Category: Cooperative Design

For almost five decades Navy and Pentagon FCUs have ranked numbers 1 and 2 in total assets for all federal charters.

These top two positions seemed pre-ordained by the circumstances of their expansive field of membership (FOM) charters. Both served broad military and civilian employees in the regulatory era when all other credit unions were limited to a single military base or location as their market.

But even with this significant advantage, the financial evolution of the two organizations has been dramatically different.

The Four Decade Growth Results

At year-end 1978, Navy reported $765.5 million in total assets; Pentagon $397.6 million. The difference in the two, $367.6 million, meant that Navy was almost two times Pentagon’s size.

• Top 100 FCUs by asset size, 1978
• Top 100 FCUs by asset size, 2020

They retained their same number 1 and 2 positions respectively over 41 years later as of June 30, 2002. Now Navy is $128.5 billion and Pentagon $25.9 billion in assets. The difference between them is $102.6 billion. Navy has expanded to be five times larger than Pentagon in this time period.

During the four-decades, Navy’s compounded annual growth was 13.1%. Pentagon’s was 10.6%. What accounts for the dramatic difference in performance by these top ranked FCUs?

Both had the presumed advantages of size, scale and untapped FOM potential. Both served sponsoring organizations more or less immune from the economic shocks suffered by private employer-based credit unions. Both enjoyed the reputations and direct support of their government and military sponsors which provided convenient, rent-free, on-base locations not available to competitors.

The Difference in Business Models

Both federal credit unions operate under the same set of rules. But each chose very different business models even with the same product and operational capabilities.

Navy FCU manages over 340 branches worldwide. It focuses operations around military bases and surrounding communities in addition to its 24/7 virtual channels. Their growth strategy is organic. They emphasize serving familiar, traditional markets connected with their historical roots. In the most recent 12 months, this has resulted in a 9.4% rate of member growth and a 27% increase of shares.

Pentagon emphasizes virtual delivery, even while maintaining 49 branches. Growth has focused on an executive led strategy of “acquisitions” versus organic market development. Over the past six years, it has merged almost two dozen other credit unions. On January 1, 2019, it merged state-chartered Progressive Credit Union (New York) and added its state-defined FOM, giving it (Pentagon) the ability to serve anyone in the US.

At June 2020, Pentagon’s merger strategy reported a 14.1% growth of members, but only a 1.1% growth in shares. During this six-year merger effort, asset growth slowed to 6.5% or far below its 41-year average of 10.6%.

Both credit unions report similar financial ratios for ROA, net worth, delinquency, and operating expense as of June 30, 2020. Even the average member relationships are nearly identical at $25,000. But Pentagon’s average member loan (-8.5%) and share (-11.3%) balances show declining relationships. Navy reports growth in average balances per member of 3.8% in loans and 16.3% in shares in this same twelve months.

Observations from Being on Top

This two-firm comparison and last Friday’s article describing the 40-year changes in the Top 100 suggest that size does not create sustainable success. Rather, the strategy and implementation chosen by the credit union’s leadership is key.

Today, conventional wisdom is to preach the benefits of size to generate growth. Some credit unions have even declared their “growth” strategy is to merge.

But greater size does not automatically generate better value or relevance for members. Growth becomes an end in itself, just another milestone for leaders, but without relevance for members.

The Navy-Pentagon comparison is striking. It demonstrates the potential of the cooperative model to create a financial juggernaut with Navy’s member-focused strategy. One might even suggest that the members of Pentagon would be much better served if they merged with Navy FCU.

Pentagon promotes its “scale” to acquire smaller, sound and well-run credit unions by incentivizing CEOs and boards to turn over their members’ future to them. (The latest example: the Sperry Associates FCU merger.) The decline in membership participation and meager organic growth suggest little to no benefits for Pentagon’s members or for the credit union members who were sold out by their CEO and directors, and who will lose their only local branch.

If the billions of assets acquired by Pentagon in its six-year merger binge were subtracted from its current total, would Pentagon even report positive growth? Is this so-called strategy nothing more than a cooperative Ponzi-like scheme disguising an inability to create sustainable member value? And if it is, the entire credit union system, not just Pentagon’s two plus million members, will suffer the public consequences when this self-serving business model runs out of patsies.

In NCUA’s 1978 Annual Report, the agency lists the top 100 federal credit unions by total assets, with hometown, charter year, and asset rankings in ‘77 and ’78.

