Category: Local Effect

Ed Callahan championed credit unions, even smaller ones, for offering consumers a choice.  A member-owned option was vital to an economy dominated by for profit firms.

From his prior experiences growing up in Youngstown, Ohio, teaching high school in Milwaukee, WI and Rockford, Il. he knew the power of local institutions.  Size did not matter.

The effectiveness of local, nimble institutions has been described in two recent articles.  One focuses on local farmers; the second on distributing Covid vaccines via small, single store pharmacies, not national chains, in two states.

In both case studies, the reader could easily place credit unions as further examples of the responsiveness local ownership provides.

Efficiency is Not Resilience

The efficiency curse describes the effectiveness of small farmers adapting more readily to market disruptions of food distribution during the pandemic.

“Efficiency is a wonderful thing. It can result in benefits such as lower prices and better uses of resources. But a hyper-specialized system is more vulnerable to disruption; it is not resilient.

“Smaller farmers are doing relatively well. According to Civil Eats, farms with existing CSAs (Community Supported Agriculture) have seen “a massive increase” in memberships since the start of the pandemic, with some reporting a 50 percent bump in sales. One California farmer said, “It took a pandemic for people to support local sustainable agriculture again, and home cooking, and ‘know your farmer.’ ”

“Why don’t we pay as much attention to the benefits of resilience as to the benefits of efficiency? We tend to get good at what we can measure, and it’s easy to produce numbers that support efficiency, such as crop yields per acre. Resilience cannot be easily measured, though. Its benefits are most evident during the catastrophes that can’t be predicted and the trends that haven’t been foreseen.

“One striking thing I’ve learned is that many (industrial scale) farmers and companies lose track of who’s eating their products. 

“That sense of interconnectedness is, for me, one of the most powerful and hopeful lessons of the pandemic. People who had never given much thought to where their food comes from suddenly learned something about farms and farmers. Which is to say, they learned about our interconnectedness. The pandemic has shown us that the world is much more connected than we thought.”

The “Know Your Farmer,” bumper stickers of the sustainable-food movement might be translated to “Know Your Member” as the mantra for credit unions.

Nimbleness and Local Knowledge Beat Big Chains

A second example, “Small Pharmacies beat big chains at delivering vaccines,” showed how local independent pharmacies were more effective delivering Covid-19 vaccine shots than large retail chains. The reason: “local owners know their community best.” But even more relevant for credit unions is the author’s assertion that government policy makers promote bigness allowing “market power abuses.” The parallel to today’s merger sales of long-standing sound credit union charters, could not be clearer.

“More than a month into the coronavirus vaccine rollout, only about 60 percent of the doses distributed across the country have actually made it into people’s arms, according to federal data — a discouraging display of inefficiency. But a handful of states are far ahead of the pack. At the top of the list are West Virginia, which had given out 84 percent of its doses as of Friday, and North Dakota, at 81 percent.

“Many factors are slowing distribution. But one key element appears to be the type of pharmacy states choose to work with. While the federal government partnered with CVS and Walgreens to handle vaccinations at long-term care facilities in the first phase of the rollout, North Dakota and West Virginia have instead turned to independent, locally owned pharmacies. Small drugstores are prevalent in West Virginia, and in North Dakota they’re just about the only game around: A 1963 law mandates that only pharmacies owned by pharmacists may operate in the state (save for a few grandfathered CVS locations).

“These small providers have proved remarkably nimble. Meanwhile, CVS and Walgreens have stumbled.

“The vaccination results in West Virginia and North Dakota have prompted a wave of national news stories, noting how startling it is that two rural states relying on local drugstores — the epitome of the old-timey “mom and pop” stereotype — have rocketed far ahead of states like Massachusetts and Virginia, with their networks of supposedly sophisticated chain pharmacies that have largely replaced the independents.

