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.

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.

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!

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 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.”

I Wish I Thought of This Tag Line

“When we lose small, we lose big”

This phrase is not about the continual decline of smaller credit unions via merger and the lack of new charters.

Rather it is the advertising lead for Goldman Sachs 10,000 Small Businesses initiative. This is an investment to help entrepreneurs create jobs and economic opportunity by providing greater access to education, capital and business support services. The firm states more than 9,700 business owners have graduated from the program across all 50 states in the US, Puerto Rico and Washington, D.C.

A Simple Cooperative Counterpart

Is it possible for the cooperative system to emulate these “small,” bank-supported start up efforts by repurposing charters under new leadership when incumbents give up? Why not identify groups in the community willing to bring fresh passion and ideas to the existing charter framework?

Despite the pandemic, new business startups are booming. On the other hand, 200-250 smaller, decades-old credit unions close each year. There was only one new charter issued in 2020. The NCUA approval process takes years.

One “big” loss is that credit union entrepreneurs are unable to be partners with local business enterprises pursuing the American dream. More consequential, without the energy and innovation from startups, the ultimate BIG loss could be the ending of the unique cooperative financial system.

Credit Unions: Two Members Debate Cooperative Democracy

Freedom and democracy. Most believe these two concepts are inseparable. How could any society be considered free if the people do not have a real say in how they are ruled?

Government operationalizes these two ideas. There are multiple theories (conservative, liberal, libertarian, et al) and personal views on government’s role and authority.

Combined these foundational ideas are both powerful and fragile. However, current and historical events demonstrate the need for “eternal vigilance.”

The ritual of inauguration, the peaceful transfer of power and leadership changes, is the outward sign of the democratic covenant between citizens and their government.

Credit unions were conceived on these two foundations. Freedom means the opportunity to control one’s resources in community, to enhance economic opportunity. Especially in a market economy dominated by large private firms pursuing their financial self-interest, not the consumers.

Democracy is how this collaborative alternative to private wealth creation is to be governed. One person, one vote, with leaders chosen from and by the members.

A Credit Union Crossroad?

As many countries have shown, economic progress can occur without democratic government. China is a current example. Democracy is not just a set of bylaws or regulations that automatically self-execute. It is a process administered by those in authority. That oversight can be faithful to the concepts or manipulated while all the time professing democratic values.

America’s credit union system is at crossroads in democratic governance. For annual elections are frequently nothing more than exercises in self-selection by incumbent boards. Voting in mergers is a process manipulated to discourage informed choice let alone active member engagement.

The result is that many large credit union boards govern like self-perpetuating “trustees” as for a hospital, university or other not-or-profit organization. Access to leadership positions is tightly controlled. Institutional and individual success supersede the role of member-owners. Accountability is simply executing member transactions safely.

Recently two long standing credit union members exchanged emails on this erosion of cooperative democracy. One’s concern was the absence of board elections; the second member had just experienced the unanticipated downsides of a merger.

Two Members’ Thoughts on the State of Credit Union Democracy

I was copied on their exchanges which are edited for length.

One Member’s Critique of Board Elections

If the credit union directors were challenged, each would probably explain that anyone can serve on the Board of Directors and that is true. A nomination requires a petition signed by 500 credit union members; a completed application packet (with materials only available on request for a short period of time) and the approval by a “Nominating Committee” whose names cannot be disclosed.

The details and application packet are only posted once a year in January and are removed from the credit union’s website in May. The materials must be submitted to the nominating committee 90 days prior to the annual election which is scheduled in May. This gives the applicant just weeks to prepare for a nomination. The nominating committee then determines the names to put “in nomination”. For years only one name per open seat has been recommended avoiding any elections. From 2004 through 2018 there were only three open seats.

By creating a path riddled with obstacles with no term limits, the Board of Directors has created a culture of exclusion that ensures these same seven individuals will be able to continue sitting as directors for their lifetime while controlling the process for those who may serve alongside them.

A Member’s Cites Athenian Democracy

Last night right after reading your critiques (of credit union board elections), something dawned on me. Would you be familiar with ancient Athenian democracy? I want to test an idea with you.

I was “browsing” – in an old store, in an old town, when I came across a volume entitled The Constitution of the Athenians, written by Aristotle. I remember, vaguely, learning about the ancient world in history class in high school.

I stood there flipping through pages when I came to the chapter on Aristotle’s constitution. I was immediately stunned by the most unexpected aspect of the Athenian democracy. Get this: They did not elect their leaders; they were selected by lot!

