Category: Cooperative Design

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Credit Unions Purchasing Banks: One Step to Improve the Process

It is hard to know if credit union bank purchases are working out or not. Are they in members’ best interests? Are the terms reasonable? How will the financial benefits be realized?

One difficulty in these deals is that only one side is required to disclose the terms: the selling bank. That disclosure can be further limited if the bank is privately held.

The Importance of Transparency

Because credit unions do not have stock and the resulting marketplace pressures that this reality places on boards and managers, it is difficult to track whether a credit union bank buy is working or not.

From 2015-2019 consulting firms estimate that the average premium to book value on bank mergers has ranged from a low of 136% (2016) to a high of 175% (2018).

This is just one element of disclosure for public companies. The bigger the transaction, the more details provided. For a stock company being merged, the details matter in that competitors might offer a competing bid if selling shareholders feel the price is too low.

For an acquirer, the impact of a transaction on future performance is an important factor to justify paying premiums over book value.

An Absence of Public Information

In credit unions, there is limited disclosure on the front end of a purchase. There are rarely any projections of future performance. There are undoubtedly reams of financial information required to gain both board and regulatory approval. But this data is not shared.

When deals are secret, no one can learn from the experience. Secrecy can lead to a lack of accountability. The process can be manipulated by interested parties to the transaction or those directly responsible to ensure member assets are not wasted.

Public relations messages dominate the information presented. This or that purchase will increase “service to the community, enhance customer relationships, provide greater expertise and expand growth opportunities” in a new market. But rarely are facts offered to support these generalizations.

Market-Based Transactions?

NCUA Chairman Hood defended credit union purchases of banks describing them as market-based transactions. He is only half right. For credit union members receive neither the financial data that bank shareholders receive when selling, nor the subsequent performance monitoring provided by a daily stock price.

Today credit union bank purchases are unknown events. They may indeed be win-win for all parties. Only one group of “shareholders” receives the information to make that judgment. Shouldn’t credit union shareholders have the same “level playing field?”

Examples of Financial Datapoints in Press Releases of Bank Purchases

Under the terms of the transaction, shareholders of Edon Bancorp will receive $103.50 in cash in exchange for each share of Edon Bancorp common stock for a transaction valued in aggregate at approximately $15.5 million. The consideration represents approximately 135% of Edon Bancorp’s tangible book value per share as of December 31, 2019.

On a pro forma basis, the transaction is expected to be accretive to SB One Bancorp’s 2019 earnings per share by approximately 8% and approximately 1% dilutive to tangible book value per share at closing assuming a transaction close in the fourth quarter of 2018 and 30% in annual cost savings. The earn back of the tangible book value dilution is projected to be less than one year.

CAMBRIDGE BANCORP AND WELLESLEY BANCORP, INC. TO MERGE

The transaction is presently valued at $45.54 per Wellesley common share, or approximately $122 million in the aggregate, based upon Cambridge Bancorp’s 10-day average closing price of $78.53 as of December 4, 2019. On a pro forma basis the transaction is expected to be approximately 4.4% accretive to Cambridge’s 2021 earnings per share and approximately 1.6% dilutive to tangible book value per share with an expected earnback period of approximately 2.2 years.

A MUTUAL BUYS A STOCK BANK

Under the terms of the transaction, shareholders of Damariscotta will receive $27.00 in cash in exchange for each share of Damariscotta common stock for a transaction valued in aggregate at approximately $35 million. The consideration represents approximately 185% of Damariscotta’s tangible book value per share as of September 30, 2019.

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How to Really Open Eyes

One year ago, CUNA began a digital-first marketing campaign on behalf of the credit union system.

The purpose is “overcoming industry myths and raising the profile of credit unions amidst an ever-competitive financial services marketplace. By the end of 2019, Open Your Eyes to a Credit Union® had reached tens of millions of consumers and earned more than 130 million video views.”

The program has spent approximately $50 million and now operates in 19 states. The hope is to double this effort in 2020.

Is This the Best Way to Open Eyes?

Digital marketing is the latest craze in corporate investment. Combining the technology of large databases and the analysis of artificial intelligence programs, it is now possible to target micro segments. These tactics are the financial wellsprings driving the growth of the large digital retail and social platforms. They are the dominant advertising tactics in political campaigns.

But is this multi-million-dollar marketing spend the best way to promote the credit union message?

