Month: February 2021

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The End of Kappa Alpha Psi FCU’s Journey to the “Promised Land” (Part II of II)

In the previous article, I outlined the unprecedented action this young credit union took to oppose NCUA’s efforts at forced liquidation. The credit union’s legal challenge stated in part:

“NCUA knowingly, intentionally attempted to summarily liquidate and revoke the charter of KAPFCU with total and reckless disregard for the truth.”

“The publication of the order of liquidation and revocation is defamatory, casts KAPFCU in a false light, and has caused an erosion of public confidence. For these reasons, if the rushed liquidation is allowed to continue, KAPFCU will suffer irreparable harm.”

The Roots of Black Belief

Recently a friend shared reflections on Martin Luther King’s last sermon. It was given on April 3, 1968, to support the Memphis garbage workers (“I am a Man”) strike.

It is remembered as the “I have been to the Mountaintop” speech as King was killed the next day. Those final words were prophetic, but there were many other truths he spoke that are relevant to this day. I believe these are why Kappa Alpha Psi FCU stood up to the NCUA.

King said in part:

“. . .we’ve got to strengthen black institutions. (That’s right, Yeah) I call upon you to take your money out of the banks downtown and deposit your money in Tri-State Bank. (Yeah) [Applause] We want a “bank-in” movement in Memphis. (Yes) Go by the savings and loan association. I’m not asking you something that we don’t do ourselves in SCLC. Judge Hooks and others will tell you that we have an account here in the savings and loan association from the Southern Christian Leadership Conference. We are telling you to follow what we’re doing, put your money there. [Applause] You have six or seven black insurance companies here in the city of Memphis. Take out your insurance there. We want to have an “insurance-in.” [Applause] Now these are some practical things that we can do. We begin the process of building a greater economic base, and at the same time, we are putting pressure where it really hurts. (There you go) And I ask you to follow through here. [Applause]

“Now the other thing we’ll have to do is this: always anchor our external direct action with the power of economic withdrawal. Now we are poor people, individually we are poor when you compare us with white society in America. We are poor. Never stop and forget that collectively, that means all of us together, collectively we are richer than all the nations in the world, with the exception of nine. Did you ever think about that? After you leave the United States, Soviet Russia, Great Britain, West Germany, France, and I could name the others, the American Negro collectively is richer than most nations of the world. We have an annual income of more than thirty billion dollars a year, which is more than all of the exports of the United States and more than the national budget of Canada. Did you know that? That’s power right there, if we know how to pool it.

“Let us rise up tonight with a greater readiness. Let us stand with a greater determination. And let us move on in these powerful days, these days of challenge, to make America what it ought to be. We have an opportunity to make America a better nation. (Amen)”

NCUA Pre-empts the Court:

On Friday, August 13, 2010, NCUA filed a brief in the DC Federal Court of Judge Emmet Sullivan responding to the complaint by Kappa Alpha Psi FCU challenging NCUA’s liquidation order of August 3. Several hours later, NCUA carried out the liquidation, mailing checks to the savers and assigning loans to the agency’s asset management unit.

The credit union had until noon, Monday, August 16, 2010 to file its reply to NCUA’s brief. NCUA’s liquidation nullified further court review. Why liquidate the credit union before the court’s expedited legal process had even run its course?

The credit union was serving the mission of the largest black professional fraternity using a virtual business model. No checking accounts, no ATMs, and no debit card withdrawals. Just regular savings to fund loans to students and black professionals to support “achievement”–a fraternity goal.

The risk of any NCUSIF loss was de minimus. The credit union’s lawyers were pro bono. Their goal was to merge the credit union, if NCUA wanted to cancel the charter. They sought an impartial hearing for this request.  Their motive was to preserve  the pride and dignity of their fraternal colleagues who began the effort and to continue a credit union offering for members.

NCUA held all the resources and power and used it to destroy this new charter.

A Legal Precedent

Their efforts to appeal NCUA’s unilateral actions may however have lasting value. For the credit union’s lawyers were not credit union attorneys. They had no prior experience to know how unprecedented their challenge would be. But their effort may have shown a legal path that could benefit members in the years to come.

Credit unions are member-owned, one-person, one-vote. The lawyers argued that NCUA’s actions violated two individual constitutional rights: due process and equal protection. Could this black-sponsored credit union have identified a legal standard that could benefit every credit union member which is subject to arbitrary NCUA dictates? Could NCUA have erred on both the facts of the case as well as the law?

Or was this just a little regulatory nuisance that NCUA wanted to dispose of quickly?

When creditunions.com reported these events in August 2010, more than 9,000 views were recorded. Almost 100 comments were filed. Many similar experiences of regulatory arrogance were recounted in these posts.

The Continued Use of Summary Authority to the Present Day

Kappa Alpha Psi FCU was not the only credit union to find its charter abruptly ended.

In September 2010, NCUA without warning liquidated five corporate credit unions with total assets of over $67 Bn. The agency stated any appeal efforts would risk personal liability—the credit unions were marched straight to NCUA’s chopping block.