Yes, literally drawn by lot. I’m talking about shards of old pottery that were used as tokens to be drawn at random to select the 9 archons. Naturally, my first response was one of utter disbelief that just anybody could be the material of solid leadership for a nation, much less the one system of governance touted as the prototype for modern democracy.

I finally caught onto the idea that it might be safe to regard most people as competent enough to lead. Especially if a lot of other eyes are watching them in a transparent process.

Curiosity drove me to devour the rest of that constitution. Checks and balances were built into that system to prevent the sort of mayhem and corruption one might conclude would be the possible outcome of a system of leadership drawn by lot.

Archons only served certain weeks of certain months of the year, at randomized times. At the end of their one-year term of service to Athens, they were subjected to an audit. Every dime had to be accounted for, and every decision made had to be justified.

Here’s the bottom line: In some 2 centuries that Aristotle discusses he notes that there were only 2 very brief periods of corruption, largely due to these systems of controls which he lays out in exquisite detail.

So, I have to wonder… if such a system could work for centuries, where democracy was first tried out on live subjects, then could it work for a credit union.

How would a credit union apply these procedures?

An outside auditor would draw however many names to fill the board, all performed in front of a live membership audience (even by Zoom if necessary).

We would select persons for the board to serve for certain periods, but no one would know exactly who, when, or in what order. This would prevent anyone from taking deleterious actions, since other board member (also randomly picked) would be relieving them next, whose duty would be to check that everything was in order upon their taking their turn at the helm.

Each board member would be accountable, individually, by way of a public audit of their activities during their staggered and unpredictable periods of duty.

Any dealings with other organizations — such as potential mergers, e.g. — would be open to question and discussion at that time.

The key is that members of the CU could only serve ONCE, and only for a limited period of service.

Term limits would prevent endless manipulation and personal betterment on the backs of members of the coop. The end of endless terms. The end of non-diversity, since board members will be chosen at random from applicants desiring to serve. The end of unilateral and secretive decision-making without membership input. Those self-serving possibilities stand little chance this way.

I believe this model has a chance of working. At the very least, any alternative system to the current approach would be a welcome improvement.

PS As an interesting aside, recent research into Koine Greek seems to indicate that the word democracy does not mean “the people rule” as is often purported. It more accurately appears to mean “the power of the common people” — and note that the word common is essential here. The word democracy intends all-inclusiveness, and I strongly feel that this point is perfectly relevant to cooperative systems of governance.

The First Member Responds

The “bottom line” is simple…the credit union is not bound by anything, so the directors operate their credit union like the Politburo. The NCUA provides broad guidelines for elections that would provide each of the over 1 million members an opportunity to serve in a board position. Instead, the credit union has chosen an election path that makes it impossible for anyone, other than the incumbents to serve. Consequently, you have a board made up of individuals who have served for over 20 years and will never give up their seats. The most recent vacancies were a result of death and illness.

The Proponent of Cooperative “Athenian” Democratic Reform

You are right; perhaps the board is not required to perform its duties in any particular fashion. But what sort of model would one use to ensure that members will never again be abused the way they have been historically? My ideas are an attempt at implementing democracy, albeit in a manner unlike what passes for democracy in the world today.

Judging from the lukewarm response, I’ll take that as a cue to push this no further.

The First Member

My lukewarm responses are based on the fact that fighting this is an uphill battle. Personally, I will continue to push. The best way to ensure that members will never again be abused by a group of leaders who value their power over diversity and democracy. That’s my objective.

My Takeaway: Term Limits

By law NCUA board members are limited to one term, a maximum of six years. Or until a successor is appointed. All three board terms are staggered.

Is NCUA’s Board structure an application of Athenian democratic governance described above? Should term limits apply to credit union boards? What is the role of “common people” in a cooperative organization?

FOM: a Regulatory Vestigial Organ

NCUA and a few state regulators still profess fidelity to the field of membership concept. Credit union competitors love the idea as a political attack weapon.

The first credit unions were begun with open, community service areas. Only later were specific FOM requirements introduced by law.

Now the last bastion of this formerly sacred concept, is getting a new charter. NCUA’s process is one of attrition.  Few applicants survive the regulatory obstacle course; most give up.

Bureaucratic instincts die hard. The impulse to stretch the process interminably is because it is somebody’s lunch pail .

