What is the Value of a Member Account?

This week my wife received a mail promotion from BB&T bank inviting her to open a checking account.

If she chose their Elite Gold product with either a $35,000 deposit or direct deposits totaling at least $3,000 per month, than they will pay a bonus of $600 into the account.

The only time limit is she must leave the deposit for 75 days or have the direct deposit(s) established in the same time frame.

Acquisition Cost and Future Value

Paying cash to incentivize new account relationships is not a new strategy. USAA regularly solicits my credit card business with a $200 cash offer.

But the amount of $600 seemed to be unusually high. Why?

I don’t know the answer. Is there a new awareness of the value of a consumer’s payment account in a low interest environment? Or is this an effort to preempt Fintech deposit acquisitions? Does the amount reflect a targeted marketing strategy for a specific demographic, such as retirees? Or is it just paying the present value of a long term customer relationship for the bank? Is the $600 based on documented acquisition costs from other marketing efforts, which it will now amortize over the estimated life of the relationship?

The Value of Members

What the offer should remind credit unions is the value of their checking account relationships, especially those with direct deposit. There is unrecorded but real value, from those members whose loyalty often goes back decades. These core deposit relationships underwrite much of the rest of the credit union’s activity.

If you have a 10,000 member credit union half of whom have checking accounts with direct deposit, according to BB&T that is $300,000 of real value to the market. Or to be more analytical, what is the prospect of BB&T’s ability to earn more than 1.7% ($600/$35,000) if the average relationship from this marketing remains with the bank for at least one year?

Even more fundamental, should credit unions still require a membership fee?

Part II: The Half-Billion Dollar Wealth Transfer in the SchoolsFirst FCU Merger

Why Should Credit Unions Care?

Read Part 1 here.

Mergers of sound well run credit unions are a fact of life in the cooperative system.  So why should the $2.1 billion mega-merger of Schools Financial and the $16.1 billion SchoolsFirst be an issue?

I believe the circumstances and specifics of this merger highlight in ways that smaller combinations do not, the threat these transactions represent to an independent system of cooperative financial institutions in the American economy.

Credit unions have a federal and many  state income tax exemptions because they are supposed to be creating an alternative to the purely for-profit practices of other consumer options. Cooperatives are designed around certain premises including self-help, self-finance and self-governance.  Member-owners are loyal, over and above the economic benefits, because the institution belongs to them and  future member-owners.

Once these fundamental facts are debased by agents who pay lip service to principles but act from personal and institutional self-interest, then the boundary lines between for-profit and coops is blurred, if not lost.

Factual Basis Missing From Merger Process

While not entirely unique, the size of the SchoolsFirst merger dramatizes the failures of the current merger process to disclose and to protect members interests.  A few of the critical omissions are:

  • The failure to mention any aspect of the approximate $540 million wealth transfer;
  • The absence of any description of the significant losses to the community in terms of business relationships, the setting of local lending and investment priorities and the consequent reduction in civic leadership;
  • The complete lack of any specific product, service or fee comparisons and changes that would be coming-whether gains and losses;
  • The conflicts with the senior management and the board negotiating their own ongoing roles and compensation versus the absence of any commitments for continuing or new services, programs and products from which the members would benefit;
  • The lack of any disclosure of alternatives considered and, if evaluated, why this merger was the option chosen.

These significant information gaps and subsequent post-merger announcements suggest a pattern of deception.

Given the public record and limited details provided, it is hard not to conclude that this combination is motivated more by the personal ambitions of two CEO’s and their boards, not from promoting the best interests of School Financials’ members.

Members Given 49 Days to Decide a Charter Cancellation

Today a new charter takes years, volumes of paperwork, financial  projections, organizers’ resumes,  and millions of donated capital to open the doors of a de novo credit union.  It seems contradictory, even absurd, that a CEO and board should ask members to give up a charter in less than 60 days from the public notice of October 23 to the December 12 final vote.  The timing prohibits any meaningful discussion.  Surely the process to surrender a charter granted and successfully managed since 1933 should warrant greater member dialogue and public scrutiny.

Lessons Learned

As other CEO’s and boards read about mergers similar to SchoolsFirst, these examples incentivizes behavior that contradicts both faithful stewardship and the priority of members’ wellbeing. Consultants now openly solicit engagements to show how CEO’s can enhance their benefits from mergers. Credit unions market their willingness to bargain with CEO’s where “like seeks like” to facilitate the sale of their leadership responsibilities.

Boards begin to feel  they must play the same game to protect their options or to preempt competitive intrusions in their markets.

The consequence is that instead of creating a cadre of cooperative leaders driving innovation for member benefit, the system is spawning a capitalistic, robber-baron CEO style that elevates institutional growth over member value.

These self-serving mergers  promote a stunted view of what cooperative leadership and collaboration looks like.  They adopt a simplistic view of success and a Neanderthal’s approach to change.

Cooperative growth opportunities are not being enhanced.   Rather myriad options for future innovation are shut down and the industry becomes more heavily concentrated in a small percentage of large institutions.  Industry risk becomes more concentrated.

The system does not grow its reach through mergers; it only reduces the diversity of credit union institutional models.  During the past decade the number of credit unions declined by 2,400 (virtually all by mergers) and shares grew at only  5.7%, an annual rate characteristic of a mature, if not stagnant, system.

The moral capital that the cooperative system created over the past century is being squandered by short term behaviors from executives unwilling to pursue long term member value creation.

The Arguments Back

  1. Everybody does it. Wrong, not everybody.  And if that were true, we should have had a much more public and active bidding process for not only this merger, but all mergers.  Instead CEO’s selectively seek  the best option for themselves, privately discuss the potential, and then negotiate in secret with the board’s blessing or indifference.
  2. The regulator approved this. Therefore, it must be all right.   Correct, NCUA and state regulators routinely sign off on actions even when shown that they violate any objective test of member benefit or due process.   The fact that the regulator can be, and often is incorrect or unknowing in its actions, does not mean an action is proper.

