Category: Cooperative Design

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The March on Washington and MLK’s Speech: The Financial Metaphor

On August 28, 1963, an estimated 250,000 people gathered in the nation’s capital for the March on Washington for Jobs and Freedom — the largest civil rights gathering of its time. Today, that landmark protest is remembered for Martin Luther King, Jr.’s famous “I Have a Dream” speech.

Many can recall almost verbatim parts of the content of his “dream.”  Politicians of all beliefs, for example, use his phrase, “that one day all people will be judged not by the color of their skin, but the content of their character” to support vastly different views on affirmative action.

To Cash a Check

The dream’s words are still aspirational and inspirational.   For credit unions however, his metaphor about justice and freedom is a reminder of why coops exist.   Here are his opening words with emphasis added:

Five score years ago, a great American, in whose symbolic shadow we stand today, signed the Emancipation Proclamation. This momentous decree came as a great beacon light of hope to millions of Negro slaves who had been seared in the flames of withering injustice. It came as a joyous daybreak to end the long night of their captivity.

But 100 years later, the Negro still is not free. One hundred years later, the life of the Negro is still sadly crippled by the manacles of segregation and the chains of discrimination. One hundred years later, the Negro lives on a lonely island of poverty in the midst of a vast ocean of material prosperity. One hundred years later the Negro is still languished in the corners of American society and finds himself in exile in his own land. And so we’ve come here today to dramatize a shameful condition. In a sense we’ve come to our nation’s capital to cash a check.

When the architects of our republic wrote the magnificent words of the Constitution and the Declaration of Independence, they were signing a promissory note to which every American was to fall heir. This note was a promise that all men — yes, Black men as well as white men — would be guaranteed the unalienable rights of life, liberty and the pursuit of happiness.

It is obvious today that America has defaulted on this promissory note insofar as her citizens of color are concerned. Instead of honoring this sacred obligation, America has given the Negro people a bad check, a check which has come back marked insufficient funds.

But we refuse to believe that the bank of justice is bankrupt.

We refuse to believe that there are insufficient funds in the great vaults of opportunity of this nation. And so we’ve come to cash this check, a check that will give us upon demand the riches of freedom and the security of justice.

Why a Financial Metaphor?

America is the world’s leading capitalist society and its wealthiest.   For many the American dream is about becoming financially well off, even wealthy.   Everyone is financially accountable for important areas of their life.

He uses this metaphor because financial services are at the heart of the American enterprise.  People know what cashing a check means.  Checks  only work if people trust that there will be sufficient funds in their account.   In using this analogy, King says all Americans were given this promissory note of freedom and justice.

Credit unions, the cooperatives founded on democratic governance, self-help and common purpose, embody a critical means for this dream of individual equality to be realized.

Financial services as King presents the metaphor are built on trust, confidence and solvency.   I believe that whenever any credit union for whatever reasons compromises these fundamental principles, the integrity of the entire system is eroded.

Whenever any person’s freedom is limited,  the entire system of justice is compromised. Freedom is not an overnight event.  Its meaning, like financial opportunity, is constantly evolving.

Since 1909, credit unions were intended to be one of the important financial options for bringing  equity for all. Especially for those “who have the least or know the least, but today pay the most for financial services in America.”

On this 60th anniversary of the March on Washington, may it remind those of us who make a living from cooperative financial services, to once again acknowledge and embrace our role in bringing Martin Luther King’s dream to reality.

 

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A Friday Morning Homily

From author and speaker Greg Satell’s article: Values Always Cost You Something

“The truth is that, to mean something, values always cost you something. Otherwise they’re just platitudes. . .

“Values are essential to how an enterprise honors its mission. They represent choices of what an organization will and will not do, what it rewards and what it punishes and how it defines success and failure. Perhaps most importantly, values will determine an enterprise’s relationships with other stakeholders, how it collaborates and what it can achieve.

“The problem is that values are often confused with beliefs. When you’re sitting around a conference table, it’s easy to build a consensus about broad virtues such as excellence, integrity and customer service. True values, on the other hand, are idiosyncratic. They represent choices that are directly related to a particular mission.

“Make no mistake. Real values always cost you something. They are what guides you when you need to make hard calls instead of taking the easy path. They are what makes the difference between looking back with pride or regret. Perhaps most importantly, they are what allows others to trust you.

