Category: Cooperative Design

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Peter Pan and Captain Hook in Credit Union Land

James Barrie’s children’s play Peter Pan has become a staple of holiday presentations since it was first staged in 1904 in London. It just opened in Washington. Wendy, Tinker Bell, Peter, Captain Hook, Tiger Lily and the Lost Boys’ feats in Neverland are alive for those who have only seen the TV or movie versions.

The conflict between Captain Hook’s pirate band with Peter and the Lost Boys seems at times too real (walking the plank, if captured) and at other moments simply fantasy.

Peter Pan is the boy who doesn’t want to grow old. Tinker Bell’s pixie dust powers ordinary children to fly to the stars. And Captain Hook while trying to capture the Lost Boys, is always listening for the tick-tock of the alarm clock swallowed by the man-eating crocodile that bit off his hand.

Audiences both young and old are asked to imagine. Moreover, the play’s tension derives from the threats of mortality should the boys be captured, or what would happen if the crocodile sneaks up on Hook unawares.

Plays endure because they embody truths transcending the theatrical story. Who really wants to grow old? Has not a shadow of death crossed every person’s mind at some point? Does the lure of adventure, the dream of flying into the sky, ever end?

Do these theatrical insights have parallels with characters in credit union land?

Captain Hooks Abound

I confess to seeing many Captain Hook figures in credit union land. They hear ticking clocks and spend their lives running from a vicious crocodile. They warn others to flee also. For it is their desire, similar to Hook’s, to subdue the optimism of Peter Pans, and to assert control over their part of credit union land. Here are some recent tick-tock warnings:

A CEO:

“In our industry there is such a short runway—we’re all going to face challenges. . . You have to be aggressive because there’s big changes in banking coming. You have got to get bigger and do it at a decent pace, and you have to look beyond your borders. If a credit union is anti-merger, they’re probably burying their head in the sand. The financial services industry is going to be facing some headwinds in the future and you have to be ready.”

A Board to its Membership:

Your FCU Board of Directors . . .has approved and is seeking a merger . . .It is the role of the board to look ahead and make decisions that we believe place our credit union in the best position to serve you. As we look to the future, we recognize the potential for economic challenges ahead. The last recession was very difficult for our credit union and we are not confident that we could remain well-capitalized through another economic downturn. We believe the time to take this step is now while our credit union remains financially strong.

Two NCUA Board Members:

“To me it’s always interesting to note the credit union community is now approaching $1.5 trillion in assets and we have an insurance fund with $16 billion, $17 billion in it. This is razor thin. There is not a lot of leeway here. (McWatters)

Or,

Harper called out the NCUA for tolerating “an uneven regulatory field. After the Great Recession, the FDIC and other banking regulators moved promptly to update and implement their risk-based capital standards, yet the NCUA wants to delay implementation for a second time. . . We know that a recession is coming. We just don’t know when and how severe it will be. That’s why we should fix the roof before it rains by implementing this (RBC) rule at the start of 2020.”

For Captain Hooks the end is around every corner. They preach negativity. It sounds expert, especially when facts don’t support their claims of future insight.

The Peter Pan World View

Like Peter Pan, credit union leaders have a different vision from the Captain Hooks of their responsibility. This is not a world where worries don’t exist; but rather one that believes in the radical, disruptive capabilities of cooperatives. Especially its focus on member well-being.

They know that the work of helping members is never ending and that hardships sooner or later come to one or all. But rather than looking for ways out of credit union land by giving up their charter, or outracing market growth, or emulating competitor’s models, or even hoarding more for future uncertainties, these leaders instead rely on one premise: how credit unions serve members will be the difference that sustains, whatever the economic or competitive climate.

As year-end nears, look for the many stories celebrating the sharing of credit union successes with members, communities and those in need. As the Hooks of the world continue predicting crises if one does not heed their ticking clock, recall the most dramatic moment in the play.

Tinker Bell appears to have succumbed in a fight with Hook and her spirit ended. Whereupon Peter appeals to the audience, breaking the theater’s fourth wall and asking “Do you believe in magic? Let me hear you.” And every time the audience shouts and claps, Tinker Bell recovers and the Lost Boys and Wendy make it home safely.