As in its financial management of credit union’s cooperative resources, the NCUA board’s oversight of mergers is squandering an inheritance that it does not value nor understand.

Instead of honoring the unique member-owner design and being the architects of a cooperative system, the NCUA board sees itself as just another banking regulator.

The NCUA’s merger process undermines any meaningful democratic choice for member owners; in fact, it promotes corruption by endorsing the self-interest of the initiators of these transactions.

Member voting is nothing more than a sham. A merger proposal has never been turned down by members.   This democratic fig leaf can no longer hide the naked ambition that animates these events.

The NCUA board lacks any respect for the member-owner cooperative system.  It does not grasp how credit unions differ from other financial institutions.   Even when given detailed examples of improper and self-serving mergers, the agency at the highest levels is unable to see the mistakes of its own making.

In sum, two wrongs do not make a right.

  1. I agree but these mergers are just the “way the world works.” This argument  reminds me a line from the play, Just Call me God.  In it the character observes, “The one thing I know about power is that the good never seek it.”

But the reality of the cooperative model is that one is not asked to stand alone.  The whole model depends on the realization that each credit union member, board and CEO is part of a whole.   That together, we uniquely contribute to a greater good.

We succeed not by acquiring but by collaborating, learning and then helping each other.

Similarly, this distortion of the cooperative system, will be ended when leaders say enough is enough.   Just as happened in the conversion from coops to mutuals and then to for-profit charters in the 1990’s.

Next Steps:

This SchoolsFirst merger is a prime example of how the community’s future is jeopardized when an individual’s ambitions or a credit union’s claim of superior capability is given priority over cooperative value and design.

It poses the question whether the cooperative system can correct its own excesses.  Will the future evolution just be a relentless pattern of bigger buying out the smaller?

This merger exposes multiple institutional failures within the cooperative system including: individual credit unions with leaders converting cooperative design to commercial ends; regulators who grasp neither purpose nor practice when faced with challenges; and,  fellow travelers trying to earn a living seeking the next big wave to take them to shore.

These factors suggest that  change may have to come from outside the system should credit unions be unable to learn from their own experience.   The fourth estate is always looking for aberrant behaviors; competitors seek examples of cooperative hypocrisy; and congress protects the public interest by highlighting the other party’s administrative failures.

The Action Called For

However, this charade of mergers ends or is transformed so members actually received the benefit they created, this is an important moment for those aspiring to future cooperative leadership.

A participant once caught in a similar historical dilemma commented: “I didn’t do anything wrong; But I didn’t do anything right.”   The difference is courage. Do believers in the specialness of cooperatives still exist?


Part I: The Half-Billion Dollar Wealth Transfer in the SchoolsFirst FCU Merger

Note: As background for this article, please see previous posts: How Can This Merger in the Members’ Best interests and What Credit Unions Can Learn from Bank Purchases

Largest Ever “Special Credit Union Dividend” of $540 Million Paid to Members on January 1, 2020

In a December 26 release to the credit union press, Schools Financial CU announced it was paying its members a special pre-merger dividend of $4 million before it completed combining with SchoolsFirst FCU on January 1, 2020.

What the announcement omitted was that the January 1, 2020 merger will also transfer over $540 million of the reserves and net worth of Schools Financial members to the Board and members of SchoolsFirst FCU.

Each Financial Schools member’s pro rata share of this transfer is  $3,420 versus the token $26 they were given upon approval of the merger.

This is the largest wealth transfer by the members of one credit union to another credit union’s control. The use and disposition of over a half billion dollars of common wealth created by the former member-owners of Schools Financial CU since 1933 is no longer theirs to determine.

How the $540 Million Wealth Transfer Occurs

In this merger of two sound, well-run credit unions, the terms called for the entire equity of Schools Financial CU to be transferred at par. The estimated year-end net worth based on the credit union’s announced 2019 ROA of 1.73% is $270 million. This becomes “equity acquired in a merger” and is added directly to the net worth of SchoolsFirst FCU.

In addition, under the accounting standards codification for “business combinations,” Schools Financials’ merged assets and liabilities assumed by SchoolsFirst are recorded at their fair values. To simplify the numerous calculations, prior year end audits certify that the assets of Schools Financial when “fairly presented” exceed the liabilities by the amount of the net worth, which would be the estimated $270 million reserves at December 31, 2019.

This excess of assets over liabilities acquired is recognized as income on the books of SchoolsFirst FCU. It is called a “bargain purchase gain” or “negative goodwill.”

The merger of two stable credit unions creates a wealth transfer similar to a credit union which makes a “whole bank purchase.” Unlike a bank purchase however, none of the shareholders’ equity is paid to the member-owners whose loyalty and patronage created the wealth. Nor is there any additional amount, that is a “premium” over book value, offered as would be expected in a purchase of a sound bank.

The Duties of Credit Union Directors

The fiduciary duties of credit union directors, established by NCUA rule and standard legal practice, are summarized in the following article:


The five key legal concepts relating to director responsibility and liability are excerpted in part below:

    1. Business Judgment Rule

The business judgment rule dictates that a court must presume a director based his or her decision on an informed and honest belief that the decision was in the best interests of the institution and members… To receive the business judgment rule’s presumptive protection, directors must inform themselves of all material information and then act with care.

    1. Duty of Care

Fiduciary duty of due care requires directors to use that amount of care which ordinarily careful and prudent persons would use in similar circumstances and consider all material information reasonably available when making business decisions.

    1. Duty of Loyalty

This duty forbids corporate directors from using their position of trust to further their own private interest (i.e. “self-dealing”)… Additionally, directors are required to act in an “adversarial and arms-length manner” when negotiating transactions between the corporation and the director.

    1. Duty of Good Faith

Breach of the duty of good faith occurs if the directors consciously and intentionally disregard their responsibilities, adopting a “we don’t care about the risks” attitude concerning a material decision. Moreover, deliberate indifference and inaction in the face of a duty to act epitomizes bad faith.