“Without genuine commitment values, there can be no trust. Without trust, there can be no shared purpose.”

 

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When Directors Fall Short as Fiduciaries

Yesterday I quoted from  an NCUA letter which emphasized directors’ primary fiduciary responsibility is to the members, not the organizational entity.

What happens when this principal duty falls short?

Sometimes dissenting directors will just give up and resign.   Other times, the entire board votes to hand over their duties to another credit union via merger.

And the members?  Most of the time they just lose interest and take their business elsewhere. But very occasionally, they revolt. That is happening at SECU in North Carolina.

The former CEO Jim Blaine resurrected his blogging skills when he was contacted by current employees and members concerned about the direction of the credit union under a new CEO.  The daily blog SECU-Just Asking was began in December 2022 with this note:  Caution: Rant in Progress.

The website’s posts of events and opinions would not have become a rallying point if it had not touched on issues of interest to many.

Members Go Democratic

Now that public dialogue has transformed into action.

The primary check and balance on directors’ oversight  is voting to fill board vacancies in the annual election.

Rarely is this process effective.  For nominations and election procedures are controlled by the incumbent directors who try to avoid any election with more candidates than vacancies.

SECU members have become engaged.   The result of the public dialogue is a contested election according to  an article from Business North Carolina.

Social Media Mobilizes Members

Members turned to social media to rally support.  Here is a Reddit example.

How NC SECU is being turned into an elitist piggy bank (and the narrow window to prevent it)

For almost 100 years the State Employees’ Credit Union (SECU) provided low cost loans and financial services to North Carolina’s active and retired state employees, teachers, and their extended families. SECU historically has been one of the only financial institutions that charges the same low interest rates on mortgages, car loans, credit cards, and financial services to all members regardless of whether they come from a rich, middle income or working class family.

Unfortunately, this approach to treating everyone fairly is changing because of actions by the current SECU Board of Directors. This group – for the first time in the history of the Credit Union – has decided to charge middle class and lower income members and their families HIGHER interest rates so that they can give upper income people LOWER interest rates.

And that’s not all the current board has done. They’ve also:

-Cut services, like the tax preparation assistance program that was available to all members.

-Raised interest rates for the majority of members and their families, while failing to raise interest rates for savings accounts.

-And finally, in an attempt to prevent their opponents from running candidates and entrench themselves in power they’ve changed the longstanding rules and bylaws for SECU Board elections.

This is wrong and we must fight back to save our Credit Union!

The current board is made up of 11 people that no longer represent the interests of the hundreds of thousands of active and retired state employees, teachers, and their families that the Credit Union was founded to serve.

What can you do to fix this?

The board changed the rules to make it extraordinarily difficult for anyone new to serve and to try to silence members’ voices. The board’s new rules require a candidate to get 500 signatures, obtained in person, in 5 days time.

In order to stop this board’s attempt to convert SECU into another traditional bank that looks out for rich elitists at the expense of regular folks, please sign the petition allowing these three candidates who support returning SECU to its historic mission to be on the ballot for the board election this fall.

(the three candidates and brief credentials were then listed)

Again, you are only signing to allow these candidates the opportunity to run for the board, so that we may continue this discussion. If they aren’t on the ballot, there will be NO discussion.

Please go to www.secujustasking.com and request a petition form to submit.

Thanks y’all

Over twenty comments were posted to this appeal. Some supported, others asked questions.  Here is one:

I sense that SECU is currently being run by bankers who don’t understand the competitive advantages the credit union historically had. Banks long ago outsourced much of their lending decision-making to people looking at an application and a credit score on a computer screen. That saved them a lot of money (those local loan officers weren’t cheap), but it created an opening for someone like NCSECU to have an advantage. . .

. . .there’s no question that SECU could have made a lot more money over the years by risk-adjusting lending rates (preferably by something a little more sophisticated than just credit scores), but they were able to keep rates flat, because that fit their ethos as a non-profit better.

I just don’t buy that this is necessary now to keep the institution afloat–I have yet to hear a cogent argument for why this is the case now. It apparently wasn’t necessary in 2008 or 2001, but we’re supposed to believe that rates being hiked back to something more like historical norms is threatening the institution? 

Or to put it another way, what have they been doing so wrong lately that they aren’t able to weather this storm the way they weathered storms in the past?

