Schools and Credit Unions Serving Communities Together

Under the US Constitution the primary responsibility for public education rests with the states, not the federal government.

The result is that K through 12 education is overseen by a fragmented system including local school boards, county level agencies and state departments of education.

Financially, approximately 90% of funding is from state and local taxes. The federal government’s share of education fluctuates between 12-15%.

Effective public education encounters all of the major issues of society: race, income disparity, immigration, technology access, financial resources and even political ideology.

The local school systems are a daily example of the major demographic, political and economic issues each community must deal with.

An Indicator of Economic Needs

Some credit unions such as NET Credit Union actively partner with school districts in their educational and outreach strategies.

Most credit unions today have community charters. One of the most useful indicators of the need for credit union services may be from the economic data provided about K-12 students.

Public information on each community’s K-12 student population is abundant.

Here are three examples of data points about the economic circumstances of students in the greater Washington DC area:

  1. In Montgomery County, Maryland, with 144,064 students, the percentage that have received free and reduced price meals (FARMS) is 42.4%.
  2. In Fairfax County, Virginia, with 187,000 students, the number considered economically disadvantaged is 34%.
  3. In the District of Columbia’s public school system of 94,503 students, 77% are considered economically disadvantaged.

These three school systems have some of the most affluent housing areas in the country and, due to government employment, some of the steadiest levels of employment.

Yet significant percentages of students are from families living in circumstances where the school system provides free meals.

Investing in the Next Generation of Members

School statistics can inform credit unions about the economic circumstances of local families especially those that are just be getting by. Financial education and access to reasonable credit is critical for lower income families achieving financial stability, if not independence.

Partnering with schools and students is a way to introduce the cooperative option to the next generation of members. Every community has a school system and most are under local control. A first step could be to ask the school board for the public statistics on their student’s economic and demographic trends. Then open a dialogue for how to reach those families who would benefit most from credit union service.

Forming a collaborative relationship with the single most important institution families’ consider when moving into an area, could give credit unions a long term partnership that enhance opportunities for those most in need.

US Economic Growth by 50 Largest Metropolitan Statistical Areas

Economic conditions across the US are very uneven. The Bureau of Economic Analysis of the Commerce department has released the growth rate of the country’s top 50 metropolitan statistical areas (MSA) through September 2019.

At the high end are Las Vegas-Henderson at 8.6% and San Jose-Sunnyvale at 7.44%. At the other end of the range are Allentown-Bethlehem at -1.2% and New Orleans-Metairie at -2.52%

Knowing your area’s economic circumstances should help you understand members’ expectations about their economic outlook.

Heroes In a Time of Crisis: Investing in Staff and Members’ Well Being

The following is a coronavirus action plan from Doug Fecher, CEO of Wright-Patt Credit Union in Beavercreek, Ohio. He opens by honoring all those serving on the front lines, outlines changes in operations (details omitted) and summarizes the waiving of many member fees. The member actions below could reduce income by $50 million or more depending on the length of the crisis. This, he says, is why we have capital. “I’m sure there’s more we can do, and will do, but this is where we’re starting.”


What is a hero?

No matter what the dictionary says, for me it is someone who simply answers the call. Often we think of saving a life, but actually most heroic acts are things we don’t usually think about at all. More often than not, heroes are those who take care of their neighbors when nobody else will.

Some people put themselves in position to perform heroic acts. Others find themselves thrust into the role– finding themselves at a crossroads of time, place, and opportunity where a decision must be made. Do I step up or not?

Being a hero doesn’t mean we don’t have fear – it means we do what we need to do despite being afraid.

Imagine life without our everyday heroes.

First responders, members of the military, nurses, and doctors are clearly heroes. But they aren’t the only ones. So understand me when I say, with all due respect to those obvious heroes, that I consider people like us – people who work in grocery stores, pharmacies, and other typical businesses who never thought that what they do is provide essential community services – those people can be heroes too.

And make no mistake – this includes all of you! You and your colleagues at WPCU who work in a business that provides one of the most essential services of all – peace of mind. At a time when you are worrying about your own families you are also being asked by the credit union to step up for others – to make sure members don’t run out of the cash they need to manage their own way through this terrible and unprecedented event.

