Category: Co-ops in Capitalism

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.

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.

The post card came to us although we are not a members of the credit union.  It announced a “community shred day” at the main office parking lot last Saturday.

From time to time we receive these notices from realtors or sometimes a local government office.  But not a credit union.  It arrived as we were doing some spring house clearing and wanted to dispose of older financial records.  So we dropped a box off, and learned why this may be a simple solution to a perennial business problem.

The Last Mile

The term last mile summarizes the constant business challenge of closing a sale, usually from a distribution or supply chain point of view.  This last leg of the process is often least efficient, comprising up to 53% of the total cost to move goods.  It is the critical final step in retail for a customer to buy goods.

A similar challenge in service industries, such as credit unions, is how do I find my next new customer/member?

The short brief Ten Ways to Get New Customers is summarizes every method used by credit unions.  Todays most likely tactic is for  a strong social media presence with  a defined brand voice across platforms like Instagram, LinkedIn, Facebook and Twitter.

This makes perfect sense. Digital marketing is the preferred way to find digital members. No local presence needed. But why a shred day?  The effort seems so retro?

The Experience

So we pulled into the parking lot of the credit union’s head office.  The branch was closed and the parking area marked by tents with credit union personnel serving breakfast of donuts, coffee along with  credit union literature and tchotchke.  Staff took the boxes, checked for anything other than paper such as plastic binders and filled up big 40-50 gallon containers to wheel over to the shredding truck.

Even though we were late in the three hour period, there was a steady flow of people and boxes so much so, the coffee had ran out.  The following shows the setting.

Why This Makes Sense

How does a community shred day help find the next best customer? Several thoughts.

A person bringing records to be shredded suggests an individual or household conscious about proper management of financial accounts.

Driving to the location where there is a branch, introduces the non-member  to where one of the credit union’s offices is located.  The public made the journey on their own initiative. Local is an advantage almost every credit union can build on versus larger institutions.

The people dropping off records experienced instant hospitality and service.  No charges, no sales pitch. Staff offered  food, gave away branded desk pens and entered person’s names and email into a drawing for four $100 cash giveaways.

And that drawing is the hook.  Here was the message waiting for me when I returned home later on Saturday:

Hi there Chip,

Thanks for chatting with us at our Shred Day! We wanted to follow up and send over some additional information about our organization.

At Lafayette Federal, we offer nationwide membership eligibility with a mission to serve, support and empower you by understanding your financial needs, delivering products and services to achieve your financial goals and offering solutions to assure your financial well-being.

Below are a few offerings that we believe you may benefit from. Please feel free to contact us should you have any questions!

The email cited their 2.02% checking account and a 5.09% certificate for savers as well as other services.

I have no idea how many leads the credit union received.  But I did go to the website. It presents a special focus on members and the community.  I was told the credit union does this once a quarter at different branches as a “community” service.

For me it was the most intriguing introduction to a local credit union in the many years we have lived in Bethesda.  It made many traditional marketing emails from our existing credit unions seem like all the other marketing emails that fill an inbox every day.

This shred day service broke through this communication clutter and got my attention.  Maybe it is not so retro after all.  In its simplicity the effort showcased the traditional credit union advantages of service, local and community.  Hard to do in an email.

From an unknown source:

An observer of modern social movements has said: “Some men wrest a living from Nature and it is called work. Some men wrest a living from those who wrest a living from Nature and it is called trade. Some men wrest a living from those who wrest a living from those who wrest a living from Nature, and it is called finance.”

And cooperatives?

At December 31, 2023, there were 2,280 federal credit unions and 1,724 chartered by 45 different state authorities.

The broad operating authorities are similar.  However, there is one major difference in the transparency of the two systems.  This difference was noted in a NASCUS comment to NCUA on August 15, 2022 on bank conversions and mergers:

All FISCUs must complete annual Internal Revenue Service Form 990 filings. Part VII of those filings is public and requires FISCUs to disclose any compensation paid to directors and officers; the compensation paid to “key employees” (employees earning more than $150,000.00 in reportable compensation; and “highly paid” employees (the top 5 employees earning more than $100,000.00 in reportable compensation).

Transparency and Accountability are Inseparable

Without timely information member-owners cannot make reasonable decisions about the board’s role overseeing CEO and senior staff compensation.

Disclosure is required for all state charters as part of their special status as tax exempt organizations.  Quarterly 5300 call reports provide only general corporate trends and broad dollar totals of some compensation programs.

Transparency of leader’s pay is an essential aspect of the member-owners’ governance role in cooperative design, via the election of directors.  Full disclosure is standard operating practice in the public sector.

The value of reporting is not just the current level of compensation.  Tracking trends over several years can show how pay correlates with the credit union’s financial performance.  Unlike their competitors, there is no daily stock price passing judgement on management’s responsiveness to members or shareholders.

Moreover, the uniform reporting standard of the 990 is specific, by name and position.  It is more useful than generic salary surveys in which asset classifications or by position and other criteria provide only general ranges.

“A Leadership Requirement”

When individuals aspire to positions of senior leadership in the management of other person’s financial resources, their own disclosures demonstrate their responsibility for the trust members have in their credit union.

The time to make this change is now, voluntarily  showing proactive leadership, not after a law or regulation requires this level playing field.

Otherwise, the absence of comparable data may give an impression that senior leaders of federal credit unions are unwilling to be as accountable as their state counterparts.  Which will just beg the question, why?

Change before you have to is a maxim FCU CEO’s  should follow in this basic issue of transparency.  It  communicates basic respect for the member-owners’ role.

Frank Diekmann, CUToday Cooperator-in-Chief,  described the benefits of transparency in a different context this way:

“Not only would disclosure be the right and ethical thing to do, it would make for an effective response to critics. . . that claim credit unions are just “profit-seeking enterprises masquerading as tax-exempt non-profits.

Transparency is a leadership requirement.  It creates trust and confidence even when things go wrong.  Doing the right thing should not require a rule or reg.   It is a character trait. “