The NCUA Board’s Actions Positioning the NCUSIF for the Future

The NCUSIF’s 1984 Annual Report describes the founding actions positioning credit union’s Fund and the cooperative system for the future.

“Between July and October 1984, the NCUA board considered at great lengths how to implement the deposit plan.  Every effort was made to listen to credit unions and their representatives,  Whether by phone, letter or in person, communications were continuous, spirited and open. Because of this input, a very workable plan for all was reached when the board adopted final rules at its October 9, 1984 meeting to implement the capitalization legislation.

First, the board waived the entire 1985 insurance premium.  Second, it ordered the distribution of $81 million in Fund equity.  This amount constitutes the Fund’s equity in excess of the 1.3% fund equity insured shares ratio the board established for the Fund, once the 1% deposit was received.   Because of these actions, credit unions will only have to transfer 85% to 90% of their initial deposit obligation to the Fund yet it can carry the full 1% asset on their balance sheets.

(Editor’s note:  credit unions transferred only .89% of insured shares and were credited with 1%-the Fund’s first dividend)

Because of this legislative achievement by the credit union movement and the regulatory approach taken to implement it, the Fund contains some very advantageous structural improvements:

  • The insurance fund will be fully capitalized at all times;
  • Fund growth will automatically parallel credit union growth;
  • Congressional concern about the Fund’s adequacy and the need to build public confidence in it will likely lessen. Future legislation will probably focus on the FDIC and FSLIC (which happened often);
  • The numerous operating options within the new deposit plan framework provide future flexibility for credit unions and for the Fund;
  • Credit unions will have a direct financial stake in the operation of their Fund.

In 14 years, members of federally insured credit unions have gone from the least well protected depositors in financial institutions to be the best protected.”

Source: National Credit Union Share Insurance Fund 1984 Annual Report, pages 6 and 7.



An Insightful Co-op History Lesson

This week I listened to a 55-minute lecture on Rochdale and the Early Cooperative Movement.  Presented by the National Farmers Union, the speaker, Erbin Crowell, is an expert in the history of cooperatives.

The Rochdale reference is a name familiar to persons working in credit unions.   But the reasons for its pivotal place in history are rarely told.  Moreover, it was only one example of decades-long efforts by social innovators to improve the lives and status of the English working class.

These multiple reform theories included socialism, capitalism, mutual aid societies and cooperatives as England transitioned to an industrial, post-agrarian economy. One very successful  capitalist Robert Owen promoted both factory reforms and utopian socialism.  He attempted to establish his vision of an experimental socialistic community at New Harmony, Indiana in 1824.

This lecture describes the context in which Rochdale became a lasting cooperative example.  He mentions the Cooperative Group’s role in Great Britain today.  One learns that cooperative principles were not an initial framework for Rochdale, but rather assembled  only in the 1930’s in the US.

Taking this 55-minute journey will provide more than a glimpse of the past.   It presents the  cooperative concept as an evolving one, not a static design limited to traditional segments of an economy.



Redesigning the NCUSIF: The Cooperative Way to “Finish the Job”

On Feb 8, 1984, NCUA Chair Ed Callahan gave his GAC keynote, an annual tradition.  He started by describing the state of the industry with one word: “fantastic”.

He acknowledged credit unions’ success in meeting the challenges of the previous two years: implementing deregulation and expanding credit union access across the country.

But there was one more structural change necessary to complete a sound cooperative system-redesigning the NCUSIF’s premium based funding.

The proposed change, depositing 1% of insured savings for continual underwriting, was recommended in a Report to Congress dated April 1983, Credit Union Share Insurance.

The Report’s  seven sections examined the history of cooperative insurance, risk rating, expanding insurance coverage, merging the three federal funds, and revisions to the current NCUSIF system.  An 8-page appendix listed over 50  credit union commenters, including leagues, state regulators, credit unions and the state cooperative insurance funds.

Why Listen to the Speech Today ?

This eleven-minute excerpt from the 14-minute recording is a critical moment in NCUA and credit union history.  It began a joint legislative effort to restructure the NCUSIF on cooperative principles, a design that has sustained for four decades. In these same years, the premium-based FSLIC failed, merging with the FDIC. The FDIC has had multiple periods of negative equity and still struggles today to find an adequate financial model.