Other credit unions were subjected to this authoritarian power mode even though the economic crisis was almost a year into recovery. The $846 million Arrowhead CU in June 2010, was conserved to remove a management team that challenged examiners’ exaggerated estimates of loan losses. Others were forced to merge, including the $600 million USA FCU into Navy FCU in September 2010.

But these were not just crisis incidents. NCUA continued to use this unchecked authority to end credit union charters without due process. On April 5, 2016, NCUA simultaneously liquidated six Philadelphia credit unions ending 308 total years of operations. These six were given no appeal rights.

These credit unions had been through economic thick and thin for decades, and their total size — $4.8 million — could not pose a serious threat to the share insurance fund. They reported an average net worth of 17.0%.

NCUA performed another instant liquidation on May 29, 2020 of IBEW Local Union 712 Federal Credit Union in Beaver, Pennsylvania. According to CUToday, “Chartered in 1964, IBEW Local Union 712 served 2,935 members and had assets of approximately $14.8 million according to the credit union’s most recent Call Report. NCUA did not provide a reason for the liquidation.”

This regulatory silence and lack of accountability continues to this day, for example in all conservatorships in which NCUA takes total control of the credit union from the board and members. When recently asked about the status of Municipal CU in New York, NCUA’s Office of External affairs stated: “we do not comment on our efforts or conditions related to conserved credit unions.”

The Journey to the Promised Land

Is Kappa Alpha Psi FCU’s fate just another instance of a decade’s long ongoing abuse of NCUA authority?

Does this credit union’s unmatched courage taking a stand have any meaning today?

Why did these credit union novices fight when others did not dare?

I believe their actions were living out the charge that King gave that final day in Memphis:

“We just need to go around to these massive industries in our country (Amen), and say, “God sent us by here (All right) to say to you that you’re not treating His children right. (That’s right) And we’ve come by here to ask you to make the first item on your agenda fair treatment where God’s children are concerned.”

Members’ Rights

NCUA does not respect members’ rights. Be they black, brown, or white; young, old or in between; male or female. When member-owned institutions, created through volunteer labor, are summarily closed or merged, the systemic failure that allows this will either be changed or there will be no more cooperative movement.

Injustice, whether by public or private organizations, always targets the vulnerable first. Be they the economically fragile, or the uninformed and unempowered. When violation of rights is left unchallenged, the inequities will extend across the entire population.

Will Kappa Alpha Psi’s stand make a difference today? I think hearing again this promise should inspire everyone to realize change is possible-even in those exercising unchallenged power.

Yes, I believe Kappa’s example will be remembered.

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NCUA and a Black-Founded Credit Union (Part I of II)

In 2010 NCUA’s regulatory activity reigned unchecked. Even though the economy was on the mend its penchant for shutting down credit unions was unabated.  It would ultimately lead to the liquidation of five corporate credit unions in September—the most catastrophic decision in credit union history.

On August 3rd, 2010, six years after founding, Kappa Alpha Psi FCU ($750K, Dallas, Tx) fell under NCUA’s knee having been served a surprise order of liquidation and charter revocation.

In the regulatory environment, one might assume this was just another small credit union falling prey to economic circumstances.  But then something happened that no other credit union had dared in this situation. The credit union appealed NCUA’s action, filing a complaint contesting the order on both factual and constitutional grounds.

KAPFCU requested  a temporary restraining order against NCUA:  “Petitioner fears that before a show cause hearing can be held, the Respondent will complete what has already been threatened, and that is to hastily liquidate assets, expend money, enter or break contracts and disrupt the ongoing operations of the credit union.”

In response, a federal judge in DC granted a temporary injunction and scheduled a hearing on the issue in the time provided for an appeal.

Who  is Kappa Alpha Psi (source: KAP web page)

“The Kappa Alpha Psi®  college Fraternity, was born in an environment saturated in racism.  Indiana became the 19th state of the Union in 1816 and it founded Indiana University in Bloomington four years later. The state of Indiana became a stronghold for the Ku Klux Klan.

In the school years of 1910-11, a small group of Black students attended the University. Most  working their way through school. Realizing that they had no part in the social life of the university they decided that a Greek-letter fraternity would do much to fill the missing link in their college existence. . .

It became the first incorporated Black Fraternity in the United States, granted a charter by the Indiana Secretary of State on May 15, 1911.

Kappa Alpha Psi® is the 1st historically black Greek Letter intercollegiate Fraternity incorporated as a national body.  The Fraternity has over 125,000 members with 700 undergraduate and alumni chapters in nearly every state of the United States, and international chapters in Nigeria, South Africa, the West Indies, the United Kingdom, Germany, Korea and Japan.

One of the Objectives of the Fraternity is: “To promote the spiritual, social, intellectual and moral welfare of members.”  Reliance would be placed upon high Christian ideals and the purpose of ACHIEVEMENT.