A Test Case

Democracy is a difficult process in all circumstances.  American elections are just the most obvious example.

SECU may be the test that illustrates whether the cooperative model of governance can be a real check and balance by members.  Can democratic voting be the means to counter the ever present temptation to become an “elitist piggy bank”?

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NCUA’s General Counsel On Directors’ Number One Responsibility

Fiduciary Duties “Are Properly Owed to People, and Not to Entities”

Credit union leaders often state priorities for their financial institution’s future but not how members will benefit. The following is NCUA’s view of directors’ principal fiduciary duty.

This analysis was in response to a state league CEO’s concerns about a proposed rule on directors’ responsibilities. NCUA General Counsel Bob Fenner wrote on March 15, 2011 as follows:

At the very beginning of your letter, you do not state that you are writing to NCUA on behalf of credit unions. Instead, you and your fellow authors state that “[a]s associations representing 18,280,456 members in nine states . . . we want to call your attention to several key issues.

. . . .” I presume that by “members” you mean the people who are members of the credit unions in your states, and I commend you for attempting to look beyond credit unions as entities and through to the people that credit unions were structured to serve. As our rulemakings make clear, the directors of federal credit unions must also represent the interests of the members of their credit unions.

The “Interests of Members”

I do not believe that a rulemaking clarifying that FCU directors owe their fiduciary duties to the membership of the FCU is a difficult concept or one that should surprise or concern directors. Section 701.4 is intended to make clear that the law with regard to federal credit unions is in direct alignment with the credit union philosophy; that is, that credit unions exist to serve their members; that credit unions are about people, not profits; and that the members own their credit unions. As the NCUA Board stated back in 2006 . . . when making important decisions affecting the FCU, directors should ask themselves the following questions:

What financial services do my members need and want? How do I know this? [And] [w]ill my decision today help the credit union provide these member services in a quality manner and at low cost to the members?

Fiduciary Duties Are Owed to Members

Your letter, however, states that “[i]t is our position that the director’s duty should be to the credit union as an organization, and not to the members of the credit union.” I disagree. As the NCUA Board has discussed at length in rulemaking preambles going back to 2006, for federal credit unions the law (as determined by the FCU Act) and philosophy align: the directors’ duties flow primarily to the membership. Id. at 77154-55.

As a practical matter, however, we believe that in the vast majority of situations what is good for the credit union will also be good for the members. See 75 Fed. Reg. 15574, 15575 (fn. 5)(March 29, 2010). . .

 . . .we also believe that fiduciary duties are properly owed to people, and not to entities. FCU directors must understand the people who are affected by the directors’ decisions and identify which people the directors are serving.

The danger is that, if the directors are allowed to focus only on the credit union when making a decision – without regard to how the members are affected – the directors can justify making self- serving decisions, or decisions that serve primarily the FCU’s insiders, under the guise that the directors are simply doing what is best for the credit union.

Ed. (emphasis added)

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Cooperatives and Business Ethics

On August 2, Credit Union Times reporter Jim DuPlessis published a followup story to Colorado Partners Credit Union’s (CPCU) sale of its cannabis CUSO business Safe Harbor.

The main news was that CPCU reported a $10 million dollar loss in the second quarter on top of a $40 million first quarter deficit, thus wiping out any gains from what was  announced as a $185 million sale of the business in 2022.

When asked about the $10 million, second quarter increase in salaries and benefits, the article quotes the CEO Doug Fagan:

“The loss in Q2 was due to the final pieces of contractual deal expenses that were not recognizable, per GAAP, until the second quarter. I am not at liberty to disclose any further information on those expenses,” Fagan wrote. “We did not have any write downs in Q2 that were directly related to the sale of Safe Harbor.”

The question is who received the $10 million?  For what contractual obligation?  After $50 million in losses, there is more than money at stake.  This is about the integrity and accountability to the member-owners by CPCU’s board and management of a deal gone bad.

Are Coops More Ethical?

This situation reminded me of a Financial Times November 6, 2013 article following the failure and restructuring of The Cooperative Bank in Great Britain.  The following excerpt suggests business ethics are not as simple as doing the right thing.

“Honest is the best policy, but he who is governed by that maxim is not an honest man.”  Richard Whately, Archbishop of Dublin, was a 19th Century theologian, but the observation is very relevant to the modern debate about the nature of business ethics.