The address is more than history. Ed’s “finish the job” challenge is a prime example of regulator industry collaboration. These mutual connections were empowering. It is a vision of leadership guided by “power-with,” not “power-over.”

Change was made through honest, open discussion seeking “a better way.” Over 2,000 comments were received to the proposals in the April 1983 study in which all parties had a say.  Chairman Callahan’s approach was based on “relational power” not assumed legal authority.  He was committed to teaming with credit unions-“we, not me.”  The cooperative way.

This excerpt is available at: 

I believe you will find this talk as enlivening and informative today, as it was years ago.




Voting: “The Most Hallowed Act in a Democracy”

A vital aspect of cooperative design is democratic member ownership.   Each member has one vote, regardless of share or borrowing relationships; proxies are not allowed for federal charters. This governance and accountability dynamic is both a moral and an organizational imperative.

Democracy is not merely a set of bylaws, or regulations or another organizing concept.  Rather it is the interactions developed between leaders and their constituents. Member involvement is more than a democratic cooperative value; it is the essential good will on which all credit unions rely replacing startup capital from the beginning.

Voting is the practice that enshrines and enables democratic organizations to legitimize leaders’ decisions.

Voting is Front Page Today

Voting is a front-page story across the country today. State legislatures have initiated changes to restrict voting access in response to the Big Lie of a stolen 2020 Presidential election.  Last week the spotlight turned to Georgia where the governor signed a law that would  prevent water being given to voters standing in line.

Public outrage has grown as evidence suggests that a purpose is to limit voting access in specific segments of the community.

The CEO’s  of Delta Airlines and Coca Cola, whose world headquarters are in Georgia, published strong statements opposing efforts to roll back voting opportunity.

Darren Walker the CEO of the Ford Foundation on NPR explained this change in the traditional low profile corporate leaders prefer on matters of public controversy.

“Voting is the most hallowed, important and sacred act in a democracy that its citizens exercise.”  He continued: “They (the two CEO’s) stood up when it mattered. We hope we can mobilize courageous CEO’s and companies across America willing to stand for American values.”

The State of Member Voting in Credit Unions

There are two occasions when members exercise their democratic role by voting:

  1. The election of directors at the required annual meeting of members;
  2. The voluntary merger of their credit union with another.

I think in both instances the vast majority of credit union practice is not “democratic” in any meaningful sense of the term. Some failures are the result of poor organizational habits, others by deliberate design.

The Members’ Annual Meeting

Recently I received the required Notice of the annual meeting from my credit union. It read in part:

Here’s the good news about our Annual meeting: There’s nothing you need to do. . .sharing this (Notice) is a legal requirement. . .Questions will not be taken during the meeting. . .there is no new business to discuss. . . only matter requiring a vote of members is approval of the 2020 Annual Meeting minutes. . .directors nominated (3)will be approved by acclamation of the Board. . .And this closing comment: We’re in this together. . .Our commitment to improving our members’ experience remains at the heart of what we do.   Signed:  President/CEO

This is not an invitation to participate, vote or become better informed about the cooperative the members allegedly own.  Instead, members should stand aside. Even the required meeting notice is portrayed as just a legal disclosure, like the rate on a loan or savings account.

The problem is deeper than this caricature of democratic governance.  The fundamental strength of credit unions is their member relationship. Member loyalty, initially via a common bond, and subsequently, lifelong patronage, created the credit union that exists today.

Sustaining these core relationships is essential for credit union success.

Members instinctively understand that the cooperative model is supposed to be different even if they cannot provide a precise legal distinction.  Treating members just like customers of a bank forfeits the most important advantage of credit unions in a market economy: the user and owner are one and the same.

Some credit unions use the annual meeting as a daylong opportunity to go beyond the legal formalities by providing workshops on member financial issues.  Sometimes the event is capped by a meal or with an outside speaker to celebrate the success of past year.