None of this is easy. Everybody wants passionately to get it right. I want to assure you that we are doing everything we can to balance the interests of all our stakeholders to make the best decisions we can. Things are changing daily, even hourly, and so as they change so will the decisions we make to navigate our way through each day.

Heroes. That’s what I think you are, and I don’t think I’m overstating it. I cannot thank you enough.

Now let me update you on where we are today: [internal operations omitted]

Member Temporary Emergency Relief Services

We are putting in place a set of emergency relief services to help members cope with the economic hardship of job loss or reduced income. These services will be available as soon as practical (some require programming, etc. that may take a few days).

Emergency relief services include:

  • Temporary unemployment loans are available at 4% interest
  • Early withdrawal penalties on share certificates of deposit are waived (daily cash withdrawal limits apply).
  • Late fees on loans are waived.
  • Consumer credit card limits for creditworthy borrowers are automatically increased by $1,000.00; higher limits may be available by request.
  • Commercial credit card limits may be increased upon request.
  • Members are permitted to skip up to three consumer loan payments without penalty (Skip a pay may not be available on certain loans). Additional skip-payments may be granted upon request.
  • We are temporarily suspending new foreclosures and automobile repossessions. If you are having trouble paying your bills we urge you to contact us so that we can help.

We are also implementing a temporary change to member fees in order to provide further relief:

  • Share transfer fees for NSF/overdrafts are suspended.
  • NSF/overdrafts fees are suspended.
  • Member choice transaction fees are suspended.
  • Foreign ATM fees are suspended.

Thank you …

These are difficult times, but they are temporary. We will get through this even if we don’t know just how long it will last. Our community will become more used to a new normal way of doing things including accessing cash, and this will happen even before the crisis ends. Every day that passes brings us one day closer to this being over.

I hope you understand that the actions we are taking are to protect our partners and members as best we can. Truth be told I personally hate that we can’t just close shop and have everyone go home to wait this out. But if a home catches fire the firefighters will show up. If you go to a hospital there will be doctors and nurses waiting to care for you. If you need food or medicine there will be grocery and a pharmacy open to help you. And if you need cash or can’t pay your bills, buy basic supplies, or take care of your family, we are your credit union. We will be there for you too. Closing our business is just not an option.

And that’s why I think you all are heroes. It’s not something I say lightly, and so when I say thanks for all you’re doing, I hope understand the emotion and force of those words. I simply can’t thank you enough.

Doug Fecher, CEO

Learning at the Speed of the Crisis: A Cooperative Advantage

Everything Cancelled! That is the economic and social reality today from the coronavirus crisis. Except for one critical capacity-to learn at the speed of change.

Credit unions have three distinct strengths in the current crisis:

  1. They focus locally. Regardless of national guidelines or initiatives, all execution is local. Schools, businesses, health care and all services are led and delivered specifically for each community The community is the “home field” advantage of every credit union.
  2. Members come first, not a stock price or buybacks, or jousting for a corporate takeover as competitors weaken. Members are why we exist. Their financial health is each institutions’ “social capital” of trust.
  3. Collaboration, based on the principle of self-help, is our competitive advantage. Working together even with “social distancing” is integral to our system’s design.

Turning to Action

When asked about knowing the peak of the curve tracking the virus spread, NIH infectious disease expert Dr Fauci stated: “We don’t know about it until after the fact.”

In contrast to this post-event knowledge (hindsight is always 20:20) the cooperative advantage is the ability to share and learn from each other to proceed with confidence through each phase of a crisis. Real time sharing brings insight and foresight.

Every crisis, externally imposed or internally caused, goes through a similar, predictable cycle: Discovery/incident, growing realization of impact, uncertainty creating fear and doomsday predictions; responses-local and national; slow recovery, and step by step return to normalcy.

The greatest danger is to get stuck in judgments in one part of the cycle and assume that will be the situation forever. The best example is NCUA’s actions to the corporate investment portfolios in2008/09.

Learning occurs from first-hand intra-industry sharing about credit unions plans and actions. Often in real time webinars.

