Historic, archived document Do not assume content reflects current scientific knowledge, policies, or practices. COLO. I IOWA KANS. Vmo. 3> Rural Credit Unions General Report 94 August 1961 U.S. DEPT. CF AGRICULTURE II P R " R Y AUG 2 2 1961 CURRENT SERIAL RECORDS in Nine Midwestern and Great Plains States by Arthur H. Pursel ( MONT. NEBR. s Farmer Cooperative Service U.S. Department of Agriculture N.DAK. S.DAK. FARMER COOPERATIVE SERVICE U. S. DEPARTMENT OF AGRICULTURE Washington 25, D.C. Joseph G. Knapp, Administrator The Farmer Cooperative Service conducts re- search studies and service activities of assistance to farmers in connection with cooperatives engaged in marketing farm products, purchasing farm sup- plies, and supplying business services. The work of the Service relates to problems of management, organization, policies, merchandising, product quality, costs, efficiency, financing, and membership. The Service publishes the results of such studies, confers and advises with officials of farmer cooperatives, and works with educational agencies, cooperatives, and others in the dissemination of information relating to cooperative principles and practices. Contents Page Highlights v Early interest in rural credit unions 2 Policy on credit. . 2 Policy on rural credit unions 2 Activating the program 3 Regionwide development of rural credit unions 4 Development in Kansas 4 Development in other States 10 Organizational structure 10 Operating capital , , 12 Methods of raising capital funds 12 Major reasons for saving 13 Thrift emphasis continuous 13 Two types of members 13 Member understanding important 14 Lending operations 15 Credit extension problems 15 Cash trading advantages 15 Special lending methods 16 Budget loan plan 16 Prepayment loans „ 18 Estate loans 18 Rural credit union and farmer cooperative program 19 Opportunities for improvement 20 Highlights This report covers the operation of rural credit unions in nine Midwestern and Great Plains States. It is the second in a series of studies by Farmer Cooperative Service on the operations of rural credit unions sponsored by regional cooperatives. The first dealt with the operations of such credit unions in Indiana. This report looks at the operation in the area served by the Consumers Cooperative Association (CCA), Kansas City, Mo. In its area, both farm supply cooperatives and credit union operations are of more recent origin and serve a different type of agriculture. The report summarizes briefly the methods by which a large regional farm supply cooperative has aided its member associations in their efforts to organize rural credit unions and examines the results obtained. Particular attention is given to Kansas, where growth and development have been most rapid. The first two rural credit unions in this area were organized in 1938 — one in Kansas and one in Colorado. By 1959, 115 were operating in the area — 58 in Kansas and 57 in 8 other States. Combined membership of the 115 credit unions reached 26,500 in 1958. Savings totaled $9.2 million by the end of 1958 and loan volume out- standing amounted to $9 million. Loans were made to meet both farm and home needs. For example, 25 of the oldest rural credit unions in Kansas had $5.3 million in loans outstanding by the end of 1958. Of this amount 40.6 percent were for farm production supplies, 17.8 percent for facilities and equipment including farm machinery, 5.9 percent for real estate, and 35.7 percent for consumer service loans, including automobiles. Some of the rural credit unions in this group were using the latest methods in lending — such as budget, prepayment, and estate loans. One helped finance a special prepayment plan offered to farmers by the cooperative. Experience shows that rural credit union lending helps reduce ac- counts receivable on the books of many cooperatives. This, in turn, helps the local cooperative maintain a better schedule in meeting its obligations. Thus, these rural credit unions help both the farmer and the local cooperative keep operations on a sounder financial basis. Rural credit unions covered in this study also provide members with a safe, convenient, and re- munerative place to invest surplus funds. Member savings are kept on a demand basis, earn dividends annually or semiannually, and are usually covered with savings or "share" insurance. A group policy is carried on the entire membership, and in case of death, claims are paid in proportion to the member's account — maximum $2,000 per account. There is no extra charge for this service. Similar insurance coverage is carried on member loans outstanding — up to $10,000 per loan. These features encourage members to save and borrow at the credit union. Frequently the insurance on member savings represents the only insurance the member has. Interest rates vary from one credit union to another and sometimes within the credit union, from one type loan to another. Credit unions are nonprofit organizations and interest overcharges, if any, are returned to members in the form of increased dividends on savings, liberalized ser- vices^ such as the insurance services, or in the form of patronage refunds on interest costs. Rural credit unions, through member education and continuous emphasis on sound financing, have helped many farmers improve and enlarge their operations. The loss ratio for this group of rural credit unions was very low. A record of safe operations helps to build member confidence and understand- ing. The close working relations with members of farmer cooperatives was also a contributing factor to this low loss record. This study shows that where cooperatives and rural credit unions work together, the program of each supports and strengthens that of the other and members benefit from the improved services of each. It also points up the need for additional member education and member services, general improvement in operating efficiency, long-range planning and more organizing, and continued close cooperation on the part of cooperative and credit union officials in CCA region. Rural Credit Unions in Nine Midwestern and Great Plains States by Arthur H. Pursed' Farm Services Branch Purchasing Division This is the second in a series of studies by Farmer Cooperative Service that relate to the organization and operation of rural credit unions affiliated with farmer cooperatives. The first study published in 1958 covered the operations of 43 rural credit unions in Indiana affiliated with county farm bureaus of that State. 