If credit union leaders fail to respect their member-owners’ role in this annual event, will members respond when leaders ask them to stand up for an issue needing their support?

Voting in Mergers: A Case Study

All voluntary mergers of sound credit unions require a majority of members voting to be approved.  This critical requirement is often treated as an administrative exercise with boards routinely encouraging members to sign off on the enclosed ballot.  Rarely do vote totals exceed single digits in this required member approval to give up a charter.

The merger Special Meeting Notice frequently lacks any specific data for members to compare their current situation with future promises. The reasons cited are general: “an expanded network of branches,” “improved operational efficiency,” “ the possibility of better rates on loans and shares,” and “we believe we should provide even better service due to additional investments in talent, technology and new products.”

The above are the verbatim explanations in a 2020 member merger Notice.  The vote in this merger, as certified by the Board Chair and Secretary, was 32,494 in favor and 0 opposed.  NCUA’s Director of Supervision for the Western Region acknowledged receipt of this certification and formally approved the combination effective June 1, 2020.

This merger of the $867 million Andigo Credit Union into Consumers Cooperative gave the members’ collective reserve of $107 million (12% net worth) to the continuing credit union.  No member dividend; only  vague promises.

However, Andigo’s senior managers were all given continued employment contracts from two to five years. Their compensation over and above what they were earning includes:

CEO: $226K in early payouts of deferred compensation plus $357K in higher bonus;CFO:  $150K higher; CLO: $165K higher; COO: $167K higher: VP Business Services: $74K higher.

This façade of members’ having voted approval is a perversion of democracy.  The members were provided no reasons supported by data.  No plan.  The process is ripe with conflict-of-interest.  It is an abdication by those with fiduciary responsibility covering up blatant self-dealing.  A scheme of enrichment and a moral swamp blessed by NCUA.

A Challenge to the Integrity of the Cooperative System

Every institution, every system, every country that follows a democratic model faces the challenge of constant renewal.  Democracy at any level of society is not self-perpetuating.  Leaders and circumstances change. Commitment to self-rule requires constant practice and vigilance.

The ever-present temptation for those in authority to exploit their current position for self-advantage is a facet of human character.  A credit union’s legacy bequeathed through generations of member loyalty is wiped out in an instant by self-serving leadership.

Two decades ago, the charlatans of Wall Street were proclaiming the need for credit unions to convert to mutual, and possibly, bank charters.  They asserted the credit union model was an anchor slowing growth and opportunity.  Almost three dozen credit unions took the bait.  Today, only one survives as a mutual.

Two outspoken credit union CEO’s led the fight against these false prophets of doom.  Bucky Sebastian and Jim Blaine did not win every fight; they were even sued for their cooperative gallantry.  But they had the courage to speak out and act when others were reluctant to challenge peer CEO’s.

Their efforts emboldened others who wanted to do the right thing.  However, the reality then is the same now. “The incentive today for corporate leaders in America discourages courage,” explained Darren Walker in his NPR interview on the reluctance of business CEO’s to speak out.

Next Steps

To address these patterns of democratic failure will require CEO’s, directors and leaders to assess their own practices of member governance.  Is the annual meeting just a perfunctory chore or is it a chance to renew and honor the member-owners’ role?

Mergers should be based on facts and logic with a documented plan, not rhetoric and vacuous future promises.  Every other area of credit union oversight needing regulatory approval (alternative capital, derivative authority, FOM changes, et al) requires more documentation than the decision to give up a sound charter via merger.

The century-long evolution of the cooperative credit union system in the midst of an economy driven by competition and private ownership is a remarkable accomplishment. To paraphrase Albert Einstein when asked about religious belief, “it is not that one thing is a miracle but that the whole thing is a miracle.”

To see this miracle of human and community enterprise crumble piece by piece through self-destruction is a tragedy.  One that only today’s leaders can reverse.






Timeless Wisdom: Why Dual-Chartering

“I think if you took the pulse of credit unions today you would discover two feelings: worry over the growing authority of NCUA; and a desire for more flexibility than now exists under the charter options. . . The best remedy to this climate is a vigorous dual-chartering system, that is both a vibrant federal option and a vibrant state-chartering, non-federal share insurance. Danger grows if there is only one option. Such a climate breeds bureaucracy and lazy thinking.”

