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A CEO recently shared his response to the question: What are you optimistic about for the future of credit unions?

My optimism lies with the “human spirit” in us all.  We believe that our communities need new solutions.  We believe that local is the best place to start new initiatives that count on people as the capital.  We believe that volunteers are our most critical resource.  We believe that we must forge relationships as the bond for problem solving.  We believe we are the catalyst to securing our families and communities futures.  

This answer was inspirational, but was it realistic?  Then I learned of the efforts to launch a new coop called The Deep Grocery.coop.

It is a worker-owned grocery cooperative dedicated to bringing to the East Oakland community fresh organic produce and general food items, education on a healthy food choice, and local control.

The Year-long Effort to Launch

I talked with one of the four lead organizers Erin Higginbotham.  All are college graduates with backgrounds in education, technology, food and restaurants and one with a food coop.  They live in the community they serve.   The effort evolved from conversations with their neighbors including a survey and an Instagram post seeking participants.

A model for their vision was Mandela Grocery Cooperative serving West Oakland.  In 2020 the organizers began training with this established firm.   From that experience the group tested their products at farmer’s markets.   In December, they began crowd funding to raise capital.   Almost $100,000 was collected from grants, community donations and local support to begin the first steps of their independent launch, an online grocery service operating from a commercial kitchen. Additional plans include converting a shipping container into a functional store prior to finding a brick-and-mortar location.

The produce listed on their web site is from local farmers.  Through trial and error, they have learned how to meet the community’s needs while also trying to educate the buyers on healthy food choices.  They have begun filling online orders and are seeking a site for a store/ community center that will be welcoming and inviting.

Why a Coop?

I asked why the group choose a coop structure.  Erin replied “it was all about our neighborhood, to spark entrepreneurs and to give everyone a voice.  We want to empower and impact the whole community.” Only one organizer had experience with this option.

They work with a local branch of Provident Credit Union which has always been “super responsive and helpful.”  By the end of the year, they want to expand the number of East Oakland families served, attract more people to better food options, and promote local participation in this alternative economic system. DEEP is an acronym for “Deep East Oakland Empowering People.”

Acta Non Verba, a local 501 C3, has been a sponsor.   “Actions not words” is a fitting description as these organizers learn by doing and visiting other coops.

The Key to this Effort

This startup demonstrates the critical nature of the “human spirit” at the heart of heart of every coop and a key factor in credit union expansion.  Will they succeed in their efforts to create a Mandela grocery clone in East Oakland?

I go again to the words of the CEO above:

Everyday new leaders want to step up, seeking new ways to address old problems.  They do so in the face of pressure, in the face of economic times, in the face of community challenges, and not based on the personal financial motivations.

It is far different, far harder for both the volunteer and the needy consumer-owner searching for their community’s best options than it is for paid professionals to run an existing solution.

Coop professionals must support these people’s efforts with the balance, creativity, and respect for their drivers as artfully as we can.  

His response to the question of whether this startup, or any coop, will endure is: People are why I am optimistic about the future.

 

 

 

 

The end was quick.  Like all hidden executions. The 60-year-old Indianapolis Newspaper FCU was conserved on January 14 and liquidated on March 31.  The $6.3 million credit union served 1,143 members.  In December 2019 it reported 10% net worth and a breakeven operation with 1% delinquency.  One year later the credit union reported a $990K loss primarily due to a $741K loan loss provision expense.

NCUA gave no explanation except the “unsafe and unsound practices” mantra in the January 2021 press release.  Why is this minor event worthy of any further attention?  A local credit union, Elements Financial, took over “most” of the members’ savings.  NCUA retained “a portion of members’ shares” and all the credit union’s loans.   The loans are being collected by a small private company, Statebridge in Colorado.  An unusual arrangement: why did Elements not also collect the loans? And only a portion of savings?

What’s to be gained spending more effort to understand this credit union’s demise?

Why Transparency Matters

The most powerful action NCUA can take is to close a credit union.  The agency has refused to say how or why it acts in all such cases.   By not providing any detail the press then speculates about circumstances using the last call report. Or more common, the true story comes out years later as a result of legal actions against bad actors. The agency vacuum creates an impression of covering up its own supervisory shortcomings.