2 This study includes only rural credit unions affiliated with member cooperatives of Consumers Cooperative Association (CCA), Kansas City, Mo. CCA is a regional wholesale supply cooperative, with member associations in 13 States. CCA actively supports and encourages the organization of credit unions among its members — as it has during the past 20 years or more. In 1943 and again in 1956, CCA employed for a short period of time a full-time fieldman, who was experienced in both cooperative and credit union operations, to co- ordinate and assist rural credit union development. Kansas program. The more rapid development in Kansas provided a basis for observing the results of effective leadership and a continuous, close working relationship between the State credit union league, local cooperatives, and Consumers Coopera- tive Association. Also these organizations, working jointly, have carried on an aggressive educational and promotional program. Emphasis in this study was on: (1) Methods used by cooperatives to aid and encourage their members to organize credit unions, (2) effective- ness of such credit unions in building pools of local capital, and (3) extent to which such capital resources were used to finance farming operations. Farmer cooperatives like other types of busi- nesses have credit problems. This is particularly true of cooperatives handling farm supplies. Farmer members of these organizations frequently ask for credit until a crop is harvested or livestock is sold, when purchasing fertilizer, seed, feed, or other farm supplies. The smaller farmer needs credit If&Miifr <<-. Home of Consumers Cooperative Association, Kansas City, Mo. Since rural credit union development has been greater in Kansas than in other States of the region, this report was based primarily on the Appreciation is expressed to officials of Consumers Coopera- tive Association, Kansas Credit Union League, local associa- tions in Kansas, and managing directors of credit union leagues in other States for their assistance in this study. Pursell, Arthur II. Rural Credit Unions in Indiana. Farmer Cooperative Service, U.S. Dept. of Agr. Gen. Rpt. 47. June 1953. to survive; the large ones to expand operations. Cooperatives should not use capital to extend credit. Experience has shown that credit sales tie up a cooperative's working capital, increase its operat- ing costs, and otherwise handicap its operations. Because of this, some farmer cooperatives have attempted to operate on a "strictly cash basis." And some of them urge their members to obtain their credit needs from the Production Credit Association (PCA's), a local bank, or another financial institution. Some cooperatives have encouraged their farmer members to organize credit unions to mobilize and pool local resources as one way to deal with this problem. These funds can then be used to pay for farm supplies and farm services that otherwise might have to be bought on credit. This not only helps reduce the accounts receivable problem for the cooperative but also strengthens the overall financial position of the farmer. Personal interviews with officials of the regional and local cooperatives in Kansas, the Kansas Credit Union League, and local credit unions provided information and data for this report. Information for other States included in this study — Colorado, Iowa, Minnesota, Missouri, Montana, Nebraska, North Dakota, and South Dakota — was supplied by the credit union leagues that are organized in these States. ..:iA'5 IJ:i --J Home of Kansas Credit Union League, Wichita, Kans. Early Interest in Rural Credit Unions Interest in rural credit unions by Consumers Cooperative Association and affiliates stemmed from their desire to help farmers meet their credit needs locally, and keep their business on a sound basis. These problems are very closely related. Once a farmer has found a method of handling his own financing, he presents much less of a "credit problem" to the cooperative. CCA based much of its support for rural credit unions on this premise. As a basis for examining the relationship of CCA to rural credit unions in the area studied, brief consideration is here given to its credit policy and its policy on credit unions. Policy on Credit Granting credit to patrons is a problem that all cooperatives have to face sooner or later. Usually it is considered a policy matter for the board of directors to decide. CCA issued the first policy statement on credit extension as early as 1938. Highlight of the state- ment was the provision for cash discounts for prompt settlement of accounts. Discounts ranged from 1 to 2 percent. An interest charge of 6 per- cent was made for accounts, or any portion of accounts, unpaid after 30 days. The membership fully approved this policy that year. It was designed to keep the association's program on a "cash trad- ing" basis as completely as possible. With minor revisions it is still in effect and is actively supported by local associations. This credit program did not stop, however, with the issuance of a policy statement. It was — and still is — carried aggressively to the local cooperative and the member patron level. Credit extension — and the problem it raises — is a much discussed subject at annual meetings, management training institutes, area finance conferences, and college short courses on cooperatives. CCA holds finance conferences and institutes in cooperation with agencies of Farm Credit Administration, State cooperative councils, and State credit union leagues of the area. Policy on Rural Credit Unions CCA also formulated a policy on rural credit unions by 1945. It was summarized for this report as follows: "Farmers in the Midwest have found credit unions to be of real value. They offer a place for farmers to pool their capital and in turn they provide a source of funds at a reasonable rate of interest. In many instances they have been a real help to retail supply cooperatives. We are doing all we can to encourage their growth." 3 Many cooperatives sponsor rural credit unions as an additional service to farmer members. This policy was further developed in a brochure entitled "Twenty Reasons Why Every Farm Co-op Should Sponsor a Credit Union for Co-op Members." The 20 reasons review the mutual benefits derived from rural credit unions by the farmers and the local cooperative. For the most part they are based on the actual experience of local cooperatives which have successful rural credit unions. The "twenty reasons" listed are: 1. Builds cooperative spirit and understanding. 2. Increases the co-op's patronage — builds co-op sales volume. 3. Reduces accounts receivable. 4. Helps keep co-op capital working. 5. Helps the co-op keep on a cash basis. 6. Helps reduce the co-op's operation costs. 7. Enables the co-op to buy at cash discount. 8. Offers a sound investment program for co-op members. 9. Offers life savings insurance to members. 10. Offers insurance on loans. 11. Develops the habit of thrift 12. Helps co-op's members meet emergencies. 13. Offers low cost credit. 14. Is a safe investment. 15. Offers convenience and simplicity to bor- rowers. 16. Enables members to withdraw savings when .needed. 17. Keeps its members' loans and investments confidential. ^Letter of November 12, 1958, from Howard A. Cowden, former General Manager, Consumers Cooperative Association. 18. Offers an insured prepayment plan for co-op merchandise purchases. 19. Increases opportunities for leadership de- velopment. 