A lot of hard work goes into the cooperative model, but in the end, success depends on what you believe. The Captain Hooks? Or the many Peter Pans going about their work joyfully, knowing good works are never finished?

P.s. If you want to read about one leader whose tenure embodied the ageless power of Peter Pan’s optimism, read my article on Olan Jones.

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The Unseen Cooperative Advantage

It is hard not to feel rushed in the Christmas season. The December countdown of shopping days left reinforces a sense of urgency.

And the year-end looming a week later, brings a set of new goals with deadlines.

Yet the cooperative model rewards the human and organizational virtue of patience. This is a characteristic often found wanting. For the instinct when confronted with problems or deadlines is to “rush to assurance.”

A cooperative virtue

Patience works for cooperatives advantage for at least two reasons. This member-owned financial model is largely exempt from the market driven performance pressures that for-profit and publicly traded companies face driven by daily stock price fluctuations.

If there are difficulties with a product, market, or business strategy, firms are incented to sell out and move on. The market wants performance now, or a firm promise down the road.

Every competitive firm will have cycles of success and shortcomings. The advantage of credit unions should be time to adjust, re-assess and implement options to regain momentum.

Secondly, there is the time value of earning assets. Credit unions have no source of external capital except their insurance pool. As problems mature, more perspective is gained and more paths forward can be identified. Most importantly, the loans and investments continue to generate income.

Two examples of impatience

The “rush to assurance” versus managing with the cooperative strength of patience is seen in the justification for many mergers. Expanded service or lack of succession are often cited as reasons for giving up a charter that will have served generations of members.

To facilitate the merger senior managers negotiate immediate compensation above what they would normally earn by accelerating or increasing retirement plans, actions defended as “retention incentives”. All the legacy of member goodwill, community involvement and local leadership is washed away. Immediate but unspecified benefits are promised to members if they will just vote to give up their accumulated common wealth as recommended by their elected board.

The effort to get to the future faster so senior executives gain more income, coupled with the loss of generations of member and community relationships, will only lead to the demise of the cooperative difference. Credit unions are launched on a belief in relationships ( a bond), but are sustained by relationships confirming belief in the special value of cooperative design.

A second example is the approach to problem resolution. The discovery of a $40 million loss in the CBS Employees FCU or the $110 million dollar write down in Municipal Credit Union in New York are real challenges. NCUA’s approach since the 2008 crisis is to just pay the bill and move on. The result is that problems are not resolved but buried with piles of members’ money. The regulatory circumstances that allowed these situations to go unchecked for years or decades is never addressed.

Cashing out problems when first identified is often the time of greatest loss and uncertainty. Instead of using cooperative time and, if necessary capital, impatience pays out losses, shortcutting patient resolutions. Bad things happen quickly, good things take time.

Progress is problem solving

In both normal commerce as well as crisis, progress is achieved by solving problems. Mergers, initiated by tired leaders or personal self-interest, are undermining the appeal of the self-help cooperative option. Liquidating problems versus developing work out strategies hurts the people credit unions were intended to help the most: the borrowers.

When NCUA liquidated the taxi medallions, they threw the borrowers to the mercies of the market, while spending over $1 billion in cash to pay off savings and borrowings. The members who actually built the credit union with their loans, end up with no options. If cooperatives cannot or will not help members when fortunes turn against them, who will?

Good things do take time. This is a season remembered not merely for a deluge of buying and giving, but also for renewal of purpose and meaning. Fundamental to those latter outcomes is patience. That is the virtue we should value, and practice, especially when leaders urge members to surrender, not pay forward, their cooperative charter whose roots date to the middle of the last century.

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How Can This Merger Be in the Members’ Best Interest?

Top 5 managers can gain $9.8 million additional compensation; 158,000 members will have one-time “special dividend” of $4.0 million if they approve merger

On October 23, 2019, the Chair of Schools Financial Credit Union sent a letter to all members saying the board and management had decided to merger the $2.1 billion Sacramento-based credit union with SchoolsFirst FCU($16.1 billion) in Orange County.