How can a small, easily examined credit union that has been in business for over 60 years suddenly fail and lose every cent of its capital?  The lack of specific facts and any NCUA person willing to take public responsibility suggests there is something to hide.  No “body cameras”– Vice Chairman Hauptman’s suggestion at the April NCUA board meeting–for these closings.

NCUA’s silence reminds me of a college student’s essay addressing the difficulty people and organizations face when something goes wrong.  The brief paper was titled Mistake-aholics Anonymous and reads in part:

“Ah, mistakes. Such an ugly word that carries quite the negative connotation. However, if you ask people if they regret their mistakes or would go back in time to change them, more often than not the answer is no. So why do we not like mistakes?

And why is retrospect so important to be able to see the true beauty in these unfortunate circumstances?

As a human I am inevitably a member of mistake-aholics anonymous; mistakes simply aren’t a choice; however, what you do about them is.

One learns that mistakes are essential to one’s evolution. But – like in AA- the first step is to recognize the problem and admit we are powerless to prevent them, so start there.

A second challenge is failure to ask others for help. However, a person must be ready to listen. Part of the journey with mistakes, is coming to these realizations personally and then seeking assistance.  Step 2 in AA: come to believe and accept that we need strengths beyond our awareness and resources.

Another obstacle, I can’t seem to stop taking things personally. Whenever someone criticizes or critiques something I have done, I feel as though they are criticizing or critiquing me.

Fast forward to last week when I received non-ideal feedback from my manager. I noticed feeling demotivated and internalizing that I was not good at my job. However, the keyword here: I noticed. I relate this recognition in AA step 5: admitting to ourselves the nature of our wrongs.

             Mistakes are important. They force us to re-think previously held beliefs and assumptions as well as encourage us to explore alternatives and pivot.

How easy would it be to just live life and never mess up? Never be wrong? I think we can all agree life would be boring. We learn by experience that mistakes are natural.

They are what it means to be human, yet we often shun those who own their mistakes. When that occurs, everyone loses. Mistakes owned, offer insight for making all things better.”

Action Required

No one expects perfection from NCUA supervision.  But as described by this student, it is reasonable, even necessary, for a responsible person or firm to learn from its failures.

Today NCUA just buries its mistakes.  Indianapolis Newspaper is just another incident hidden in a pattern of silence.  How can a credit suddenly suffer huge losses on a portfolio years in the making?  There are no postmortems.  Institutional failures become accepted, a way of life, a cost of doing business.

Is anyone at NCUA willing to enroll in Mistake-aholics Anonymous?  The entire credit union system could benefit if NCUA followed AA’s step one: recognizing it has a problem.

Police body cameras  were necessary when  transparency was avoided and after-the-fact explanations  proved self serving.   Is this the accountability process NCUA wants imposed on its most critical supervisory activities?

 

The British writer on religion,Joseph Pearce, used the period of Lent to write the following observation on life.  His distinction between owe and own is helpful in understanding how cooperative value is distinct from private sector intent. And how easy it is to confuse the words in practice.

The following is from a longer essay on Lear and Shakespeare.

“The paradox at the heart of Lent is that life itself is lent. It is not owned outright by those who possess it. If it were, we would not relinquish it when our life’s sand is sifted softly away.

“Off, off, you lendings!” Such is King Lear’s exclamation as he strips himself naked on the heath, the moment of madness being the moment when he comes to his senses. Lear, powerless in the face of elemental nature and stripped of his political power by unscrupulous treachery, realizes that the very clothes on his back are but lent to him. We can take nothing with us when we shuffle off this mortal coil. We will leave as naked as the day on which we arrived.

“Shakespeare knew this, as the “lendings” scene on the heath shows; but most of his critics seem oblivious of this elemental fact of life. It is, for instance, all too common that Shakespeare’s use of the word “owe” in relation to human life is glossed as “own,” an egregious error that exposes the pride and ignorance of those who consider themselves experts. As Chesterton quipped, it didn’t matter how much he made the point of a story stick out like a spike, the critics would still go and carefully impale themselves on something else.

“As Shakespeare affirms in his multifarious works and manifold ways, we do indeed “owe” our lives. And this stark reality has practical ramifications. It means that life is not simply a gift; or, in any event, it is not simply a free gift. It comes at a price that we are obligated to pay. To put it bluntly, if our lives are lent, we are debtors.”