20. Helps build the co-op's membership. Activating the Program Through group meetings of member cooperatives, through cooperation with other interested organi- zations, and through printed material, CCA has worked consistently at building a better understand- ing of credit and also a better understanding of rural credit unions in its region. Talks on credit problems, technique of handling credit, sources of credit, and the possible use of credit unions are made at local membership meet- ings, credit forums, workshops, and management training programs. CCA's membership publication provides infor- mation to members on credit and credit unions. The Scottsbluff, Nebr., home of Panhandle Cooperative Federal Credit Union. Organized in 1951, it was the first to be started in a CCA member cooperative in Nebraska. regional also issues special literature and publica- tions to help member cooperatives understand credit unions and the use farmer members can make of them. The contribution to rural credit unions by CCA through its field force has been extensive. For example, each fieldman carries a kit which includes general credit information, information on the as- sociation's credit policies, and general information on lending organizations in the area such as local banks, PCA's, and rural credit unions. The kit is also conveniently equipped with credit union charter application forms. If, during the course of a meeting of directors the question of rural credit unions is discussed, fieldmen are pre- pared, by prior training and experience, to advise directors on rural credit unions and their possible use by cooperatives. If a decision is made to sponsor a rural credit union, these fieldmen can provide official charter application forms and even help execute them. Then the group submits the application for charter, with the proper supporting recommendations to the State department of banking, or the proper issuing agent of the State government if the credit union is to be incorporated under State laws. The group submits the application to a regional office of the Bureau of Federal Credit Unions if the credit union is to be incorporated under Federal law. In most States, credit union groups have a choice of State or Federal charters. Fieldmen may also be helpful in getting new rural credit unions organized and operatingproperly. While the technical details of setting up anew credit union are usually handled by officials of the State credit union leagues, fieldmen in their regular work have been helpful to many new groups. The field- men are in a unique position to reach and work effectively with many cooperatives which otherwise might never get around to seriously considering the addition of a rural credit union to their member service program. Regionwide Development of Rural Credit Unions On January 1, 1959, 115 rural credit unions were serving the membership of CCA member co- operatives in nine Midwestern and Great Plains States. These credit unions had 26,486 members, $9.1 million in member savings, $9 million in loans outstanding to members, and $10.4 million in assets. Figure 1 gives the location of these credit unions while table 1 shows these totals by States. The second rural credit union in Kansas was organized in 1939 in Hutchinson, Kans., to serve the membership of the Reno Consumers Co-op Association, the Ark. Valley Co-op Dairy Associ- ation, and the Ark. Valley Electric Cooperative Association. The third rural credit union, also organized in 1939, was sponsored by and serves the members and employees of the Dodge City TABLE 1. --Rural credit unions, by State, reported for Midwestern and Great Plains States, January 1, 1959 * State Colorado Iowa Kansas 2 Minnesota Missouri Montana Nebraska North Dakota South Dakota Total Number of: Credit unions Members Member savings Loan volume outstanding Total 16 4,153 $ 860,621 $ 862,280 $ 984,691 10 1,151 418,030 442,537 496,633 58 15,290 6,581,606 6,655,007 7,538,623 2 110 9,864 9,314 9,768 3 351 74,873 59,346 76,893 1 100 23,873 14,507 25,448 5 1,698 316,164 242,257 343,614 1 853 240,630 210,990 274,410 13 2,780 652,568 $9,178,229 522.173 $9,018,411 710.069 115 26,486 $10,460,149 Additional rural credit unions were organized in these States and in Arkansas, Oklahoma, and Wyoming during 1959 and I960 but data on them were not available for this report. By January 1, 1961, Kansas had 60 rural credit unions with 19,402 members, $9,931,560 in member savings, $10,129,534 in loans outstanding, and $11,265,000 in assets. Development in Kansas The first rural credit union in Kansas was sponsored by and organized for members and employees of the Quinter (Kans.) Cooperative As- sociation. It was organized in 1938 and has become very useful in the credit program of this coopera- tive. As of January 1, 1961, this rural credit union had a total of $197,296 in member savings. (Kans.) Cooperative Exchange. The latter now exceeds $2 million in member savings. Additional rural credit unions were organized during the late 1940's and the early 1950's but it was not until 1956 that the Kansas Credit Union League and cooperative fieldmen began to co- ordinate their efforts in organizing rural credit unions on a large-scale basis. From 1949 to 1959 the Kansas program increased in number of rural Figure 1 Rural Credit Unions Serving Members of Affiliates of Consumers Cooperative Association, January 1, 1959 North Dakota \ Montana • • Minnesota • • < ( South Dakota • • Wyoming / Nebraska -' "S./ Iowa Wisconsin X t .:Jl j •. '-,.■; / i '■K± '■Til Colorado New Mexico v • BP J: Missouri \ Arkansas «/> a> ^ »k •■™ • ^™ o • 8 CD o S ** a* o • ■■■ o w t*/ *- «A o* a> 8 E o> E 8> 8 1 o O • ■■■ a> 8 *■■■ w O .a «/i «/> o • MM 0> 8 •■j 4> <B 3 •mb <•> ^_ 8 (A • ■M O 0> 8 a— Q. w# o o °- 8 w ~o &_ s 3 (/» 8 k- ^B O) 4b O E a_ */> £ 0> ■■O E o • ■■■ z o • ■■E CM a> 1 CO i i i i i m ^^^^^^^^^^^ o """»^»« CO Z I o a — p— ! ■ z CO ; 3 < ■■ " ■ ' ' »— CO — z Q LU < oc *: U LL. o i i i i i i #c <p. '<*■/ y r, p, 8> O z o o o 00 o o o CN Figure 3 - Growth in membership and shares, 1951 to 1960, Kansas rural credit unions. MEMBERS (000) MIL 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 LION DOLLARS 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 Figure 4 - Growth in loan volume and total assets, 1951 to 1960, Kansas rural credit unions. MIL 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 MILLION DOLLARS : 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 credit unions from 7 to 58 (figure 2). During the 1956-58 period, 34 new rural credit unions were organized in Kansas alone. member savings, $10.1 million in loans outstanding to members and $11.2 million in total assets on January 1, 1961 (figures 3 and 4). Quinter Co-op Federal Credit Union, Quinter, Kans., was sponsored by and serves members of Quinter Cooperative Association. It was the first to be organized in a CCA member cooperative in Kansas. On January 1, 1961, Kansas had 60 rural credit unions in operation serving members of CCA af- filiates. This was slightly over 50 percent of all rural credit unions covered in this report. From 1950 to 1960 credit union members increased from 1,878 to 19,402. This was an increase of over 900 percent. Important increases also occurred in member savings, loan volume, and total assets. These 60 rural credit unions had $9.9 million in Nine of the older rural credit unions in Kansas showed substantial progress during this period. By January 1, 1961, this group had 10,586 members, $6.2 million in member savings, $6.3 million in loans outstanding, and $7 million in assets (table 2). Dur- ing 1959 and 1960 this group of rural credit unions had an increase of 28 percent in members, 48 percent in member savings, 51 percent in loans outstanding, and 45 percent in assets. TABLE 2. --Nine of the older cedit unions of Kansas showing date of organization and present status on