The Challenge

In 2020, current trends suggest the total number of credit unions will fall below 5,000. The last time that few a number were operating was in 1935. By the following year the numbers had increased to 3,490 state charters and 1,865 FCUs reaching out to a population of 127 million.

While credit unions are larger and serving more members, the industry is harvesting seeds planted generations ago. The last time there were more new federal charters issued than those cancelled was in 1978 (348 new, 298 cancelled). Simply growing existing institutions without new entrants, will only discourage innovative ideas and the passions that startups attract.

Another Option for the Next $50 Million

Here is another option. Today the NCUA requires a minimum capital commitment of $500,000 to $2.5 million to charter a new credit union.

Why not tap into the timeless passion that people have to help their communities and to own and control their own assets by offering to provide the seed capital for 50 new charters this year?

It would be an unprecedented undertaking. Nothing like this has happened since 1986. To accomplish this goal would require an “all hands on deck” approach involving leagues, state and federal regulators, CUSOs, credit union mentors and all other parties who support the credit union system.

The project could begin with a national “call out” for groups, especially in “credit deserts” that want to start their own financial cooperative. Criteria could be established for screening applications based on some of the same requirements for chartering (founders’ experience, community/sponsor commitment). But it could also include expressions of support from leagues, local credit unions, and vendors willing to underwrite their future relationships in the critical launch years.

Why This Effort Would Really Open Eyes

  1. It would show the movement’s continuing support for new groups willing to embrace cooperative solutions.
  2. It would reverse the industry’s collapsing numbers and demonstrate the continued attraction of the credit union business model.
  3. It would reignite the imaginations of persons looking for ways to support their communities, especially in areas now lacking locally owned financial choices.
  4. It would draw upon the most potent of cooperative advantages: collaboration.
  5. It would fire up the entrepreneurial instincts and provide an attractive opportunity for the next generation of credit union leaders.

Instead of industry resources spent defending the status quo or seeking minimalist changes in regulations, this effort would put the powerful attraction of the cooperative model on display for all to see.

This approach would take effort and be riskier than just sending money to Facebook et al. But can you imagine the enthusiasm and cooperative spirit it could create. Fifty new charters in fifty states! Now that’s a campaign everyone could support.

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What’s Special about a Cooperative’s Overdraft Fee?

Most would answer “nothing.” The fee is just another way to grow non-interest revenue.

An article about Alpena Credit Union lowering its overdraft fee again, from $19.52 to $17.50, brought to mind a conversation I recently had with a CEO.

A $35 Fee for “Courtesy” Pay

The discussion was how to explain a $35 fee for clearing a member’s check on an overdrawn account.

This amount would equal a half day’s (four hours) take home pay for a member earning at or near the minimum wage of $10 per hour in their community. The team needs more money to make budget. What choice do we have? The CEO responded, what kind of a co-op do we want to be?

Finding the Right Performance Metric as a Co-op

He further asked whether the strategy was to grow income or member relationships?

The lack of clarity was further confused by the metrics the credit union tracked for acceptable performance. All of the ratios had to do with balance sheet financial outcomes: growth, ROA, expense ratios, productivity goals, etc. In other words, an examiner’s financial checklist.

Members were not the focus of any tactical criteria, except to get more of their business.

He then raised the topic of cooperative metrics. How are we tracking cooperative tactical success? What would these say about who we are and what our business evolution should look like?

His point of view was that to be true to ourselves, credit unions are supposed to enhance member well-being. Absent meaningful metrics, there can be no practical oversight or peer comparisons for what makes cooperatives different. The risk is that members will see credit unions as insincere, just another financial option with a gentler persona.

The right metrics are a choice for every credit union. In this case, is your credit union a $35 or $17.50 co-op? What would your member choose?

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Has Anything Changed?

Almost twenty years ago, Callahans had a program of hiring five new college grads annually for the company’s future growth. There was a two week, full-time orientation to introduce the credit union movement and the company’s history before the new employees began a six month rotation among the firm’s operating units.

In the two-week introduction , we would invite a credit union CEO to speak about why they chose a career in credit unions and their vision for cooperatives.

A frequent guest was Jim Blaine, the now retired CEO of State Employees Credit Union in North Carolina. It was and is the 2nd largest credit union in the country.

Jim is a master story teller. He makes his points with directness. He seeks agreement as he goes along. He wants you to share his beliefs.