The seven-page summary can be found on the NCUA’s website.

CEO could benefit by over $8.0 million

Two full pages are used to describe potential additional compensation benefits for the five senior managers, the bulk of which would go to the CEO. His total of over $8.0 million includes potential severance pay and salary guarantees, a three-year bonus prospect of $1.2 million, accelerated vesting of the existing supplemental retirement plan and an amended split dollar life insurance retirement benefit. These additional payments are on top of existing salaries.

The 158,000 owners of the coop will receive an average of $25 from a $4.0 million “dividend”  paid from their common equity of over $260 million. Using the credit union’s average share balance of $11,453 and the pro-rata table showing payment by average account size, this would equate to a distribution rate of 15 basis points, or 0.15%.

This token “tip” to the members, as an incentive to vote for the merger, insults both their century-long loyalty and their trust in the cooperative.

In contrast to this $25 payment, each member’s actual share of the $260 million equity averages over $1,710. This “book value” does not recognize the real market worth of the credit union if goodwill, market presence and performance were priced in a true arm’s length transaction.

The true market value would be a 150-200% of book for a franchise with its 96-year history.

So why is this merger being proposed? Why should members be asked to give up their collective capital and the legacy of member contributions since 1933? What are they gaining in return, if anything? What other services and benefits will they surrender and what is the greater Sacramento community losing?

The front cover of the credit union’s 2018 Annual Report is headlined “Members First”. The cover has a picture of a couple who have been members since 1986 with the following quote:

ABC10 Teacher of the Month! “The personal attention and family atmosphere keep us banking at Schools Financial.”

This couple have been members longer than any of the five senior management beneficiaries of the merger have worked at the credit union. In fact, this proposed merger places members last!

I believe an objective review of the credit union’s public information describing its unique role and the sparse rationale in the member mailing clearly demonstrate that the only people gaining from this merger are the CEO and his four senior executives. They are receiving increased compensation while at the same time, giving up all the responsibilities of leadership.

What the members lose

The members lose control for how their $2.0 billion in collective resources and $260 million of equity are utilized for their own circumstances. They have no control for which unique products (e.g. a special 7% Banking for Everyone Savings, Senior Savers Club and business accounts) are retained, whether to continue participating in the 5,000 shared branching service centers or even which branches remain open.

Once the Sacramento-based charter is given up, the local community relations with realtors, car dealers, school districts, community organizations and media are now directed by managers located in Orange County overseeing $16 billion in their home market. There is no more local credit union elected leadership accountable for relationships with the Sacramento community.

Here is how the credit union currently describes this leadership in Sacramento:

Community & Education Outreach

https://www.schools.org/about-us/news-publications/news-special-offers#EducationOutreach

Schools Financial Credit Union strives to be an active partner in our community. We recognize that practicing good Corporate Citizenship supports the Credit Union Philosophy of “People Helping People.” Furthermore, we aspire to help raise the overall level of social and economic well-being of those in our community through direct financial support and participation in public service activities, in addition to championing the education sector. The Credit Union is always looking for ways to better position us to reach out and serve — as only credit unions can — those people in greatest need of affordable financial services.

Abdication by the Board

One has to question why, if this project was fully considered, it was not discussed with members in the March 17, 2019 annual meeting. The board has further abdicated its fiduciary responsibility to members providing just 49 days from the mailing of the announcement to the final vote and meeting on December 12. A 96-year-old, member-owned institution dissolved in a two-month process, with the only documented benefits going to the five senior managers.

The Board is charged with representing the member-owners’ interests. This is both a legal and moral role. Nowhere are the actual costs to members of the merger outlined, only the required listing of enhanced management compensation. What we do know is that the board has approved spending at least $13 million to induce members to give up their charter. That action alone seems to be a highly questionable decision and raises fundamental issues of fiduciary accountability.

For generations members gave their financial resources to the board’s care What is most disappointing is that the board’s decision to put the credit union out of business in just 46 days draws upon the members’ longstanding trust and loyalty to follow their lead. This board’s action reeks of betrayal.

