Kirsten Moy

We have 6 fabulous speakers and 6 fabulous models. There are a lot of remarkable stories that we'll hear about today. Each speaker will each have 5 to 7 minutes. We'll hear about each organization's operations, products and services, and how it benefits its members.

You have no idea how exciting it is for a mortgage guy to be at the Federal Reserve Bank! I feel like I'm very close to being able to dictate monetary policy!

We are an alliance of independent mortgage bankers. We are one of a long trend of industries that is consolidating, in our case, in support of the independent business owners that operate in our industry. All fragmneted industries will eventually consolidate, and if you don't believe me, try finding a local hardware store. Try finding a local drug store. They simply don't exist much anymore.

In most major industries, you are one of two entities: either you are a consolidator, or you are not. The environement for consolidation includes large major competition and small entrepreneurs who are all battling for the same customer. Typically the large national customer has advantages that the small local business owner does not have, such as buying power on the products that they sell, cost-reduction on those products that they buy, marketing, branding, and training.

Lenders One is a national alliance of independent mortgage bankers that provides its memeber companies with revenue enhancing, cost reducing and market-share expanding opportunities. When we started Lenders One we did this not simply as a business opportunity, but because it was something that we believed in very firmly. My grandfather started a mortgage bank in 1955 in St. Louis, MO. Through the latter half of the 1990s it was the largest bank in Missouri. Unfortunately over the last several years, St. Louis has also home to many large competitors, like Bank of America and Wells Fargo. Some came in and put down roots, while others entered the region through acquisitions of smaller companies. We asked the question about our family business - what are we going to do to survive in the future? We felt very strongly about it. We have our name on the door. We built communities and neighborhoods in our marketplace. Our names are on the back of little league baseball jerseys.

We found that the large banks are using predatory tactics to compete against smaller banks. They are making it difficult for smaller banks to do business. They are putting their name on a storefront and wanting to originate loans. Beceause of this, we started this collaborative business model of a cooperative to help companies like my grandfather's that exist to compete and survuve. We have found that despite what you've heard in high school, size does matter.

Let's look inside the numbers. Lenders One is actually a 5 year old company, but we've experienced tremendous growth. We have 75 member companies. Each company is a shareholder being that we are a legally chartered sub-chapter T cooperative. We have 1200 total locations, 6000 employeees, and $40B in total loan volume last year. We're the ninth largest retail mortgage originator in the United States.

What does Lenders One do? It's really three things:

1. Revenue enhancing strategies to help our members compete
2. Cost-reducing programs
3. Market share expanding programs

Typical mortage companies sell loans one loan at a time.We sell loans in pools of hundreds and thousands. Buying mortgages in hundreds of thousands is more attractive to the investors who buy loans. Selling loans in large volumes enables us to generate more revenue for our member companies. The number one thing that we do is help our member companies increase their revenues. Over the last few years where there were very low interest rates, this was the number one thing that our member companies looked at. They are not interested in expense reduction. But as interest rates rise, I assure you that expense reduction will become a greater part of what we do to help our member companies' bottom lines.

So it's not a surprise that to offer such savings we buy in bulk. We buy about 1/4 million flood letters, credit reports and appraisals a year. We are the largest client of some of the largest serice providers across almost every product you can buy in the mortgage industry. This has two benefits. The costs of purchasing products goes down, which ultimately saves consumers more money. We have eliminated about $75 off of the cost of a typical mortgage transaction. Doesn't sound like much, but times 250,000 mortgages, we have saved customers quite a bit.

We also buy things like overnight mail, long distance, as well as computers and cell phones together. Since we buy in bulk, our members can substantially save of purchases of new equipment and supplies for their business.

Training and technology are listed last, but they are probably first in what we do for cost reduction. We have 11 full-time trainers. They teach everything. We have a full online university, with 250 courses. Training is something that is difficult to quantify. Training is typically not seen on a balance sheet - it's an expense. We can pull off Fortune 100 style training with the help of our member comapanies.