The Fraternity seeks to raise the sights of Black youths and stimulate them to accomplishments higher than might otherwise be realized or even imagined.

Local chapters participate in community outreach activities to feed the homeless, provide scholarships to young people matriculating to college, serve as mentors to young men, participate in blood drives and serve as hosts of seminars for public health awareness to name a few.”

The Credit Union’s Brief History

Kappa Alpha Psi FCU, chartered in 2004, was in its sixth full year of operation when NCUA struck.  It was classified as a “new” credit union, that is, in operation for less than 10 years and its total assets did not exceed $10 million.

NCUA Regulations provide that ‘new credit unions’ must be ‘adequately capitalized’ or (6%) Net Worth Ratio within 10 years.

NCUA based its liquidation order on the credit union’s net worth ratio, asserting that because the financial institution was minimally capitalized at the end of first quarter 2010 with no reasonable prospect for becoming capitalized, prompt corrective action was warranted.

The credit union notes its first quarter net worth ratio was 1.95%; by the June 30, 2010 second quarter however, the credit union was moderately capitalized with a net worth ratio of 3.67%– a 600% increase since its December 31, 2009 rating.

These numbers, for reasons never explained, were not reflected on the credit union’s second quarter 2010 Call Report posted by NCUA. Who altered Kappa Alpha Psi FCU’s second quarter Call Report to make it appear insolvent? What was the basis for the change? Why was the credit union not contacted?

Read Part II for the outcome tomorrow:

Why Kappa Alpha Psi FCU’s Stance Matters Today

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The Resilience of Small Firms

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

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

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

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

Efficiency is Not Resilience

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

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

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

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

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

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

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

Nimbleness and Local Knowledge Beat Big Chains

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

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

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

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

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

Public Policy Treats Small as Expendable

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

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

Better Results from Being Small

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

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

Regulatory Bias for Bigness

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

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

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

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

The Takeaway for Credit Unions

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

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No Limiting Principle

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?

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A Paradoxical Merger “Opportunity”

Recently the required Member Notice on NCUA’s website announced the intended merger of the $18 million Cal Poly FCU with the $24 billion SchoolsFirst FCU.

Cal Poly’s reasons make the merger seem appropriate, maybe inevitable. But in a paradoxical way, would that really the best outcome for the two institutions, their members and the credit union system?

The Reasons Given

Cal Poly Federal Credit Union was chartered in 1961 to provide local financial services to the employees on the Voorhis unit of California State Polytechnic College of San Luis Obispo. In 1966, the Pomona unit and became the 16th member of the California State University System. Soon after the credit union changed its name to Cal Poly Federal Credit Union.

The Member Notice gives the following statements for merging:

  • Challenges involving scalability, member service and management continuity;
  • A single branch limits expansion;
  • Relocation looms as the sponsor seeks a larger financial institution for the current space.

Not mentioned is the credit union’s financial situation at 2020 year-end: negative $13K net income and a net worth ratio 5.2%, largely due to a 27% growth in shares. However, there is no delinquency and $10 million of liquidity in this 60 year old institution with 2,680 members served by four experienced staff.

Cal Poly’s 2021 Winter Newsletter celebrates its personal service during the pandemic: “It has always been our passion to be there for our members and campus community especially during a time of need.”

The Paradoxical Opportunity

A paradox is a seemingly absurd or self-contradictory proposition that when investigated or explained may prove to be well founded or true.

Cal Poly’s merger seems a routine event. Its $18 million single-branch operations would not seem to provide any measurable benefit to the $24 billion SchoolsFirst.

Is it possible that instead of merging with Cal Poly, SchoolsFirst might offer to assist the credit union to survive and thrive? And would that outcome better serve both institutions’ members, employees and the credit union system-immediately and in the long run?

Contrary Reasoning–Why Help, Not Merge

The prior blog on why SECU NC avoided mergers as corporate policy outlined their business logic and self-interest. These reasons include:

  • Members are being forced to join an institution not of their choosing. Often there is no familiarity, or knowledge, between the merged membership and the leadership of the continuing credit union. Experienced and trusted relationships with members are strained and sometimes severed by imposed conversions.
  • Combinations require one-off efforts to rationalize different systems, products, staff and often “cultures.” The result, lots of folks are not happy, both internally and among the membership.
  • These operational changeovers distract from organic, measured growth. In some large combinations employee disenchantment and cultural conflicts add to the disruption.
  • Merger-acquisitions by larger organizations seed distrust and suspicion among other credit unions undermining their ability to work together on mutual business and political agendas. This is especially true when the continuing credit union is from out of state, with head offices hundreds of miles away. The local voice no longer has standing.
  • Locally focused and governed credit unions present an easy to understand, familiar model that billion-dollar institutions find difficult to embody. These niche institutions bring political contacts and area or state-wide credibility in legislative debates.
  • Independent credit unions can anchor their attention on the specific needs of minority communities especially Latino and Black, versus becoming a DEI project of a large, multi-market, or multi-state credit union.