The merger rationale

The document used to justify the merger is the 7-page letter to members from the Chair. The key factors cited are the intent to “re-focus its efforts upon educators on a state-wide basis.” The reasons given include the historical loyalty of educators, the value of a market niche for growth and the need to differentiate itself and gain more economies of scale.

Even though School Financial’s state charter reports a potential FOM of over 4 million, it now claims to grow it must merge with SchoolsFirst FCU in Southern California with $16.1 billion assets and its historical roots in Orange Country.

Indeed, the explanation seems to merely adopt SchoolsFirst state-wide strategy not the implementation of an independent judgment by Schools Financial.

Nowhere are the details for how this justification will better serve the interests of the Sacramento-based membership. There are broad generalities about further commitment to member service, providing low cost accounts, long-term stability and expanding “rather than competing with our existing branch/ATM footprint.”

However, all the details are left open-ended about what these changes might be, as for example:

  • The existing branches will remain open for three years unless leases expire sooner.
  • The credit union’s participation in the shared branch will be evaluated later and the participation in the ATM network will be maintained.
  • The retention of federal share insurance reads like the logic of giving the sleeves off one’s vest since that is the case now.
  • All employees are “being offered retention bonuses to help ensure a smooth transition and successful integration”- an amount not disclosed. Of course there would be no retention bonus if the employees don’t support the change, another example of “tipping” interested parties to go along with proposal.

So the letter’s assurance seems to be nothing much is going to change, and if it does, it will be for some undefined future in which the only definite reality is the members will be part of an $18 billion credit union with its main headquarters almost 500 miles away.

There are no side by side comparisons of savings or loan rates, or fees ( one example only) or any other standard performance indicators that would suggest members might be better off transferring the management and leadership of their collective and personal interests to another organization with which they have no relationship.

Reviewing the latest facts

Savings: Different rates reflect different ALM strategies

Both of these credit unions are very successful using any financial performance measures. The differences that do exist reflect the different business models each has developed in their respective markets over the past decades.

For example, the letter says that SchoolsFirst pays its members higher rates on savings as measured by the average cost of funds. This is accurate: 1.05% for SchoolsFirst and 0.54% for Schools Financial through September 30, 2019.

However, the credit unions’ call reports show exactly the same rates on the core accounts, regular shares and share drafts. The difference in cost of funds is that SchoolsFirst has 28% of its savings in higher paying CDs, versus Schools Financial’s 12%. This funding difference reflects the contrasting loan strategies discussed below, in which SchoolsFirst is more concentrated on mortgage loans.

Moreover, Schools Financial provides options not available at SchoolsFirst including a special 7% Banking for Everyone savings, Senior Savers Club and business accounts.

The latest rates posted by Schools Financial for $1,000 minimum CDs ranging from 1.10% to 2.55%, appear to be more than competitive in almost any local or out of area market.

Two distinct lending portfolio priorities

The same analysis shows that Schools Financial’s 86% loan-to-share portfolio is very different from SchoolsFirst’s 70% ratio. Real estate loans are 54% of SchoolsFirst’s portfolio, versus 33% of Schools Financial’s. The yield on the member loans at Schools Financial is 3.98% versus 4.87% at SchoolsFirst. As reported in the September 30 call report Schools Financial’s rates are lower for credit cards and 1st liens, but higher for auto loans which are 59% of their portfolio, versus 31% for SchoolsFirst.

In both cases the credit unions offer excellent member value for their markets and their differing business strategies.

Institutional performance

The September 2019 data also shows that scale seems to make little difference in overall performance

Some comparisons of note:

Ratio                                   Schools  Financial            Schools First

Efficiency                         60%                                        66%

Net Worth                        12.2%                                     11.6%

ROA (YTD)                        1.85%                                    1.16%

Delinquency                    0.22%                                   0.46%

Net C-O/ave loans        0.39%                                  0.49%

Allow/Del Loans            2.47X                                     1.58X

On many productivity measures the numbers are virtually the same even though the credit unions have contrasting business models. The average member relationship is $21.5K at Schools Financial versus $25K at SchoolsFirst, but the rate of growth in this comparison is faster at Schools Financial.