“Uninterrupted Service” and “There’s a lot we can do”

One CEO’s focus in his staff communications is to ”deliver uninterrupted service to members.” He further observed:

We are offering members a variety of ways to help them. We have a temporary income replacement loan with an interest rate of 2 or 3 percent. Also a few extra free skip-a-pays (we offer one free skip-a-pay per year as a matter of routine). Our Governor closed our schools for three weeks which is creating a childcare nightmare for our mostly parent-age employees so we are considering an interest-free loan for any extra childcare expenses they incur during the crisis (we need them to come to work if they can). 

So far not much of an issue for members – we’re getting some requests for assistance but only a handful so far. I expect this could increase significantly in coming months.

Our crisis team is meeting every day to re-assess and make new decisions. I’ve been around a long time and have never seen anything like this – this is worse than the great recession because of the panic around health. We will be fine – this is what we have capital for, right? We have a lot of it so there’s a lot we can do.

Keeping Credit Flowing-Lowest Borrowing Rates Ever

The Federal Reserve’s actions lowering short term rates to zero creates a potent borrowing and member lending opportunity for credit unions This morning’s fixed rate term loan advances from a FHLB ranged from .81% for one year to 1.02 for five years.

With this historically low cost of funds, credit unions can leverage their balance sheets to assist members to refinance outstanding loans. Refinanced loans have a payment history and can be secured. Lowering rates puts more cash in members’ hands or enables faster loan spay offs. Refi’s of home mortgages can benefit members years beyond the crisis.

Creating low cost short-term financing for those members and businesses subject to uncertainty is vital to an economic rebound. Credit unions have the local knowledge to direct their lending priorities where it is most needed in the community.

“An Essential Service” and “Being Good Neighbors”

I received the following excerpt in an email from a credit union:

Financial institutions are considered an essential service, so our branches are open to serve you during the shelter-in-place order impacting six Bay Area counties.

In a crisis, recovery starts from the bottom up, not the top down. While national funding can counter market’s liquidity panics, recoveries in retail sales, business re-openings and restoring normal patterns of commerce must occur locally. Dependable financial services are the oil to keep the wheels of commerce turning.

On Sunday I participated in a Zoom church gathering. The order of service was the same as if we were in the sanctuary, some music and congregational interaction through Zoom’s “gallery view.” The technology provided all regular service practices. By doing so it renewed a sense of community even without physical presence.

Learning inspires innovation. Another congregation announced in the midst of city-wide church closures in DC: “The church is not closed, but the church is changing its practices for the time being.” 

When everything is postponed or shutdown in our daily lives, all routines are unsettled.

Crisis can breed fear, even panic. One credit union reported a member who withdrew his entire share balance: $500,000.

Learning new ways to be good neighbors for our members, community and the coop system could be the most important outcome of this crisis experience. That would be an “essential service” lasting much longer than facilitating daily financial transactions.

The Cooperative System’s Unique Capabilities In a Crisis

Since the era of deregulation, the credit union system has navigated multiple national and local crises. These include the October 1987 stock market shock, the meltdown of the S&L system, the bankruptcy and government rescue of the FDIC and FSLIC, the Y2K uncertainty, the 9/11 terrorist attack, and the Great Recession of 2008/09.

Now the coronavirus threatens national physical and economic security.

There are three vital responses that characterize credit union capabilities in a crisis.

1. Liquidity

The number one priority for both credit unions and their members. As economic uncertainty mounts, markets begin to tighten, there is no longer rational pricing, and everyone starts to hoard cash. Consumer spending slows, job losses mount and business revenue becomes less certain.

The most important action credit unions take is to keep credit flowing. Actions include supporting members’ credit requests, financing purchases such as cars and housing, and marketing lower interest rates to help members refinance higher rate loans.

2. Act Counter-Cyclically

Credit unions are designed for crises. Cooperatives’ unique structure enables them to act counter cyclically and therefore stand against the market pressures to put institutional financial priority ahead of member interests. Credit unions are the solution to many of the individual and community economic strains a crisis brings. By keeping the loan windows open and liquidity available at normal rates, market failures can be ameliorated and the time to recovery shortened.

3. National Legislation

The national legislation that accompanies a crisis should be an opportunity to enhance the cooperative model, not queue up at the federal trough seeking taxpayer funds for an industry built on the concept of self-help.