The Unique Credit Union Advantage

Credit unions will never “out-size” their competitors. The credit union advantage has always been collaboration. It is working together not only when threats appear but also developing cooperative business solutions a single credit union would rarely be capable of implementing.

If SchoolsFirst were to respond to Cal Poly’s expressed needs to ensure their continued success, the benefits of that could far outweigh any advantage gained by adding assets of less than ½ of 1% of its own balance sheet. And the investment in time and resources would be far less than the real costs of the merger conversion.

Paradoxical thinking, turning standard practice upside down, is challenging. Going with the flow is more comfortable.

But when used by leaders to make a difference, it can be the basis for long term success, as SECU NC proves. Even more important, it might initiate a reassessment of how mergers accelerate the systemic decline in charters and local credit union relevance.

If SchoolsFirst CEO were in a public legislative hearing defending or promoting credit union interests, his position would seem much more credible if sitting alongside was a CEO from a thriving Cal Poly FCU. A proof of “credit unions helping credit unions.”

By contrast, a $24 billion credit union rounding up smaller firms to add to its portfolio would not seem to be in much need of legislative or public succor, or even tax exemption.

Non-mergers Could Reignite the Credit Union Story

People respond to those who ask more out of them.

Cooperatives depend on committed communal efforts. If members or leaders sometimes do little, is it because so little is asked of them? When there are goals that seem daunting, even as we acknowledge that not everyone might succeed, isn’t the system better off by persevering? Shouldn’t all try to do as much as possible, not give up and betray the self-help foundation that launched every credit union initially?

Paradoxical reasoning is easy. Acting on the logic is infinitely harder. For a CEO who has had a career managing other credit unions, a large state league, serving on corporate boards and even leading CUNA, there have been a lot of big decisions. This $18 million dollar situation may seem insignificant in the context of those responsibilities, but the decision could be the most consequential of his career to sustaining the movement.

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Why America’s Second Largest Credit Union Avoided Mergers

Jim Blaine is an iconoclast. CEO at State Employees Credit Union in North Carolina (1979-2016), he rarely followed the conventional business practices of his peers. His credit union model had one north star: improving members’ wellbeing.

His team created a cooperative financial conglomerate that includes multiple CUSOs as well as a large branch and ATM network. Total assets at December 2020 were $47.8 Bn serving 2,550,000 members.

Several examples of contrarian thinking are his responses to the proposed agenda for a collaborative conference on credit union strategy in 2006. Among them:

Merger Benefits: Consolidate what we do, not what we own. Fashionable thinking based on gossamer logic.

Network/Standalone: Niche should be pursed, not “overcome.”

Credit Union Movement: Saints always believe in the church, sinners never do!

An example of  not following conventional practice is his response  to the numerous merger proposals he received as CEO.

The Reasons for SECU’s Not Merging Other Credit Unions-A Proactive Strategy

“At SECU, we never chose to merge unless “requested” by our State regulator (usually a very small CU with a serious problem that needed a quick fix – and one that no other state CU would agree to merge – we required that we be the last resort)…only one or two over 40 years.

If a CU wanted to merge, we always encouraged it to approach other local credit unions. The mergers that resulted strengthened the local community and also strengthened all NC credit unions.

Politically the more CUs we had embedded in local communities, the stronger voice we had in the State Legislature to resist assaults from the banks (and they were a strong, powerful bunch, including the likes of NCNB, First Union, Wachovia ) – as you know since the infamous membership lawsuit (which resulted in -HR 1151) came out of NC.”

(1990 — In conjunction with four North Carolina banks, the American Bankers Association (ABA) files suit against NCUA and the AT&T Family Federal Credit Union over the 1982 interpretation of the Federal Credit Union Act. Bankers are concerned with the authorization to allow select employee groups to join AT&T Family Federal Credit Union who are unrelated to the original credit union sponsor and don’t necessarily share that common bond. The bankers appealed the lower court ruling that favored credit unions.

On April 1, the full House passes HR 1151 by a vote of 411-8.On July 28, the U.S. Senate’s version passes with a vote of 92-6 culminating in a rewrite of the 1934 Federal Credit Union Act. President Clinton signed the Credit Union Membership Access Act on August 7, 1998)

A Political Target

“SECU was a very large potential political target – we wanted all the allies we could get in a multitude of other CUs. Same reason we branched into every county in the State – we wanted a local presence to provide local jobs, pay local taxes, help solve local economic problems, and make grants thru the SECU Foundation, etc. – as the S&Ls evaporated and the big banks pulled back from small towns and rural NC.

Organic vs Merged Growth

Growing “organically” is a more reasonable, measured form of development….mergers require an immense effort to combine, rationalize different systems, products, staff and often “cultures” – inevitably lots of folks are not going to be happy, both internally and among the membership.