Public Policy Treats Small as Expendable

“For decades, Americans have been steeped in the idea that big businesses naturally outperform small ones. Indeed, much public policy is predicated on this belief. Our antitrust rules bless most corporate mergers on the grounds that larger companies are more efficient. Our financial regulations grease the flow of capital to the biggest firms. And in unstable times, the federal government almost invariably steps in to ensure their survival, while treating small businesses, local banks and family farms as expendable.

“So ingrained is this ideology of bigness that we routinely overlook evidence to the contrary. The fact is independent pharmacies have been outperforming their larger rivals all along. According to research by Consumer Reports, for instance, local pharmacies generally offer lower prices than the chains. And while the major chains only recently began offering one- or two-day home delivery, most independents have been providing same-day delivery for more than a decade (and most do it free).

Better Results from Being Small

“Independent pharmacies achieve superior results not despite being small, but because they are small. It’s their local ownership that makes the difference. Their decisions are guided not by the prerogatives of Wall Street but by the healthcare needs of their neighbors. Lacking top-heavy bureaucracy and rich with local knowledge and relationships, independent pharmacies possess what you might call economies of small scale. That helps explain why, in the places where they’ve been tapped to provide vaccinations at nursing homes, they’ve been able to quickly map out a plan and efficiently execute it.

“Like pharmacies, small banks derive advantages by virtue of being locally run that big banks simply cannot match: The owners know their communities and their borrowers, giving them access to a rich trove of “soft” information that enables the institutions to extend loans to new and growing businesses on the basis of factors that aren’t easily quantified and don’t fit the rigid parameters of big-bank lending. This is true not only during crises like the pandemic: Community banks account for less than one-fifth of the industry’s assets, but they supply nearly half of all lending to small businesses.

Regulatory Bias for Bigness

“So, if local pharmacies, banks and other businesses are outcompeting their biggest rivals, why are they losing ground? The number of independent pharmacies, for instance, has dropped by nearly 1,400 over the last decade, to 21,700 — and their market share has fallen from 28 percent to less than 20 percent.

“The answer is that policymakers, convinced of the inherent superiority of bigness, have allowed a few corporations to amass outsize power and wield it with impunity. Rather than compete head-to-head with their smaller rivals on price or service, these huge companies can simply crush them. (ed. or buy them out via mergers)

“These kinds of market-power abuses are rampant across the economy, but we’ve been conditioned not to see them. Confronted with yet another shuttered storefront, we take it as simply more evidence that small businesses can’t compete.

“It’s not just some hazy nostalgic feeling that we’re losing when independent businesses close. The stakes are much more consequential. We’re trading away some of the most productive and effective parts of our economy. The strong performance by local pharmacies in distributing lifesaving vaccines makes that clear

The Takeaway for Credit Unions

Every time a sound, locally supported and managed credit union is merged, the local economy, the cooperative system and the American marketplace is less diverse, nimble and responsive.

Flying to Japan in April 1970, I had two days to find off-base housing for my family before beginning sea duty on the Windham County LST 1170. The ship left Yokosuka Naval Base to join a small task group in Operation Golden Dragon.

Golden Dragon was a joint military exercise with the South Korean navy off the coast of Korea. Our LST’s tank deck was filled with Korean marines, landing craft, trucks and tanks for amphibious landing drills.

As we crossed the Sea of Japan, the ship’s captain, CDR J. P. Mann, reminded us of the January 1968 seizure of the USS Pueblo (AGER-2), an intelligence gathering ship. Captain Bucher and his crew of 82 were held for eleven months before release.

Our captain told the officers in a wardroom meeting that should there be any threat of North Korean intervention, we should know he would never let his ship be captured, whatever the circumstances.

That was my introduction to how this commanding officer understood duty and our collective obligation. Growing up I had watched the WW II television series “Victory at Sea” with its portrayals of the Pacific island-hopping campaigns. Now it was real life.

Credit Union Duty

There are three pillars of cooperative duty:

1. The trust, loyalty and support of the members
2. Leaders who take the fiduciary responsibility managing their inherited legacy to heart
3. An effective networked collaborative support system including sponsors, joint ventures, supervision and collective resources.