It's also expensive to buy and maintain technology. We help our members by pooling together resources to obtain the best hardware and software throughout the mortgage process.

We increase our members' net profitability by 25% per year once they become a member company.

IT's not easy to run a collaborative business model, and a cooperative in particular. All of our companies are entrepreneuial in nature. They started their business on their own. So it's difficult to say to a group of companies that we're going to put an umbrella over them that they need to act in a unified way to try and help them compete. It's not easy, but it is very rewarding. And we see that it is ultimately rewarding to them. They see the increase to their bottom line, they can help sustain their business, and be able to pass it on to future generations.

I'd like to thank Kirsten and the Aspen Institue for asking us to participate. We are proud of our company, and always enjoy telling our story.

Unified Western Grocers wholesale grocery distributor to independent grocers in the western United States. To put us in perspective, if we were a publicly traded company, we'd be equivialent (in sales) to the fortune 500. We are the largest wholesaler in the US.

There are three national chaines: Kroger, Safeway, and Albertson's. Well, there were three. Yesterday Alberston's was sold, so we're curious to see how that shakes out. These three chains are not our cusotmers. They have their own warehouses and their own fleets. They self distribute.

Then there's the regional chains that also mostly self-distribute.

We service the strata below the regional chaines. The independent grocer is our customer. Our mission is to help the independent grocer succeed and compete with the national chains. At the same time, we want to help them build keep unified as a sustaining entity.

Think of Unified as a virtual chain. We provide the products and services to our members to help them compete.

There's been some proof of concept. We've been around since 1925. Unified was founded in 1925 by eight merchants who collaborated to buy a carload of soap - using buying power. Today the concept holds. We have bigger buying power - not just by the carload, but by the truckload now.

Our members are diverse. There is not a cookie-cutter approach. We have single-store operators and those that own 50 stores. There is no common banner required. There are no geographic requrirements. We have members that often compete against one another, as is the case in southern California. We have upscale grocers, conventional, and in the case of southern California, we have retailers that serve various ethnic communiteis, such as the hispanic communities. The big chains were not able to fit the needs of ethnic communities into their cookie-cutter approach to doing business.

There are no restrictions on memberships and no territorial boundaries. You can call your store what ever you like. There are a few purchase requirements, but we encourage maintaining local identites for our members.

Branding is available, but is not required. Some members form ad groups. They get together to share the cost of advertising. They can have a common banner for products.

We also offer some private label products to our members. And we can offer various private label products at a lower price than the big chains.

Unified has access to over 60,000 products, with local and centralized buying. We do what is impractical for an independent grocer to do, such as warehousing over 60,000 products. Think of Kraft - their products are everywhere. But there is no way that they can affordable go to every single independent grocer and sell their products. It is easy to see the economies of scale that a cooperative can bring to the table.

We have 4 million square feet of warehouse space.

Becoming increasingly important over the last 20 years is the use of technology. We offer training and maintenance of technology. It's not required for our members to take it, but it is available.

Unified offers advertising, merchandising support (seasonl product support), real estate (often we will go on a lease with a customer), dairy (milk is a rather sensitive item to the consumer), insurance, and lending. It's important to the independent grocers to remain independent, so we've developed this lending arm to help grocers do some remodeling, or anything they need to remain competitive.

In a typical world, we would measure our success based on stock price. But in a cooperative, we can only measure our success by how well the independent grocer competes against the big chains.

In a past life I was the president of the National Credit Union Foundation. My background is in community development finance. I can remember about 10 or 12 years ago sitting with Kirsten in DC, and writing on napkins a model of the gap between the cost to get a product to market and what is currently possible in the non-profit world. It's obviously still a problem we're still addressing.

I'm going to give you an overview of the different credit union models that are out there. I want to provide some context for my remarks, then give some examples of models.