• • Top 100 FCUs by asset size, 1978

Wekearnyan Ranks 70^th in Top 100

Many names in this top 100 are still familiar as sponsoring organizations were the single largest factor in credit union FOM identity. Only FCU’s are listed. In 1978 there was no data source for the 45 state chartering systems. Some SCU’s were NCUSIF-insured, some privately insured, and some uninsured.

I did not recognize Wekearnyan ranked # 70. I googled it but found no reference. Was it merged? Liquidated? Converted to a new FOM and name? The only indirect mention was to employees of a Western Electric, Bell Telephone subsidiary, with a similar name.

What Could Have Happened?

Now I was intrigued. Could a credit union with a 43-year track record just disappear? That seems contrary to traditional views of credit union resilience.

At year-end 1978 there were 12,759 FCUs with total assets of $34.8 billion. As number 70, this “lost” credit union ranked in the top 0.5% of all federal credit unions. It had scale and assets that were larger than 12,700 smaller charters. This standing should have given it the resources, leadership capability and operational experience to navigate change. That was the conventional wisdom, still espoused today.

Looking Ahead 41 years

To further explore what happened, I ran the list of the top 100 FCUs as of June 30, 2020. Was there a successor? What were the fates of 1978’s other top 100 credit unions four decades later?

• • Top 100 FCUs by asset size, 2020

Comparing these two top 100 tables raised more questions about the staying power of being in the largest 100 group. A number of credit unions were obvious casualties of sponsor failures. Eastern Airlines Employees (#5); Pan American (#33); or Braniff Airways (#77) are a few examples.

Other credit unions however, retained their relative ranking over these four decades: Fort Knox at #88 is now #86 Abound; or #96 Corning Glass Works Employees is now #91 Corning.

Several credit unions have moved up in rank significantly. Teachers (NY) from #63 to #13; Police and Fire (PA) from #68 to #17. Bethpage from #23 to #10. And Randolph-Brooks from #29 to # 6. These examples appear to support the presumed competitive advantage of the largest credit unions.

But just as soon as one might conclude this, there are examples of the opposite trend. Hughes Aircraft Employees fell from #3 to #22 today (now Kinecta); Andrews from #15 to #58; and State Department from #22 to #59.

One challenge in interpreting top 100 trends is the group is not static, Charter conversions add to or subtract from the 1978 listing. Some notable credit unions that left for state charters and thus not now included are: Lockheed Missile Employees (#13) renamed StarOne; IBM Poughkeepsie Employees (#17), now Hudson Valley; Suncoast Schools (#35). IBM Mid America #100 converted to a mutual savings bank charter.

Also new credit unions join the list such as ESL, a former mutual bank, now #14. The State Farm ranking #24 is new, but a result of merging over a dozen separate, local State Farm credit unions into a single organization.

One Observation from This Lost FCU

After analyzing the myriad comings and goings and relative re-rankings between these two lists, I found no trace of Wekearnyan FCU.

Conventional wisdom is that credit union size is critical for success. This premise is that bigger is better because size creates the scale and resources to remain competitive. Or so it seems if one looks at only the latest data or at trends just several years back.

But when the time period is extended further, the proposition about size becomes much less supportable. Credit unions prosper not because they are the biggest, have the leading market share, or even approach some ideal “scale” of operations.

Size may be useful in certain circumstances, but it is not the cause of success. Rather, that outcome depends on effective leadership. The responsibility of CEOs and boards is to create relevant and consistent value for its member-owners. Well executed business models are the basis for resilience and longevity.

Monday I will look at the number 1 and 2 ranked credit unions in both lists, Navy and Pentagon. What does their relative performance with each other suggest about the assumption that size is a necessary foundation for success?

Do Your Own Analysis

In the meantime, look at these two lists–the comings, goings and changes in relative rankings. What do you take away from this decades-long perspective about credit union performance? There are multiple case studies for analyzing leaderships’ choices. What example is most relevant to your circumstances?

And if anyone knows what happened to the lost credit union, please share your knowledge.