Mergers `”force” all merging CU members “to join” an organization not of their own choosing. That’s not an unsubtle difference from the members of SECU, who all chose to join of their own volition – because they wanted to be a part, because they saw some personal benefit to them – no captive audience at SECU. 

Through organic growth and the disavowal of mergers, our smaller peers were less “suspicious” of us and assured we weren’t out to gobble them up – we were more able to cooperate on many things. SECU always shared resources, policies, practices, etc. with other CUs – nationwide.

As you know we “exported” many “well indoctrinated” leaders to other CUs – many, many in NC to smaller CUs. We also did things like not charge other CUs for using the 1,250 Cashpoints ATMs , which gave the smallest CUs an affordable statewide access footprint.

Equally the organic growth of SECU had the effect of “killing off” the “slackers” among CUs – when SECU opened a new branch in a small community, the local CUs had to “raise their game.” We were competition for many small CUs due to the ability of folks to join multiple CUs.

Working With, Not Merging

When Latinos became a demographic factor in NC, we, with other CUs, helped charter Latino CU (and still provide the underlying accounting/IT systems support – it should reach $1 billion shortly). Same for Local Government FCU (Maurice Smith) – – started in 1983, now $ 3 billion and the NC Press Association CU – @ $10 million, and Greater Kinston CU (last existing NC AF-Am CU)@ $15 million.

Not merging was a conscious, rational, and “best interests of SECU” decision in my opinion.

A Story of Innovative Self-Interest

Another enlightened self-interest story about supporting other CUs. As mentioned, the “membership lawsuit” (AT&T v First Nat’l)) which led to HR 1151, came out of NC. That was actually the third lawsuit on membership filed against CUs by NC banks.

The first two were against SECU. Around 1977, at the request of employees in many very small NC towns and counties not served by a CU (and too small to form one), SECU agreed to include local govt folks in small communities not served by existing CUs in its field of membership. The NC bankers sued and won on a split decision in the NC Supreme Court–fought out in state courts since SECU is state-chartered. SECU was required to expel the approximately 9,000 members who had joined.

Well, being a bit cantankerous, SECU (with the help of the Assoc of County Commissioners and the League of Municipalities) decided to charter a federal CU, (which today is Local Government FCU) to expel those members into. Additionally, SECU agreed to provide LGFCU with all support services, use of the branches etc. in exchange for a fee of 25% of its gross income. LGFCU had an independent board but agreed to provide only those services provided by SECU. LGFCU had only one employee, the volunteer manager Jim French, who worked for the League of Municipalities.

Essentially you ended up with a de novo, full-service CU with 35 branches, 1 employee, and a “guaranteed can’t lose money” service contract (LGFCU’s first month gross revenue was $1.60 of which SECU received 40 cents). Of course, the banks sued again but that’s not the point of the story.

In anticipation of being sued, SECU also established the NC Press Assoc CU and contracted for services with the Methodist Ministers CU (assets @ $75,000). The point was so that when we hit the courts again (this time in federal court since LG was federally chartered), we were well prepared to fight. Our supporters now included: NC teachers, state employees, county employees, city employees, state and fed regulators, the press (thru NCPAssociation CU), and even God (thru Methodist Ministers) was on our side. Needless to say, the banks didn’t stand a chance…and lost the case.

The Moral

More is not less with credit unions

SECU Merger Policy

Jim Blaine’s successor, Mike Lord continued SECU’s merger stance.

“Under my watch there have been no changes in thoughts on mergers—they cannibalize the industry and hasten our demise! We continue supporting small credit unions and recently have helped four of them—three of them in dire straits and one with a COVID-19 emergency –decimated staff meant they had to close their branch in a small community and our local branch opened their doors to cash checks and take deposits for a day or two for their members until their staff could return.”

“People Helping People” at its finest! Credit Union Helping Credit Union!

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Member Merger Voices Ask: “Where was NCUA?”

When NCUA passed a revised 708b merger disclosure rule, effective October 2018, it also established a member-to-member communication process through its CURE office.

Following are member comments posted in this process. They all point to a common shortcoming summarized by one member: Where was NCUA when these actions were approved?

Brief Summary of Members’ Multiple Concerns

The first comment is from a family of members who question the choice of an out of state merger partner. They note that the manager that has already moved to Florida (from Wyoming) but still receives a “retention bonus” of $240,000. The second commenter asks why no merger benefits were presented. The third points out that the merger discussion via telcon is after the voting deadline. The final set of six comments are members all opposed to the proposed merger because they believe their credit union provides better value.

These voices suggest that the cancellation of these financially sound, long-standing charters are not serving members’ interests. Each merger provides immediate compensation benefits to senior managers far above what they would receive if no combination took place.

There is no indication these member concerns were either followed up by NCUA or answered by the credit union. Every comment demonstrates that members were not involved or consulted when the merger was being considered. Rather, they are expected to ratify a decision made without their knowledge or input.