If members lose confidence, leaders shun accountability, or supporting organizations forget who founded them, the cooperative model will slowly decline in relevance.

All Three Pillars Weakened

Two back-to-back emails from members about a current merger vote suggested that all three elements of duty are lacking in this proposal.

One read in part:

“I’ve learned a lot about credit union mergers from you. Curious if you have an opinion about the merger of Kinecta FCU (formerly Hughes Aircraft Employees FCU) and my credit union Xceed Financial/XFCU (formerly Xerox FCU).

Based on online reviews of Kinecta FCU, I voted against the merger. As a former Xerox employee myself, my father worked for Xerox in Rochester’s Xerox Square for 30 years I hate to lose the affiliation of what’s left of my Rochester focused credit union.”

The second was a comment on my blog, “Should a CEO’s Last Act be a Merger,” published August of 2020.

“Is there any organized attempt among members to oppose this merger?

I have been a member of Xceed for over 25 years and have been very satisfied with the institution.

I was also a member of Kinecta from 2002 until I closed the account in 2017 due to them nickel and diming me with fees that were often worse than the big banks, and horrible customer service.

In 2014, Xceed gave me a substantial personal loan, right after Kinecta rejected my loan application.

I have no desire to go back to Kinecta’s fees and horrible customer service and will likely close my account if the merger goes through.”

Until these emails, I had not seen Xceed’s Member Notice of December 30 requesting member approval for the merger. Reviewing this Notice confirmed the issues in my first blog. For this event is nothing less than giving up the ship. This sale of long-standing member relationships, loyalty and common resources by those in authority undercuts all three cooperative pillars.

Xceed’s Leaders Surrender

Voluntary mergers require that members vote to approve closing their charter. No minimum participation is needed. A simple majority determines the outcome. Each member has one vote regardless of account size or length of membership.

To properly make this voting decision, members should have sufficient information to exercise an informed choice. This Member Notice is woefully deficient in describing why the abandonment of this 1964 charter is necessary.

Some of the questions that should be addressed so Xceed’s 48,500 members can make a knowledgeable decision about management’s proposed “surrender” include:

• Since members are turning their long-standing relationships to an unknown management team and board, why is no information on these individuals provided?
• If Kinecta is the chosen successor, why is no data about their past and present financial performance, current business model and future plans given?
• If “enhanced convenience” is one of the reasons for merger, how does adding 23 Kinecta branches, all in Southern California, help Xceed’s members in their eight locations in New York, New Jersey and northern California?
• If Xceed’s employees and branch network are integral to member value, why were employees given no post-employment commitments and all branch locations now “subject to business necessity?”
• Xceed’s net worth ratio is 20% higher (10% versus 7.9%). Why are the members’ $94 million reserves given to the “continuing credit union’s” control and they receive nothing? Not even a token homage for their $2,000 individual pro rata value?
• If merger costs (contract cancellations, core conversions, etc.) are so great that transferring Xceed’s $94 million equity “will not result in a material increase” in Kinecta’s 7.9% net worth ratio, shouldn’t these new costs be fully disclosed?
• If “better pricing, additional products, lower operating costs” will result in “lasting benefits” why is no single fact or comparison of existing fees, savings or loan rates provided to support this promise? What is the evidence of Kinecta’s superior member value?
• What is the basis for five senior employees receiving a “possible maximum amount” of additional compensation of $3.5 million while giving up their leadership roles and responsibility for future performance? What is the rationale for the CEO gaining $1.5 million in added compensation above that earned by staying on the job? Is this a conflict when senior managers negotiate their own benefits and do not provide any for members?

The Record of Xceed’s Board and CEO

When asked to approve a merger, members should have factual information not merely rhetorical promises of a better “low-cost” future. Lack of facts suggests the merger tactics have not been thought through.

Performance data is especially important in evaluating the marketing clichés and future hopes offered in the merger Notice.