Significant legislation to upgrade the cooperative system historically occurs once each decade. Given the rivalry with banking groups and conflicting treasury priorities, it is difficult to predict when and how any opportunity will occur.

Rather than being caught up in the bailout legislative frenzy, this is the time to upgrade the cooperative system. Necessary bold changes could include:

    1. The redesign of the CLF to bring governance by the member owners and to enhance purpose by enabling cooperative access to the secondary market via the CLF.
    2. Explicit recognition of member-owner rights in cooperative governance.
    3. Enhanced accountability and transparency by NCUA for use of member funds and the agency’s responsibility in advancing cooperative solutions.

Not Letting a Crisis Go to Waste

The urgency of a crisis can cause responsible parties to focus only on the immediate challenges and not broader opportunities. Restoring the status quo can dominate the immediate agenda.

Credit unions were created to transform market options for members. During the Depression they were a national policy response resulting in the passage of the FCU Act.

Credit unions can respond to crisis in ways firms worried about share prices and market reactions cannot. Their member ownership structure ensures credibility by placing members’ interest first. The cooperative financial structure permits patience to persevere through the cycles of value that accompany every crisis.

Leaders Who Believe in the Power of Self-Help

These features mean that credit unions, in crisis, can demonstrate practically and forcefully why America needs cooperative solutions more than ever.

The key to realizing these crisis advantages is leadership. Can the persons responsible avoid getting caught in the panics that ensue? Will leaders listen and collaborate with credit unions on the front lines already responding with creativity and resilience? Will they promote the cooperative solutions or revert to practiced roles promoting personal or political advantage?

The cooperative message is that we are not prisoners of fate in a crisis. Credit unions demonstrate the many ways to overcome the doubts of today for a better tomorrow.

What Can Credit Unions Learn from Bethesda’s Tastee Diner

In 1982 I moved to Bethesda, Md. It is a zip code address with a post office, but there is no city. The local government is the Montgomery County council. There is no local representation. As a result the Bethesda area’s fate is not controlled locally. A dominant objective of the County Council has been to stress development and the growing tax revenue that results.

Since the metro line opened in 1984, Bethesda has gone through waves of building booms and increasing construction. All local gas stations have been replaced by 12 story or greater condominiums. Local shops such as a fresh fish store, barbershops, nail salons and second hand consignment outlets survive only until the next rent increase.

The development boom has accelerated this past year with the construction of a new metro purple line connecting with the original red line stop. On top of this juncture of the two lines are three 30-40 story glass and steel office centers. No historical site such as the farmers market, no single or double story retail space is safe from this development driven construction frenzy. All the familiar, locally-owned businesses are being replaced by high end retailers, national chains and the latest trendy eateries.

The Tastee Diner

One business has avoided this construction destruction: the Tastee Diner. First opened in 1935, it is the only restaurant that has survived economic crisis and successive waves of ever dense building. The life span of any restaurant in Bethesda is measured by the years left on the lease as landlords seek increasing returns from their valuable holdings.

Tastee Diner is literally a throwback to the dining car layout of train travel. It has not changed its seating format of wooden booths or sitting at the counter and watching the cook work at the grill. It even has a jukebox at each table. For a quarter you can hear Johnny Cash Walk the Line or other 1960s rock and roll hits.

The sign on the door says: “Welcome, Open 24 hours.” The diner closes only 42 hours per year from noon on Christmas eve to opening at 6:00 am the day after Christmas.

The menu is classic American “comfort food.” Fried chicken, meat loaf, burgers, creamed chip beef on toast, etc. There are specials of the day and a senior menu for over 55. Kids eat free in the evening, one per each paying adult. Prices are the best food value in town. All drinks have free refills. The diner doesn’t have a liquor license, a key source of restaurant income.

Three years ago the local DC cultural magazine listed the diner as one of the top five restaurants to go in the greater Washington area for pancakes on Shrove Tuesday.

At the Foot of Marriott’s New Head Office

Today, the 85-year-old diner literally rests at the foot of the construction of the new international headquarters of the Marriott hotel chain. It will be dwarfed by this 27-story office building that will tower over it in every possible way.