The system of credit unions out there, they still embraces the model of a cooperative philosophy. In the credit union systems that I'll talk about, each model represents varying levels of cost efficiencies and structures. The primary motivation is enhanced services to members - to continue more cost-effective outreach to more members. All lot of it is about expanding geographic reach, especially for smaller credit unions. More often than not, credit unions will work collaboratively to achieve these results. The models are among the best recognized in the system and the best tested in terms of their structures from a service delivery and from a regulatory oversight standpoint. There is not a lot of standardization in these models, and quite a bit of innovation.

The cost-effectiveness elements of these models focus on shared back office, shared managemett services, and sometimes shared front office, or teller-based transactions. These are often the infrastructure costs that impact growth and service the most.

Four models
1. Credit Union Service Org (CUSO)

There are different types of CUSOs. One example is one structured by the Denver Community Federal Credit Union. Their goal was to provide check-cashing services within their traditional branching system. They built a branch in a lower-income area of town. They wanted to attract lower-income members. CUSO allows service of non-members. When a non-member goes in to cash a check, they become members when they walk in.

Another example is a multi-state CUSO that provides investment and trust services to its members. There are multiple models of CUSOs out there Once the CUSOs are up and running, ongoing costs are paid for by fee-for-service.

2. Credit Union Shared Service Center

Iin some ways there is a lot of overlap between all of these models. Shared service center means that a bunch of creditors get together and open up their doors to allow their members to access any services across the board. Very much an economy of scale concept.

On a national level there are a systems like this. One is called the Co-Op Network. It provides access to ATM and branch network around the country. When I travel, I look for ATMs with Co-Op Network on it, because I know they are part of this system, and won't charge me fees.

At a local and regional level, shared branching happens among credit unions that want to extend their geographic reach. It works for someone who moves to a new city, and doesn't want to travel to their old city to do banking. They can use a network branch to take care of their business. This provides convienecne. It's important to note that in the shared-branch system, a lot of what we're dealing with is teller-based transactions, and not loan-based transactions. It's easy for the individual banks to maintain their own policies with teller-based transactions. Also very fee-for-service based.

3. Credit Union Shared Management

There are a lot of examples of this going on today. The biggest example, in terms of community development-based, is the State Employees Credit Union in North Carolina. Essentially they provide back-office managment services to the latino Community Credit Union, as well as to 4 other credit unions in the state. Essentially, they provide, through a management contract management service and data processing.

Through the management contract, they provide access to their ATMs for the smaller credit unions, as well as access to their broad array of financial services. The smaller credit unions don't have to create those products - their members have access to those services through the network. Again, fee-for-service generates the majority of funds to pay for the management contracts. It's based on volume and geographic reach.

Another example is the Green Bay Credit Union Center. It's a cooperative model among a number of credit unions in Wisconson. It's the same concept in terms of management services.

4. Credit Union Group/Affiliate Structure

The best known example of this is Self Help in North Carolina. We'll see this more in the community development credit union world where a CDCU will be a large financial component of a community based organization. We're seeing this happen more with mainstream credit unions putting check cashing outlets into place and are working with community-based organizations and making partnerships around that.

Again, shared management access provides access to other kinds of funding for members that would otherwise be unavailable.

Questions
Gwen Robinson with GE Consumer Finance. I am on the board for a non-profit Lower East Side Credit Union. As you were presenting, I was think about industry trends towards consolidation. A lot of mid-sized credit unions are looking for reach and trying to grow. I am also familiar with a lot of other credit unions that are extremely small, such as church credit unions. They may not even have staff. I wonder if there is a parallel with the CDC community in that the mid-size players have an interest in growing and getting market share. What do you see happening in the credit union field that might be a parallel here to these very small organizations that may not have the same motivation?

Pat Sterner
That is a huge dilemma right now.The smaller credit unions, especially the faith-based credit unions, tend to bring a certain dynamic in the community in terms of just very basic financing. We see some mid and large size credit unions beginning to look at creating partnerships with these smaller credit unions. Unfortunately what happens with many small and faith-based credit unions is that often times the same manager might have been there for years and years, and when that person leaves, the board is essentially exhaused. The credit union either folds or merges into another credit union if they're fortunate enough to be able to do that. Then at least the members will still have service.