Merger Comments Follow

1. We Oppose: Manager Has Already Moved to Florida

Greater Wyoming FCU into NuVision

“Me (and three other family members who are also GWFCU members) are opposed to the merger at this time. GWFCU indicates they have looked at Wyoming Credit unions but have only approached one in Casper, which was two years ago, until they looked at NuVision.

“There are five Wyoming Credit Unions with main offices in Cheyenne and as far as I know none of them were approached. I was told it is unprofessional to work with more than one merger possibility at a time. When the wellbeing of the members is at stake management should be looking at all possibilities and when they fail to do that it is a disservice to the members.

“We will lose board representation, all of our assets and our CEO. Ms. Stetz may be working in Florida but will no longer represent our credit union. I think we should take a step back and look at other merger proposals or see if we could hire a new CEO since Ms.Stetz has already moved to Florida. Our Credit Union will be less than one percent of NuVision and local needs will get lost in the needs of other larger markets. Until I have more than one option, I will not vote in favor of this merger.”

In the Member Notice CEO Stetz (apparently in FL) will receive additional compensation of a retention bonus of $240,000 if she remains for two-year transition or $218,000 if she leaves sooner. Loan Officer Brother’s additional compensation is $107,000 bonus over two years or $102,000 if she leaves before then.

2. No description of Specific Benefits-We Should Know Trade-offs Involved

Ball State FCU into Finance Center CU

“I have had accounts with the Ball State Federal Credit Union since 1996. I do have two questions/concerns.

1. In the relevant literature I received from the BSFCU, there is no description of how specific member benefits and applicable policies would change after the proposed merger. Can we get more details about that? It seems that an informed vote would hinge upon knowing the specific consumer trade-offs involved. My letter from the BSFCU stipulates that a detailed member Welcome Kit, indicating all changes to services and member benefits, will be mailed “at least 30 days before the conversion date.” But I’m guessing that is still subsequent to the July 14, 2020 special member meeting for voting on the merger?
2. If the Financial Center First Credit Union is the “continuing credit union,” how is the BSFCU able to “retain the Ball State name and identity”?”

3. When Do Members Get An Open Discussion on the Proposed Merger?

Friendship International Airport FCU (FIAFCU) into Central CU of Maryland

“I understand COVID-19 restrictions on everyone…What I do not understand is why shareholders are not provided a TELCON meeting to discuss the proposed merger. If you have to vote by Feb. 8, 2021 and TELCON is held on Feb. 10. 2021, when do the members get the benefit of an OPEN discussion on the proposed merger?

“Why did the Board of Directors vote NOT to distribute a portion of FIAFE’s net worth in a SPECIAL DIVIDEND? Why did the Board of Directors vote to provide 3 employee members $57,000 + pay their taxes? Not to discount the fantastic job that Delores, Ron and Dorothy did for all of us, and it is much appreciated, but why not split the profit with all of the members.

“If a special dividend of 1% were to be implemented, it would be less than the three board members are to receive. Where was NCUA when these actions were approved? It seems if one were to compare the net worth of the two credit unions, FIAFE appears to be the more efficient and profitable credit union with a Net Worth/Total Asset percentage of 33.43% compared to 10.55% for Central CU.”

Data provided in Member Notice

Credit Union at 6/30/20 Total Net Worth Total Assets Net Worth Ratio
Friendship International FCU $2.1 MN $6.3 MN 33.20%
Central CU of Maryland $4.5 MN $43 MN 10.50%
Combined Net Worth Ratio 13.40%

4. I’m absolutely against the merger; This is the first time I have heard of it

Columbus Metro FCU ($260 mn-10.6% net worth) into Telhio CU ($952 MN and 9.6% net worth) ( excerpts from six comments)

    • The CMFCU has been a great resource for our members for years. Management wins, members lose Being through this and it’s a mean to the end.
    • I am absolutely against the merger. I have enough problems with their last upgrade they did. It will just cause more problems for senior trying to get information from their…
    • I am concerned that Telhio Credit Union money market interest rates are much lower than Columbus Metro Credit Union and the deposit requirements to obtain higher rates are more…
    • I received an email this morning informing me of this proposed merger between Telhio and Columbus metro federal credit union. This is the first that I have heard of any such talks…
    • I just so happen to be a member of both banks. CMFCU has better accounts as far as Christmas and vacation savings, although I never liked that they transfer the money annually out…
    • I urge a NO vote. With ongoing pandemic, unsent financial statements and misleading net worth values, it’s no time to consider merging. Columbus Metro began seventy (70) years ago…

Merger Related Financial CEO Disclosures provide:

  • Under CEO’s new employment agreement, he will receive salary and benefit increases of $1,600 per month: $19, 200 annually;
  • 100% vesting of split dollar policy increases payout by $6,400 per year for 20 years: $128,000
  • Payment of unused sick and vacation: $135,539.

Total CEO additional immediate compensation benefit: $282,739.

The Question: Where is NCUA?