On March 25, I published an analysis of Infinity FCU’s proposed merger with Deere Employees CU in Moline, Il whose tagline reads, “Exclusively for the John Deere family.”

Infinity is Maine’s oldest credit union, founded as Telephone Employees in 1921.  The analysis highlighted the absence of facts supporting any member benefit.  Most importantly it pointed out members will lose their ability to vote annually  for credit union directors or on any future mergers due to the use of proxies under Illinois credit union regulations.

April 15-Voting Ends

Federal credit unions purport  to be “democratically controlled” with a statutorily defined one member, one vote governance structure. No proxies permitted. Member ballots must be submitted by the date of the special meeting or by voting in person on April 15.

The member’s comments below augment the many shortcomings outlined in the above initial analysis.  The most concerning critique is of the board’s role outlined in detail by a former Infinity board member.

If Infinity’s 18,000 or more members do not participate in this critical decision to give up their charter, then the democratic process has been circumvented.   A motivated few will impose their way on the unorganized majority.

Ben Franklin’s once observed: “It takes many good deeds to build a good reputation, and only one bad one to lose it.”  Or in this situation, a century old successful $350 million local cooperative.

Infinity Members Comment

All merger notices include an option for members to post comments via a site managed by NCUA.  Three members have posted their concerns.  Names are required with these posts.

John McGinn: I went with Infinity that was then Telco over thirty years because it was a Maine based credit union. I absolutely do not want to be joined with an out of state large corporation credit union. I do not like or support this merger. If it happens, I will be reviewing all my options.

John Lander:  The CEO has changed the culture of the Board of Directors (BOD) during the last six years. Directors must be committed to on-going education to be able to make “best practice” policy decisions. The current BOD is averse to on-going education and has, as a result, become dysfunctional in many areas. . .

About ten years ago, The BOD hired a local Board Source consultant to help the BOD with governance. Using a Filene Research and Board Source collaboration we developed roughly 12 principles of good governance to guide the consultants’ work. The BOD accepted the concepts and directed the Governance Committee to implement the recommendations with the consultants help.

Unfortunately, the Governance Committee chair relied only on advice from the COO ignoring the consultants. A few years later, the committee quietly reported their satisfaction with our governance. Now dysfunction is present in the development of mission and vision, strategic planning, BOD evaluations and succession planning.

Directors must be committed to on-going education to be able to make “best practice” policy decisions in the best interest of members. . .

Nine months before my term expired, I attempted to join the Governance Committee, but Board Chair and the Governance Committee Chair said no. During my many years on the board, directors have always been welcome to join a committee. . .

A few months before the end of my term, I requested a discussion on governance be put on the agenda. At that meeting the CEO brought an attorney. The hiring of an attorney was not approved nor previously discussed by the BOD. The Chairman did not give notice if he approved it. The CEO asked the attorney to comment on my governance discussion. The attorney agreed with me in his own words. After this BOD meeting the Governance Chair withdrew from her BOD position.

She is now on the Supervisory Committee. The committee usually has had an odd number of members to avoid ties, but not now. As a Board Director and Treasurer, I tried to meet with the Supervisory Chair; I wanted to discuss governance including member service. He would not meet with me. Board members said, “I can only talk to the Supervisory Committee if I file a complaint.” This is dysfunctional governance.

Effective directors maintain an attitude of constructive skepticism; they ask incisive, probing questions, and require accurate answers. This BOD does not have a culture of inquiry because of its lack of commitment.

In 2020 Infinity’s capital was strong. We have opened two branches in four years and ROA is low. Membership growth is also low. We had better loan growth than five larger credit unions in our area.

We don’t need to give away control of our credit union so that we can open another branch soon. We need the BOD to commit to good governance. Please vote against the merger and demand the BOD fulfill their responsibility. John Lander, MBA, NAFCU Certified Volunteer Expert, 2017

Joe Mottershead: I Have Been a Loyal Member Since Infinity Was Telco Credit Union 1990s. I can Not Imagine what Benefits there are to Merging with John Deere CU That is a Billion Dollars in assets Larger? Are any of the Officers of Infinity Getting Stock or other Benefits From this merger? I am TOTALLY AGAINST this Merger!!!

Both are on April 13, but at different times.