January 1, 1961 Rural credit union Quinter Co-op FCU, Quinter. Reno Co-op FCU, Hutchinson Exchange FCU, Dodge City Moundridge FCU, Moundridge Ellsworth Co-op FCU, Ellsworth . United Co-op FCU, Norton Cross Roads FCU, Goessels MC Co-op FCU, Beloit Equity FCU, Garden City Totals Year organized Number of members Member savings Loan volume outstanding Total assets 1938 454 $ 197,296 $ 199,153 $ 215,985 1939 2,338 1,495,443 1,643,150 1,760,331 1939 2,937 2,029,839 2,036,150 2,212,255 1947 996 467,224 593,136 604,223 1948 416 223,735 243,384 257,762 1949 419 182,268 170,648 194,856 1950 506 142,754 195,983 205,137 1951 1,566 1,048,299 861,621 1,131,518 1951 954 440,569 $6,227,427 455.389 $6,398,614 480,053 — 10,586 $7,062,120 Development in Other States During the late 1930's and early 1940's, several rural credit unions were organized to serve CCA member cooperatives in other States. In Colorado, the first one was sponsored by Adams County Con- sumers Cooperative Association in 1938. The first in North Dakota was organized at Ellendale in 1941. Following the war years, rural credit unions were organized in member cooperatives in six other States; in South Dakota, at Nunda, in 1948; in Missouri, at Kansas City, in 1949; in Iowa, at Mt. Pleasant, in 1950; in Nebraska, at Scottsbluff, in 1951; in Montana, at Ekalaka, in 1953; and in Minnesota, at Lismore, in 1957. State credit union leagues reported a total of 57 rural credit unions operating in these 8 States as of January 1959 with 11,196 members. Share savings were reported at $2.5 million, loan volume outstanding at $2.4 million, and total assets at $2.9 million (table 1 and figure 2). *^wvv wnv * Henry County Credit Union, organized in 1950, was sponsored by and serves members of Henry County Supply Cooperative, Mt. Pleasant, Iowa. Organizational Structure The Kansas rural credit unions included in this study were chartered under both Federal and State enabling legislation. Twenty-four have Federal charters and 36 have State charters. The legal and organizational structure of these credit unions have been kept simple and easy for members to under- stand. Figure 5 shows their basic organizational pattern and the relationship of members to the directors, officers, and committeemen. Rural credit unions are cooperatives in all respects. They are member owned, member con- trolled, and operate on a service-at-cost basis. Members elect directors and elect and appoint committeemen from their membership, and then delegate operating responsibilities to them. Members require regular operating reports from their officers and committeemen and meet at least once each year to handle elections, reports, and program policies. Farmer cooperatives sponsored most of the rural credit unions included in this study. For the most part they serve cooperative members. In some areas the field of membership includes all farmers of the county. In Dodge City, Kans., for example, Exchange Federal Credit Union serves all farmers in Ford County who want to join and use its services. Sometimes the "field of membership" includes the members of more than one cooperative. For example, Reno Co-op Federal Credit Union, Hutchin- son, Kans., serves members of the local farm supply, dairy, and rural electric cooperatives of Reno County. In each credit union the "field of membership" is specifically defined, and only those 10 persons so defined are eligible to join. This arrangement facilitated their close working The rural credit unions included in this study relationship with farmer cooperatives and, in turn, closely associated with farmer cooperatives enabled them to provide better service to rural were and most of them were located in the co-op building. people. FIG. 5 Basic Credit Union Organizational Chart Credit Committee President MEMBERSHIP Board of Directors Vice President Secretary 1 Treasurer (Manager) Employees, if any Supervisory Committee Educational Committee The modern office of Exchange Federal Credit Union, Dodge City.Kans., is located in the co-op building. This rural credit union, Kansas' largest, serves 3,000 members in Ford County. 11 Operating Capital For the most part, credit unions are required to raise their operating capital from members. For some this is a real problem — especially the very new credit unions. In contrast, some of the older credit unions included in this study actually have a surplus of lending capital. Methods of Raising Capita! Funds When a farmer cooperative sponsors a rural credit union, the cooperative presents the new ser- vice to the members, explains its purposes and operations, and invites each family to join and invest in it. Investment in rural credit unions may be made in a number of ways. It may be by lump sum or scheduled over a period of time. For example, dairymen at Hutchinson and Hillsboro, Kans., were invited to save by authorizing deductions from their monthly and weekly milk checks. They liked the idea and still use it. A number of farmers at Hays, Kans., invest the equivalent of a load of grain or the price of a steer to increase their credit union account. Some farmers increase or maintain their share savings by making small deposits when making payments on loans. Other practices used by credit unions in Kansas include share drives with awards to those making the greatest investments in a given period of time, coin banks for use by children, reinvestment of dividends received from the cooperative or credit union, and investing an amount estimated to be the difference between the cost of a loan at the credit union and the cost of the loan elsewhere. Different groups use different means of raising their operat- ing capital. When a group of farmers in Mitchell County, Kans., oversubscribed for a new cooperative grain elevator in the early 1950's, they authorized the use of the extra funds to start the MC Co-op Federal Credit Union, Beloit. In this way the extra funds they had mobilized for building the grain elevator were used to build their rural credit union and thus made available to other Mitchell County farmers needing to borrow. Rural credit unions in Kansas have also been Young North Dakota farmer makes a deposit at the Portland Credit Union, Portland, N. Dak 12 successful in raising capital through group activity — the pie auction being an example. The MC Co-op Federal Credit Union reported raising as much as $8,000 at a single auction. Under this plan ladies of the membership contributed pies. They were sold to the highest bidder, with the understanding that the bid price on the pie would be deposited to the member's credit union share account. Many Kansas credit unions also use youth projects and activities to focus attention on the importance of young people joining and saving in the credit union. Figure 3 shows growth in savings in Kansas credit unions over a 10-year period. Major Reasons For Saving Members may save in their rural credit union for various reasons — but findings of this study indicated they usually included one or more of the following: 1. To build up a cash reserve for contingencies or for planned future expenditures. 2. To earn dividends. Kansas rural credit unions paid dividends for 1958 ranging from 3 to 4-1/2 percent. 