How Do You Survive?

As we left the diner this past week, I asked the manager how they’ve avoided the fate of all the other local businesses. How can you possibly stay here in this increasingly upscale, luxury retail environment that constantly turns over renters every three to five years?

The answer was simple: “We own the land.”

The message for credit unions worried about fintechs, new entrants, big bank competitors or the constant refrain that you have to be big to survive is to remember the Tastee Diner model.

Your members won’t go away. Local loyalty can trump all the newcomers in the world as long as we remember that our members “own the land.”

A Picture Worth a Thousand Words

A Call to Action and a Test of Who Credit Unions Are

This photo is shared with permission from the January 23, 2020 NCUA board meeting courtesy of the New York Taxi Workers Alliance.

What are these members telling us? Why has no one listened to them before? More crucially, why did these borrowers show up at an NCUA board meeting?

Member frustration and hope are on display. Throughout the taxi medallion disruption NCUA from top to bottom has turned a deaf ear to the needs of the member-borrowers.

This neglect has been pointed out time and again in letters to the NCUA Board, in articles in the New York Times, and in the stories from members to the press. Now there is a last opportunity to do the right thing. And to demonstrate the credit union difference.

A Thousand Words

A Feb 5, 2019, an article on described NCUA’s ineffectiveness in its oversight of the taxi medallion disruption. The article asked: The Taxi Medallion “Resolution” Works In Whose Interest? Following are excerpts from one year ago:

. . . .The critical question is not what the normalized the value of the medallion asset might be, but how does a credit union manage through a business disruption to sustain operations? The NCUA’s response was to eliminate the impacted credit unions through liquidation, purchase and assumptions, and forced merger. And in the end, to charge credit unions $744 million for “washing its hands” for oversight.. . .

This raises two questions: Did the NCUA act in members’ best interest? And is the $744 million liquidation expense the wisest use of credit union money?

Who Is The NCUA Really Helping?

The traditional approach of share insurance is to ensure the safety of member savings for all amounts less than $250,000. But in a credit union, the interests of the borrowers should also be considered and treated with the same or even greater respect as those of savers.

Credit unions were not designed primarily as savers clubs. Consumers have multiple options for safely saving money, insured and uninsured.

Credit unions were formed to address borrowers’ needs. Taxi medallion financing was not only a community service but also an ideal example of cooperative finance. A lot of people — many of them immigrants making their way in a new country — financed their American dream through taxi driving and then medallion ownership.

When the security that underwrites a loan is devalued, both the borrower and the institution suffer. When the security is an income-producing asset, such as a taxi medallion, the impact on both is even greater. Both income prospects and accumulated value are hurt. 

Whatever the security for a loan, a lender’s successful transition through a crisis depends on its willingness to rewrite terms, lower payments, and recognize the borrowers’ efforts to find other income and/or to persevere in current circumstances. This is what credit unions did repeatedly for home and auto borrowers during the recent Great Recession. Cooperative design makes this patient, member-focused adjustment process possible.

The Broken Bonds Costing $500 Million

Conservatorship is an important regulatory option for sustaining the institutional framework as a credit union works through problem assets (loans or investments) whose future value is uncertain. But if regulatory problem-solving becomes merely a “fire sale” to dispose of problem loans, then the bond between the borrowing member and the credit union is broken. The future for both becomes problematic and the options for positive, mutual solutions much reduced.

The NCUA conserved Melrose and LOMTO credit unions in February 2017 and liquidated them 18 months later. When these conservatorships were terminated, the opportunity to preserve value, and assist members, was destroyed..

LOMTO and Melrose reported their June 30, 2018, financial condition under NCUA management as a combined deficit capital position of $155 million. When liquidated within months of that filing, NCUA recorded a $744 million expense. This $500 million difference shows the cost of giving up all future value from working with members. Resolution becomes “cutting and running” away from members’ problems rather than using cooperative design advantages to resolve them.