    1. Waste

Waste is defined as a director irrationally squandering asset. To prove waste, the plaintiff must establish that an exchange was so one-sided that no businessperson of ordinary, sound judgment could conclude that the credit union received compensation.

I believe each of these standards is relevant when assessing this transaction.

What the Members of Schools Financial Were Told About the Merger

The primary document provided members was an October 23, 2019 letter to members from the Board Chair. NCUA did not post the financials referred to in the letter so it is not clear how the financial combination was presented, or even if it would have been understood by a member if received.

The Chair’s letter states the merger was a result of a mid-2017 board decision to refocus the credit union’s “efforts upon educators on a state-wide basis.” One public announcement since that mid-2017 date was on January 22, 2019 in which the two credit unions in a joint press statement announced their intent to merge. The Chairman’s announcement of the member vote in October was the implementation of this January decision.

The letter to members is very general in its justifications. The most specific language was two pages of detail about the potential increase of compensation to be received by the CEO ($8 million of the total $9 million described) and five most senior managers as a result of the merger.

The letter did not state:

  • That the credit union’s accumulated wealth of over half a billion dollars would be transferred to another credit union’s control and use;
  • That the credit union’s resources would now be controlled by a board of directors for which no information was provided and is located over 400 miles from Schools Financial primary service area;
  • That the operating control of the credit union’s assets and shares would now be under the control of a management team about which no information was provided and which, like the board, is over 400 miles removed from the Sacramento membership;
  • Any immediate changes of rates on savings or loans that would occur as a result of the merger;
  • Any information about ongoing roles negotiated for Schools Financial’s Board of Directors;
  • Any commitments relating to products and services provided by Schools Financial that are not offered by SchoolsFirst such as Banking for Everyone Savings, business accounts or the shared branching outlets-“each to be evaluated to determine whether to continue or discontinue them after the merger;”
  • Any impact on Schools Financial’s field of membership granted by the State of California which according to the September 5300 Call Report covered up to 4 million potential members.

The members were urged to give up their independent charter and the direct control of their credit union’s resources and all future decisions in return for general promises of “improved financial benefits” and “to gain economies of scale to be able to compete with larger financial services companies.”

On this latter point about the benefits of scale, in the year-end special dividend announcement by Schools Financial, the full year’s ROA of 1.73% would be approximately double the industry average and .60 basis points higher than SchoolsFirst FCU which is eight times the size of the Sacramento based credit union.

Subsequent Announcements by Both Credit Unions

After the voting and special $4 million dividend were announced, the following information has been published by the credit unions on their websites after stating the merger was overwhelmingly approved:

  • The annual membership meeting of the newly enlarged SchoolsFirst FCU will be on May 19, in Tustin, CA approximately 430 miles from the location of the former office of Schools Financial CU.
  • The Nominating Committee of Schools Financial met on December 5th (one week before the December 12th Schools Financial member meeting to vote on the merger) and nominated two of the merged credit union board members to their board: Marie B. Smith who as Chair signed the merger letter, and Theresa Matista, another current board member approving the merger. The annual meeting notice also stated: “The election will not be conducted by ballot when there is only one nominee for each position to be filled. There will be no nominations from the floor.”
  • In a post-merger web announcement titled: An Exciting Time for Schools Financial Members,” Marie Smith, chair of Schools Financial stated: “I along with two other current Schools Financial CU Board Members will serve on the SchoolsFirst FCU Board of Directors. I look forward to our bright future and helping you and your family secure lasting financial security.” Apparently, the Nominating Committee didn’t get the same message for the December 5th nomination described only two board members from Schools Financial!
  • The letter also listed five potential fee reductions such as eliminating $8 incoming wire service fee. The post also reiterated the prospect of “improved savings rates and highly competitive interest rates on loans” but with no specifics.
  • In another section of the web: Returning to our Roots, Schools Financial, a division of SchoolsFirst FCU announces that their FOM is “exclusively open to current or retired school employees and their immediate families,” not the open community charter followed prior to the merger.
  • On the SchoolsFirst website, the FAQ about the merger includes the announcement that the credit union will open a new branch in the Sacramento area in the first half of 2020. But otherwise the credit union twice states, “most things will stay the same,” and again, “all products and services will stay the same.” One way to interpret this assurance is that the junior partner’s product and service profile will be conformed to that of the senior partner.

These after the fact disclosures illustrate the lack of transparency surrounding this $2.1 billion transaction. The assessment begun in May of 2017, triggering the joint merger press release in January 2019, which suggests the board had over two years to evaluate and to negotiate on behalf of the members. Yet the most detailed part of the letter to members concerns compensation to the CEO and senior managers, and no details of any potential benefits or losses for the membership.

Which raises the most important question, what options did the board consider and evaluate for the members’ best interest?

What Could $540 Million Endowment Contribute to the Sacramento Community

Separately from the issue of whether the board talked to or considered mergers with local credit unions such as Safe or Golden 1 to enhance the future for Schools Financial members, is whether the credit union even deliberated investing some or all of the wealth created by the members to benefit the future of the community which created this surplus.

Did the directors consider paying forward the reserves for helping the school districts and communities versus giving half a billion dollars to the control of a board and management whose primary responsibilities are rooted hundreds of miles away in a different part of the state?

What could a half billion-dollar fund do for the needs of the Sacramento educational community?

  • How might it help with affordable housing options for teachers to live closer to the communities they work in?
  • For scholarships to seniors from families that cannot afford to contribute to higher education expenses?
  • For teacher training especially in areas that fall outside the immediate priorities such as the arts, technical and vocational skills?
  • For equipment for schools that are short-changed versus wealthier districts in the allocation of funds for classroom technology or extracurricular sports?
  • For educational programs for those adults striving to get a GED or other certifications?
  • For pilot programs for encouraging and supporting new online educational options?
  • For reducing the college debt burden to hire new graduates for teaching careers so they do not have to worry about paying off loans?
  • For special grants to local community colleges and universities to underwrite innovations in educational experiences and curriculum?

