Category: NCUA

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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. http://www.nytwa.org/

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 creditunions.com 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

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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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NCUA Board Member Harper’s Uninformed Stance on Risk-Based Capital (RBC)

It is one thing to be uninformed on a critical issue of public policy. It is another to open one’s mouth and remove all doubt. And then compound the folly by writing a public editorial after losing a 2 to 1 vote at the most recent NCUA Board meeting.

Harper’s Rationale for Implementing Risk Based Capital Rules

The core logic in his December 16 press release follows: (https://www.cujournal.com/opinion/ncua-a-day-late-and-a-dollar-short-after-delaying-capital-rule

After the Great Recession, the Federal Deposit Insurance Corp. and other banking regulators moved promptly to update and implement their risk-based capital standards. Yet the NCUA wants to delay implementation for a second time. Why should it take complex, federally insured credit unions with $500 million or more in assets seven or eight years longer to implement their comparable risk-based capital rule than it took for banks and thrifts to implement theirs? That’s an uneven regulatory playing field…

Pursuant to the Basel Accords, which sets international best practices, no modern financial institution’s regulatory system operates without a meaningful risk-based capital component. Not only would the 2015 RBC rule finally bring the NCUA into greater compliance with the Basel framework, it’s required by law in the Credit Union Membership Access Act. That’s why the risk-based capital standard is consistent with the cooperative nature of the credit union system and provides comparability to the other federal banking regulators.

The Argument is Dead Wrong

Apparently, Board Member Harper and his staff have been so busy that they have failed to note that on September 17, 2019, the FDIC eliminated all risk-based capital requirements for community banks with assets less than $10 billion. The policy was supported by the OCC and Federal Reserve.

Banks are no longer required to calculate or to report the ratio. They will be considered well capitalized under PCA if they meet a simple leverage ratio.

This simple leverage ratio is the PCA model for credit unions. The banking regulators have endorsed the credit union’s current and historical approach to capital adequacy measurement.

Harper now wants to impose this failed system on credit unions. The banking regulator’s actions acknowledged that RBC is not only burdensome, but more importantly, it does not work in practice. As one banking analyst Tom Brown observed as early as 2014:

We’ve already seen that the risk-based approach does not work. It’s obvious that neither man nor model can adequately assess a given asset’s risk under all circumstances before the fact. It doesn’t make sense to spend a lot of time trying. It does make sense to have a minimum leverage ratio, but it should be the same for banks of all sizes.”

Source: A Loss of liquidity, not inadequate capital, is what often dooms banks. Bankstocks.com, April 22, 2014

Similarly, Harper’s references in his editorial to Basel, the taxi medallion failures and the role of capital in credit unions are inaccurate. More importantly his reference to an “uneven regulatory playing field” demonstrates a complete failure to grasp cooperative design, its distinctive strengths versus for-profit financial models, and the unique role of the NCUSIF’s pool of credit union capital.

The Failure of NCUA Board Leadership

When NCUA board members appear so oblivious to the realities of their responsibility, other leaders must step up. Call out the erroneous facts and logic. Present reasonable solutions. And if that fails, go to Congress and the press.

This public bumbling undermines the public reputation of the NCUA board and the cooperative system it regulates. It calls to question the ability of the board members to oversee their responsibilities not just for policy but also for basic tasks of examination, supervision and funding oversight.

The track record described below suggest the current NCUA board has a long way to go to overcome a growing list oversight failures.

Read more from the blog:

 

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Where is the Transparency for NCUA’s Actions at Municipal Credit Union

In May, NCUA became conservator of the $3.0 billion Municipal Credit Union in New York City.

In the June call report, 45 days after the conservator took over, Municipal reported a $123 million YTD loss. This appears to have been caused by the termination of a defined benefit plan triggering a required funding of the shortfall. This loss reduced the credit union’s net worth ratio to 3.41%, or undercapitalized, from over 7% the quarter prior to NCUA’s becoming conservator.

The September 2019 Update

The most recent call report implies that the credit union had net income of $10 million as the YTD loss has been reduced to $113 million. Comparing June and September call reports shows total membership declined by 35,000 and total employment reduced by 104 (to a total of 591) in the three months ending September.

The average salary and benefits are $369,000. Total salaries and benefits have increased to $163 million from $62 million for the previous year. This extraordinarily high number suggests the credit union is paying out the terminated defined benefit program.

The professional services expense is running almost three times greater than the prior year: $18 million versus $6.9 suggesting the consultants are well compensated, or is there another explanation?

The credit union’s loan originations are down significantly at $378 million from $615 million in 2018. Shares declined by $76 million in the quarter. Delinquency is .85% and the allowance accounted is funded at 227% of total delinquent loans. Net worth is 3.87%, or still undercapitalized.

What is Going On?