• • Top 100 FCUs by asset size, 1978
  • Top 100 FCUs by asset size, 2020

In this election season every new and traditional media outlet is overflowing with ads urging us to vote. Some link to information sites. Others rely on celebrity exhortations as this rap video from the cast of Hamilton:

(https://www.youtube.com/watch?v=YMmkXAIRXCU)

Voting legitimizes the power and policy of elected officials.  From local school boards to statewide offices and up to Congress and the President. It also is how credit union directors are supposed to be chosen.

So critical is this democratic perception, that even autocratic rulers in Russia, China and dozens of other long tenured dictators must offer the pretense of voting for their citizens. And when an electorate knows the process is a fraud, they hit the streets as is occurring now in Belarus.

Cooperatives and Democratic Practice

Democratic governance is one of the 7 cooperative principles:

Democratic Member Control

Cooperatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary cooperatives, members have equal voting rights (one member, one vote) and cooperatives at other levels are also organized in a democratic manner.

(Source: North American Students of Cooperation-NASCO)

The required annual meeting for the election of directors, plus any new or unfinished business members may wish to raise, is the most common way this value is practiced. Unfortunately, this essential member governance activity is often compromised.

Federal Credit Union Bylaw Practice

Here is the process as described by one FCU in the required annual meeting notice:

Members are advised that XXX Federal Credit Union bylaws stipulate the following:

Any Member can place his/her name in nomination exclusive of the Nominating Committee by written petition that includes a brief statement of qualifications, biographical information, and a petition with the required minimum signatures of at least 1% of members of  the Federal Credit Union. Inquiries regarding the election process and requesting a petition package that includes signature collection requirements should be directed to  . . . To be effective, such nominations must be accomplished by a signed certificate from the nominee stating that he/she is agreeable to nomination and will serve if elected to office. A completed nominations package must be sent to the  Board Secretary. The closing date for receiving the nomination by petition with supporting documents is date. There will be no opportunity for nomination from the floor. The election will not be conducted by ballot and there will be no nominations from the floor when there is only one nomination for each position to be filled. Should the number of candidates equal the number of open positions on the Board of Directors the chair may take a voice vote or declare each nominee elected by general consent.

The common practice of FCU’s is to have the board appoint a nominating committee which in turn proposes candidates to fill expired terms and open seats. Rarely are more persons recommended than seats to be filled. Nominations by petition are rare. Therefore, as summarized above, the pre-chosen nominees are deemed elected “by general consent.”

Contested FCU elections almost never occur. The result is perpetual, self-ratifying boards that become “closed shops.” Members are not encouraged to participate let alone offered a choice among  candidates. Members are merely customers, not participants in cooperative ownership.

This board-controlled process isolates volunteer directors from members’ concerns and the need to reach out and listen. Volunteers validate their oversight by their credit union’s CAMEL 1 or 2 regulatory rating and continued profitable operations, not by member engagement.

As one federal credit union member expressed to me: “At least in Belarus they got to vote.”

State Bylaws

While many states following FCU model bylaws (one member one vote, no proxies allowed), over thirty states authorized state charters prior to the passage of the FCU act in 1934. This has created multiple organizational bylaw options for co-op “democratic” governance.

I recently received the following request from a state-chartered credit union in California:

Update Your Proxy Date

As a member-owner of XXX, you have the opportunity to vote for matters related to the governance of the credit union. A proxy is a person you designate to vote for you at meetings. By designating a proxy, you allow that person – in this case, a qualified member of our Board of Directors – to cast votes on your behalf.

Updating only takes a few seconds and remains in effect for three years. By updating, you will:

• • • Have your vote represented with no need to attend meetings
    • Provide authority to our member-centric Board of Directors
    • Allow qualified business people to look out for your financial interests, and those of all members

You have the right to revoke your proxy at any time by calling 800.XXX,XXXX sending us a secure message in online banking, or otherwise contacting us in writing.

Your current proxy expiration date is 00/00/0000

This update request just transfers members’ voting power to the incumbent board. The most significant owner role to elect directors is itself controlled by the board through proxies. Want to guess how much turnover occurs in this environment?

This proxy-driven outcome is a “closed shop” where directors are relieved of any need to interact or respond to members.

Currently 13 states permit proxy voting—CA, CO, CT, FL, IL, IN, MD, MT, NE, NV, NY, OH, VA.

Illinois’ standard bylaws illustrate how proxies go beyond election of directors to include mergers and voluntary dissolutions. Moreover, voting is weighted by the number of shares in the director elections. Selected sections of the standard bylaws read as follows (emphasis added):

Section 6.