In his February 11th virtual stakeholder update, Chairman Harper reiterated his long-stated commitment to consumer protection:

“We must also strengthen the agency’s consumer financial protection program to ensure that all consumers receive the same level of protection regardless of their financial provider of choice.”

Cooperative Self-dealing Contrary to Member Interest

In June 2018 NCUA passed an updated merger rule requiring that additional compensation benefits for senior managers be disclosed. Public reports, especially in CUToday shown below, had documented the regular practice of secret payments to incent managers to merge their credit union.

In NCUA’s analysis the problem was the secrecy of the payments; therefore the rule’s solution was to just publish them. NO. The error was NCUA’s sanctioning these payoffs greasing palms to induce these so-called “voluntary” mergers of sound, long-serving credit unions in the first place.

The payola continues, but now out in the open. Managers act as if they are private owners, negotiating their personal benefits while promising members nothing more than a “brighter future” once new leadership takes over. The conflict of interest in these merger arrangements is unconstrained.

NCUA blesses this cooperative self-dealing even when common sense and member reactions show these mergers are not serving members. The boards fail to exercise any meaningful fiduciary responsibilities required by rule 704.1 and especially Guidance on Director Duties in NCUA letter 11-FCU-02. Management and board unite in their failure of care, duty and loyalty to members. The result is a cancelled cooperative charter that members created and still value.

The Regulatory Abdication

Multiple NCUA offices facilitate these manager-led sellouts. The regional offices approve the transactions with misleading and vague member notices, CURE posts all the notices, ONES approves mergers with credit unions over $10 billion, and the division of consumer access sits idly by as these transactions multiply.

The member harm is now available for the whole world to see. Just because these payments are now public does not make them proper. Why should a manager(s) be paid additional compensation for giving up their leadership responsibility while accelerating benefits and additional compensation for themselves that nothing more than sinecures? The alleged future merger benefits are so vacuous as to be meaningless or laughable: for example how do 20 additional Southern California branches benefit Xceed’s members in Rochester, NY?

If these boards and managers had presented these merger “plans” to support a new charter, they would have been rejected out of hand. Yet CURE and Regional Directors routinely approve these boilerplate submissions sometimes copied word for word from other merger packages.

The credit unions in these so-called voluntary mergers all report sound financial performance with high capital levels. Chairman Harper’s consumer protection efforts should start within his own Agency, at all levels. For the casual corruption now routinely blessed by the agency suggests it has no commitment to either member “rights” or “best interests,” both terms used in the regulatory requirements.

Disclosure does not make these payoffs and asset transfers any less disreputable or deceitful. NCUA’s administrative “benedictions” merely shows unprincipled conduct permeates the entire process.

The members have done their part. Will Chairman Harper now do his?

Background Articles Reporting Merger Self-dealing–Activity Continuing Today

What NCUA Staff Found When Investigating (Secret) Merger Compensation  (5/25/18 CUToday)

“During the Q&A with the NCUA board members following a proposal calling for greater disclosures in mergers, agency staff were asked about the types of bonus compensation paid to executives and volunteers at CUs that were acquired that they had uncovered in examining merger agreements.

Staff told the board that in “75% to 80%” of mergers they had found “significant merger-related compensation” being paid to people at the credit union that was being acquired, nearly all of which was kept from members when voting on the merger.

In one case, staff said, it found a total payout in the low-seven figures paid to 18 people at a credit union, with the bulk of that money going to four people. In another case, an acquiring credit union discovered after the fact that the board of the acquired CU had cut a deal in which each of them were to be provided with expensive season tickets to a local football team’s games for a three-year period.

NCUA Board Member Rick Metsger asked staff about how some credit unions have worked to “obfuscate” payments being made to officials at the acquired CU, and staff responded that one common method is that instead of having a clearly articulated dollar amount being paid, benefits are paid out in a different fashion, such as a split-dollar life insurance plan.

At another credit union, staff said it found the merger agreement called for the CEO of the acquired CU to be paid for a guaranteed five years of employment, even if at any point that CEO quit or the acquiring CU terminated him.”

Secret Pay Packages (06/12/2018-CUToday)

“The new NCUA rules came after CUToday reported extensively on lucrative pay packages and other benefits going to senior executives and even board members at credit unions that were being absorbed in mergers. As reported, in most cases these pay packages were not being disclosed to members prior to or at the time members were voting on the merger; instead, members were often told only that the merger was about “improved products and services.”

A number of sources told CUToday.info it was common practice for larger credit unions to approach managers and boards at smaller CUs with offers of paying out incentives well into six figures from the smaller CU’s capital, which in many cases could be substantial. Often, none of that same capital was paid back to members of the disappearing CU.”

Happy Independence Day, CU Members (6/23/18-CUToday)

“Just in time for Independence Day, credit union members have been given more rights in their respective democracies. Too bad so many who came before them didn’t have the same rights and weren’t able to make informed votes. . .

The new rule comes after CUToday has reported earlier on just how much undisclosed compensation has gone to and goes to the management and volunteers of credit unions in some mergers, where the capital that belongs to everyone suddenly goes to a few in management—and the board—to entice them to agree to merging into another CU.”