The Cooperative Bank has just announced a restructuring that wipes out the value of existing equity.  Over many years the message of the bank’s advertising has been its aspiration to higher standards of ethical conduct than its competitors. The devil’s advocates might seize on the bank’s financial problems as evidence that honesty does not pay, but that s not what happened here.

The Coop Bank failed for the usual reason banks and businesses fail-bad lending in commercial property and the misguided acquisition  of another business by management whose ambitions exceeded their abilities. . .

Ethics are about what to do when good behavior and profitable business are not necessarily the same thing.

Bishop Whately noted the difference between the honest man and the man for who honesty is the best policy.  When you deal with the man for whom honesty is the best policy, you never know when it might be the occasion on which honest is no longer the best policy.

Bankers, not bishops, deliver lectures extolling their own personal integrity; the man who repeatedly reminds us how honest he is rarely acquires, or deserves our trust.   The integrity we value is a personal or organizational characteristic, not a business strategy.”

 

 

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The Skill of Keeping Honest People Honest

When humankind invented places for reflection, knowledge, good deeds and community leadership, the laws of nature were not repealed.

Organizational design wether this be a church, non-profit driven entity, a credit union, or political office, leaders are all members of the human race.  With their bundles of good intentions and temptations.

Money is an especially potent allure in critical moments, from petty cheating on travel claims to large self-dealing transactions.

So organizations develop checks and balances to,  in the words of my college roommate, “keep honest people, honest.”

Designs Are Not Enough

Returning from a weekend reunion in Chicago, this was the new design for the Metro exist at Bethesda.

The gates have been altered to heighten the exit to prevent “jumpers” from leaving Metro without paying.  Metro had announced that it was losing so much in unpaid fares, that this redesign was necessary to discourage an ever growing temptation.

The “Barriers” in Credit Union Design

There are three elements of organizational structure in credit unions to discourage the ever present temptations when managing money.

  1. The credit union supervisory committee and its system of internal and external audits;
  2. The oversight and review of policy, process and results by external regulatory exams;
  3. The political check and balance provided through the democratic oversight of members in the annual required election of directors.

When these checks and balances are listed, it is easy to see why credit unions can go “off the rails” in terms of personal and organizational shortcomings.

Human temptation is not overridden by organizational design.  For ingenuity can work around the most explicit of processes or checks and balances.

That is why the most critical aspect of leadership is integrity.   One of the best indicators of this quality is the words leaders use when describing an organization’s activity.   In cooperatives those who talk about MY members, MY credit union, MY board or even MY agency reveal potential misunderstanding of their responsibility.

In cooperatives, the operative word should be OUR.   OUR collaborative system, OUR dual regulation, OUR insurance fund, OUR communities’ needs . . .

Designing barriers can help reduce temptation.  Leaders’ integrity is necessary to keep them meaningful.

 

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FDIC Reports $12 Billion Fund Decline for First Quarter;  NCUSIF Stable and Growing

On June 23, the FDIC released its quarterly financial update as of March 2023. The Fund had fallen by $12.1 billion to $116.7 billion, or a ratio 1.11% of insured savings.

The largest factor in this decline was an increase of $16.7 billion for the loss provision expense for the two bank failures and potential shortfall on the resolution of First Republic.

The Fund’s revenue was primarily from quarterly premium assessments of $3.3 billion (83% of total).  Earnings from investments were only $661 million.   In addition to the loss provision and operating expenses of $508 million, the fund realized a loss of $1.7 billion on sale of investments.

The FDIC’s Assessment Practice

The quarterly premiums are calculated on average consolidated total assets minus tangible equity, not insured savings.   This assessment base is $20.7 trillion or twice the $10.5 trillion of insured deposits at the end of March.

These quarterly fees are not a single rate for all banks.   Rather for the first quarter they are based on CAMELS score and balance sheet complexity.   The range from a low of 2.5 to 42 basis points of each bank’s assessment base.  The annualized total premium for the entire banking system using the first quarter total is approximately 6.4 basis points.

The FDIC presents no other information about the quarter such as a standard balance sheet, income statement and cash flow reports.   So it is not possible to track other performance indicators such as the total loss provisions and management of the FDIC’s investment portfolio.

The March quarter was the first significant bank failure in at least the past eight years as shown in the historical table II-C.