The track record of Xceed’s leadership is one of continuing decline. The past five years show a compounded annual (CAGR) asset growth of negative (-0.67%) per year. The CAGR for the CEO’s 14-year tenure is 1.39%, less than a quarter of the industry’s 5.77% annual growth. This 1.39% long term growth includes five mergers that added $200 million in external assets and over 30% additional members in this time frame.

The September 2020 financial report shows a year-to-date loss of $1.7 million versus a $2.5 million gain for the same nine months in 2019. The members are already “voting” with their feet: over 4,000 (almost 8%) have left the credit union in the 12 months ending September 2020.

The board and management responsible for these trends state their future roles as President of Kinecta and two directors will “help ensure members have a voice.” What support could this “voice” be in light of their own abdication?

Xceed’s CEO provides members with the criteria they should apply in voting on this proposal. In a 2010 Credit Union Times the CEO wrote:

“At the end of the day, credit union mergers must be based on what’s best for the member (of both credit unions). At Xceed FCU, although we operate across the country, we wouldn’t merge a credit union just for the sake of expanded asset size.”

She continues: “Mergers call for serious consideration and although I appreciate the unprecedented difficult operating environment, we find ourselves in today-let’s continue asking the question “What’s in it for the member?”

Kinecta’s Track Record of Size and Performance

Since Xceed’s summer 2020 announcement, this combination has been justified by saying larger size will bring better value. As presented in the Notice:

“The combined credit union, and consequently the members will benefit from the economies of scale (including a combined entity totaling approximately $6 billion in assets and approximately 300,000 members) translating into lower operating costs by allowing such costs to be spread over a wider membership base. . .this merger (will) create a larger credit union that will be in a strong competitive position to offer members greater value than they have today.”

Kinecta’s record of its “competitive position” suggests that there is little relation between performance and size in this organization. The following shows long term and more recent trends in Kinecta’s asset ranking. It continues to fall even though it has been in the top 100 listing throughout this listing.

1978: Hughes FCU, #3 of all 12,759 FCU’s; no state cu listing available
1995: Hughes FCU, #9 of all 12,107 credit unions
2005: Hughes FCU, #16 of all 9,062 “ “
2015: Kinecta FCU, #34 of all 6,284 “ “
2017: Kinecta FCU, #40 of all 5,815 “ “
2018: Kinecta FCU, #43 of all 5,482 “ “
2019: Kinecta FCU. #47 of all 5,349 “ “
9/20: Kinecta FCU, #49 of all 5,244 “  “

This fall from #3 to #49 means Kinecta’s performance is not keeping pace with its peers. In 2010, Kinecta attempted a merger with NuVision using a two year trial run with a shared CEO. After reporting a $30 million loss in 2011, the effort was ended.

As of September 2020, Kinecta’s 2.74% operating expense to average assets is lower than Xceed’s 3.59%. But size does not automatically create better member value. Together the credit unions report losing 16,000 members in the past twelve months. Kinecta’s 12,000 drop is equal to almost 5% of its total from the previous year.

These declines are not a sign of member confidence. Member value depends on the business model, not the institution’s size.

Members Told to “Abandon Ship”

The two emails above suggest that members are disheartened as they are asked to leave the self-help craft in which they placed their trust, loyalty and belief for six decades. And how must they view the ship’s captain rewarding herself and the senior officers after bailing out of future responsibility.

With so many unanswered questions, Xceed’s members should vote No.

Management’s proposal to sell their cooperative’s future to an unnamed board, an unknown leadership group and then rewarding themselves with additional millions in compensation is a failure of leadership. A violation of duty.

If a No vote prevails, this $3.5 million dollar payoff plus the savings from added merger expenses, should be enough to find the right crew to set a better direction going forward.

In 1974, Peggy Holliday, CEO of Burbank Schools FCU, started student run branches at two Burbank High Schools. Each campus had a Student Credit Union Treasurer, who would “work” the student credit union during lunch, opening accounts and performing basic deposit/withdrawal transactions.