I was reminded of this anachronistic obsession by a CEO’s reaction to FOM commentaries on NCUA’s recent “updates.”

“Depending on your point of view, these are trade groups guarding the gates like an old dog tied to a tree; or the NCUA winning a shadow boxing match with banker’s lobbies swinging at ancient windmills. It’s a time of political theater where trades and regulators prop up their dues.”

Everyone Is Welcome

A second reminder was this website:

The Largest Credit Unions Anyone Can Join

This website, Deposit Accounts–“a different kind of bank account comparison site”–is apparently supported by Lending Tree. Under each credit union name is the link “how you qualify” describing how anyone can join.

The list ranges in size from Cadets FCU in Buffalo, NY at $14.8 million to PenFed in VA at $26 billion. Some are federal and some state charters. All have a member option open to anyone.

The purpose of the listing is described as follows:

Overview of the All-Access Credit Union List

The list is now updated daily. By default, the list is ordered based on asset size. Click the column title “Credit Unions” to order alphabetically or “Branches” to order based on the number of branches.

Click on the name of the credit union to visit our hub page for that credit union. The hub page lists all of my blog posts for that credit union. It also includes the credit union rate tables, financial health, branch locations and readers’ remarks.

A Reminder

Before deregulation credit unions would frequently use the phrase, “my members,” to assert, and no one else’s. Today members have choices even among credit unions. These listings remind us that credit unions succeed not simply by whom they serve, but how they serve their member-owners.

The Ship’s Captain Surrenders

Flying to Japan in April 1970, I had two days to find off-base housing for my family before beginning sea duty on the Windham County LST 1170. The ship left Yokosuka Naval Base to join a small task group in Operation Golden Dragon.

Golden Dragon was a joint military exercise with the South Korean navy off the coast of Korea. Our LST’s tank deck was filled with Korean marines, landing craft, trucks and tanks for amphibious landing drills.

As we crossed the Sea of Japan, the ship’s captain, CDR J. P. Mann, reminded us of the January 1968 seizure of the USS Pueblo (AGER-2), an intelligence gathering ship. Captain Bucher and his crew of 82 were held for eleven months before release.

Our captain told the officers in a wardroom meeting that should there be any threat of North Korean intervention, we should know he would never let his ship be captured, whatever the circumstances.

That was my introduction to how this commanding officer understood duty and our collective obligation. Growing up I had watched the WW II television series “Victory at Sea” with its portrayals of the Pacific island-hopping campaigns. Now it was real life.

Credit Union Duty

There are three pillars of cooperative duty:

  1. The trust, loyalty and support of the members
  2. Leaders who take the fiduciary responsibility managing their inherited legacy to heart
  3. An effective networked collaborative support system including sponsors, joint ventures, supervision and collective resources.

If members lose confidence, leaders shun accountability, or supporting organizations forget who founded them, the cooperative model will slowly decline in relevance.

All Three Pillars Weakened

Two back-to-back emails from members about a current merger vote suggested that all three elements of duty are lacking in this proposal.

One read in part:

“I’ve learned a lot about credit union mergers from you. Curious if you have an opinion about the merger of Kinecta FCU (formerly Hughes Aircraft Employees FCU) and my credit union Xceed Financial/XFCU (formerly Xerox FCU).

Based on online reviews of Kinecta FCU, I voted against the merger. As a former Xerox employee myself, my father worked for Xerox in Rochester’s Xerox Square for 30 years I hate to lose the affiliation of what’s left of my Rochester focused credit union.”

The second was a comment on my blog, “Should a CEO’s Last Act be a Merger,” published August of 2020.

“Is there any organized attempt among members to oppose this merger?

I have been a member of Xceed for over 25 years and have been very satisfied with the institution.

I was also a member of Kinecta from 2002 until I closed the account in 2017 due to them nickel and diming me with fees that were often worse than the big banks, and horrible customer service.

In 2014, Xceed gave me a substantial personal loan, right after Kinecta rejected my loan application.

I have no desire to go back to Kinecta’s fees and horrible customer service and will likely close my account if the merger goes through.”

Until these emails, I had not seen Xceed’s Member Notice of December 30 requesting member approval for the merger. Reviewing this Notice confirmed the issues in my first blog. For this event is nothing less than giving up the ship. This sale of long-standing member relationships, loyalty and common resources by those in authority undercuts all three cooperative pillars.