With a 6% grant rate and a half billion-dollar fund, over $30 million could have been donated annually to benefit the community that created, supported, funded and made the credit union a force for good in the Sacramento area.

SchoolsFirst, the fifth largest credit union in the country, had the capital to absorb the credit union which would have allowed the credit union to transfer the wealth for the benefit of the community that created it in the first place. If the rejoinder is that the SchoolsFirst Board can now do the same work, one needs only look at the credit union’s track record to know that that is highly unlikely. For in the 2018 Annual Report, the $16 billion SchoolsFirst reports as follows: “In 2018 we partnered with local, national and global educational and credit union charities to give back in significant ways. We made more than $2 million in charitable donations including donations to local schools and colleges, Children’s Miracle Network, Hospitals, Habitat for Humanity and CUAid.”

Part II of this analysis will be posted tomorrow. It will address why credit unions should care about this wealth transfer and the circumstances which enabled it to occur.

Remembering Long-Time Members

When entering the Navy, the instructor as part of our orientation to military life, said we should join two organizations: USAA for auto insurance and the local military credit union for checking accounts.

His advice has caused our family to use USAA for auto, and later home insurance, for over 50 years.

We receive two bonus checks annually as part of this relationship.

The first for $412 was the annual distribution (dividend) from the Subscriber’s Account, a portion of the capital base for this mutual insurance company. USAA stated that the amount was partly from the sale of their asset management company as well as from their overall net income.

That equates to three to four months of my combined auto/home premium payments.

The Senior Bonus

But there is more to come. The senior bonus paid in mid-February is for those with at least 40 years of membership. It is a partial distribution of the capital in the Subscribers Account held in my name. It will be an even larger payout than the annual dividend based on prior year’s payouts.

A growing number of credit unions are paying special dividends, interest rebates and holiday bonuses to members when 2019’s annual results are well in hand.

One of the vital strengths of the cooperative model is their relationships with their member-owners. These year-end special payments acknowledge the owner’s stake in the cooperative.

USAA’s 40-year senior bonuses show their recognition and the importance of long-term loyalty. Is there a parallel for credit unions in this example?

Peter Pan and Captain Hook in Credit Union Land

James Barrie’s children’s play Peter Pan has become a staple of holiday presentations since it was first staged in 1904 in London. It just opened in Washington. Wendy, Tinker Bell, Peter, Captain Hook, Tiger Lily and the Lost Boys’ feats in Neverland are alive for those who have only seen the TV or movie versions.

The conflict between Captain Hook’s pirate band with Peter and the Lost Boys seems at times too real (walking the plank, if captured) and at other moments simply fantasy.

Peter Pan is the boy who doesn’t want to grow old. Tinker Bell’s pixie dust powers ordinary children to fly to the stars. And Captain Hook while trying to capture the Lost Boys, is always listening for the tick-tock of the alarm clock swallowed by the man-eating crocodile that bit off his hand.

Audiences both young and old are asked to imagine. Moreover, the play’s tension derives from the threats of mortality should the boys be captured, or what would happen if the crocodile sneaks up on Hook unawares.

Plays endure because they embody truths transcending the theatrical story. Who really wants to grow old? Has not a shadow of death crossed every person’s mind at some point? Does the lure of adventure, the dream of flying into the sky, ever end?

Do these theatrical insights have parallels with characters in credit union land?

Captain Hooks Abound

I confess to seeing many Captain Hook figures in credit union land. They hear ticking clocks and spend their lives running from a vicious crocodile. They warn others to flee also. For it is their desire, similar to Hook’s, to subdue the optimism of Peter Pans, and to assert control over their part of credit union land. Here are some recent tick-tock warnings:


“In our industry there is such a short runway—we’re all going to face challenges. . . You have to be aggressive because there’s big changes in banking coming. You have got to get bigger and do it at a decent pace, and you have to look beyond your borders. If a credit union is anti-merger, they’re probably burying their head in the sand. The financial services industry is going to be facing some headwinds in the future and you have to be ready.”

A Board to its Membership:

Your FCU Board of Directors . . .has approved and is seeking a merger . . .It is the role of the board to look ahead and make decisions that we believe place our credit union in the best position to serve you. As we look to the future, we recognize the potential for economic challenges ahead. The last recession was very difficult for our credit union and we are not confident that we could remain well-capitalized through another economic downturn. We believe the time to take this step is now while our credit union remains financially strong.

Two NCUA Board Members:

“To me it’s always interesting to note the credit union community is now approaching $1.5 trillion in assets and we have an insurance fund with $16 billion, $17 billion in it. This is razor thin. There is not a lot of leeway here. (McWatters)


Harper called out the NCUA for tolerating “an uneven regulatory field. After the Great Recession, the FDIC and other banking regulators moved promptly to update and implement their risk-based capital standards, yet the NCUA wants to delay implementation for a second time. . . We know that a recession is coming. We just don’t know when and how severe it will be. That’s why we should fix the roof before it rains by implementing this (RBC) rule at the start of 2020.”

For Captain Hooks the end is around every corner. They preach negativity. It sounds expert, especially when facts don’t support their claims of future insight.

The Peter Pan World View

Like Peter Pan, credit union leaders have a different vision from the Captain Hooks of their responsibility. This is not a world where worries don’t exist; but rather one that believes in the radical, disruptive capabilities of cooperatives. Especially its focus on member well-being.

They know that the work of helping members is never ending and that hardships sooner or later come to one or all. But rather than looking for ways out of credit union land by giving up their charter, or outracing market growth, or emulating competitor’s models, or even hoarding more for future uncertainties, these leaders instead rely on one premise: how credit unions serve members will be the difference that sustains, whatever the economic or competitive climate.

As year-end nears, look for the many stories celebrating the sharing of credit union successes with members, communities and those in need. As the Hooks of the world continue predicting crises if one does not heed their ticking clock, recall the most dramatic moment in the play.

Tinker Bell appears to have succumbed in a fight with Hook and her spirit ended. Whereupon Peter appeals to the audience, breaking the theater’s fourth wall and asking “Do you believe in magic? Let me hear you.” And every time the audience shouts and claps, Tinker Bell recovers and the Lost Boys and Wendy make it home safely.