3. To secure additional life insurance. Under provisions of the life savings insurance program, members are automatically given life insurance equivalent to their investment in the credit union — within limitations. This gives them increased financial security. 4. To keep local funds mobilized and working in the community. In the minds of members, their credit union provides a common meeting place for those with money to loan and those needing to borrow, supplying both needs in a businesslike manner. This is a useful service. Rural credit unions enjoy a high degree of member confidence. This is helpful in building capital funds. Officials are bonded — usually for 100 percent of the true assets of the credit union. Losses are infrequent, and savings are kept on a demand basis. As of January 1, 1959, the three largest rural credit unions in Kansas had lost only $3,100 since organization in handling a total of $16.9 million in loans. This is an average loss ratio of one-fourth of 1 cent for each $1,000 loaned. For example, the oldest Kansas rural credit union has never had a loss and the second oldest has a loss ratio of only 0.0004 percent. Federal credit unions are permitted by law to borrow up to 50 percent of their unimpaired assets. This means that credit unions may borrow 50 cents once they have raised $1 and retain it unimpaired. Similar provisions exist for most State chartered credit unions. In addition, credit unions may discount with the Federal Intermediate Credit Banks of the Farm Credit System on certain farm production loans, but total borrowing and discounting can never exceed 100 percent of unimpaired capital funds. Such limitations tend to be proportionally more restrictive on new credit unions, which must begin operations without accumulated reserves and usually with small member savings. In actual practice, it was found that only a small proportion of the Kansas credit unions ever needed to borrow, and still fewer discounted with Federal Intermediate Credit Banks. When the savings , lending , insurance , and service features of the credit union are brought together in one program, they comprise a rather attractive package for members. Findings of this study emphasize that where operations are handled efficiently and the program is promoted wisely, the joint endeavor of the mem- bers helps to provide the necessary impetus for raising operating capital. Additional funds may also be made available by deposits of association members such as a farmer cooperative or farm organizations. Group motivation seems to be a built-in factor with credit unions and helps them maintain their status of self-sufficiency. The nature of the credit union program enables members to become more aware of the direct relation of member savings to local credit require- ments, the dependence of loans on member savings, the relation of loan protection and life savings in- surance coverages to both saving and lending func- tions, and the importance of related member ser- vices to the overall credit union program. Thrift Emphasis Continuous The more progressive rural credit unions in this study continually emphasized member thrift. This was necessary to insure capital growth, and it is also beneficial to members in the long run. Some of them used the slogan: "Save systematically, borrow prudently, and repay promptly." This pretty much summarizes the operational policy of these credit unions. Member savings, when left in the credit union, are also increased by dividend accumulations. Divi- dends are matched by credit life insurance, may be withdrawn as desired or used as loan collateral, and enable the credit union to make loans to other members needing to borrow. While the average Kansas credit union share account was relatively small, the cumulative savings of the group was usually adequate to meet the need for lending capital. Two Types of Members Every credit union has members who save primarily but who borrow infrequently, if at all, and those who borrow regularly but never accumulate sizable savings. Credit unions are able to serve both types of members. The operations of Farmers Credit Union of Hays, Kans., illustrate this rather typical membership practice (table 3). This credit union had 442 members on December 31, 1956, and $226,176 in member savings. Sixty- four members, or 15 percent, had savings of $1,000 or more per member, the average being $3,226 each. Three hundred and thirty-four members, or 76 percent, had less than $100 each in savings. Their average was just over $6. The upper 15 percent of the membership of this credit union contributed 91 percent of its total share capital. At the same time 288 members, or 85 percent of the membership, had loans outstanding totaling 13 $247,441. Of this number 179 members, or 41 percent, each had a loan outstanding of $1,000 or over. The average loan was $1,152. Thus 41 per- cent of the members were borrowing 83 percent of its total loanable funds. rural credit unions as of January 1, 1959, was $430. This study showed each year brought additional members, additional savings, and a little better understanding of the program — one year pyramid- ing on the other. That was the story — and in TABLE 3. — Member savings and loans outstanding, by size, December 31, 1956, for Farmers Credit Union, Hays, Kans. Member savings classified by size Number of members Percent of members Total member savings Average saving per member Percent of total savings Less than $ 100 S 100 to $ 249 $ 250 to $ 500 $ 500 to $1,000 $1,000 and over.. 334 75.6 $ 2,078.53 $ 6.22 0.9 16 3.6 2,281.54 142.60 1.0 8 1.8 2,925.78 365.72 1.3 20 4.5 12,408.62 620.43 5.5 64 14.5 206,481.05 $226,175-52 3,226.27 91.3 442 100.0 $ 511.71 100.0 Member loans classified by size Number of members borrowing Percent of members borrowing Total loans outstanding Average loan outstanding Percent of loanable funds Less than $ 100 $ 100 to $ 249 $ 250 to $ 500 $ 500 to $1,000 $1,000 and over.. 13 2.9 $ 721.84 $ 55.53 0.3 14 3.2 2,433.35 173.81 1.0 48 10.9 15,869.80 330.62 6.4 34 7.7 22,262.24 654.77 9.0 179 40.5 206,153-92 $247,441.15 1,151.70 83.3 288 65.2 $ 859.17 100.0 This credit union had, as of that date, $12,000 additional funds for lending should members have needed them. This is a typical pattern found in most credit unions and illustrates how they serve both types of members — the man with money to loan and the man needing to borrow. Both needs are met in a businesslike manner. Member Understanding Important Where farmers understand the credit union program and have confidence in its leadership, adequate operating funds are usually available from local resources to meet all demands. To illustrate: The combined share capital (member savings) of all rural credit unions covered in this study totaled $9.1 million as of January 1, 1959. Of this amount, $6.5 million was in Kansas, and $3 million was in three of the largest of Kansas' rural credit unions — Reno Co-op FCU, Hutchinson; Exchange FCU, Dodge City; and MC Co-op FCU, Beloit. These three rural credit unions had an average saving per member of $585. Compared with these 3 older, well established credit unions, the 10 newest ones (those organized in Kansas in 1957-58) had an average savings of $53 per member. The difference in average savings per member between the old and the new was $532. The average savings per member for all Kansas general the pattern for development — of most rural credit unions in Kansas and the other States of CCA region. Member understanding is important in a rural credit union. 