What is the purpose of all of these very expensive charges? Why close out the retirement fund now when liabilities will stretch decades into the future? Why were over 100 employees let go? What is the reason for the decline in lending? Is this tied to layoffs? Who is responsible for these decisions? Is anyone overseeing this rundown of the credit union? What is the plan?

Most importantly, whose interests is the conservator serving. Is it. . .

  • The employees who are taking the brunt of the layoffs?
  • The members whose numbers fell by 35,000, shares by $76 million, and loans by $24 million in the September quarter?
  • The conservator’s reputation and/or compensation?
  • The NCUA’s desire to protect its public standing?
  • The credit union system’s trusted role in New York City and the state?
  • The cooperative option in the nation’s financial system?

No Transparent Goals

No one knows, because NCUA has not provided any information that would give all stakeholders insight into the goals of this regulatory seizure.

Without any goals, it is easy to defend whatever outcome occurs. (“We tried our best.”)

Options are not debated. Critical constituencies are left out of the deliberations. The result is that confidence in the outcome will always be open to question.

Operating in secret will only create further uncertainty. Is the goal a turnaround to return the credit union to its owners and the community? Or is this just a dressing up exercise to sell off this 100-year franchise and branch network to the highest bidder? And thereby let NCUA wash its hands for its responsibility in this situation?

The silence of NCUA board members, some of whom have been before congress twice in the past ten days, is deafening. It is easy to talk about future visions and past activities, but who is dealing with the here and now? Not even Municipal’s website mentions the NCUA’s takeover.

Chairman Hood, this is occurring on your watch. Are you a CEO on the bridge or one sleeping in your cabin?

Who is Affected by Municipal’s Conservatorship?

The field of membership from the web site:

Who Can Join?

You can Join MCU if you are:

      • An employee of the City of New York
      • An employee of a hospital, nursing home, health facility, or their affiliates located in New York State
      • A Federal employee who works in the five boroughs
      • A State employee who works in the five boroughs
      • All students enrolled in a college, university, school, or institution, in the City University of New York (CUNY) education system
      • All students enrolled in St. John’s University who are attending campuses located in New York State
      • An employee working for agencies operating within the City of New York metropolitan area and which are at least in part funded by the City of New York or the State of New York
      • A retiree receiving a pension or annuity from one of the organizations that qualify for membership in MCU
      • An employee of an insurance company that offers health related insurance in the State of New York
      • An employee of companies that produce and/or supply hospitals in the State of New York with medical and other types of healthcare products
      • An employee of the City of Yonkers or Mount Vernon
      • An employee of a private college located in the City of New York
      • An employee of a private or public college in the counties of Nassau, Suffolk or Westchester
      • An employee of the Archdiocese of New York or Brooklyn
      • A member of certain private employers or industry groups
      • A family member of a member or individual who is eligible for membership. Eligible family members include those related by blood, marriage, adoption or living in the same household, including spouse, parent, stepparent, child, stepchild, sibling, stepsibling, grandchild, grandparent, or great grandparent. “Household” means living in the same residence and maintaining a single economic unit.
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Understanding Who We Are

There seems to be a lot of confusion, intentional or otherwise, about why credit unions cooperatives exist.

For some, buying banks is just another “voluntary, market-based transaction.”

One NCUA board member has asked that credit unions be subject to more rigorous consumer exams, just like the banks have.

For others, having greater capital and balance sheet options is necessary to “level the playing field.”

A Reminder of the Difference

At a time in the past when credit unions were in the words of the NCUA Chairman “on a roll”, he reminded them of their most important characteristic:

“Your future is brighter now that it has been ever before. You have the flexibility to do things you were never able to do. Plus you have the most important ingredient of all-the element missing in banks and S&Ls: your relationship with your members. You are cooperatives first and financial institutions second.” – Chairman Ed Callahan, NCUA 1982 Annual Report, pg 10.

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From Bipartisanship to Doubt — Professional Reputation in Washington

From Senator Sherrod Brown’s (D-OH), opening statement at the February 14, 2019 confirmation hearings for NCUA’s nominees Harper and Hood:

“Mr. Hood previously served as an NCUA Board Member from 2005 to 2010. Mr. Harper worked in the NCUA’s office of Public and Congressional Affairs and served as the chief policy advisor to the Chair from 2011 to 2017. Both nominees possess a deep understanding of credit unions and the issues that affect them.” [emphasis added]

From Senator Brown’s questioning of NCUA Chairman Hood at Senate Banking Committee hearing, December 5, 2019:

“I just am not sure you understand what an independent regulator is.”

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Are Credit Unions Missing Out on the Next Generation of Entrepreneurs?

At colleges and universities throughout the country, entrepreneurship is being encouraged by administrators and embraced by students and professors.

There are new, for credit, academic programs in innovation and new business ventures. Universities routinely offer prizes for the best ideas. Competition among startup ideas are held within and among campuses throughout the year.

