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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