After school, the Student Treasurer would come to Burbank Schools FCU and reconcile the deposits/withdrawals of the day and process the membership forms to open the accounts.

The experience taught students the real-life skills of money management, budgeting, balancing cash drawers, and basic financial transactions. Students learned the concept of compound interest and making loan payments. Some went on to build careers in the credit union industry.

In 2011, the student credit union branches were disbanded. As account access became available online, the need for in-person transactions diminished. Promoting loan products became challenging, due to regulations. Checking accounts required parental authorization, difficult during school hours. Additionally, as school security increased, hallways became locked down during lunch, and access to the dedicated student credit union room became an issue. Finding student volunteers also became challenging.

But the focus on offering great service to students continued with UMe Credit Union (formerly named Burbank Schools FCU). UMe has an ATM on the quad at Burroughs High School, offers scholarships to Burbank grads, provides a student intern program and offers financial workshops and “Bite of Reality” financial simulation experiences. Additionally, UMe has some student-centric savings products created to help the younger generation get a head start on saving money.

Growing loyal student members by helping teach smart money management is a continued business effort for UMe. They think of themselves more as “helpers” than bankers, which is why they believe in promoting the cooperative spirit to their next generation of members.

From High Schools to Universities

Credit unions, especially those with educational FOMs, continue to sponsor student run credit unions or branches in high schools throughout the country. Students gained financial skills and become part of a new generation of co-op members.

In 1982 to address a falloff in the number of new federal charters (only 114 in 1982), the NCUA launched a renewal program called Credit Union Expansion or CUE-84. The goal was to make credit unions available to many new members ahead of the 50^th anniversary of the Federal Credit Union Act in 1984, The committee’s members were a who’s who of credit union CEOs, league and trade association leaders, and state regulators. The one surviving attendee of the 1934 founding of CUNA at Estes Park Colorado, Louise Herring, was on the committee along with Joe Scoggins, CEO of Navy Federal, the country’s largest credit union.

The three-pronged growth effort included chartering new credit unions, expanding FOMs and adding groups such as retirees to credit unions.

The College-University Initiative: Solving a Real National Problem

One important focus was organizing new charters at universities around the country. One example profiled by NCUA was New York University FCU for faculty, all university employees, trustees, alumni and students. Potential membership was 20,000.

The local poster child for this effort was Georgetown University Alumni and Students FCU (GUASFCU) in Washington D.C. Sponsored by the student government, it was open to students and alumni and managed by undergraduates who wanted the experience of running their own co-op.

NCUA changed policy to designate student credit unions as low income, enabling them to accept non-member deposits to fund low cost loans for books and tuition. As explained by NCUA Chairman Callahan:

“This opens the door to alumni through the corporations they work for to make contributions in the form of federally insured deposits which can be earmarked for student loans. Here is a vehicle that could provide a private enterprise approach to something that is a real national problem-the need for student loan funds.”

Of the 107 new charters approved in 1983, NCUA’s Annual Report included a picture of the GUASFCU’s first annual meeting. Also highlighted were charters for the University Student FCU (University of Chicago) and Skidmore Students FCU in Saratoga Springs, NY.

Recently GUASFCU’s Hoya Banking model with $17 million in assets announced a grant from the University to underwrite a secured loan for all incoming students so each could establish a credit score of 685 or greater by graduation.

Current Chartering Environment

From military recruiters, to political parties to businesses seeking the loyalty of new consumers for their products, high school and colleges are target markets for every institution that wants to remain relevant in society. Most major college campuses now have a bank branch on the grounds, or nearby, to serve students.

Gen Z and millennials embrace activism, engagement and technology to create new ways of participating in economic and social change. Starting new enterprises is one hallmark of this creative impulse.