On all questions and at all elections except for the election of directors, a member shall have a single vote regardless of the number of his shareholdings.

Section 7.

There shall be no voting by proxy except on the election of Directors and proposals for merger or voluntary dissolution.  A member may appoint a proxy by signing an appointment form and delivering it to the person so appointed, provided that the person is a member of this credit union.

Section 8.

All voting on the election of directors shall be by ballot, except when there is no contest‑‑written ballots need not be cast. On elections of directors, every shareholder has the right to vote the number of shares owned by him for as many persons as there are directors to be elected, or to cumulate the shares and give one candidate as many votes as the number of directors multiplied by the number of his shares shall equal; or distribute them on the same principle among as many candidates as he shall desire. . .All elections shall be determined by plurality vote and shall be by ballot except where there is no contest.

Democratic Governance Underwrites Safety and Soundness

So, what if credit unions are democratic in theory but fail in practice? What is wrong with boards managing their own longevity? Doesn’t credit union success prove these hybrid voting processes work just fine?

Two, among many reasons, why this anti-democratic process is harmful:

1. The distinctive strength of any credit union is its relationship with the member-owners. Lincoln’s observation about fooling some of the people all the time etc. applies here. Undemocratic practices are sooner or later called out. The trust critical for all financial institutions becomes suspect. And when the veil of democratic pretense is ripped away, people will vote with their feet, closing accounts, or rise up in public anger at unprincipled leaders.
2. Directors and managers self-immunized from any meaningful member-owner role creates an environment in which self-interest breeds and fiduciary responsibility becomes peripheral. Instead of member well-being and serving community needs, the focus becomes institutional exploitation for personal benefit and/or prestige.

The essential check and balance from democratically elected boards in cooperatives is lost.

Peers see this decline in the owners’ role.  Member voting is nonexistent or an empty pro forma exercise.

A cooperative financial system founded on values and community service becomes more and more susceptible to self-dealing.

Member Exploitation Via Mergers

Credit union charters are not declining because of financial safety and soundness weaknesses. Rather CEOs and boards have found it more personally beneficial to merge as retirement nears or to seek outsiders to provide the future direction from which the incumbents benefited for years.

NCUA appears oblivious to the reality of this internal rot as it routinely signs off on sham merger rationales and manipulated processes.

If credit unions are to regain their institutional integrity, member confidence and unique character, state and federal regulators, leagues and CEO/volunteer leaders must say, Enough is Enough!

Democratic governance requires participation. It is not a heritage to be spent down, but beliefs and conduct renewed continuously by today’s managers of this inheritance. That is how future generations will be assured the option of a member-owned financial choice.

Cooperative ownership is a concept that can be difficult to communicate. It feels like a virtual, not objective, reality. Moreover, the democratic processes implementing ownership vary from credit union to credit union.

Credit unions create both personal and common wealth. The fiduciary responsibility of leadership is to “pay forward” the legacy which all members and employees inherit and add to. This is quite distinct from privately owned firms.

When properly presented and practiced, member-ownership can be a valuable advantage in all times and circumstances.

A Timely Reminder

“You never actually own a Patek Phillip. You merely take care of it for the next generation.” That is the message of this luxury watch ad. It is also the inter-generational contribution created by credit unions.

And while current members may not see all the future benefits, their children will. It is a tradition begun over 110 years ago.

Voting is how democratic firms (cooperatives) and countries sustain effectiveness and legitimacy. For citizens, it is an important civic duty in all circumstances requiring elected office holders.

Cooperative democracy is strengthened every time members vote for directors in a credit union’s annual meeting. For co-op owners, it is the process that undergirds sound governance.

Encouraging Voting by Members

The National Cooperative Business Association (NCBA) is asking all co-ops to encourage member voting in the upcoming November elections.

Voting, they maintain, is the practice of cooperative principles and values. Co-ops often serve as more than just a place of business. They play a central role in the community. Especially during a pandemic they are uniquely positioned to help people register, act as a conduit for critical voting information, and assist people to make a plan to vote.

NCBA CLUSA, U.S. Federation of Worker Cooperatives (USFWC), National Rural Electric Cooperatives Association (NRECA), and Democracy at Work Institute are sponsoring a webinar today, September 15 at 1:00 pm EDT. In the webinar, presented in English and Spanish, they will share information about National Voter Registration Day and how your co-op can play a part encouraging a high voter turnout this election.