The FDIC’s conclusion about its financial situation is that it will return to its statutory minimum reserve ratio of 1.35% under the DIF Restoration Plan approved on September 2020 by the required time frame of September 2028.  What is unstated is how high the quarterly premiums will be will have to be to make this goal.

The NCUSIF’s Status

NCUA posts the NCUSIF’s monthly financial statements for public review.  The latest is for May 2023 and shows a stable fund  with positive earnings $70.2 million which is an increase versus the prior year’s $67.2 million.

This result is due to the $50 million increase in revenue from the rising yield on investments.  This offset a $14 million increase(16.5%) in operating expenses and a $10 million higher loss provision expense compared to the first five months of 2022.

The fund’s retained earnings as a percentage of insured shares has stayed stable throughout the first five months at .297. Adding the 1% required deposit gives a normal operating level of almost 1.3%.

The most challenging part of the NCUSIF’s management is the investment portfolio which reports a YTD return of 1.76%.   The overnight portfolio shows a yield of 5.23% for May but the remaining $18.4 billion earned only 1.4%.

The investment portfolio’s market value is $1.4 billion below book.  This fall equates to 27.7% of the NCUSIF’s retained earnings.    As the fund continues to add to its overnight total, the average duration has slowly declined to 2.86 years at the end of May.

Learning By Comparison

The FDIC’s premiums will continue to be an open-ended fee paid quarterly to build back the FDIC, a process that will continue for the next five years.

The NCUSIF is at the traditional NOL of 1.3%.  As it adjusts the management of its investments, the Fund’s primary source of income, this should result in credit unions looking for a premium from their cooperatively designed fund in the years to come.

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An Initial Reaction to the NAFCU-CUNA Merger

I have just read the general announcement.  But am looking forward to learning the details, plans and benefits as these become available.

Here are my first thoughts.  The members of both organizations will vote on the mergers.  This is a good precedent for all coop mergers.   That way the details and commitments are explained to both constituencies.   When only the merging entity votes, the acquiring firm is exempted from commenting, or even committing, to what the intended benefits will be.

The Loss of Competing Views

Competition in ideas can result in more and better options for credit unions.   NAFCU as the # 2 trade association had to always “try harder.”   This was especially important in critical moments of legislative and regulatory change when there were different “proffers” or options presented by each trade group responding to congressional or administration views.    One need only recall the give and take in passing the CUMAA in 1998.

NAFCU’s origin story in the early 1970’s was to advocate for a federal insurance option, a  position on which CUNA was extremely skeptical.   CUNA feared federal insurance would mean the dual chartering system and cooperative solutions would be subjugated to federal control and uniformity.   Both trade groups were right.

As any CEO who has merged their credit union will testify, mergers are acquisitions, not “marriages of equals,” or other PR pseudonyms.  CUNA’s culture, priorities and politics will be, absent explicit goals, the continuing model.

The Importance of Details and Plans

This first step of mobilizing political consensus at the board and CEO level for a merger is the easy lift.  Most mergers defer the messy details until after the deed is done and the surviving leadership takes over both organizations.

Intentions, promises of shared goals, enhanced capabilities, reduced costs-in sum better value for the members-are never identified or stated.  Just rhetorical promises, sometimes sugar coated by adding several directors from the old organization to the new.

Details matter when change of this magnitude and circumstance occur.  What I will be seeking in this process is how the merger will address the top two or three strategic issues facing credit unions and the future of the cooperative option in America’s financial markets.

Every party serving the cooperative system will have a different vantage point from which to provide their priority.   In my view, this strategic assessment should be the number 1 task for this most consequential change in how America’s credit unions will be represented going forward.

Some strategic issues might include:

  • What should be the role and voice of the member-owner, now largely absent, in the evolving credit union model? NCUA prefers consumer protection not member rights.  Credit unions have removed members from any meaningful role in the governance process.
  • How will the continued trends in consolidation and absence of new charters be addressed?
  • Can the unilateral and “me-first” approach of NCUA be transformed to a more collaborative, cooperative effort for oversight and project priority?
  • How can the credit union system be more engaged in addressing the key challenges members face in their communities from affordable housing, student debt overload and fair financial options?

Priorities may vary across the numerous cooperative organizations.  However, without identifying these issues, the merger outcome could be samo-samo.