I. Rochdale & The Early Co-operative Movement
 (from: National Farmers Union)
Description: Working People and Business Owners. Weavers and Socialists. Democracy Activists and Abolitionists. Over 170 years ago, a small group of people founded a humble grocery co-op in the North of England with an ambitious vision for a better world. Building on earlier experiments in co-operative enterprise, their ideas soon spread around the world, complementing local struggles, traditions, practices of mutual aid to help inspire what became an international movement for economic democracy.

What became known as the Rochdale Principles were taken up by groups such as the National Farmers Union, forming the basis for organizing successful agricultural co-ops, and other organizations focused on their adaptation to consumer, worker and other co-operative models. In this webinar, we will discuss the origins of the Rochdale Society of Equitable Pioneers, the challenges that they were trying to address, and how their legacy remains relevant today.

Submit any questions to: elindberg@nfudc.orgDate Time: Apr 13, 2021 02:00 PM Eastern Time (US and Canada)

II.  Cooperative Board Self Evaluation
(from: UW Center for Cooperatives: Fostering critical thinking and understanding about cooperatives.)

Description: Board evaluations are a critical component of maintaining a healthy, functioning board of directors, however they often fall to the backburner. This session will explore why and how to conduct board evaluations. It will also explain different methods for conducting board evaluations and their respective advantages and disadvantages.

Submit any questions to: mawebster@wisc.eduDate Time: Apr 13, 2021 10:30 AM Central Time (US and Canada)

Today’s NPR morning news reported on “banking deserts.”   The full four minutes can be found here: https://www.npr.org/2021/03/26/979284513/what-are-we-going-to-do-towns-reel-as-banks-close-branches-at-record-pace

The message is that people still want local service even as the digital options continue to expand.  Credit unions are a key option for communities abandoned by banks.

Hope FCU “Waters” the Desert

Banks closed 3,300 branches last year.   The pandemic has accelerated the push to online services and the closure of in-person options.  NPR cited FDIC data that said  83% of customers visited a branch at least once in 2019.  In rural areas more than 40% of customers visited a branch ten times or more during the year.

A bank branch is part of the social fabric of these smaller and rural communities.  Hope FCU is the example in the story of a non-profit stepping in when the only bank left Morehead, MS.

“I can’t say how much that meant to us,” said the Mayor of Morehead.

Is there a comparable opportunity for your credit union?

A reader inquired why I wrote about the  minor update to corporate rule 704 to illustrate aberrant NCUA policy.  The reason is that seemingly small errors compound; they become embedded when no one grasps their implications.   Ultimately these deviant practices recycle and become the basis for consequential erroneous actions.

This 704 rule update is an example of NCUA’s policy process subject to no limiting principles.  The critical flaws are numerous.

First, the agency asserted open-ended, unchecked authority from the Federal credit union act. There are no restrictions to what the board might “deem appropriate.”

“Under the FCU Act, the NCUA is the chartering and supervisory authority for Federal credit unions (FCUs) and the federal supervisory authority for federally insured credit unions (FICUs). The FCU Act grants the NCUA a broad mandate to issue regulations governing both FCUs and FICUs. Section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe regulations for the administration of the FCU Act. Section 209 of the FCU Act is a plenary grant of regulatory authority to the NCUA to issue regulations necessary or appropriate to carry out its role as share insurer for all FICUs. The FCU Act also includes an express grant of authority for the Board to subject federally chartered central, or corporate, credit unions to such rules, regulations, and orders as the Board deems appropriate.“

In law, a limiting principle without limits, does not limit.

Secondly, the rule provided no statement  of general authority or purpose, as the basis for  corporate’s buying subordinated debt.  Why is this activity appropriate? There is brief reference to lending power for what appears to be activity more akin to investing.

Thirdly there was no factual, objective information given for any aspect of the rule including the demand for or any known risk related to credit union’s issuance of subordinated debt.

Fourth, the rule has contradictory logic. It authorizes an activity-investing in subordinated debt-but then negates the very action by requiring credit unions to subtract from their capital any such “loans” when complying with required net worth ratios.

Fifth, the required subtraction contradicts generally accepted accounting principles-GAAP.

Sixth, the write-off requirement is not grounded in objective analysis  and ignores the fact that every such  debt issuance has to be approved by NCUA with a fully documented plan for its use.   The Agency effectively admits that it cannot rely on its own supervisory decisions if a corporate chose to invest in an offering they authorized.