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Credit Unions and the PPP Loans: Who Tells What Story?

When looking at data that is quite general, it is hard find meaning. The SBA has just released total Payroll Protection Program loans disbursed as of the program’s end on August 8, 2020.

https://www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-508.pdf

SBA total PPP loan data as of August 8, 2020

Loan Count Net Dollars Lender Count Avg Loan
5,212,128 $525,012,201,124 5,460 $100.7K

What role did credit unions play? What are insights from this very summary data? Did the lending matter? Two observations come to mind.

  1. Small lenders were vital. These were categorized as firms with less than $10 billion in assets. They were 98% of total participants. They provided 45% of the total dollars disbursed.

As shown in the table, loans less than $50K were the majority of those granted (69%) but only 12% of the total dollars disbursed.

$50K and Under From SBA Loan Size table

Total Loans Total $ % Loans %Total $ Loans Avg Loan
3,574,110 $62.742B 68.6% 12.0% $17.6K

This is the primary category that includes credit union activity. Their average loan size was $46.7 K.

  1. If the public relied solely on the eight SBA data summaries, credit unions’ role would be significantly understated. The Lender Segment chart assigns 84% of the credit union participants to the under $1 billion asset group. That “credit union” segment’s loan total is only 35% of the actual disbursements credit unions reported in their September 30, 2020 call report.

From SBA’s Lender Segment Chart

# Lenders # Loans $ Total Loans Avg Loan
Credit Unions (<$1B): 719 67,846 $3,099,426,436 $45.7K
% cf. to Call Report 84% 35% 34.6% 97.8%

From NCUA September 30, 2020 Call Reports

# Lenders # Loans $ Total Loans Avg Loan
Call Report Totals: 859 191,856 $8,954,408,403 $46.7K

Credit unions comprised 17% of all lenders.  They disbursed 1.7% of all PPP loans.

Ohio’s Example

The SBA also presents macro totals by state. The following is for Ohio. The credit union data is from call reports.

Ohio Total All Loans from SBA

# Lenders # Loans $ Loans Avg Loan
N/A 149,144 $18,532,840,346 $124.3K

Ohio CU Totals from 9/30 NCUA Call Reports:

# Lenders # Loans $ Loans Avg Loan
38 4,792 (3.2%) $263.7M (0.4%) $55K

Wright Patt CU was the largest PPP coop lender in Ohio, and the 41st by loan count nationally. Their 952 loans totaled $67 million or an average of $70.4K.

What is the Story? Who Tells It?

Numbers are dry. They show activity, not impact. These loans are the means to an end—stabilizing small business and employee income caught up in a crisis not of their making.

The goal is not merely reporting credit union statistics: 192,000 loans totaling $8.9 billion. The message should be what these funds did to sustain local businesses and economic activity.

That outcome, improving members’ lives, is coop’s primary purpose. Now is the time to again tell how the “credit” in credit union makes a difference. Better yet, have some of the members who received these 192,000 payroll protection grants, tell their story from your platform.

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Timeless Wisdom: Creating Effective Public Policy

Two principles guided Ed Callahan’s tenure as NCUA chair.  One was his positive motivation.  In his many public comments,  he never summoned  fear about the future; rather he always presented examples of hope and progress by the movement.

The second was his belief in the enterprising spirit of human nature.   He believed ordinary men and women had created an extraordinary cooperative system  that deserved the respect and support of regulators.  In his own words:

“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

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A Critical Role for America’s Credit Union Museum

The stay-at-home pandemic induced isolation has caused many to clean out years of storage.  And find forgotten keepsakes, even treasures.

I discovered two complete copies of the July 21, 1969 Boston Globe, with the headline: Man Walks on the Moon.  The half page black and white fuzzy photo was printed right below.

What should I do with them?  Who might find them uniquely useful for instruction or other use? Should they just be put in this week’s recycle bin along with this week’s papers?

In a nutshell this illustrates  an issue every credit union professional will confront in the twilight of their career.  What to do with all the records, memorabilia, recordings and  newsletters one kept of their professional years?

The emotional meaning and possible historical value that caused them to be set aside, will not matter to one’s heirs.  When downsizing, the easiest thing to do with these basement or garage-stored boxes  is to just throw them out.

But might these individual and industry documents, newsletters, and recordings be valuable to future researchers seeking first hand accounts of credit union history and critical events?

Without an ability to easily access historical records–both public documents and private collections–the movement can lose touch with its past.  Most importantly personal records can help future generations appreciate the “human capital” that laid he foundation for today’s system.

One CEO’s View Why History Matters

“I wish I had kept the phone numbers and emails of CEOs that are now gone from view. Ex-CEOs 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

This valuable, vital role is one the Credit Union Museum is expanding through its archiving and library functions.  This effort warrants everyone’s support, especially those wondering what to do with their personal archives.