In many of the models I discussed, they are based on serving very small credit unions - as low as under $5M. It gives them the ability to stay alive. But it often depends on the board, and their ability to be innovative and to be able to see beyond the immediate issue of making it through the next year.

Question to Christine:
Why are you guys a CDFI?

I wondered if anybody saw that. I'm not sure that we are. But we actually have a subsidiary company, called Grocers Capital Company, and it's unregulated. Its objective is to loan money to help our channels specifically. That's the only people we loan to. They are there to help the independent grocer grow and succeed.

Can small grocers not get this from the marketplace? Why would they come to you?

They will come to us because often times they are too small for the marketplace, because the marketplace will not recognize them. Oftentimes they do not have a proven track record. What we are finding now is that we are competing with the marketplace, and companies such as NCB. Because of that our loan portfolio is down. But our objective is not to make money on loaning money, but to help that independent channel succeed.

To Scott:
You're not really trade associations, but organizations like yours start when there is a base of potential members that need your services. I can think of one example somewhat in reverse where there aren't that many members, but a central organization starts to help build an industry, rather than focusing only on assisting individual businesses or products. How did you get started?

There are a number of trade organizations in the mortgage industry. We find that they serve a very diverse constituency. We focus on a subset in particular. I'm not sure if this will address your question, but one of the areas that we are focusing on is servicing market segments that we feel are not well served. They could be called emerging markets - emerging markets have emerged, and it's time to start paying attention to them.

Things like having brochures in different languages, having multilingual or bilingual staff, and putting people in locations where there are loans to be made are some areas where we feel we are not following a trend but setting a trend.

One of the best things that we do well is utilize best practices in order to help our member companies succeed. A lot of that is new frontiers. Our members are able to help one another buy sharing best practices from city to city. We feel it is our mission to expand homeowner opportunities. In that regard, I think we are different from a not-for-profit trade association in that we feel it is OK to influence our members behavior based on motives that we have, (such as feeling strongly about expanding home ownership opportunities.

The EarnFair Alliance has been operating for six years. It's made up of 13 alliances. The reason it was created was because there were a lot of fine community organizations in New York City that had no way to compete for large scale contracts. They just didn't have the resources and because of the performance based nature of the contracts they could not compete. So we take the lead in technical assistance, contract management, government liaison, quality assurance, resource development, and product development. And that freed them up to do what they do best - run really good operations in their communities.

I want to talk about EarnBenefits. It's a whole set of tools to do outreach and education for workers to connect them to government and private benefits. We've created an online screening tool. The worker can put in family information and it will tell them what benefits they are eligible for. It's a really nice tool.

We also created an online community. Here, you can find a shared calendar and best practice papers. People can share job orders here also.

Key features
The contracts we get are 100% performance based. So we convert the contracts for them. 50% is perormance based and 50% line item based. We have a partnership with United Way so we can get them cash quickly so they're in a positive or nuetral cash flow situation. We make sure we keep enough money so the high performing companies don't feel like they're carrying the weak ones. We provide fiscal and technical help too.

EarnFair Alliance Performance as Compared with Peer Group
We took a Welfare-to-Work contract. The targets were measured against which part of them we're hitting their targets. There are nine organizations in the city running the same contract. Some are private organizations. As you can see we're doing well when compared to the others. We're ranked either number one or two in: placements; 3-month retention; 6-month retention; average hourly wage; and 6-Month public assistance recidivism rate.

This summer the city's Welfare Department put out an RFP for a $60M project. EarnFair Alliance came up with a three-year expansion and replication goals. We reached out to other organizations to find partners. As you can see it's fairly ambitious, it utilizes private funding too. The private funding investment goes down over time, as does the cost.

To summarize. Who benefits? Employers looking for a productive and stable workforce. We're working with more since '01. Low-income job seekers and workers. We're placing more people in jobs at higher wages. There is an additional $1800 in average pay. EarnFair Alliance community partners.