On critical productivity measures such as $ loan origination per full time employee, $ loan income per FTE or net revenue per FTE the credit unions are virtually the same.

The comparisons could continue. The point is that neither credit unions shows a significant performance advantage versus the other. Both are efficient, productive, and offer members excellent value.

Schools Financial further documents their value by referencing this citation on their website:

Schools Financial Named in Top 200 Healthiest Credit Unions List

DepositAccounts.com has released its list of the 2019 Top 200 Healthiest Credit Unions in America. In addition to being in the top 200, Schools Financial Credit Union has received an A+ rating for financial soundness.

The diminution of local employment and leadership

Schools Financial’s website is replete with examples of its involvement with the school districts it serves, offering special loan programs, supporting teacher recognition and local efforts at school support. Moreover, it advertises itself as a great place to work:

Top-5 Reasons to Work for Schools Financial Credit Union

      1. 100% Paid Insurance Coverage
      2. Up to 7% Employer Contribution to 401k Plan
      3. Babies in the Workplace Program
      4. Education Reimbursement
      5. Gain Sharing

In giving up their 1933 charter the members will lose control of not just their collective resources, but also of the election of local directors and governance which provides the oversight in the direction of policy and resource allocation. Business strategy and the numerous member education programs will be determined at head office and economic realities in Orange County. The priorities will then be passed down to local branches.

The relationships the credit union has created with the community–the auto dealers in its indirect program, the school district’s local support, the realtor networks which refer 1st mortgage home buyers, the media in which the credit union advertises, not to mention the civic organizations and involvement of the board and senior management—all lose their priority if not their significance once there is no longer local control.

Here is one of many examples of how Schools Financial describes its role in the community today on its website:

Community

“People Helping People” extends beyond our branches. Our members and our staff band together to extend that philosophy to those in need who reside in the communities we serve. Some of the organizations we lend a hand to are: (details omitted)

      • Children’s Miracle Network
      • Food Banks
      • Making Strides for Breast Cancer Walk®
      • Spirit of Giving

The fallacy of cooperative mergers

Credit unions rarely succeed by trying to become larger than their competitors. Rather their success is creating and cultivating member relationships. This grows loyalty and member trust. The cooperative design, uniquely among financial alternatives, encourages participation and connectedness among the member-owners.

SchoolsFirst could compete with Schools Financial, but they know how difficult that would be given the credit union’s Sacramento track record. Or, it could embrace cooperative collaboration where there are mutual benefits for members. But no, it instead is has bought out the CEO, a much easier way to expand and gain control of members’ equity without paying anything or committing to any future details.

The consequence is the member-owners will see their loyalty being sold as executives get windfalls for surrendering their leadership responsibilities. Their elected board abdicates any fiduciary role for either a democratic process or for providing genuine member value in the transaction.

The members not only lose in what is an insider-arranged “commercial sale,” but also, the credit union system loses credibility as stewards of cooperative design and member-ownership. Instead those agents charged with overseeing the model have engineered the system to serve their self-interests first, and members last, or not at all.

But the regulator approved this

The defense and one of the FAQ explanations is that the regulator approved this transaction including the statement sent to members.

Mergers of well run, independent sound institutions are seen by some as a necessary strategy. However, the inherent conflict of interest for a CEO arranging the merger of a credit union and specifically benefiting from it, has never been openly addressed.

NCUA has long abandoned its role as a steward of member interests. Cooperative leadership throughout the system has become increasingly hollowed out by the transactions of self-interested agents, including the regulator.

NCUA proclaims its basic mission is safety and soundness. However, it has turned a blind eye as one of the most basic principles of risk management is compromised by mergers of healthy credit unions. For putting more eggs into fewer and fewer baskets only creates larger risk concentrations for the next cyclical downturn.

Merger violates a sacred trust

The strength of credit unions is first and foremost the member-owners.