Ed Callahan used to observe, people will do what they know.  Meaning they revert to the actions with which they are comfortable.   In this case a single national trade association could result is just more resources devoted to political lobbying, PAC’s and PR tacking with each change in the political and economic winds.

Without a plan for what the system should strive to be, a CUNA-NAFCU merger could just perpetuate the status quo but absent an important forum for dissenting views.

 

 

 

 

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Reporting Coop Success In the Glare of Live Market Updates

This is the season for reporting quarterly earnings by all public companies.  Even credit unions must file their 5300 financial updates with the regulator which are then open to the public.

These many forms of quarterly financial reports are required by law and regulation.   For stock companies, shareholders, traders, investment funds and market analysts, the daily news is dominated by the ups, or downs, in company performance. Here is one example of this reporting frenzy:

Earnings season marches on

This week brings another busy slate of quarterly earnings reports, from tech giants to restaurant stocks. Apple and Amazon are the biggest names due up, along with Starbucks and CVS Health. Earnings this season have so far defied expectations and have been somewhat stronger than expected. Here are the big names on deck . . .

None of those big names will be credit unions.  Credit unions are required in their bylaws to post a monthly financial report in a conspicuous place in the credit union and file the quarterly 5300, but few will provide a public description of these results.

Credit union have shareholders, as do all public companies.  The members’ interest in the performance of their firm is the same as the owners of a bank or any other firm.   How is my ownership benefitting me versus other options?

For stock companies, the market readily evaluates this performance as documented by changes in the daily stock price.   Analysts evaluate the current results and make their “calls” about whether a stock is a buy, hold or sell.  Explaining a firm’s quarterly performance to all market participants is an important skill for CFO’s and CEO’s of all companies, even the smallest.

Credit unions generally provide no such reports or future forecasts (guidance). There is no stock price to provide market feedback.   But is the interest of the member-owners any less deserving than those of public companies?  Is the responsibility to coop shareholders by the credit union’s professional staff any less than to a publicly traded or even a private firm?

When Credit Unions Did Speak Up

In the March-April closures of three banks led by Silicon Valley’s failure, credit unions launched major PR campaigns to assure their members that they were sound.  CEO’s stated there were no parallel circumstances in the coop industry.  Some credit unions devoted a major part of the Annual Meeting to this public concern.  Some of these updates highlighted the credit union’s percentage of insured shares, or capital levels, or liquidity.  The message was to assure members the credit unions were able and willing to continue meeting their needs.

I believe each quarter’s financial filing is another opportunity for credit unions to tell their special story.

What Do the Numbers Mean For Me?

Numbers matter and presenting the credit union’s financial position and key trends is a beginning.   The most important message, just like a public company, is to tell what the numbers mean to the individual owner.

How has the credit union enhanced the value it brings to members?  What investments has the credit union made and what was the member benefit?  As the interest rate environment remains high, what changes has the credit union made to its rates?

Members will assume their credit union is safe and sound, or they would have left.  Credit unions will often announce events, such as branch openings, sponsorship with a local sports team or venue, and even the comings and goings of senior management.  These PR events and community engagements matter, but are not the same as the quarterly status report.  At this time everyone presents their financial results-so how did our members specifically benefit?

The Radical Cooperative Model

Since the 2008-2009 financial crisis, there has been a singular focus within financial systems on stability.  Financial outcomes are all that matter.  The more capital the better.  The only equity that matters is net worth, not social responsibility.

Financial performance is evaluated by the money made, not by the people served.  The relevance of a coop is becomes  its size, its growth and its superior numbers.   A credit union that focuses on what it helped members accomplish becomes a radical act.

Transparency is the key to member-owner confidence and trust.  And competitive advantage.  It is as important for coop leaders as it is for those whose performance is judged daily by the fluctuation of share price in the market.

However credit union’s quarterly numbers are not merely about financial outcomes but for how the performance aligned with the aspirations of members.  Coops should be presenting the values and partnerships that demonstrate their role in communities beyond the conventional financial success measures.

We should be holding up a model that is better for individuals, especially those often unaware of better opportunities.  The quarterly updates should show how a credit union’s purpose is more than making money.   It is a report on the difference made for the members.