A lot of hard work goes into the cooperative model, but in the end, success depends on what you believe. The Captain Hooks? Or the many Peter Pans going about their work joyfully, knowing good works are never finished?

P.s. If you want to read about one leader whose tenure embodied the ageless power of Peter Pan’s optimism, read my article on Olan Jones.

The Unseen Cooperative Advantage

It is hard not to feel rushed in the Christmas season. The December countdown of shopping days left reinforces a sense of urgency.

And the year-end looming a week later, brings a set of new goals with deadlines.

Yet the cooperative model rewards the human and organizational virtue of patience. This is a characteristic often found wanting. For the instinct when confronted with problems or deadlines is to “rush to assurance.”

A cooperative virtue

Patience works for cooperatives advantage for at least two reasons. This member-owned financial model is largely exempt from the market driven performance pressures that for-profit and publicly traded companies face driven by daily stock price fluctuations.

If there are difficulties with a product, market, or business strategy, firms are incented to sell out and move on. The market wants performance now, or a firm promise down the road.

Every competitive firm will have cycles of success and shortcomings. The advantage of credit unions should be time to adjust, re-assess and implement options to regain momentum.

Secondly, there is the time value of earning assets. Credit unions have no source of external capital except their insurance pool. As problems mature, more perspective is gained and more paths forward can be identified. Most importantly, the loans and investments continue to generate income.

Two examples of impatience

The “rush to assurance” versus managing with the cooperative strength of patience is seen in the justification for many mergers. Expanded service or lack of succession are often cited as reasons for giving up a charter that will have served generations of members.

To facilitate the merger senior managers negotiate immediate compensation above what they would normally earn by accelerating or increasing retirement plans, actions defended as “retention incentives”. All the legacy of member goodwill, community involvement and local leadership is washed away. Immediate but unspecified benefits are promised to members if they will just vote to give up their accumulated common wealth as recommended by their elected board.

The effort to get to the future faster so senior executives gain more income, coupled with the loss of generations of member and community relationships, will only lead to the demise of the cooperative difference. Credit unions are launched on a belief in relationships ( a bond), but are sustained by relationships confirming belief in the special value of cooperative design.

A second example is the approach to problem resolution. The discovery of a $40 million loss in the CBS Employees FCU or the $110 million dollar write down in Municipal Credit Union in New York are real challenges. NCUA’s approach since the 2008 crisis is to just pay the bill and move on. The result is that problems are not resolved but buried with piles of members’ money. The regulatory circumstances that allowed these situations to go unchecked for years or decades is never addressed.

Cashing out problems when first identified is often the time of greatest loss and uncertainty. Instead of using cooperative time and, if necessary capital, impatience pays out losses, shortcutting patient resolutions. Bad things happen quickly, good things take time.

Progress is problem solving

In both normal commerce as well as crisis, progress is achieved by solving problems. Mergers, initiated by tired leaders or personal self-interest, are undermining the appeal of the self-help cooperative option. Liquidating problems versus developing work out strategies hurts the people credit unions were intended to help the most: the borrowers.

When NCUA liquidated the taxi medallions, they threw the borrowers to the mercies of the market, while spending over $1 billion in cash to pay off savings and borrowings. The members who actually built the credit union with their loans, end up with no options. If cooperatives cannot or will not help members when fortunes turn against them, who will?

Good things do take time. This is a season remembered not merely for a deluge of buying and giving, but also for renewal of purpose and meaning. Fundamental to those latter outcomes is patience. That is the virtue we should value, and practice, especially when leaders urge members to surrender, not pay forward, their cooperative charter whose roots date to the middle of the last century.

How Can This Merger Be in the Members’ Best Interest?

Top 5 managers can gain $9.8 million additional compensation; 158,000 members will have one-time “special dividend” of $4.0 million if they approve merger

On October 23, 2019, the Chair of Schools Financial Credit Union sent a letter to all members saying the board and management had decided to merger the $2.1 billion Sacramento-based credit union with SchoolsFirst FCU($16.1 billion) in Orange County.

The seven-page summary can be found on the NCUA’s website.

CEO could benefit by over $8.0 million

Two full pages are used to describe potential additional compensation benefits for the five senior managers, the bulk of which would go to the CEO. His total of over $8.0 million includes potential severance pay and salary guarantees, a three-year bonus prospect of $1.2 million, accelerated vesting of the existing supplemental retirement plan and an amended split dollar life insurance retirement benefit. These additional payments are on top of existing salaries.

The 158,000 owners of the coop will receive an average of $25 from a $4.0 million “dividend”  paid from their common equity of over $260 million. Using the credit union’s average share balance of $11,453 and the pro-rata table showing payment by average account size, this would equate to a distribution rate of 15 basis points, or 0.15%.

This token “tip” to the members, as an incentive to vote for the merger, insults both their century-long loyalty and their trust in the cooperative.

In contrast to this $25 payment, each member’s actual share of the $260 million equity averages over $1,710. This “book value” does not recognize the real market worth of the credit union if goodwill, market presence and performance were priced in a true arm’s length transaction.

The true market value would be a 150-200% of book for a franchise with its 96-year history.

So why is this merger being proposed? Why should members be asked to give up their collective capital and the legacy of member contributions since 1933? What are they gaining in return, if anything? What other services and benefits will they surrender and what is the greater Sacramento community losing?

The front cover of the credit union’s 2018 Annual Report is headlined “Members First”. The cover has a picture of a couple who have been members since 1986 with the following quote:

ABC10 Teacher of the Month! “The personal attention and family atmosphere keep us banking at Schools Financial.”

This couple have been members longer than any of the five senior management beneficiaries of the merger have worked at the credit union. In fact, this proposed merger places members last!

I believe an objective review of the credit union’s public information describing its unique role and the sparse rationale in the member mailing clearly demonstrate that the only people gaining from this merger are the CEO and his four senior executives. They are receiving increased compensation while at the same time, giving up all the responsibilities of leadership.