A Request to the NCUA Chair

NCUA’s ineffective oversight undermined the relationship between the credit unions and borrowers so much that the president of the Committee for Taxi Safety wrote NCUA chair McWatters on May 12, 2017, about the agency’s shortcomings: 

“For the most part medallion owners are not seeking to walk away from their loans. They are not seeking to walk away from personal liability. Recognizing this, lenders have stepped up to meet this challenge and work with medallion owners. … The only lender that is refusing to work with medallion lenders is Melrose, under the control of NCUA. Regardless of each owner’s outstanding debt, the NCUA has taken a hard-line, one-size-fits-all approach that demands massive up-front principal pay downs of several hundred thousands of dollars and/or mortgages on residences to renew loans. 

“Even if the borrower complies, the NCUA then seeks to substantially increase the interest rate on the loans. Melrose has taken borrowers who want to pay and placed them in a position in which they know they will be put in default, thereby forcing them to face financial ruin. …

“The NCUA’s position is so extreme that it has told borrowers who are current on their loans and still making all payments, that if a medallion is in storage for any reason, temporarily or long term, that it will immediately commence foreclosure proceedings. … 

“All we are asking is for the NCUA to act reasonably and allow struggling medallion owners some flexibility in paying off loans. … The NCUA’s behavior has been that of a bully. … It is time for the NCUA to end this assault on our industry and show leadership and human decency.”

Transferring Loans to an Outside Servicer

The best estimates implied by call report data are that all credit unions now hold more than 8,000 member loans secured by taxi medallions. The average outstanding loan is between $250,000 and $350,000. Many of these borrowers will be financially challenged as self-employed driver/ debtors. Like others working in the so-called gig economy, their future is not certain. Will credit unions work with these borrowers as members, or will the regulator and its agents try to rid themselves of any responsibility for these member-owners?

The NCUA transferred Melrose’s medallion loans to an outside servicer. . . The borrowers now have three options: pay, go delinquent, or walk away via bankruptcy. Without an interested lending partner holding the loan, rewrites or other refinancing accommodations are lost. There is no prospect of a future relationship. The credit union promise to member-owners is non-existent. Selling problem loans is how banks, not coops, routinely solve their problem credits.

Although written one year ago, the article shows why the borrowers came to the NCUA, not the FDIC’s board meeting last week.

Where We Are Now: NCUA Largest Holder of Taxi Medallion Loans

Newspapers reported NCUA’s intent to sell in the open market its portfolio of loans acquired from its liquidations. Last week a New York city councilman announced a multi-pronged effort to stabilize the taxi industry including creating a mission driven, nonprofit entity to purchase the loans at a discount and then pass the lowered obligation through to borrowers CUNA and three leagues wrote NCUA on January 22 requesting that NCUA delay a liquidation sale due to harm it would cause borrowers, even those who are current in payments, and to credit unions still holding loans but whose collateral would be devalued in a fire sale.

NCUA working in collaboration with credit unions, leagues, CUSOs and New York taxi regulators, has the chance to create a cooperative solution that would help thousands of member-borrowers and set break from its past neglect. One NCUA board member called the drivers’ attendance “democracy in action.” But democracy only works if those in positions of authority respect their constituents by supporting collaborative solutions, versus selling out to financial bargain hunters seeking to maximize profits out of the misfortunes of others.

A Message: Who Does the Credit Union System Serve?

Read more:

CU Times: Amid Urgent Calls for Help, NYC Taxi Medallion Task Force to Meet With NCUA Officials

NY Times: New York Is Urged to Consider Surge Pricing for Taxis

From the Field: “Takes Away Choice” – One Member’s Comment on Proposed Chesterfield FCU Merger

The Board wrote in part to justify the merger:

Your Chesterfield 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.

The member responds:

I have been a member of Chesterfield F.C.U. for over 17 years. I do not support this merger and ask that all members vote against it. I have looked at the Financials for Chesterfield F.C.U. and in my opinion, the credit union is stable and is meeting its financial commitments.

It is well known that large majority of the members of Chesterfield F.C.U. can already qualify for membership at VACU due to being part of the Virginia Retirement System. This merger only takes away a choice from the current Chesterfield F.C.U. membership and future employees of Chesterfield County government and the Chesterfield County Public Schools. Less consumer choice is not a good thing. For this reason, I ask that the NCUA not approve this merger.

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.