The Never Ending Credit Union Challenge

Even with all of his distinctive rhetorical skills, the one assertion that stands out for me from his presentations is:

“In America today, those that have the least, or know the least, pay the most for financial services.”

From this factual foundation, he would then describe his business tactics: the non-conforming variable mortgage with every member paying the same rate, no indirect auto loans, a simple savings account, no paid advertising, etc.

While one might debate the tactics, his observation still stands as a challenge for today’s cooperative executives: what are credit unions doing about this persistent market reality for America’s consumers?

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Why the Past Matters Today

Recently I posted two blogs that lifted stories Jeff Farver, a former credit union CEO turnaround artist, wrote for his family and friends about his career.

In three multi-year workouts, two as CEO, he saved these credit unions from liquidation. He did so in partnership with the NCUA who recognized his talents and innovative approach to resolutions. For example, his Good CU and Bad CU distinction and his ability to fashion a long term plan.

Credit union difficulties in New York City are continuing front page news.

Regret Yet Contentment

At the end of his short history, Jeff added this paragraph:

One of my regrets in retirement is the loss of fellowship with my fellow Credit union CEO’s, but especially those who were problem solvers, risk takers and cooperative adventurers. As I reflect on my career, I must acknowledge how those past successes have led to my positive outlook on the future and self-esteem and contentment.

The Regret that Should Inform Us All

Today NCUA and state regulators struggle with how to resolve problem situations. The instinct is to want them to go away. Merge them so someone else with excess capital can figure out what to do. Or in harder cases, just spend money to make the problem disappear—the most expensive and destructive option of all. Moreover, members don’t vanish when a credit union is liquidated, as we see in the example of NCUA’s mishandled taxi medallion liquidations.

Jeff knew that turnarounds were not a math problem to achieve the right net worth result. Competent leadership was the key. Like life itself, effective management takes multiple paths for success and flexibility for changing circumstances.

Jeff was not the only workout road warrior for the cooperative system. Other names that come to mind then and today include: Jim Ray (now deceased), Gordon Dames (former NCUA examiner), Don McKinnon, Bill Connors, Andy Hunter, John Tippets and Steve Winninger.

And it was not just RD John Ruffin but a whole class of NCUA Regional Directors who became partners with credit union workout leaders. These senior NCUA managers encouraged turnarounds not simply ending charters. Dozens of CEOs also persevered often in the face of irrational NCUA demands to downsize. They resisted the demand to shrink until the remaining capital was sufficient to meet a net worth ratio goal, but maybe not sustainable for the long term.

The Key Success Factor in CU Turnarounds

The key success factor in resolving the inevitable problems credit unions will encounter is wise leadership. When this wisdom is lacking, replaced by panic or fear for one’s reputation, then responding effectively to problems is literally short-changed. Every NCUA  response becomes a nail to be hit with a hammer, until it disappears into the wood.

Jeff characterizes the qualities needed “problem solvers, risk takers and cooperative adventurers.” He laments their absence. He modeled these necessary capabilities. That is leaders informed by the lessons of the past and the ambition for resolving credit union challenges with sustainable solutions.

Thank you, Jeff, for your life of cooperative service. Hopefully your example will inspire others to emulate your venturing spirit.

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What Credit Unions Can Learn from the Passage of the 19th Amendment Guaranteeing Women the Right to Vote

The progressive period of American history (roughly 1880-1920) was a time of reform at all levels of government. This exciting era saw the passage of civil service reform, national forest preservation, new bureaus for regulation of business and monopolies, limits on campaign finance, the establishment of the Federal reserve system, and the passage of four amendments to the constitution.

These four authorized the direct election of US Senators, the ability of Congress to levy an income tax, prohibition of the sale of intoxicating liquors, and universal women’s suffrage.

Credit unions also planted their roots in this period. The first credit union St Mary’s Bank was chartered in 1909. The follow-on efforts by Filene and others to build a cooperative credit system were a product of these progressive reform impulses.

There are two critical takeaways from the passage of the 19th amendment that are as vital today, as they were a century ago.

They are:

  1. One person can make a difference.
  2. States are the laboratory for change; Congressional legislation most often follows success from reforms proven at the state level.

Who is Harry Burns?

The final ratification of the 19th amendment required 36 states’ approval for it to be added to the constitution. The final success would rest on one person’s vote in the Tennessee House of Representatives.