What the members lose

The members lose control for how their $2.0 billion in collective resources and $260 million of equity are utilized for their own circumstances. They have no control for which unique products (e.g. a special 7% Banking for Everyone Savings, Senior Savers Club and business accounts) are retained, whether to continue participating in the 5,000 shared branching service centers or even which branches remain open.

Once the Sacramento-based charter is given up, the local community relations with realtors, car dealers, school districts, community organizations and media are now directed by managers located in Orange County overseeing $16 billion in their home market. There is no more local credit union elected leadership accountable for relationships with the Sacramento community.

Here is how the credit union currently describes this leadership in Sacramento:

Community & Education Outreach


Schools Financial Credit Union strives to be an active partner in our community. We recognize that practicing good Corporate Citizenship supports the Credit Union Philosophy of “People Helping People.” Furthermore, we aspire to help raise the overall level of social and economic well-being of those in our community through direct financial support and participation in public service activities, in addition to championing the education sector. The Credit Union is always looking for ways to better position us to reach out and serve — as only credit unions can — those people in greatest need of affordable financial services.

Abdication by the Board

One has to question why, if this project was fully considered, it was not discussed with members in the March 17, 2019 annual meeting. The board has further abdicated its fiduciary responsibility to members providing just 49 days from the mailing of the announcement to the final vote and meeting on December 12. A 96-year-old, member-owned institution dissolved in a two-month process, with the only documented benefits going to the five senior managers.

The Board is charged with representing the member-owners’ interests. This is both a legal and moral role. Nowhere are the actual costs to members of the merger outlined, only the required listing of enhanced management compensation. What we do know is that the board has approved spending at least $13 million to induce members to give up their charter. That action alone seems to be a highly questionable decision and raises fundamental issues of fiduciary accountability.

For generations members gave their financial resources to the board’s care What is most disappointing is that the board’s decision to put the credit union out of business in just 46 days draws upon the members’ longstanding trust and loyalty to follow their lead. This board’s action reeks of betrayal.

The merger rationale

The document used to justify the merger is the 7-page letter to members from the Chair. The key factors cited are the intent to “re-focus its efforts upon educators on a state-wide basis.” The reasons given include the historical loyalty of educators, the value of a market niche for growth and the need to differentiate itself and gain more economies of scale.

Even though School Financial’s state charter reports a potential FOM of over 4 million, it now claims to grow it must merge with SchoolsFirst FCU in Southern California with $16.1 billion assets and its historical roots in Orange Country.

Indeed, the explanation seems to merely adopt SchoolsFirst state-wide strategy not the implementation of an independent judgment by Schools Financial.

Nowhere are the details for how this justification will better serve the interests of the Sacramento-based membership. There are broad generalities about further commitment to member service, providing low cost accounts, long-term stability and expanding “rather than competing with our existing branch/ATM footprint.”

However, all the details are left open-ended about what these changes might be, as for example:

  • The existing branches will remain open for three years unless leases expire sooner.
  • The credit union’s participation in the shared branch will be evaluated later and the participation in the ATM network will be maintained.
  • The retention of federal share insurance reads like the logic of giving the sleeves off one’s vest since that is the case now.
  • All employees are “being offered retention bonuses to help ensure a smooth transition and successful integration”- an amount not disclosed. Of course there would be no retention bonus if the employees don’t support the change, another example of “tipping” interested parties to go along with proposal.

So the letter’s assurance seems to be nothing much is going to change, and if it does, it will be for some undefined future in which the only definite reality is the members will be part of an $18 billion credit union with its main headquarters almost 500 miles away.

There are no side by side comparisons of savings or loan rates, or fees ( one example only) or any other standard performance indicators that would suggest members might be better off transferring the management and leadership of their collective and personal interests to another organization with which they have no relationship.

Reviewing the latest facts

Savings: Different rates reflect different ALM strategies

Both of these credit unions are very successful using any financial performance measures. The differences that do exist reflect the different business models each has developed in their respective markets over the past decades.

For example, the letter says that SchoolsFirst pays its members higher rates on savings as measured by the average cost of funds. This is accurate: 1.05% for SchoolsFirst and 0.54% for Schools Financial through September 30, 2019.

However, the credit unions’ call reports show exactly the same rates on the core accounts, regular shares and share drafts. The difference in cost of funds is that SchoolsFirst has 28% of its savings in higher paying CDs, versus Schools Financial’s 12%. This funding difference reflects the contrasting loan strategies discussed below, in which SchoolsFirst is more concentrated on mortgage loans.

Moreover, Schools Financial provides options not available at SchoolsFirst including a special 7% Banking for Everyone savings, Senior Savers Club and business accounts.

The latest rates posted by Schools Financial for $1,000 minimum CDs ranging from 1.10% to 2.55%, appear to be more than competitive in almost any local or out of area market.

Two distinct lending portfolio priorities

The same analysis shows that Schools Financial’s 86% loan-to-share portfolio is very different from SchoolsFirst’s 70% ratio. Real estate loans are 54% of SchoolsFirst’s portfolio, versus 33% of Schools Financial’s. The yield on the member loans at Schools Financial is 3.98% versus 4.87% at SchoolsFirst. As reported in the September 30 call report Schools Financial’s rates are lower for credit cards and 1st liens, but higher for auto loans which are 59% of their portfolio, versus 31% for SchoolsFirst.

In both cases the credit unions offer excellent member value for their markets and their differing business strategies.

Institutional performance

The September 2019 data also shows that scale seems to make little difference in overall performance

Some comparisons of note:

Ratio                                   Schools  Financial            Schools First

Efficiency                         60%                                        66%

Net Worth                        12.2%                                     11.6%

ROA (YTD)                        1.85%                                    1.16%

Delinquency                    0.22%                                   0.46%

Net C-O/ave loans        0.39%                                  0.49%

Allow/Del Loans            2.47X                                     1.58X

On many productivity measures the numbers are virtually the same even though the credit unions have contrasting business models. The average member relationship is $21.5K at Schools Financial versus $25K at SchoolsFirst, but the rate of growth in this comparison is faster at Schools Financial.

