2022, or in five months, if Harper is able to get a second board vote.

The End of Dual Chartering

Aside from the lack of any substantive basis for these proposals, the outcome would effectively end the dual chartering system.   Risk based capital would throw a single regulatory blanket over every asset and liability decision made by an NCUSIF insured credit union.

NCUA would be the single hegemonic regulator for all coop charters. This single lens for risk evaluation would create a homogenous cooperative balance sheet.  Instead of increasing safety and soundness, if this uniform approach to risk analysis is wrong, it could lead the cooperative system over a cliff.

The One Sure Defense: Choice

This prospect of NCUA dominance was foreseen decades ago.   The following is a timely and timeless reminder of this threat in a speech by former NCUA Chair Ed Callahan in 1986.   The excerpt of these remarks to the Association of Credit Union League Executives is under three minutes. https://www.youtube.com/watch?v=cTMGvXPnVa8

“The insurer is the regulator.  The system only works when there are choices.”

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Coop Design’s Two Unmatchable Advantages

Living in a forest sometimes keeps participants from seeing the factors that create its growth.  For the credit union system, there are two areas where they should have the upper hand in the ever-changing world of financial options.

Ownership Matters

We live in a commercial, social and political world in which success is often attained by accentuating differences–through branding, sloganeering or pandering to individual fears.

Cooperatives are built on peoples’ need for community. Instead of fueling division, credit unions rely on shared effort. When people feel included, these efforts build ownership. Ownership is more than “I am a member of.” It is being a part of something bigger than oneself.

Members are choosing a financial option that promotes individual and local opportunity, trust and prosperity.  The inclusive spirit of owning integrates diverse needs and persons in mutual efforts for a better community.

The Power of Relationships

In a brief article on managment strategy author Greg Satell references a McKinsey study that points out the change in the asset composition of leading American firms and why this requires a different approach to leadership:

“In 1983, McKinsey consultant Julien Phillips published a paper in the journal, Human Resource Management, that described an “adoption penalty” for firms that didn’t adapt to changes in the marketplace quickly enough.

. . .research shows that in 1975, during the period Phillips studied, 83% of the average US corporation’s assets were tangible assets, such as plant, machinery and buildings, while by 2015, 84% of corporate assets were intangible, such as licenses, patents and research.”

By NCUA rule, credit unions’ “tangible” assets-buildings, equipment and fixed- are limited to 5% of assets or less.  The structure of loan and investment assets is self-liquidating.  As with other corporations, the most vital cooperative “assets” today are intangible, but not patents or research. It’s about people.

One of these is employee culture especially when credit unions define their competitive advantage as service.  But the most valuable and hardest to quantify is the member-owner relationship.  This is more than the total of product balances, length of membership or volume of transactions. Relationship is members’ ongoing belief that a credit union’s decisions are in their best interest.

When a credit union’s most precious advantages are intangible, effectiveness is directly connected to people — what they believe, how they think and how they act.

This strategic imperative is counter to prevailing themes that coop competitiveness is finding the best technology, skill with data analytics or AI applications, or the dominate theory that size is essential for success.  All may help to some degree, but are not unique coop advantages.

Ownership and relationship are two sides of the same coin.  Without either, the member becomes just a customer, and the credit union one option of many in the financial forest.

The Network Advantage

Satell’s article highlights another credit union system advantage, albeit not unique to coops:

“Yet there is significant evidence that suggests that networks outperform hierarchies.

Wherever we see significant change today, it tends to happen side-to-side in networks rather than top-down in hierarchies. Studies have found similar patterns in the German auto industry, among currency traders and even in Broadway plays

The truth is that today we can’t transform organizations unless we transform the people in them. . .It is no longer enough to simply communicate decisions made at the top. Rather, we need to put people at the center and empower them to succeed.

Later this week I will present the story of a CEO and credit union where these cooperative ideas are the center of every effort.  The results speak for themselves, even if the model appears traditional.

 

 

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Mergers: Can’t We Do Better than This?

At last week’s Senate Banking Committee hearing, Senator Warren challenged banking regulators about their oversight of bank mergers.

Warren told the FDIC and OCC leaders the data indicate the regulators have “no credibility” when it comes to merger supervision.

“This has turned into a check the box exercise where the outcome is predetermined,” said Warren, who plans to introduce legislation to revamp the bank merger process.

“Our regulators have a job to do and it’s our job here in Congress to make sure they do it,” Warren said.

Her observations/questions included the following as reported in the CUToday article:

“Community banks are being gobbled up. The market is being dominated by big banks. There is more concentration, higher costs for consumers, and greater systemic risk, and it is happening in plain view of the federal agencies whose job it is to keep our communities safe.”

In a question directed at the FDIC Chair McWilliams: “The FDIC has a searchable database of all merger applications received since 2013, and there have been 1,124 such applications. Out of those, how many has the FDIC denied?” The total number of denials for any reason whatsoever?”   Before McWilliams could respond, Warren said, “It’s zero.”

Is the credit union system vulnerable to this political critique?

Here is a current case.  The $52 million South Division Credit Union has called a special members’ meeting on August 30 to approve its merger with Scott Credit Union, both Illinois state charters. Is this just another “ordinary” merger announcement?