Our mission is to enhance economic opportunity for low-income workers. I will talk about a project we're working on to utilize a co-employment model in Wisconsin and Pennsylvania. Both are in the pre-development phase.

The Co-employer Relationship
What is it? The employee is both an employee of the Childcare center and an employee of a PEO (professional employer organization). If you look at our diagram here you'll see that it shows the PEO, the client company, and the employee all intersecting together. The areas of overlap represent shared responsibility. The details around these areas of overlap still need to be defined. The critical thing is the right to hire and fire. Both entities need to have that control.

What Does a PEO Do?
It's an outsourcing of services - in this model HR is being outsourced. I run a non-profit and I'm not in HR. They're trying to figure out how to make money and we're trying to figure out how to get benefits to workers.

PEO Services: payroll processing, risk management, benefits administration, workers compensation, labor law compliance.

Benefits to clients
The client in this case is the childcare center. A PEO could have a benefit with lots of employers. The major benefits are: access to broader range of benefits; HR management expertise; reduced administration burden; risk management; and potential to reduce benefit costs through volume.

The PEO is about 20 years old concept. It's a $50B industry. Their target customer is about 16 employees. They take a part of payroll. Average gross pay of co-employees $25K.

The PEO in Context
It's a subset of business process outsourcing. So you'll see in slide number 6 that BPO applies to all aspects of it. Basically, the PEO can do a range of things that can serve a number of childcare centers.

PEO and Childcare
This details the pilot in Pennsylvania. The box is the PEO. Who owns it: Profit? Non-profit? Co-op? The PEO has a service contract with a number of child care centers. The PEO in this model has a bargaining agreement with a union. The Union has a relationship with a multi-employer fund. They're affordable and provide approximate coverage. If you move from one childcare center to another you can take your benefits. The overall goal is to be more efficient.

I want to start by thanking Kirsten and Greg. Kirsten is always three years ahead of the curve. Tom Bledsoe is the director of the Housing Partnership Network. I am an enthusiastic member of the board. The whole point of this is to figure out ways to create efficiencies to increase product and do a better job to have an impact on the mission. Our mission is to increase the performance and social impact of non profit community developers.

HPN Background
HPN has been around for 15 years. In the last 10 it's gotten wind under its sails. We now have 84 organizations nationwide. We have 600,000 housing units produced or financed. The partnership early on decided to focus on regional organizations not local ones. From the outset they wanted organizations that had got to some level of scale.

The partnership is based on a European model of co-ops and mutual organizations. The whole is greater than the sum of the parts.

HPN Enterprises
There have been a number of experiments. One of the most successful has been the Housing Partnership Insurance Company. The partnership created a new company. It's a $10 million capitive insurance company owned by 18 regional non-profits. The premium savings is in the range of 15%. That's real change. Each of the 18 participants can do more with the money they've got.

Housing Partner Securities has also been successful. It is a $100 million 501c3 bond conduit with Freddie Mac. Thereby they deliver a much more efficient source of capital for the housing producers.

The HPN is putting together a mortgage services company that will do $18 million to 200 new homeowners in '06. Another future HPN enterprise is the CDFI Investment bank. It's a liquidity outlet for large scale CDFI's. We're hoping to get the rating a bank would get. About a half dozen of us came together to try to form this new investment bank.

Why do we care? HPN saves us money; HPN increases our competitiveness; HPN solves problems too big for a single member.

One of the next steps is to examine what others are already doing out there. There's a similar entity in Europe working on something like this. The European network unites organizations through different countries, so we're starting peer-to-peer exchanges.

Questions
Q: Nancy, how did you capitalize the enterprises?

A: By chipping in. I recommend that. With the bank project, Lift provided money. We got a matching grant from Fannie May. Once we figure out what we want to set up, we will figure out how we capitalize it. There will also be a pitch for PRI support and subordinate capital to set things up.

The management capacity is being provided by the HPN. It rigorously selects people.

Q: Have you thought of brining training into the model?

A: Yes. This originally grew out of a strategy for healthcare workers. Basic core for conventional PEO's can have more glommed on to it.