Xceed’s Leaders Surrender

Voluntary mergers require that members vote to approve closing their charter. No minimum participation is needed. A simple majority determines the outcome. Each member has one vote regardless of account size or length of membership.

To properly make this voting decision, members should have sufficient information to exercise an informed choice. This Member Notice is woefully deficient in describing why the abandonment of this 1964 charter is necessary.

Some of the questions that should be addressed so Xceed’s 48,500 members can make a knowledgeable decision about management’s proposed “surrender” include:

  • Since members are turning their long-standing relationships to an unknown management team and board, why is no information on these individuals provided?
  • If Kinecta is the chosen successor, why is no data about their past and present financial performance, current business model and future plans given?
  • If “enhanced convenience” is one of the reasons for merger, how does adding 23 Kinecta branches, all in Southern California, help Xceed’s members in their eight locations in New York, New Jersey and northern California?
  • If Xceed’s employees and branch network are integral to member value, why were employees given no post-employment commitments and all branch locations now “subject to business necessity?”
  • Xceed’s net worth ratio is 20% higher (10% versus 7.9%). Why are the members’ $94 million reserves given to the “continuing credit union’s” control and they receive nothing? Not even a token homage for their $2,000 individual pro rata value?
  • If merger costs (contract cancellations, core conversions, etc.) are so great that transferring Xceed’s $94 million equity “will not result in a material increase” in Kinecta’s 7.9% net worth ratio, shouldn’t these new costs be fully disclosed?
  • If “better pricing, additional products, lower operating costs” will result in “lasting benefits” why is no single fact or comparison of existing fees, savings or loan rates provided to support this promise? What is the evidence of Kinecta’s superior member value?
  • What is the basis for five senior employees receiving a “possible maximum amount” of additional compensation of $3.5 million while giving up their leadership roles and responsibility for future performance? What is the rationale for the CEO gaining $1.5 million in added compensation above that earned by staying on the job? Is this a conflict when senior managers negotiate their own benefits and do not provide any for members?

The Record of Xceed’s Board and CEO

When asked to approve a merger, members should have factual information not merely rhetorical promises of a better “low-cost” future. Lack of facts suggests the merger tactics have not been thought through.

Performance data is especially important in evaluating the marketing clichés and future hopes offered in the merger Notice.

The track record of Xceed’s leadership is one of continuing decline. The past five years show a compounded annual (CAGR) asset growth of negative (-0.67%) per year. The CAGR for the CEO’s 14-year tenure is 1.39%, less than a quarter of the industry’s 5.77% annual growth. This 1.39% long term growth includes five mergers that added $200 million in external assets and over 30% additional members in this time frame.

The September 2020 financial report shows a year-to-date loss of $1.7 million versus a $2.5 million gain for the same nine months in 2019. The members are already “voting” with their feet: over 4,000 (almost 8%) have left the credit union in the 12 months ending September 2020.

The board and management responsible for these trends state their future roles as President of Kinecta and two directors will “help ensure members have a voice.” What support could this “voice” be in light of their own abdication?

Xceed’s CEO provides members with the criteria they should apply in voting on this proposal. In a 2010 Credit Union Times the CEO wrote:

“At the end of the day, credit union mergers must be based on what’s best for the member (of both credit unions). At Xceed FCU, although we operate across the country, we wouldn’t merge a credit union just for the sake of expanded asset size.”

She continues: “Mergers call for serious consideration and although I appreciate the unprecedented difficult operating environment, we find ourselves in today-let’s continue asking the question “What’s in it for the member?”

Kinecta’s Track Record of Size and Performance

Since Xceed’s summer 2020 announcement, this combination has been justified by saying larger size will bring better value. As presented in the Notice:

“The combined credit union, and consequently the members will benefit from the economies of scale (including a combined entity totaling approximately $6 billion in assets and approximately 300,000 members) translating into lower operating costs by allowing such costs to be spread over a wider membership base. . .this merger (will) create a larger credit union that will be in a strong competitive position to offer members greater value than they have today.”

Kinecta’s record of its “competitive position” suggests that there is little relation between performance and size in this organization. The following shows long term and more recent trends in Kinecta’s asset ranking. It continues to fall even though it has been in the top 100 listing throughout this listing.