The Credit Union’s Website Promises

Since 1935 South Division Credit Union, headquartered in Cook County, IL, has been guided by these founding principles:

To meet the financial expectations and needs of the Members by providing the highest quality products and services, delivered with a sense of professionalism, friendliness, and respect for the individual Member and their common financial bond with one another. The Next Evolution in Personal Banking

Member-Focused Attention Meets Diverse Banking Options

As an open-to-the-public, not-for-profit institution, our unique focus is on you, the consumer. Our end goal is to provide service that’s customized uniquely to you, backed by offerings that address all of your banking needs.

Our credit union offers a complete array of products and services to our Members —checking, savings, debit and credit cards, vehicle and consumer loans, money market accounts and certificates of deposit, along with a variety of mortgage products. 

Member Ownership 

Unlike at a bank, you’re not just another “customer” at South Division Credit Union. You’re a Member with a say in everything that we do. And what we do is strive to add more value for our well-deserving Members. As a nonprofit, rather than pocket any profits, we pour them back into the institution to provide better rates and additional benefits for you.

SDCU is owned and democratically operated by our Members, who elect our all-volunteer Board of Directors. In turn, the Board represents our Member-owners’ interests in credit union policymaking.

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What South Division is Telling Members Now

In the July 14, 2021 Notice of Special meeting sent to members, the credit union gave the following explanation for going out of business:

The directors of the participating credit unions have concluded that the proposed merger is desirable for the following reasons: South Division Credit Union has not grown in size or membership participation for several years and has been faced with increasing operational, regulatory and compliance expenses; lack of managerial expertise, aging Board of Directors and no effective succession plans. We believe a merger would offset these trends by offering South Division Credit Union’s members access to an array of new services, more modern account management systems, improved remote electronic access for lending programs, better savings and loan rates, and additional facilities.

Voting by Proxy: A Foregone Outcome

The Notice continues: The merger must have the approval of a majority of members of the credit union who vote on the proposal. . .Illinois permits voting on merger proposals only at the meeting or by proxy. If you DO have a proxy on file at the credit union, to vote in FAVOR of the merger, you may attend and vote in person at the meeting or, do nothing and the Board of Directors will vote in favor of the merger in your stead.

To vote AGAINST the merger, you must either attend in person and vote at the meeting. . . If there is no proxy enclosed with this notice, you have a proxy on file with the credit union, and to vote NO, you must revoke that proxy by giving written notice to the board secretary. . .

What is Left Unsaid

Scott Credit Union is a $1.5 bn, strong performing credit union located in Southern Illinois.  Its main office is 240 miles, a five-hour drive from South Division’s headquarters in Evergreen Park.

Scott founded in 1943 at Scott Air Force base, sits across the Mississippi river from St. Louis.  Its multi-county southern Illinois charter is in a very different economic, social, demographic and political environment from the Cook County, Evergreen Park-based credit union.   The combination would appear to be an act of charity by Scott.  The four small branches of South Division are anything but a viable foothold in the greater Chicago market.

In addition to South Division’s board and management confession of their leadership shortcomings—aging board, no succession plan, managerial inexperience-there is the question of their fiduciary oversight.

In 2020 the credit union reported a loss of almost $2.0 million reducing the net worth from 14% to 8.4% in just one year.   The major reason for the loss was an increase of over $1.0 million in salaries and benefits above the $1.2 million of the prior year.   What were these payments for?   Was staff helping themselves to the net worth prior to announcing a merger where such payments would have to be disclosed?

A Challenge for the Credit Union System

Both the Illinois credit union supervisor and the NCUA regional director signed off on this merger.   Are they OK with the $2.0 million loss in 2020, and therefore welcome to another credit union taking this emerging problem off their hands? Were local credit unions approached and turned this “opportunity” down?   How did Scott Credit Union end up with the short straw?

Where are the other components of the credit union system as this 85-year old credit union decides to close: the league, the vendor business partners, the sponsors?  Are there no other leaders or groups in the community willing to step up to this challenge?

The promises on the credit union’s website recruited over three generations of members.  Is this legacy of failure the best option the cooperative system can devise for these members, their children and grand children?  Because of the Board’s proxy voting process, the members will have no say in this dissolution.

When Collaboration is Most Needed

The credit union system was founded and built by collaboration.  No credit union would exist today without sponsor support, volunteer effort, member loyalty and system provided solutions.   But when it comes to ending a charter, collaboration seems nonexistent.   Without all-hands-on-deck  participation in these decisions, the ability of members to trust and respect their credit union’s choice to dissolve, is suspect.  Leaders at every level of the system are abandoning this charter at a most critical time.

This merger is based on a guilty plea of incompetence.   The 2020 salary payouts raise a question of integrity.  The process is devoid of “any respect for the individual Member and their common financial bond with one another.” (web site purpose statement)

Mergers in circumstances like this undermine the cooperative system’s reputation for acting in the member’s interest.  These credibility stains cannot be washed away no matter how competent or well-meaning the continuing credit union’s intent.

One more credit union charter gone, one more hole in the cooperative boat.  Will the sinking ever end?  How will Senator Warren or other members of the committee react when they see this example of a cooperative merger?