Ed Callahan, Callahan Report, May 2000

An Open Secret: NCUA, Oxymorons and Merger Truths

An oxymoron is a figure of speech in which two seemingly contradictory terms are used together.  Sometimes the intent is literary, as in “deafening silence.”  Sometimes the purpose is  ironic juxtaposition—“postal service” or “jumbo shrimp” –to highlight conflicting concepts.

I propose a new example Truth in Mergers.  This is a 25-page NCUA publication from May 2014. The subtitle: A guide for merging credit unions.

This document was prepared by NCUA’s Office of Small Credit Union Initiatives (OSCUI). The preface lists three purposes:

■ Understand trends in credit union mergers.

■ Determine when a merger is in (a credit union’s) best interest or, in the worst case, necessary to continue operations.

■ Negotiate a merger agreement that best serves the merging credit union’s interests.

OSCUI’s mission statement read: We support the success of small credit unions … (and) recognize the unique role small, low-income designated and new credit unions play in the lives of their members and communities. We are committed to helping these credit unions not only survive but thrive.

 The “truth” is that the brochure was to facilitate the demise of smaller credit unions.

 Oxymorons can assist the reader to clarify NCUA’s doublespeak. After each of the following verbatim excerpts, I have provided this figure of speech to aid in interpretation.

Statements from “Truth in Mergers”

  • Mergers between credit unions are commonplace in the industry today. (old news)
  • like all businesses and institutions, mergers can be successful or unsuccessful. (even odds)
  • NCUA does not endorse mergers. (seriously funny)
  • mergers undertaken proactively by credit unions in sound financial condition have better outcomes for the credit unions involved and their members. (alone together)
  • many credit unions wait until they are in a troubled financial position before exploring the option to merge. (definite possibility)
  • Weak Financial Condition Drives Most Credit Union Mergers (deliberate mistakes)
  • A merger can also provide direct benefits to credit union members, including lower cost of services, lower loan rates, and higher dividends. These benefits are significant, immediate, and persistent. (true lies)
  • Negotiating the terms of the merger contract is one way a merging credit union can realize the greatest benefits of the transaction. (bittersweet)
  • OSCUI’s study of merger packages also demonstrated a clear link between a merging credit union’s financial strength and its ability to negotiate advantageously with the continuing credit union. (strength in weakness)
  • Best Practices: Shop around for the best fit. Merging credit unions should seek out and evaluate multiple potential partners and critically evaluate major issues, such as: organizational culture, mission statements, and respective memberships. (act naturally)
  • Include a merger in the strategic planning process. Credit unions are encouraged to consider the impact of a merger as part of the strategic planning process. (definite possibility)
  • Develop a succession plan for executives and board members. Avoid letting the board and the CEO grow old together. (open secret)
  • Merger contracts can be negotiated to ensure that the merging credit union’s members, staff, and community continue to be served. (true myth)
  • Take measures to enforce the merger agreement. How can merger agreement provisions be enforced when one party to the agreement no longer exists?

NCUA’s Office of General Counsel suggests that a merging credit union name in the contract the third-party beneficiaries with standing to enforce the contract. For example, if the continuing credit union agrees to keep a branch open for at least one year, the agreement would note that the members of the discontinuing credit union are beneficiaries with standing. Because these matters would fall under state contract law, the wording should be state specific. (clearly confused)

The Almost Final Word

“This brochure has been prepared by NCUA’s Office of Small Credit Union Initiatives (OSCUI) as a resource to help credit unions.


The truth: this Office of Small Credit Union’s initiative was intended to phase out small credit unions.  Those with problems-for sure.  Those in sound financial condition-in due course.

And Consequences

This  “small credit union” endeavor gave the green light for all credit unions to seek merger opportunities.  No matter the size, circumstance, proximity or business logic.  It began an open season for self-dealing. CEO’s saw the opportunities to cash out at their retirement; long standing member loyalties were  squandered, and a binge of back room deals by leaders of sound local credit unions was officially sanctioned.