1978: Hughes FCU, #3 of all 12,759 FCU’s; no state cu listing available
1995: Hughes FCU, #9 of all 12,107 credit unions
2005: Hughes FCU, #16 of all 9,062 “ “
2015: Kinecta FCU, #34 of all 6,284 “ “
2017: Kinecta FCU, #40 of all 5,815 “ “
2018: Kinecta FCU, #43 of all 5,482 “ “
2019: Kinecta FCU. #47 of all 5,349 “ “
9/20: Kinecta FCU, #49 of all 5,244 “  “

This fall from #3 to #49 means Kinecta’s performance is not keeping pace with its peers. In 2010, Kinecta attempted a merger with NuVision using a two year trial run with a shared CEO. After reporting a $30 million loss in 2011, the effort was ended.

As of September 2020, Kinecta’s 2.74% operating expense to average assets is lower than Xceed’s 3.59%. But size does not automatically create better member value. Together the credit unions report losing 16,000 members in the past twelve months. Kinecta’s 12,000 drop is equal to almost 5% of its total from the previous year.

These declines are not a sign of member confidence. Member value depends on the business model, not the institution’s size.

Members Told to “Abandon Ship”

The two emails above suggest that members are disheartened as they are asked to leave the self-help craft in which they placed their trust, loyalty and belief for six decades. And how must they view the ship’s captain rewarding herself and the senior officers after bailing out of future responsibility.

With so many unanswered questions, Xceed’s members should vote No.

Management’s proposal to sell their cooperative’s future to an unnamed board, an unknown leadership group and then rewarding themselves with additional millions in compensation is a failure of leadership. A violation of duty.

If a No vote prevails, this $3.5 million dollar payoff plus the savings from added merger expenses, should be enough to find the right crew to set a better direction going forward.

Underwriting Cooperative Designs

The list of the top 100 US cooperatives by total revenue lists only five credit unions.

Do you know the co-ops operating in your communities? How are credit unions supporting cooperative solutions especially with needed, local  startups?

A proposal  from Finland where 90% of the population belongs to a co-op

It would be fair to say that the American credit union movement was born from a unique way that Edward Filene did charity. He helped reduce obstacles people face when they try to help themselves by setting up cooperatives. As it became harder and more expensive to start new credit unions, this tradition started to fade away. It could be more complex for credit unions to help people set up cooperatives, other than credit unions, because it requires different expertise. But I hope credit unions would ask themselves – if we are not carrying on Filenes distinctive civic tradition of helping start new coops, who is? 

It’s common for credit unions to donate to food banks and other local charitable efforts.  

What if some of those donations would be used to give food cooperative coupons/vouchers to credit union members who are struggling economically? Ideally the food cooperative would also provide opportunities to get further discounts by volunteering to help run the business, as is common in grocery coops. 

I think many would find this sort of mutual self-help more dignifying than being given food from a food bank – not that there should be a stigma in doing so. Perhaps especially men who are reluctant to get assistance would find this psychologically more helpful. Abstract models of comparing the logistical cost-effectiveness of providing food through food banks or food cooperatives can’t capture this difference. But can credit unions? 

It could be used to demonstrate the cooperative difference of credit unions in a way no advertising campaign could. The Open Your Eyes campaign remaining budget was $50 million. What if there was an equally large campaign, where 5 million credit union members would use a $10 coupon in a new cooperative business?

It doesn’t have to be limited to food cooperatives either. Maybe a couple who open up a joint-account could be given a pair of movie tickets that could be used in a local cooperative cinema. The possibilities are endless.  

Leo Sammallahti

The Problem We All Share Part III: Addressing the Problem

A Solution: Open Up Market Participation and Transparency

I believe more open competitive forces must be added to a Board’s decision to give up their charter. All merger intentions should be announced in a public notice so that any interested party is able to participate when a board decides to end its independence.

For example, why should Post Office in Madison or Sperry Employees in Long Island negotiate their members’ future in secrecy and then announce their decision without other area credit unions able to “bid” for these long-standing, local, well-capitalized ”franchises?”

Why not give members a real choice of a convenient and familiar credit union as well as one that is remote, digital only, and with no connections to the community?

Bringing more market forces could add better options for members. If two large billion-dollar credit unions want to merge locally, why shouldn’t a large credit union from outside the market be able to participate and preserve a real choice for members?

If the members are informed by an open process, they are more likely to support the board’s recommendation. Now they are forced into a combination they know nothing about and where the results are approved by only a very tiny minority of members returning the requested mail ballot.

Mergers that Enhance Safety and Soundness

Opening up the merger process would make the credit union system more transparent, responsive and relevant for members and their communities. Facts and plans would have to be laid out, not merely bland marketing assurances of “ a better future.”