Cooperative design asserts that members’ well-being and what really matters to them will be kept close at hand. Credit unions can be locally sponsored and supported. To some this model seems contrary to the temper of the times and the siren attraction of size as a monument to success.

However, cooperatives are not merely financial firms, but a form of social capital based on a covenant to serve the common good.

This basic cooperative principle is compromised in this merger. For it privatizes and rewards the few from the common wealth created by generations of members. The members should vote against this merger.

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Thoughts on Mergers: The Tallest Candlestick Ain’t Much Good Without a Wick

I am increasingly concerned about mergers of well run, healthy credit unions. And the bandwagon that many credit union CEOs seem eager to join. Here are my reasons why.

One of the most important innovations of the cooperative financial model was to give ordinary citizens the right to “own and manage the means of financial production.”

Without this option, members would just be consumers of financial services at the mercy of whatever options the market, private enterprise or non-regulated firms offered.

Making Capitalism More Democratic

The co-op response emerged out of the progressive era at the turn of the 20th century. Large monopolies controlled railroads, banking and other vital industries such as steel and oil. Farmers were one of the first groups to organize against large corporate monopoly power via co-ops.

The credit union belief that regular citizens, not the wealthy, could own, control and invest their collective savings was both a political and an economic innovation.

The elected boards were the mechanism by which the governance and democratic purposes were carried out.

The Importance of Economic Democracy

As consequential as the movement’s financial growth to over $1.6 trillion has been, the value of cooperative design goes beyond a purely economic role. Or offering just another market option. Benefits individual credit unions provide for their communities and member groups include:

  • Collaborative economic capacity inspired by purpose, passion and values
  • Direct CEO accountability to user-owners
  • Elected oversight of directors, from the membership
  • Focus on community needs and priorities
  • Reinvestment of savings responsive to local conditions
  • Firsthand knowledge of members and community circumstances-both routine and in uncertain environments
  • Leadership in the community to support other local solutions

Credit unions are an essential part of members’ lives especially when communities, no matter the size, are hollowed out by changing economic, political or even demographic events. Credit unions’ roots provide local, CEO level, leadership capacity and staying power in ways other economic firms cannot or will not do.

Mergers of Healthy Credit Unions Compromise Cooperative Design

NCUA released the latest batch of merger totals. Year to date, there have been over 110 approved. In the last five years the total exceeds 1,200.

The most frequent reason provided in the NCUA summary spreadsheets is “expanded services.” A very small number report difficulty finding officials, and a one or two, poor financial condition in the third quarter 2019 summary.

None of these situations is irreversible or necessarily fatal. Yet the industry has accepted this consolidation as inevitable. Regulators routinely encourage mergers for situations that would be temporary but lack oversight perseverance. Consultants tout their help in arranging new combinations–for a fee.

The Agency Challenge and Board’s Fiduciary Role

Most mergers, especially among healthy credit unions, are initiated by the CEO. Almost all credit unions merging today were begun at least two generations (50 years) ago or longer. All have survived severe economic cycles, regulatory disruptions, constant technology innovations and leadership changes in their decades of service.

But today the boards, led by CEOs, have thrown in the towel. Forgetting the responsibility for the legacy they inherited and their accountability to future members, the board’s present “happy talk” narratives saying the credit union can no longer meet its responsibilities to the member-owners.

Instead of carrying on their fiduciary duties to members, they transfer this financial and relationships legacy to another credit union. Often the senior leadership has carved out a better immediate future for themselves. This is often accompanied by a token “incentive” special dividend, if members will give up their accumulated commonwealth reserves and political control over their co-op’s future.

Although boards and their CEO are supposed to be agents of the members, they can also be motivated by self-interest. The best support for this interpretation is that most merger discussions are portrayed as extending over a year or two. Boards state they have routinely evaluated all strategic possibilities. Even though these discussions occur during the annual election-meeting cycle, I have yet to find a board seeking election while stating their intent to merge the credit union.

Rather, a sudden decision is announced with no prior public information. Members are asked to give up their independent charter on short notice. Their accounts are transferred to another credit union seemingly offering a better deal than what their own board and senior management are able to provide.