A Renewed Commitment to Using Numbers to Say Who We Are

As all three major U.S. stock indices closed higher for July, the S&P 500 and the Nasdaq mark their fifth consecutive months of gains, and the Dow is riding a 14-day winning streak, its longest since 1987; however  cooperatives have a different benchmark to report.

Our momentum is not market driven, but member focused.  There will be a big new batch of corporate earnings the rest of this week not to mention the July jobs report due Friday.

Instead of  live market updates, we should be offering our reports of improved member lives and opportunity.   That is the difference coops should make.

 

 

 

 

 

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How This Story Ends May Show the Future of a Unique Coop System

Oscar Abello, economic editor at the non-profit reporting site Next City, finds instances where credit unions provide “solutions for liberated cities.”  In his latest coverage, the event is a six plus years effort to charter a new credit union for North Minneapolis.

However the end of the story is not clear.   Will there be a new community financial institution, or will the process be stillborn?

Abello poses this fundamental question:  The travails of Arise Community Credit Union, set to be Minnesota’s first Black led-credit union, raise the question: How hard should it be for communities to have their own financial institutions?

The link to his analysis posted on July 11th can be read here.  While recent events are promising, the charter has yet to be granted.

I have three takeaways from his description of this new chartering effort.

Three Lessons

  1. New charters require people with passion and commitment, that is entrepreneurs who believe in their cause. His article profiles Daniel Johnson the CEO-designate who left a successful financial career to serve a clear community need where businesses have been “disinvesting” for years.

Johnson’s motive for leaving his career security: “The community said,(after George Floyd’s death) ‘We don’t want another park. We don’t want another place just to throw flowers. We want something more tangible, something that we can have as an institution that will be around long after we’re gone.’”

  1. In addition to the community’s decline, the market timing was right as Minnesota had just capped payday lenders at 50% APR: One fact: “The average borrower took out nine payday loans, at an average loan amount of $365, and was charged an average of 197% interest per loan.”

The process is not easy as Abello describes:  But chartering a new credit union today is like traversing a long-lost trail through the woods, one that used to be well-traveled but is now overgrown or littered with fallen trees or other obstacles no one has had to navigate previously.

Prior to 1970, there were 500 to 600 new credit unions chartered across the country every year. After a steep decline to near zero, the numbers have never recovered. Over the past ten years, fewer than 30 new credit unions have been chartered across the country.

Changes of leadership, loss of local funding from foundations, the challenges from Covid have led to stops and restarts.   The  Minnesota Credit Union Network and AAUC have stepped up to help.  Credit unions have contributed to a $1.0 capital fund and pledged deposits of several million when up and running.

NCUA is apparently requiring $3.0 million in committed capital based on the credit union’s projections to be $10 million in assets in three years-or a 30% net worth ratio.  This capital base would equate to 50% of the first year’s asset goal of a $6 million balance sheet.  This is an amount not required by law, regulation, or common sense.

In addition to this enormous fundraising barrier, the requirement distorts the fundamental dynamics of self-help for a new charter.   Raising capital encourages investments in fixed assets and operational capabilities that may not be required for years.  It discourages the boot-strapping and learning that must occur when a new  charter reaches out to find the best ways to serve their community.

  1. The chartering process is failing the communities which most need credit union support. Abello points out that “out of 4,700 credit unions across the country, only 500 are self-designated minority credit unions.”

The executive director of the Minnesota Credit union foundation has a new goal from this effort: “One thing that we’re working on right now is coming up with a playbook because the chartering process is quite complex, and really trying to take the learnings that that we’ve had working with Arise and trying to come up with a resource that’s going to be helpful for additional groups going forward.”

Abello tentatively answers the question he posted at the beginning with this observation:

“If a community wants it, if it can prove there is a market for such services that no one else is meeting, and if it can marshall the necessary financial, professional, technological and other resources necessary to pass regulators’ muster, then for now, any community has the right to try and answer the question for itself.”

The obvious answer is few would want to navigate this obstacle course before even entering the market’s fray.

Why did CEO-designate Johnson decide to join a startup in this context of financial consolidation, established competitors and bureaucratic barriers:  “It’s important for people to be able to see that an institution has planted a flag that really represents them and isn’t driven by stockholders.”

In other words:  You own it.  But will that motive be enough to overcome a process that discourages new coop charters?

How this story ends may be a harbinger for the future of the unique credit union financial system.