Credit union safety and soundness would be enhanced because members can make an informed choice. Interested credit unions must take their time to present a relevant option. Token payouts of members’ equity to achieve a positive vote could be replaced by considered bids for the credit union’s real value, including good well.

As presented in Part I, PenFed’s five-year performance has not been enhanced by its merger-growth efforts. Its asset growth rate is half that of its peers; expenses are rising and there are no obvious economies of scale. Asset quality challenges have heightened. There is no evidence members see better value. Member relationships are declining. PenFed’s ROA and asset growth increasingly depends on acquiring other credit union’s net worth. Mergers are disguising its underperformance and slowing internal growth.

Even more pernicious is that PenFed’s mergers have eliminated 20 credit union boards of directors, CEOs and senior management teams. Twenty seeds of future innovation are gone. Multiple long-term relationships with local communities are broken. Members’ loyalty is discarded. None of these outcomes enhances the cooperative system’s financial diversity or soundness.

Transferring the financial equity from generations of members to a board and senior management with no connections to the community’s surplus further removes members from their cooperative creation.

Directors’ view of their responsibility changes in mergers. Instead of acting as stewards of a legacy they inherited, they become deal makers. They routinely ratify payoffs to other credit union’s directors and employees as just the “the art of the deal.” Values be damned.

In the end, the current secret negotiations corrupt both credit union buyers and sellers. And in so doing, the cooperative model.

The Problem We All Have

The current merger practice promotes the privatizing of members’ common wealth and the degrading of credit unions’ role in their communities. Because participation in voting is so minimal, members are left with the feeling they were not informed, or maybe even tricked. The experience is no different than when a bank is sold. Instead of being the alternative to for-profit capitalism, the industry is becoming that which it was supposed to replace.

There are two traditional approaches to system problems. The first is, let the “free” market work it all out. Give the forces of competition loose rein so the magic of the invisible hand can create the best outcome. In the end, all will be right. Winners take all.

The second is that government must step up to regulate abuses, enact better rules and enhance its supervision of the current practice of routine signoff.

But I recommend a third solution built on cooperative principles. Let the members decide. One person, one vote. Put their interests truly front and center.

There are multiple current merger practices that would give member owners the information to have a real choice about the future of their credit union. Working with the industry, regulators should design a truly “cooperative” process that enhances members’ involvement and in so doing, their commitment to the outcome.

The revitalized process would seek traditional financial and operational proposals combined with the important qualitative values credit unions promote: community connections, local focus, giving back to members, and demonstrated track records.

For many Americans, the lack of trust of those in authority is based on their perception that leaders place their interests above their own and the community’s broader shared values. PenFed is a prime example of an outside organization hollowing out local communities by cashing out its leaders.

The social trust on which the cooperative model exists is enhanced by a more visible and transparent process. The public support for the industry’s tax exemption is upheld. The movement will be guided by the shared set of norms and values that created it.

Going from Spectators to Engaged Co-op Citizens

With over 99% of credit unions in NCUA’s lowest risk CAMEL ratings, it is easy to lose sight of the interdependence and cooperation on which the cooperative movement is established. The common good slowly recedes to second place versus individual institutional success.

Market forces are not motivated by the common good or subject to moral limits. Credit unions were to be a counterexample to Mark Twain’s assessment of human motivation:

“Some men worship rank, some worship heroes, some worship power, some worship God and over these ideals they dispute and cannot unite–but they all worship money.”

Current merger excesses are destroying the moral capital created by movement’s founders. Instead of active citizens we become spectators or voyeurs hoping the abuses will go away or maintaining that this is not my problem.

A Renewed Movement

However, movements are not simply a one-time past occurrence, but rather something we can all participate in our own time.

Individual economic isolation and the power of large monopolies which gave rise to the progressive movement at the turn of the 20th century is as pervasive today as 100 years ago.

Some label credit unions as an industry. They are no longer disrupters of the status quo, but a mature segment of financial services with resources, opportunities and influence to play like the big boys. Movements are a moment of history, not the current reality they argue.

Both views can be true, but when movement is left out, credit unions become identified with the status quo and its problems, versus innovators of trusted value to members.

In its finest expression, cooperative design is an ongoing experiment to address the shortcomings of unfettered capitalism. It takes only a few leaders to stand up for change to convert perverse merger activity to a more productive outcome for members. Who will have the foresight and courage to push this to the top of the movement’s agenda?