What is TigerLaunch?

One of the recently promoted competition open to all students is TigerLaunch.

Here is the description from the website: “Sponsored by the Princeton Entrepreneurship Club, TigerLaunch is the nation’s largest student-run entrepreneurship competition dedicated to building a network of student founders at the university, regional and national levels. TigerLaunch combines networking, mentorship and funding opportunities to craft a distinct experience.”

The site lists the most recent winners and discusses financial and mentoring support available to attendees.

Where Are Credit Unions?

Three years ago, several enthusiastic freshmen entered George Washington University’s new venture competition with the idea of starting a credit union. Their mission statement: “to strengthen the GW community by helpings students and alumni bank cheaply, build credit, better manage their finances and develop valuable skill sets that they can bring to their careers.”

Their concept placed them in the top ten finalists (from several hundred submissions) gaining them a small cash prize and free office space. The university issued a letter of support

So where is this initiative today? This all-volunteer effort with undergraduates and advisors donating their time, ideas and energy?

The quick answer: it is in NCUA’s bureaucratic bog for new charters. The organizers recently shared the documentation with me for counsel. The first draft of their operating policies runs over 70 pages and includes bank secrecy, foreign assets control, disaster recovery, vendor management and additional statements more relevant to their immediate operations such as a loans and collection policy.

A second document is for asset/liability and liquidity management. It runs 10 pages.

The credit union has also developed five years of financial projections. In the initial years the balance sheet will be less than $500,000 total assets. Their products will be simple, and all transactions will be virtual. They have identified and selected their principal vendor relationships and even signed an agreement with a core provider.

They have $10K in the bank and want to raise a total $40K in initial capital. The goal is to operate at breakeven, relying entirely on student volunteers.

They have not been able to meet in person with NCUA. Their goal at this time is to be operational by next May to work through startup issues before classes resume in the fall.

The Agency has slowed the process to a crawl with paperwork requirements, so much that the original entrepreneurs are now seeking successors for this effort when they graduate.

The Dearth of New Charters

Few would question the need for credit union services in communities across America. But the passion and vision needed are drained of life by NCUA’s bureaucratic process that results in few if any new charters each year. Meanwhile 250 or more charters are closed via mergers or dissolution because of morale and/or leadership failings.

Without new generations of leaders inspired by the passion to serve and make a difference and using the latest technology, the credit union option will become a “mature” industry in slow decline. It will end up cannibalizing itself through self-interested mergers, and seek growth via bank and other acquisitions, not by deepening relationships and value for members and communities.

Which start up effort would you back? The students participating in their university’s innovation fairs, or those trying to bring cooperative financial services to the campus?

The answer could be a harbinger about the relevance of credit unions for today’s newest generation of financial customers. Chances are they won’t be called members, except by American Express.

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The Ax Lies Ready at the Root of the Trees. . .

Chairman Blaine Luetemeyer (R-MI) asking a question at the House Banking Committee on December 4, 2019 of Chairs Rodney Hood, NCUA, and Jelena Williams, FDIC.

Rep. Luetemeyer regarding the purchase of banks by credit unions: That is something on the radar of both groups. I’m fearful of a war beginning to break out. Are you guys at all concerned?

Chairman Hood: Sir, these are voluntary market-based transactions. . .

Chairman Williams: About 28 banks have been acquired by credit unions since 2011. There are additional mergers (sic) pending. Yes, we are looking at this. The two entities are not set up in the same way. And Congress did this for a particular reason. . .

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

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

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

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

CEO could benefit by over $8.0 million

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

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

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

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

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

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

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

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

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

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

What the members lose

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

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

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

Community & Education Outreach

https://www.schools.org/about-us/news-publications/news-special-offers#EducationOutreach

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

Abdication by the Board

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

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

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

The merger rationale

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

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

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

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

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

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

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

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

Reviewing the latest facts

Savings: Different rates reflect different ALM strategies

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

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

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

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

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

Two distinct lending portfolio priorities

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

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

Institutional performance

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

Some comparisons of note:

Ratio                                   Schools  Financial            Schools First

Efficiency                         60%                                        66%

Net Worth                        12.2%                                     11.6%

ROA (YTD)                        1.85%                                    1.16%

Delinquency                    0.22%                                   0.46%

Net C-O/ave loans        0.39%                                  0.49%

Allow/Del Loans            2.47X                                     1.58X

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

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

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

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

Schools Financial Named in Top 200 Healthiest Credit Unions List

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

The diminution of local employment and leadership

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

Top-5 Reasons to Work for Schools Financial Credit Union

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

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

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

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

Community

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

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

The fallacy of cooperative mergers

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

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

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

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

But the regulator approved this

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

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

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

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

Merger violates a sacred trust

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

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

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

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