On critical productivity measures such as $ loan origination per full time employee, $ loan income per FTE or net revenue per FTE the credit unions are virtually the same.

The comparisons could continue. The point is that neither credit unions shows a significant performance advantage versus the other. Both are efficient, productive, and offer members excellent value.

Schools Financial further documents their value by referencing this citation on their website:

Schools Financial Named in Top 200 Healthiest Credit Unions List

DepositAccounts.com has released its list of the 2019 Top 200 Healthiest Credit Unions in America. In addition to being in the top 200, Schools Financial Credit Union has received an A+ rating for financial soundness.

The diminution of local employment and leadership

Schools Financial’s website is replete with examples of its involvement with the school districts it serves, offering special loan programs, supporting teacher recognition and local efforts at school support. Moreover, it advertises itself as a great place to work:

Top-5 Reasons to Work for Schools Financial Credit Union

      1. 100% Paid Insurance Coverage
      2. Up to 7% Employer Contribution to 401k Plan
      3. Babies in the Workplace Program
      4. Education Reimbursement
      5. Gain Sharing

In giving up their 1933 charter the members will lose control of not just their collective resources, but also of the election of local directors and governance which provides the oversight in the direction of policy and resource allocation. Business strategy and the numerous member education programs will be determined at head office and economic realities in Orange County. The priorities will then be passed down to local branches.

The relationships the credit union has created with the community–the auto dealers in its indirect program, the school district’s local support, the realtor networks which refer 1st mortgage home buyers, the media in which the credit union advertises, not to mention the civic organizations and involvement of the board and senior management—all lose their priority if not their significance once there is no longer local control.

Here is one of many examples of how Schools Financial describes its role in the community today on its website:


“People Helping People” extends beyond our branches. Our members and our staff band together to extend that philosophy to those in need who reside in the communities we serve. Some of the organizations we lend a hand to are: (details omitted)

      • Children’s Miracle Network
      • Food Banks
      • Making Strides for Breast Cancer Walk®
      • Spirit of Giving

The fallacy of cooperative mergers

Credit unions rarely succeed by trying to become larger than their competitors. Rather their success is creating and cultivating member relationships. This grows loyalty and member trust. The cooperative design, uniquely among financial alternatives, encourages participation and connectedness among the member-owners.

SchoolsFirst could compete with Schools Financial, but they know how difficult that would be given the credit union’s Sacramento track record. Or, it could embrace cooperative collaboration where there are mutual benefits for members. But no, it instead is has bought out the CEO, a much easier way to expand and gain control of members’ equity without paying anything or committing to any future details.

The consequence is the member-owners will see their loyalty being sold as executives get windfalls for surrendering their leadership responsibilities. Their elected board abdicates any fiduciary role for either a democratic process or for providing genuine member value in the transaction.

The members not only lose in what is an insider-arranged “commercial sale,” but also, the credit union system loses credibility as stewards of cooperative design and member-ownership. Instead those agents charged with overseeing the model have engineered the system to serve their self-interests first, and members last, or not at all.

But the regulator approved this

The defense and one of the FAQ explanations is that the regulator approved this transaction including the statement sent to members.

Mergers of well run, independent sound institutions are seen by some as a necessary strategy. However, the inherent conflict of interest for a CEO arranging the merger of a credit union and specifically benefiting from it, has never been openly addressed.

NCUA has long abandoned its role as a steward of member interests. Cooperative leadership throughout the system has become increasingly hollowed out by the transactions of self-interested agents, including the regulator.

NCUA proclaims its basic mission is safety and soundness. However, it has turned a blind eye as one of the most basic principles of risk management is compromised by mergers of healthy credit unions. For putting more eggs into fewer and fewer baskets only creates larger risk concentrations for the next cyclical downturn.

Merger violates a sacred trust

The strength of credit unions is first and foremost the member-owners.

Cooperative design asserts that members’ well-being and what really matters to them will be kept close at hand. Credit unions can be locally sponsored and supported. To some this model seems contrary to the temper of the times and the siren attraction of size as a monument to success.

However, cooperatives are not merely financial firms, but a form of social capital based on a covenant to serve the common good.

This basic cooperative principle is compromised in this merger. For it privatizes and rewards the few from the common wealth created by generations of members. The members should vote against this merger.

Thoughts on Mergers: The Tallest Candlestick Ain’t Much Good Without a Wick

I am increasingly concerned about mergers of well run, healthy credit unions. And the bandwagon that many credit union CEOs seem eager to join. Here are my reasons why.

One of the most important innovations of the cooperative financial model was to give ordinary citizens the right to “own and manage the means of financial production.”

Without this option, members would just be consumers of financial services at the mercy of whatever options the market, private enterprise or non-regulated firms offered.

Making Capitalism More Democratic

The co-op response emerged out of the progressive era at the turn of the 20th century. Large monopolies controlled railroads, banking and other vital industries such as steel and oil. Farmers were one of the first groups to organize against large corporate monopoly power via co-ops.

The credit union belief that regular citizens, not the wealthy, could own, control and invest their collective savings was both a political and an economic innovation.

The elected boards were the mechanism by which the governance and democratic purposes were carried out.

The Importance of Economic Democracy

As consequential as the movement’s financial growth to over $1.6 trillion has been, the value of cooperative design goes beyond a purely economic role. Or offering just another market option. Benefits individual credit unions provide for their communities and member groups include:

  • Collaborative economic capacity inspired by purpose, passion and values
  • Direct CEO accountability to user-owners
  • Elected oversight of directors, from the membership
  • Focus on community needs and priorities
  • Reinvestment of savings responsive to local conditions
  • Firsthand knowledge of members and community circumstances-both routine and in uncertain environments
  • Leadership in the community to support other local solutions

Credit unions are an essential part of members’ lives especially when communities, no matter the size, are hollowed out by changing economic, political or even demographic events. Credit unions’ roots provide local, CEO level, leadership capacity and staying power in ways other economic firms cannot or will not do.