The webinar is free. Register here: https://ncbaclusa.coop/blog/how-your-co-op-can-help-turn-out-the-vote-join-this-coopsvote-webinar-on-september-15/

National Voter Registration Day

National Voter Registration Day is September 22, 2020. The following are additional NCBA suggestions to get involved. I personally found the vote.coop website intriguing. There is even a store!

• Click here to participate as a National Voter Registration Day host on September 22..
• Listen to the Along These Lines podcast episode featuring NRECA’s Laura Vogel and Non-Profit Vote’s Brian Miller on initiatives and resources for cooperatives.
• Check out this toolkit or visit vote.coop for more opportunities,
• Invite candidates to virtually speak with your co-op,
• Add the vote.coop link on your co-op’s website,
• Watch this webinar from Non-profit Vote on Digital Voter Engagement Tools During the COVID Pandemic,
• Send an email to your co-op’s member owners with voter registration information, or
• Create a Co-ops Vote insert for your member-owners or customers to be included in an invoice, receipt or delivery.

Credit Unions and Democracy

Elections have winners and losers. However practicing the responsibility of voting creates a win for democracy, whether in a credit union or for a public office.

The following comment from Leo Sammallahti, a coop enthusiast from Finland, was posted in response to “From the Field: Democratic Governance Makes a Difference”:

Voter participation in large cooperatives can be increased from the low level it is in the US.

I’m from Finland, where the most widely used bank is the OP cooperative, with 2 million members out of a population of 5.5 million. Around 15% of the members of the largest branch voted in the board election, where any member who would get a signature from 3 other members could stand as a candidate. From hundreds of candidates, 10 receiving most votes were elected – the votes are very contested!

This does not require a long tradition – Tipton and Coseley Building Society in the UK increased their voter participation more than ten-fold, from 1.7% to 18% between 2002 and 2009 by introducing donations per vote cast, online voting and pre-paid reply envelopes.

Here are few ideas how credit unions could do this in the US:

1. 1. Contested elections

Have contested board elections. There are many credit unions that do, and they seem to be doing fine. Research should be conducted on what is the effect – would be great to hear your thoughts on contested board elections in credit unions.

1. 2. Cooperate to increase member participation

Cooperation between credit unions by having them coordinate the the vote on same day in all or many credit unions, and work together to campaign to get members to vote. Maybe the shared ATM network could be used to advertise members to stand for board or vote in board elections by showing a message encouraging them to do so when they use the ATM and wait for their cash?

1. 3. Pay credit union board members according to voter participation rates

Instead of board members being unpaid volunteers, pay them according to voter participation of the members. So if 10% of members vote, each board member receives 100$ per monthly meeting. If 20% vote, they receive 200$, etc.

To get paid more, one would have to encourage members to hold one accountable. There’s a lack of incentives for members to vote as #coop membership grows. Incentivising elected representatives to increase participation could help. It could incentivise engaging contests, as more votes for candidates not elected would increase the pay for those elected. Might be that it would backfire, and members would be *less* likely to vote if it meant paying the board more! But nevertheless, it could be tested in a low-risk way.

It would be a performance-related pay model designed uniquely to cooperatives that could not be adopted in conventional businesses.

Leo Sammallahti

Coop enthusiast from Finland, where 90% of the population is a member of at least one cooperative

The following comment was posted by Leo Sammallahti, a Finnish advocate for cooperatives, in response to “The Key to Credit Unions’ Future: “Trust Each Other””:

I have tried to find but have not come across any research looking into whether having contested board elections has an impact on the performance of a credit union. Some credit unions that have them seem to do just fine. Yet if I’ve understood correctly they are rare in US credit unions.  Imagine if only 10% of members of US credit unions would vote – that would be a massive democratic exercise of over 10 million Americans. That would demonstrate the cooperative difference to the mass membership in a way no advertising campaign can.

In Finland, with a population 5.5 million, the largest grocery chain is a cooperative owned by 2.4 million people and the most used bank is the OP cooperative, owned by 2 million people.  15%-25% of the members vote in the *largest* branch of these cooperatives. The US credit unions would mobilise over a million Americans for every 1% of increase in voter participation. Let’s not underestimate the impact of such a mass mobilisation.