The amendment passed the Tennessee Senate in August of 1920 but was tabled in a 48-48 tie vote in the House. Harry Burns, at 24 years old, was the youngest House rep. He wore a red rose signifying his opposition to the amendment. When the vote came up for ratification it was expected to again tie and therefore fail.

Instead Harry changed his vote to Aye, and the 19th amendment was approved. What changed? The morning Harry’s mother, Phoebe, had sent a note reading:

“Hurrah, and vote for suffrage! Don’t keep them in doubt. I notice some of the speeches against. They were bitter. I have been watching to see how you stood but have not noticed anything yet.”

The next day Harry explained his vote for universal suffrage:

“I believe we had a moral and legal right to ratify. I know that a mother’s advice is always safest for her boy to follow and my mother wanted me to vote for ratification.”

Yes, one person can still make a difference. One mother, one son. The efforts of a generation are realized. A reminder for when we might be that one needed vote.

The States as Incubators for Change

A number of states gave women the right to vote before passage of the 19th amendment.

The first was the territorial legislature of the Wyoming Territory which granted women suffrage in 1869. On September 6, 1870, Louisa Ann Swain of Laramie, Wyoming became the first woman to cast a vote in a general election.

Other states included Utah, Colorado, Idaho, Washington, California, Oregon, Montana, Arizona, Kansas, Alaska, Illinois, North Dakota, Indiana, Nebraska, Michigan, Arkansas, New York, South Dakota, and Oklahoma.

The states were the proving ground for women’s political power to get legislatures to enact their suffrage rights.

Where Change Starts

One of the recurring themes in the 110 years of the cooperative system has been innovation implemented first in states, sometimes decades before adoption at the federal level. The 25-year head start in state credit union chartering gave Filene “facts on the ground” to convince Roosevelt and Treasury Secretary Morgenthau to support passage of the Federal Credit Union Act in 1934.

Other significant innovations begun in the state credit union system include:

  • Share drafts which were authorized for Rhode Island credit unions, as NOW accounts, a decade before the Monetary Control Act gave all credit unions the authority to have transaction accounts;
  • Share insurance was begun in Massachusetts and expanded to at least 16 state sponsored programs. The NCUSIF was legislated in 1971. Moreover, it was the state’s cooperative financial model, with the 1% deposit requirement, that was the basis for the capitalization of the NCUSIF in 1984;
  • Corporate credit unions evolved out of state “chapter” credit unions long before NCUA passed its first corporate rule distinguishing between a corporate and natural person charter;
  • Mortgage lending was permitted early on In multiple state credit union acts. Senator William Proxmire from Wisconsin noted in a hearing in 1984 that he received his first mortgage from a credit union in 1948. This power was not authorized for federal credit unions until 1977.
  • Credit union owned banks, needed for access to the country’s financial clearing and settlement networks, were formed in both Wisconsin (WISCUB) and Kansas.
  • The first CUSO’s were approved at the state level. In Pennsylvania, the data processing firm Users, owned by its member-users became one of the first large multistate CUSO’s
  • Most field of membership evolutions have been tested and proven first in the states. For example, every Rhode Island state charter could name a primary sponsor, but then add a catch all sentence to admit anyone who lived, worked or worshipped in the state.
  • From 1977 through 1981, the Illinois Director of Financial Institutions Ed Callahan implanted the policy of deregulation and overhauled the examination and supervisory capabilities to transition the state’s credit union system to the market driven world of today. In October 1981, Callahan became the NCUA Board’s second Chairman. The NCUA was the first federal regulator to embrace complete deregulation of savings in April 1982. Additionally, he reformed the agencies administration and activities to support the new supervisory challenges in this chapter of cooperative expansion.

The list goes on. Today, the importance of innovation in the state system is more vital than ever.

As NCUA seeks to dominate all credit union regulatory options via NCUSIF insurance, the one area pioneering new approaches are state licensed CUSOs. All CUSOs are organized under state law and, where applicable, regulation. Whether the firm’s structure is an Inc., a cooperative, an LLC, or even a non-profit, the “chartering’ is done by the state. While NCUA can limit investments in or loans to CUSOs, the state prescribes the organizational opportunity.

That is why in the current credit union system, the CUSO option, especially multi-owned CUSOs, are proving to be one of the most important arenas for startups, fintech initiatives, and third-party partnerships.