14 Lending Operations Findings of this study stressed that one of the major functions of the rural credit union is to make effective use of member savings. This it does by making loans to those members who need to borrow. Bylaws permit loans to be made for any "provident or productive purpose" so long as they are handled properly. Rural credit union loans include production loans made for the farm opera- tions and consumer-service loans made for the home and family. Credit Extension Problems "One of the most common problems of farm supply cooperatives is to control charge sales — and then collect for them . . ." 4 Farmers, at times, look upon their cooperative as a place to get free credit, and cooperatives, too often, acquiesce in the practice. It is the responsibility of cooperative officials to keep their own — and to help keep the farmers' — business transactions on a sound basis. is* Self-propelled gleaner combines financed for members by the MC Co-op Federal Credit Union, Beloit, Kans. The new or small credit union must necessarily limit its loans in both size and number. In so doing, it tends to have a greater percent of its funds in consumer-service type loans. However, as lend- ing capital increases, loans increase in both size and number, and production loans tend to utilize a greater percent of the loanable funds. For example, when the Ellsworth County (Kans.) Farmers Cooperative Association decided to expand its propane gas program to an additional section of Ellsworth County, the rural credit union made loans to members for new installations. Rural credit unions in Reno and Marion Counties, Kans., made loans regularly to members of their dairy cooperatives for enlarging dairy herds, making bulk milk tank installations, and other production type loans. Dairy cooperatives assist members by per- mitting repayments through milk check deductions and also endorse the farmer's note if he needs such endorsement to secure the loan. Loan volume for Kansas rural credit unions increased from $718,000 to $6.6 million in the decade from 1949 to 1959 and to $10.1 million by January 1, 1961. Table 4 shows the distribution of loan volume outstanding (by purpose) for 25 of the older rural credit unions in Kansas on January 1, 1959. This includes credit extension. When a farmer has open account credit privileges with no fixed or scheduled debt reduction payments to make, he usually makes none. But if he con- tracts for an obligation in good faith (with a business house or finance organization), he usually meets the terms of the contract or loan. The difference seems to be in his understanding of his obligation. The conditions of his contract seem to control his response and promptness in meeting it. In many instances, it is as simple as that. Cash Trading Advantages When a rural credit union, local bank, or PCA is available to provide adequate production credit the farmer needing to borrow, he is able to pay the cooperative cash for his purchases, take advantage of cash discounts as offered, do more long range planning, and practice better financing methods. At the same time, the cooperative is able to remain in a more solvent and better position to 4 Bailey, John M. Credit Control in Selected Retail Farm Supply Co-ops. Gen. Rpt. 35- Farmer Cooperative Service, U.S. Dept. of Agr. June 1957. 15 serve members. The local lending institution or association is also strengthened by greater usage. Many Kansas cooperatives and rural credit union leaders believe that the solution to the "cash trading — credit extension problem" of cooperatives and their members is primarily a problem of recog- nizing its existence — actual or potential — and taking proper steps to meet it. TABLE 4. — Distribution of loan volume outstanding (by purpose) for 25 Kansas rural credit unions, January 1, 1959 Purpose Number of credit unions 1 Amount Average per credit union ' Percent Production Petroleum Feed, seed, and fertilizer Livestock and poultry Other miscellaneous farm supply Total Facility and equipment Hardware and building supplies Farm trucks and/or tractors Other farm machinery Total Real estate Total Other Automobiles Home repairs Home appliances and freezers Medical care Educational loans Loans to co-ops and other credit unions Miscellaneous Total Total — all purposes 24 $ 738,307 330,763 13.9 25 560,902 22,436 10.5 19 705,145 37,113 13.3 8 154.655 19.332 2.9 12,159,009 40.6 15 159,691 10,646 3-0 17 488,308 28,724 9.2 12 301,388 25,116 5.6 13 $ 949,387 310,987 $ 310,987 23,922 17.8 5.9 5.9 22 1,044,450 47,475 19.6 12 102,191 8,516 1.9 21 215,540 10,264 4.1 16 113,344 7,084 2.1 10 78,942 7,894 1.5 9 153,846 17,094 2.9 16 191,008 11,938 3.6 $1,899,321 35.7 $5, 318,704 100.0 Not all credit unions made all type loans. Special Lending Methods Methods of handling rura 1 credit union loans may, and frequently do, vary from one organization to another. This is to be expected since credit union laws permit local groups some leeway in carrying on their operations. While most rural credit unions still follow established patterns of lending — making loans on an individual application basis — some rural credit unions included in this study have adapted such methods of handling member loans as: (1) Budget type loans, (2) loans to make prepayments for purchases at the cooperative, and (3) estate or special loans for reinvestment in the credit union. Each represents a trend in rural credit lending operations and reflects willingness of leaders to attempt new methods in their search for ways to render better service to members. These three plans are now discussed briefly. Budget Loan Plan Under the budget loan plan, the farmer submits his application for a loan to cover his foreseeable needs of the season or the entire year. The credit committee reviews it in light of the farmer's credit record, financial statement, collateral offered, ability to repay, and so on, much the same as for other loans. If the application is approved, the farmer may receive the full amount of the loan or be permitted to draw against it as needed during the year or period covered by the loan agreement. Interest is charged only on actual dollars used for the actual days used. Repayments must be made as scheduled. Some farmers schedule re- payments to fall due at harvest time or when live- stock is sold (table 5). At Hutchinson and Hillsboro, Kans., dairy farmers authorize regular deductions 16 TABLE 5. — Example of a budgeted loan Date Purpose of advance or source of repayment Amount advanced Amount paid Balance out- standing Days out- standing Interest at 6 1/2 percent Jan. 10 Apr. 5 July 15 July 20 Aug. 15 Sept. 5 Dec. 10 Dec. 20 Fertilizer Feed Seed Fuel Labor Purchase of cattle. Feed Fencing Supplies Sale of hogs Taxes Labor Sale of cattle Sale of hogs Totals Total interest cost S 225 250 215 200 325 625 360 350 250 250 450 13,500 515 2,550 435 $3,500 475 1,215 85 101 S 7.19 21.85 2,800 5 2.49 2,285 26 10.58 2,535 21 9.48 2,985 96 51.03 435 10 .77 $103.39 from their share balance, and from it make regular payments on outstanding loans. Budget loans are advantageous to the