In this message-controlled process by the CEOs and boards, there has never been a member vote against a merger. Developed in secret, the charter surrender is then marketed as a logical decision to members, completely unaware such a pivotal event was even needed. No other option is allowed to emerge. The incumbent always wins.

The Irrelevance of Size

The benefits of cooperative design do not depend on size. Very large credit unions can be just as focused on member well-being as small ones. Often a credit union’s size ambitions reflect its market reach. As FOMs expand, so does the logic for larger and larger size, resulting in a self-justifying need to seek mergers.

The difference is not the size of the credit union, but its approach to business strategy. Some credit unions want to be primarily commercial firms with institutional ambitions that mimic the for-profit banking sector. Other leaders focus on innovation in member service. Both approaches can fit within the cooperative model.

The difference is what success criteria are used. One is driven by institutional performance, the other by member well-being. Regardless of size, I believe that strategies that focus on commercial success are like candles without a wick. No matter how tall, they will never shed any light.

Shredding the Legacy

Why should credit union leaders care whether mergers are driven by “commercial” motives or member well-being? Because democratic co-ops are hard to sustain if the member focus is subordinated to agent self-interest. Cooperative democratic governance depends on values where leaders follow the highest standards of fiduciary conduct overseeing collective wealth. It is based on the foundation that members’ interests will always be paramount. Abdication by boards and CEOs of decades of cooperative investment justified by marketing bromides about future benefits, compromises the reasons credit unions were created in the first place.

The unchallengeable progress of the credit union system demonstrates both the need and power of cooperative design for the American economy. If its distinctive purpose is increasingly hijacked by questionable combinations driven by self-interest, then the entire system’s foundations are at risk. For if credit union CEOs do not believe in their own institution’s autonomy, but instead are open to the best offer, will members themselves respect the cooperative choice?

Mergers are complex and hard to engage in non-interested discussion. However everything we say or do affirms or critiques the status quo. To say nothing is to say something; in this case, that the status quo in merger trends is okay. I believe these trends are not okay.

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The Necessity for Coop Designs: Food Deserts Turn to Co-ops for Local Grocery Stores

On November 6, a New York times story In Land of Plenty, Few Places to Find Fresh Foods described the challenges of small, rural communities maintaining local shopping options.

The article led with an example of a small town in the Midwest that is a center for the farming community. As in many other small communities across the country local grocery stores have closed in the face of large regional competitors. “It’s the story of every small town; it’s a domino effect and it starts with the grocery store,” states a resident of Winchester, Illinois, a town of 1,500.

The irony of over five million people who make their living feeding the rest of the nation but having to drive at least 10 miles to buy groceries, has prompted local residents in a number of these circumstances to seek new options.

One solution is to set up cooperatives financed by residents to start their own stores. “This isn’t charity. This was self-responsibility. If you want a grocery store in town, you have to step up to it,” says one of the founders of Winchester’s for-profit coop which opened in August 2018.

The article describes multiple volunteers contributing community help and resources. Radishes and spinach are delivered from a local farm; milk from a local dairy; beef from a nearby ranch and eggs are delivered once per week by a local farmer.

Co-op design allowed local residents to mobilize resources for solutions that larger firms do not see as practical or profitable.

Parallel histories for farmers and consumer finance

Farming coops are one of the creators of this country’s collaborative business model at the turn of the 19th century. So popular were cooperative solutions in rural America, that the original bureau for federal credit unions was assigned to the Department of Agriculture in 1934 when the Federal Credit Union Act was enacted.

Credit unions in the past and even today actively serve “credit deserts”. These are communities where no locally-owned financial institutions are located. Credit policy and lending priorities are set at headquarters located outside the areas served.

Relevance for credit unions

Should these “fresh” initiatives be borne in mind as several hundred local credit unions per year cancel their charters to merge with larger, often out-of-area, credit unions? Is giving up local control, leadership and resource allocation compromising the unique capacity of credit unions to fill voids left by larger financial competitors?