The challenge for Chairman Harper and the board: is there a CURE for this official document issued while he was senior policy advisor to Chairman Matz?

To keep mergers in perspective we give the last word to capitalist Henry Ford:  “A business that makes nothing but money is a poor business.”




Comments from Finland & America on Credit Union Governance

This observation on America’s credit unions is from Leo Sammallahti​, Marketing Manager, for the Coop Exchange Leo lives  in Finland.

“When I first read about a “Credit Union Governance Modernization Act” I was optimistic that this would help ensure there is more democratic accountability in the form of open and contested elections. Unfortunately this seems not be the case.  Rather the focus is making expelling credit union members easier.

“I totally support being able to expel abusive and violent members to protect the staff.  If there has been cases where this has been made too difficult they should be tackled with better legislation. If the new act is limited to cases like this, I totally support it.

“However, I’m concerned whether the act could be used by incumbents to solidify their positions by expelling critical members seeking to challenge them? I’m not saying this is the case, just interested whether such risk is involved. I also question the language used in it, talking about how credit unions should have more control over their members. Shouldn’t it be the other way around–how to ensure members have more control over their credit unions?

“I believe that perhaps more than ever,  American democracy would benefit from revitalization of credit union democracy. Instead of focusing on polarizing politics, credit unions could foster vibrant democratic practices rooted in their local communities, without party political point scoring and division.

We also need to encourage young people with skills and ideas to stand for the board for this to work out. This is the most educated generation in the history of the country, so I’m sure there are more than enough qualified candidates to stand for the board.”

A Second Observation

Apropos to Leo’s last comment, last week I received the following email from a senior credit union employee:

“CU’s are supposed to be democratically governed through the election of member chosen representatives. Due to  a possible age-driven mass exodus of board members, it appears that replacement of these directors is a coming problem.

“Director replacements are full of issues such as the CEO filtering and controlling who gets nominated; or the  nominating committees filtering applicants, NOT by qualifications, but by other unknown criteria. And anyone not nominated must solicit petitions to get on the ballot, an almost  impossible process that is frankly a JOKE.

“I am mentoring a midlevel credit union leader in (state).  He has been trying to offer his youthful vision and services  to a credit union board by getting on the ballot.  The push back he is receiving from many angles is sad and upsetting to me.  This young man could add significant value.”

My Comment

Are these two observations on the lack of young people on boards just a coincidence?   Or is this  generational absence in credit union governance glaringly obvious to anyone taking note?






Finding a “Cooperative” Summer Intern

Formed in 1968, the purpose of the North American Students of Cooperation (NASCO) is “to achieve a socially and financially responsible North American cooperative economic sector for all people and organizations interested in applying the principles and practices of cooperation.”

To further its goal of educating and organizing an emerging generation of cooperators, this non- profit 501C-3 organizes summer internships. An information webinar today, March 5 for all interested organizations to learn more. Their announcement follows.

I signed up. The link to do so is here.

Host applications are open for NASCO’s Cooperative Internship Network

NASCO’s Cooperative Internship Network is a summer internship placement program designed to connect emerging cooperative leaders with co-ops, non-profits, and solidarity economy organizations across the U.S. and Canada.

NASCO’s 50 member organizations represent over 4,000 individuals, the majority of whom are youth living in housing cooperatives. Unlike average internship applicant pools, our members are entering the workforce with a wealth of cooperative experience, advanced democratic competencies, and a deep appreciation for the cooperative model.

Through the Cooperative Internship Network, NASCO processes host and intern applications, advertises the internships, identifies potential matches, places interns with host organizations, and supports communication between hosts and interns. Hosts simply design their internship, conduct interviews, and select from a list of applicants they would consider offering a position to.

This year we are only accepting remote internships for our network in order to ensure safe working environments for all interns. All internships must provide an hourly living wage or stipend.

If you’re considering hosting an intern this summer, we welcome you to join us for an informational call on March 5 at 12:30 pm CST. This 1-hour call will open with an overview of the Internship Network, lead to anecdotes and advice gathered from participants, and will close with a brief Q&A. 

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.