farmer, the cooperative, and the rural credit union. The farm family has more latitude to do advanced farm and home planning. The farmer can utilize better farming practices without fear of inadequate funds and may be able to save more on cash discounts at the cooperative alone than he pays out in interest. He is usually able to save elsewhere on cash pur- chases also. The cooperative saves also on extra bookkeeping, billing, collecting, losses, and interest cost on operating capital, if borrowed to replace funds out on open account, when business is kept on a cash basis. By substituting one annual or seasonal loan for several small loans, as is done in Mitchell County, time is saved for both the farmer member and the rural credit union. Besides, the cooperative and the rural credit union usually increase both volume and membership from this type lending program. Each is strengthened in the process. The number of rural credit unions making budget loans at the time of this study was small but seemed on the increase. Where farmers have budget loans in operation and make regular additions to their account through deductions, they can arrange for regular payments to be made to the cooperative by executing a power of attorney in favor of the credit union and the cooperative, enabling the credit union treasurer to handle payments for them. When this is done, the budget loan becomes a revolving type account and is continuous. Bob Boiler uses line-of-credit through his rural credit union to finance livestock and grain operations on his Black Velvet Angus Farm, near Mankato, Kans. 17 Those rural credit unions making budget loans to farmers also carry loan protection insurance on borrowers equal to their outstanding loans and share insurance on their savings. This is a regular member service and is without extra charge. Max Porter, Mitchell County, Kans., produces quality "Porter's Porkers" on his year-round, "all weather" swine raising farm. Financing for the herd and facilities is provided by a $12,000 line-of-credit from the MC Co-op Credit Union. Prepayment Loans Part of the cooperatives in the area studied were using their rural credit unions to help control accounts receivable. When they are used properly, this can be done effectively. In Garden City, Kans., for example, the Co- operative Equity Exchange uses its rural credit union not only for regular loans to farmers to clear up indebtedness at the cooperative but also for special loans, made to actually "prepay" co-op purchases. In 1954, this cooperative decided to go on a strictly cash basis. Accounts receivable were $51,000 at the time, and increasing. The plan agreed upon required farmers to pay up all old accounts — even if they had to borrow to do so — and make current purchases on a cash basis. A 30- day extension of credit was permissible only if adequate guarantees for prompt monthly payments were established in advance. The cooperative made an extensive educational effort to encourage farmers to use the prepay plan. Those who did became eligible for cash discounts (2 to 3 percent on most items), for deliveries to the farm whether they were at home or away, and for a few other advantages to make the program an attractive one. The plan had a number of advantages to both the farmer and the cooperative. Farmers otherwise unable to prepay were encouraged to borrow from the local credit union for this purpose. In some cases, the cooperative signed the note or orally agreed to underwrite the loan. Farmers could also qualify for the plan by making a special deposit in the credit union in lieu of prepayment to the cooperative and designating it to be used only for making regular monthly payments to the cooperative. Some farmers borrowed from the credit union and then reinvested it in the credit union for this purpose. This gave them the additional advantage of loan protection and life savings in- surance coverages on both their outstanding loan and saving balance. Farmers using the credit union for their prepay plan usually executed a power of attorney in favor of the cooperative and the credit union so that the credit union treasurer could make their payments each month. This plan, as used by this cooperative, was successful. By December 1955 — 18 months after it was started — accounts receivable were reduced from $51,000 to less than $5,000. The plan helped the cooperative keep its accounts current and the farmer to keep his business affairs in better condition, and it brought the credit union new mem- bers and new business. While this type of plan was somewhat unusual for the cooperative, it was little more than a normal operation for the credit union. Estate Loans A third type of special loan offered by a number of Kansas rural credit unions is commonly referred to as the estate loan or the share loan plan. It is made possible by combining loan protection and life savings insurance coverages in a single, special 18 transaction. Under this plan, a member borrows and reinvests the amount of the loan in the credit union. He then proceeds to repay it on an agreed upon repayment schedule. All estate loans are $2,000 or under, since $2,000 is the maximum coverage available per account per credit union under life savings insurance coverage. In 1957, eight farmers started the Ness (Kans.) Farmers Credit Union with $40 capital, and then each signed up for an estate loan of $1,000 to help launch the new program. Now this credit union has 152 members, $62,000 in member savings, $70,000 in loan volume outstanding, and $78,000 in assets. Some farmers look upon the estate loan as a unique and profitable plan. The only cost is the cost of interest. It is easy to set up, and no collateral is required since the loan collateralizes itself. In return, the farmer receives insurance on the loan for the life of the loan, insurance on his shares for the life of his deposit, and dividends annually or semiannually, as earned. Most important, perhaps, is the self-discipline applied in forcing members to accumulate savings by repaying a loan. This it does rather effectively. Estate loans help provide insurance coverage for some farmers, known to have no insurance other than that secured through their rural credit union. Many are unable to get insurance except on a group basis. Rural Credit Union and Farmer Cooperative Program Many cooperative and rural credit union leaders in the area covered by this study have found the rural credit union to be a useful tool and have used it extensively. Some of these leaders are pioneering in new methods and techniques of making the rural credit union more useful to the farmer and the farmer cooperative. Farmer cooperatives are well adapted to sponsor and also use rural credit unions. They can provide housing, clerical, and managerial assistance and a field of membership that is organized and under- stands cooperative type operations. This is an initial advantage. In turn, the rural credit union may be helpful to the cooperative in a number of ways. The co- operative and the rural credit union may, by working together , provide a greater service to farmer- member-patrons than possible for each to do without the other. It is a joint program in every respect. The advantages to the cooperative, the rural credit union, and the farmer from a jointly operated pro- gram as is being developed in Kansas and the other States of CCA region, reflected by the study, may be summarized as follows: A. How the Farmer Cooperative May Help and Use the Rural Credit Union 1. The cooperative may sponsor the credit union as a service to its members, join and help raise initial operating capital, and provide facil- ities and general assistance to the new organi- zation. 