Responding to this student interest, over 220 colleges and universities across the country provide innovation and entrepreneurship programs to encourage this activity. (https://www.acceleratorinfo.com/see-all.html)

These academic business accelerators respond to students wanting change, promote the traditional American spirit of innovation and, if successful, provide a financial return to the school. Many academic institutions now sponsor “shark tank” contests to incent new venture ideas offering dollars as well as in-kind support for winners.

One winner in the spring 2018 George Washington University’s new venture competition was a group of freshmen. They proposed a student managed credit union for their university community. They had three primary goals: provide better value services for the students; offer practical management opportunities for volunteer leaders; and create a prototype that could be easily replicated at other colleges around the country.

These students are business, finance, technical and liberal arts majors. They are volunteers in this multi-year effort receiving no pay or course credit. Now in their fourth year of trying to obtain a charter, they may earn their bachelor’s degree before NCUA approves their application.

The Problem for Credit Unions

If students are not part of credit unions’ recruiting efforts, the industry is losing the battle for the next generation of leaders and members. Unlike many areas of civic endeavor or business enterprise, cooperative solutions are best understood when experienced first-hand. They are not a dominant form of organizational design in America’s capitalist economy.

Earlier NCUA efforts, recognized the need to encourage the use and formation of credit unions for all groups. Especially students. Now less so. But the needs of Americans in 2020 and forward are not that much different from 1980.

A Cooperative Opportunity: HBCUs and NCUA

Chairman Hood has announced his ACCESS initiative (https://www.ncua.gov/access) to promote financial inclusion. To put real work, not just talk behind this concept, NCUA should reinvigorate the student credit union charter effort.

For example, there are 107 historically black colleges and universities (HBCUs) in the country. Fifty-six are private and fifty-one public. The democratic Vice-Presidential candidate is a graduate of Howard University whose credit union has charter # 648 (1935) but apparently does not include students.

Can here be a program with local credit union mentors (the Burbank Schools model) to launch credit unions at HBCUs around the country? It would bring a new generation into the cooperative experience as members and managers. Successful examples like GUSAFCU are operating. The benefits are known.

There is nothing more inclusive than the empowering persons through self-help. That is how all credit unions began.

The need is leaders willing to move forward. The ball lies in NCUA’s court. No one wants to wait four years to receive a license to start an enterprise. Especially a cooperative where community progress, not individual enrichment, is the motivation.

If NCUA were to initiate such an effort it would stop working its way out of business and start seeding the economy with a new generation of cooperators. It would also:

• Turn the industry to a new vision for itself.
• Extend the NCUAs role in the expansion and success of cooperative solutions.
• Point credit unions to new heights for mutual benefit, versus consolidation.

For 30 years, the National Cooperative Bank (NCB) has published the annual NCB Co-op 100, America’s top 100 Cooperatives by total revenue. In 2019, these member-owned and controlled businesses had total revenues of $228 billion.

https://impact.ncb.coop/hubfs/assets/resources/NCB-Co-op-100-2020-final.pdf

Who is on the list?

Five credit unions are in the top 100. Navy is #7; State Employees (NC) #22; PenFed #30; BECU #57; and SchoolsFirst #78.

There are several well known consumer brand names of firms such as SunKist Growers, Land O’Lakes, Ocean Spray, Welch Foods and ACE hardware. In addition to finance, larger co-ops also serve the farming, energy, health care, grocery and hardware sectors.

The total assets of these leaders are $733 billion.

The compiler of the list, NCB, was created to address the financial needs of an underserved market niche: people who join together cooperatively to meet personal, social or business needs especially in low income communities. Chartered by Congress in 1978, NCB was privatized in 1981. Owned by its more than 3,100 customer-owners, it has $7.9 billion in assets under management. As part of its enabling legislation, NCB was tasked with ensuring that 35% of the capital it deploys will benefit low income communities.

A Credit Union Opportunity?

The question for the $1.7 trillion cooperative credit union community’s 5,200 institutions: What are we doing to enhance cooperative solutions for the American economy beyond consumer finance?