Seventh, the rationale that this is equity and therefore at risk, contradicts the way corporates record investments, following GAAP, in other financial institution’s shares including the CLF and Federal Home Loan Bank stocks.

Eighth, the ultimate justification is that this is the way the agency treated similar “investment-loans.”  In plain English, this is the way we have always done it.

This is the most troubling of all the logical errors.   For it illustrates how bad decisions and rules become embedded in agency practices forever-and a board lacking in historical familiarity just accepts the continuation and cumulation of previous errors.

There are additional flaws in both logic and substance.  One agency official defended the action by saying nobody objected to the rule in the comment period.  Might the reason be that the corporate input has been ignored or denigrated for so long corporates saw no  benefit in pointing out how irrelevant the rule was in the first place?

A 3-0 Board Vote

In the midst of a full January agenda and the aura that the action somehow represented deregulation, the board unanimously approved this “nothing rule.”

No harm no foul, one might argue.  Wrong.  The board’s approval sanctioned a very flawed and incoherent policy by staff resulting in regulation with no practical meaning or purpose.

That precedent is now in place.  The deficiencies in logic and substance were rubber-stamped.  These factual, illogical and legal flaws will reappear in other policies down the road.

With the NCUA board relying on the open-ended authority referenced above there is a real danger to the credit union system when any two members can take unfounded actions that can severely harm credit unions.

The NCUA Board’s Challenge

Ultimately a government of laws depends on the judgment and intelligence of those chosen to oversee the authority the people have given.  For credit unions, the NCUA board are the three individuals with that responsibility.

At this time there appears to be “no limiting principle” that governs their deliberations and decisions. When one reviews the prior decade’s use of this unconstrained regulatory power, the challenge is real.

The critical question from this rule is what is the limiting principle for the Agency?  Is there any? Would board members agree on one?

Shouldn’t a primary discipline be thorough public deliberation that earns the confidence of the 100 million plus credit union members knowing their rights and interests are paramount in all agency decisions?

These ten insights were included in a book, The Silent Revolution, published in 1968 by a Harvard sophomore.

The latter years of the 1960’s were marked by demonstrations and unrest across the country.  Civil rights activity combined with anti-war protests culminated  in occupations and extensive campus disruptions. Kent’s book presented  the alternative of working within the system for change.

To succeed, he presented ten  obstacles to be expected and the necessary counter response to sustain an effort.

I think his sixth commandment is especially relevant for the majority of credit unions, many of whose futures are devalued in public commentary.

The biggest men and women with the biggest ideas can be shot down by the smallest men and women with the smallest minds.

Think big anyway.

America’s Credit Union Museum in Manchester, New Hampshire, is on the site of the first credit union founded in the United States— St. Mary’s Cooperative Credit Association, renamed in 1925 to La Caisse Populaire Ste.-Marie, or “Bank of the People.”

Over the past several years the museum’s role has expanded beyond collecting credit union memorabilia.  When the Richard Ensweiler research library was christened in2018,  the goal of supporting studies of the movement became central to its purpose.

I believe this expanded function couldn’t be more timely.  If credit unions lose their connection to past events and personalities, it will lead to a declining IQ for the industry.

This does not mean that the IQ of current leaders is less their predecessors.  It may even be higher.

But the collective appreciation  of the unique power of cooperative design, the advantage of collective action, and  the embrace of disruptive innovation have atrophied in favor of imitating banks and an addiction to mergers versus organic growth efforts.

The importance of knowing about the movement’s past was captured in this CEO’s observation:

I wish I had kept the phone numbers and emails of CEO’s that are now gone from view.  Ex-CEO’s that could tell what they wished they had done when they faced downward curves to the end.  I worry that lessons lost and archived outside our industry are what is needed now.

 Some might say that we missed nothing; we witnessed progress and the natural march towards an industry’s maturation.  But that sounds like short-term winners talking to me.

Randy Karnes, CEO CU*Answers, February 2018

Our movement does not exist because it was created from the top down.  Rather it was created from the bottom up.  We did not tell Congress we wanted to be “safe and sound” institutions.   We always knew that if we were lending to our members there was risk involved.  Serving came first; safety and soundness was a means to the end of serving.

Ed Callahan, Callahan Report, May 1999