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The Versatility of Co-op Designs

On Tuesday November 12th, the largest milk company in the Unites States, Dean Foods, filed for bankruptcy.

Among the contributing factors were too much corporate debt and changing consumer attitudes toward both branded products as well as the traditional dietary recommendation to drink three glasses of milk per day. In 2017 Americans drank 37% less milk than in 1970 according to the Agriculture Department.

The solution to continue providing distribution of dairy products according to newspaper accounts is “to sell itself to Dairy Farmers of America, a marketing cooperative that sells milk from thousands of farmers.”

This situation illustrates the ability of persons and firms affected by the market conditions can potentially ally via a cooperative to address changing circumstances for mutual benefit.

A Lesson for Credit Unions

What can credit unions learn from this example? When the taxi medallion crisis arose, credit unions were best positioned to help borrowers transition to the new, lower valuations. But these options were stopped as NCUA liquidated the credit unions experienced in these kinds of transition problems. Without a firm that can renegotiate and continue to serve these borrowers, the only option is to force collections even if this causes member bankruptcies.

Meanwhile Uber reported a $1.2 billion loss in the third quarter. 

It is forecasting a profit sometime in 2021 as it runs through investor capital. The taxi industry will adapt, just without credit union participation.

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“ED” Talks for Credit Unions: Cooperative Ideas Worth Spreading

TED talks are a relatively new learning paradigm. Not only have these presentations expanded in both depth and breadth, but they have even become the curriculum for educational courses.

As described on their home page, TED is a nonprofit devoted to spreading ideas, usually in the form of short, powerful talks (18 minutes or less). TED began in 1984 as a conference where technology, entertainment and design converged, and today covers almost all topics — from science to business to global issues — in more than 100 languages.

Its mission is simple: to spread ideas. “We believe passionately in the power of ideas to change attitudes, lives and, ultimately, the world. On TED.com, we’re building a clearinghouse of free knowledge from the world’s most inspired thinkers — and a community of curious souls to engage with ideas and each other.”

ED Talks: a Clearing House for Cooperative Thinkers

I believe there is a parallel opportunity for such a resource in the credit union cooperative community. We have both a wealth of current leaders and historical examples that can be shared to educate and inspire change similar to the TED exchanges.

An “ED” Talk: Choice and Credit Union Success

In June 1986, the savings and loan crisis was beginning to emerge into a full blown industry debacle. Among the first causalities were the private insurance options available in several states (Ohio, Rhode Island) for mutual S&Ls. The closing of these funds led to concerns about the multiple private insurance options for credit unions.

In this environment of fear, Ed Callahan spoke to the summer leadership conference of the Association of Credit Union League Executives (ACULE).

He asserted that the five years of unparalleled success since deregulation proved credit unions had created the best financial system in the country. But there was a threat.

The industry’s success was based on choices. That vital characteristic was being undermined by “panic” and a failure of leadership.

Listen to this two-minute excerpt in which he makes the case with passion and logic for why choice is central to cooperative performance.

Best System:

The Insight for Today

Throughout credit union history there have been efforts to create single source solutions. Examples include state leagues, a one-stop option for required fidelity bonds, and a dominant service bureau data processing company (CUNADATA). It is easy to confuse a single, uniform solution as the best way to achieve cooperative system.

Ed states the years of success years after deregulation enhanced choice by opening up options that are now threatened by a monopoly share insurer.

His concern about no choice of a share insurer except the NCUSIF, is certainly as critical today as 35 years ago. For if this logic continues to prevail in credit union land and beyond, a potential next easy move is to have just one federal insurer called the FDIC.

While his example was share insurance, the message would be the same for all areas of credit union solutions. For choice to be sustained, leaders will have to be willing to support options even when their own organizations may not have chosen that path.

P.s. If you have an idea to share for your own “ED” talk, please send it to me at chipfilson.com.

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What Deregulation Means

“Deregulation isn’t an issue of less regulation. When I talk about deregulation, I mean that decision-making is put back where it belongs-in the hands of the boards of directors and credit union managers. In other words, let credit unions be credit unions.”

(Ed Callahan Feb 1987)