Cooperative history is filled with examples of industry leadership arising from the state system. In addition to the initial pioneering charters, other organizations include state associations and leagues, share insurance options, and the corporate network. As these onetime innovators lose momentum, new efforts provide renewed leadership.

Today it is CUSOs who capture the passion and entrepreneurial spirit every industry needs to continually reinvent itself. Going forward it may well be CUSO creativity that renews the cooperative charter so credit unions can again be seen as progressives known for leading in solving members’ most important needs.

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The $530 Million Gift of a Credit Union’s Legacy

The 2019 financial year of Schools Financial CU’s (Sacramento, CA) operating performance is impressive. Loan growth of 10.4% to $1.6 billion with delinquency of only 0.26% and an allowance account of more than double all past due loans. ROA of 1.55% building net worth to 12.3% . Member growth of over 4% adding up to a year-end total of 160,00 member-owners.

As of January 1, 2020, Schools Financial CU, chartered in 1933, no longer exists. Its total assets of $2,150,075,670 including net worth of $264 million were transferred via merger to the control of the Board and executives of SchoolsFirst FCU ($16.8B) in Santa Ana, CA.

The Gift That Doubles in Value

The total gain for SchoolsFirst FCU however is $530 million in this generosity from the members of Schools Financial CU.

The $265 million in reserves will be transferred intact as “equity acquired in merger” to SchoolsFirst’s balance sheet. And following the accounting requirements for business combinations, the assets and liabilities of Schools Financial CU will be marked to market, creating an excess of assets over liabilities of a similar amount. This second gain will be called “negative goodwill” and recognized as income on the books of SchoolsFirst FCU for a total gain of $530 million.

The Immediate Benefits of the Merger for Members of Schools Financial

As described in the Schools Financial Chairman’s letter to members recommending they approve the merger, the two largest financial “benefits” disclosed as part of this transaction were:

  1. A one-time special year-end $4.0 million dividend (an average of $26 per member) , if they approved the merger, to be paid from Schools Financials’ 2019 results above;
  2. The opportunity for Schools Financial CEO, who arranged this merger, to increase his existing compensation by over $8.0 million

The details of this event and possible consequences have been described in three prior blog posts.

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

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

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

The only question remaining: Is this example what the credit union cooperative system was intended for?

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From the Field: Concerns About Leadership for CU America

The following email recently landed. The writer lists multiple concerns which reflect a lack of vision for the system. My experience is that his concerns are widely shared. Following used with permission:

I find myself squirming about another CU Times article pushing mergers.

  • A month or so ago I was talking with an Ohio CU CEO who shocked me with the tale that the NCUA was pushing them toward dropping their State charter because the CU was informed they would never be a candidate to acquire a CU in a merger if they did not fall back into the Federal ranks.
  • A few months before that I was contacted that my credit union was “ripe” and a good candidate for merger and wanted to know if I was interested further.
  • A year before that we were pulled from consideration from a perfect merger candidate when the NCUA put a rep in their shop to “facilitate” and pushed it toward a fed charter CU.
  • All of these things have been like an itch I can’t scratch. Here are my thoughts on lack of vision and these pressures:
    • I thought it was about member choice? – doesn’t the Boards know that they are the representatives and should stand up for their base’s wishes?
    • If CU Times and NCUA are going to champion mergers, why do they need MORE operating budget?
    • Why are well capitalized smaller, even the tiniest, cu’s “ripe” for anything?
    • What happened to the unique circumstance that brought them in to existence? – why is that not relevant now?
    • Why do CU leaders not recognize the risk to loss of tax status if we just keep consolidating, homogenizing, embracing banking attitudes and strategies, not evangelizing currently recognizable differences.
    • Why does the national leadership groups keep beating this drum? – what is the agenda and long-term vision for CU America?
    • Is CUNA Management school really focused on creating opportunities for CU rising stars in an environment that is saying less and less opportunities will be available?
    • When did CU leaders agree not to be cooperative and eat our own?
    • Can we get efficient with process and products and investments and keep our uniqueness out front?
    • NCUA approved 50 mergers in the 3rd quarter 2019 (138 Q3 2018) – what was the value gained for the industry?
    • Growth and value are not the same thing
  • These may seem like rantings with no clear meaning/point/resolutions. I may not be able to articulate the concern but my hackles are up and the lack of national CU leadership recognition and the media that pander to it are making me feel like I put on that thick scratchy wool sweater that you have to wear to a relative’s house because they gave it to you.
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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?

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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?