2. Cooperative officers and employees may serve voluntarily on the board and committees, help in educational and membership relations activities, and otherwise assist with operations on a gratis or reimbursable basis. 3. The cooperative may encourage farmers to use the credit union for systematic savings; for seasonal or lump-sum investments; for per- sonal, production, or mortgage type credit; and for keeping their financial operations on a sounder, more businesslike basis. 4. The cooperative may use the credit union to help members finance cash sales, provide cash for cash discounts, and handle accounts receivable and line-of-credittype service, there- by helping build both membership and volume. 5. The cooperative may use the credit union in helping farmers to better understand the principles of cooperative enterprise, the intri- cacies of "money management," and in establish- ing habits of thrift. How the Rural Credit Union May Help the Farmer Cooperative 1. The credit union may enable the cooperative to go on and stay on a cash trading basis by providing cash for cash sales, for cash discounts, and by reducing or eliminating the problems of accounts receivable. 2. The credit union may provide the coopera- tive with a ready source of investment for surplus funds (on a demand basis) and a source of ready credit when necessary at reasonable rates and on favorable terms. 3. The credit union helps cooperatives build membership, volume, cooperative goodwill, and rural leadership, and increases member under- standing of cooperative enterprise. 4. The credit union may enable cooperatives to be more versatile in handling farmer accounts. For example: a. Farmers borrow from the credit union for cash trading, to protect investments, meet emergencies, and to enlarge or carry on their farm operations. ( Loans are usually insured against death and disability, without cost to the farmer, thus decreasing risks of borrowing). b. Farmers, through the credit union, set up a prepay or line-of-credit type service 19 for easy handling of cooperative purchases, pledge credit union shares to stand for receivables, if any, or even withdraw sav- ings to pay accounts outstanding. 5. The credit union may in effect serve as an independent finance division but without cost to the cooperative. How the Farmer Cooperative and Rural Credit Union by Working Together May Help Their Farmer Members or Patrons . 1. The cooperative and the credit union enable farmers to own and control (as well as use) their farm supply and farm finance organizations. 2. The cooperative and the credit union help provide quality products and sound financing; and help protect from poor quality products and un- sound or high cost financing. 3. The annual return of cooperative and credit union refunds and dividends increases the farm- er's income (buying-spending power), and im- proves his financial position. 4. The cooperative and the credit union help farmers to better prepare for the demands of modern day farming, and thus increase their chance for success. 5. The cooperative and the credit union enable farmers to actually have more for less; have a higher standard of living, and exercise greater influence, collectively, over factors which affect their economic status. By working together , and with other farm organizations, they can contri- bute much to the farmer's financial security, success, and standard of living. Opportunities for Improvement Cooperative and credit union officials in Kansas have pinpointed five ways to help improve operating performance. They are as follows: 1. Better Understanding . Findings of this study showed that where understanding prevailed as to the contributions that rural credit unions make to farmers and farmer cooperatives, their opera- tions were more successful. 2. More Effective Know How . — The need for more field staff assistance to organize and service rural credit unions was pointed out. As cooperative fieldmen gain experience in rural credit union operations and credit union fieldmen become more familiar with the basic objectives of farmer coopera- tives, they will be able to pursue more effective assistance to each program. 3. More Long Range Planning. — It takes time to build successful rural credit union programs. Those cooperatives that had the foresight to organize in the 1940's and 1950's now have successful, self-sustaining finance organizations to serve their members. More recently — 1956 to 1960 — other cooperatives have taken steps to set up rural credit unions. Cooperative and credit union officials need more long range planning, if this type of service is to be extended to more Midwest farmers. 4. Close Cooperation . — In those instances where cooperative and credit union officials have worked together, they have demonstrated oppor- tunities for developing successful local programs. Close cooperation is advantageous to both programs. 5. Proper Organizing . — When rural credit unions are set up with adequate groundwork and proper service follow-up to assist new officials, they have gone a long way in getting their program off to a good start. These five points emphasize the need for stress- ing performance and developing a more compre- hensive program if the best interests of sponsoring cooperative and credit union members are to be served effectively. In this, as in any rural credit union program, there is a premium on operating efficiency and on providing needed member services. These require and depend upon adequate training for officials as well as effective member education — both for existing programs and new ones as they are or- ganized. Where credit union and cooperative leaders — local, State, and regional — join efforts to provide proper educational and training programs, they provide the basic ingredients for successful rural credit unions. Farmers use rural credit unions to help finance the purchase of farm equipment and supplies. 20 OTHER PUBLICATIONS AVAILABLE The Story of Farmers' Cooperatives, Educational Circular 1„ , , Organizing a Farmer Cooperative, FCS Circular 18. Using Your Rural Credit Union, Educational Circular 16. Arthur H, Pursell. How Cooperatives Use Credit Agencies To Meet Patron's Needs, General Report 52. John Mo Bailey, Arthur H. Pursell, and Russell C. Engberg. Rural Credit Unions in the United States, General Report 49. Arthur H. Pursell. Rural Credit Unions in Indiana, General Report 47„ Arthur H. Pursell. The Rural Credit Union -- a Place To Save and Borrow, Rural Resource Leaflet 8. Retirement Plans of Farmer Cooperatives, Circular 21. French M. Hyre„ Making the Most of Your Co-op Annual Meeting, Circular 22. Oscar R. LeBeau and French M. Hyre. A copy of each of these publications may be obtained upon request while a supply is available from — Information Division FARMER COOPERATIVE SERVICE U. S. DEPARTMENT OF AGRICULTURE WASHINGTON 25, D. C.