Mergers of Healthy Credit Unions Compromise Cooperative Design

NCUA released the latest batch of merger totals. Year to date, there have been over 110 approved. In the last five years the total exceeds 1,200.

The most frequent reason provided in the NCUA summary spreadsheets is “expanded services.” A very small number report difficulty finding officials, and a one or two, poor financial condition in the third quarter 2019 summary.

None of these situations is irreversible or necessarily fatal. Yet the industry has accepted this consolidation as inevitable. Regulators routinely encourage mergers for situations that would be temporary but lack oversight perseverance. Consultants tout their help in arranging new combinations–for a fee.

The Agency Challenge and Board’s Fiduciary Role

Most mergers, especially among healthy credit unions, are initiated by the CEO. Almost all credit unions merging today were begun at least two generations (50 years) ago or longer. All have survived severe economic cycles, regulatory disruptions, constant technology innovations and leadership changes in their decades of service.

But today the boards, led by CEOs, have thrown in the towel. Forgetting the responsibility for the legacy they inherited and their accountability to future members, the board’s present “happy talk” narratives saying the credit union can no longer meet its responsibilities to the member-owners.

Instead of carrying on their fiduciary duties to members, they transfer this financial and relationships legacy to another credit union. Often the senior leadership has carved out a better immediate future for themselves. This is often accompanied by a token “incentive” special dividend, if members will give up their accumulated commonwealth reserves and political control over their co-op’s future.

Although boards and their CEO are supposed to be agents of the members, they can also be motivated by self-interest. The best support for this interpretation is that most merger discussions are portrayed as extending over a year or two. Boards state they have routinely evaluated all strategic possibilities. Even though these discussions occur during the annual election-meeting cycle, I have yet to find a board seeking election while stating their intent to merge the credit union.

Rather, a sudden decision is announced with no prior public information. Members are asked to give up their independent charter on short notice. Their accounts are transferred to another credit union seemingly offering a better deal than what their own board and senior management are able to provide.

In this message-controlled process by the CEOs and boards, there has never been a member vote against a merger. Developed in secret, the charter surrender is then marketed as a logical decision to members, completely unaware such a pivotal event was even needed. No other option is allowed to emerge. The incumbent always wins.

The Irrelevance of Size

The benefits of cooperative design do not depend on size. Very large credit unions can be just as focused on member well-being as small ones. Often a credit union’s size ambitions reflect its market reach. As FOMs expand, so does the logic for larger and larger size, resulting in a self-justifying need to seek mergers.

The difference is not the size of the credit union, but its approach to business strategy. Some credit unions want to be primarily commercial firms with institutional ambitions that mimic the for-profit banking sector. Other leaders focus on innovation in member service. Both approaches can fit within the cooperative model.

The difference is what success criteria are used. One is driven by institutional performance, the other by member well-being. Regardless of size, I believe that strategies that focus on commercial success are like candles without a wick. No matter how tall, they will never shed any light.

Shredding the Legacy

Why should credit union leaders care whether mergers are driven by “commercial” motives or member well-being? Because democratic co-ops are hard to sustain if the member focus is subordinated to agent self-interest. Cooperative democratic governance depends on values where leaders follow the highest standards of fiduciary conduct overseeing collective wealth. It is based on the foundation that members’ interests will always be paramount. Abdication by boards and CEOs of decades of cooperative investment justified by marketing bromides about future benefits, compromises the reasons credit unions were created in the first place.

The unchallengeable progress of the credit union system demonstrates both the need and power of cooperative design for the American economy. If its distinctive purpose is increasingly hijacked by questionable combinations driven by self-interest, then the entire system’s foundations are at risk. For if credit union CEOs do not believe in their own institution’s autonomy, but instead are open to the best offer, will members themselves respect the cooperative choice?

Mergers are complex and hard to engage in non-interested discussion. However everything we say or do affirms or critiques the status quo. To say nothing is to say something; in this case, that the status quo in merger trends is okay. I believe these trends are not okay.

The Necessity for Coop Designs: Food Deserts Turn to Co-ops for Local Grocery Stores

On November 6, a New York times story In Land of Plenty, Few Places to Find Fresh Foods described the challenges of small, rural communities maintaining local shopping options.

The article led with an example of a small town in the Midwest that is a center for the farming community. As in many other small communities across the country local grocery stores have closed in the face of large regional competitors. “It’s the story of every small town; it’s a domino effect and it starts with the grocery store,” states a resident of Winchester, Illinois, a town of 1,500.

The irony of over five million people who make their living feeding the rest of the nation but having to drive at least 10 miles to buy groceries, has prompted local residents in a number of these circumstances to seek new options.

One solution is to set up cooperatives financed by residents to start their own stores. “This isn’t charity. This was self-responsibility. If you want a grocery store in town, you have to step up to it,” says one of the founders of Winchester’s for-profit coop which opened in August 2018.

The article describes multiple volunteers contributing community help and resources. Radishes and spinach are delivered from a local farm; milk from a local dairy; beef from a nearby ranch and eggs are delivered once per week by a local farmer.

Co-op design allowed local residents to mobilize resources for solutions that larger firms do not see as practical or profitable.

Parallel histories for farmers and consumer finance

Farming coops are one of the creators of this country’s collaborative business model at the turn of the 19th century. So popular were cooperative solutions in rural America, that the original bureau for federal credit unions was assigned to the Department of Agriculture in 1934 when the Federal Credit Union Act was enacted.

Credit unions in the past and even today actively serve “credit deserts”. These are communities where no locally-owned financial institutions are located. Credit policy and lending priorities are set at headquarters located outside the areas served.

Relevance for credit unions

Should these “fresh” initiatives be borne in mind as several hundred local credit unions per year cancel their charters to merge with larger, often out-of-area, credit unions? Is giving up local control, leadership and resource allocation compromising the unique capacity of credit unions to fill voids left by larger financial competitors?