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The State of Your State

Each quarter, the FDIC issues a single page, three part economic and banking profile for every state. You can look up any state from their website.

What You Can Learn

The data is usually timely, released about two months after each quarter’s end. It is a good macro snapshot of key economic and financial institution trends.

It provides three current data sets:

  1. Macro economic indicators including the % changes in employment growth , housing permits issued, home price index and rate of bankruptcy filings.
  2. Banking trends showing number of institutions, total assets, asset quality, capital/earnings, liquidity and loan concentration trends for five quarter ends.
  3. Banking profile including the # of banks in the five largest deposit markets and the distribution by asset size within the state. Note the September report uses the latest 2019 bank deposit report.

Adding Credit Unions to the Totals

Using external databases from Callahans and NCUA, an analyst can easily add credit union numbers to the banking profile to see total market size and individual firm share.

In many states there is a marked difference in the balance sheet composition for banks and credit unions. However, growth and financial ratios can be compared for relative performance trends.

The one caution is that the institutional performance ratios from the FDIC data are based on the median( the number half way in the set), whereas most credit union data is a weighted average which is a better indicator of a system’s overall standing.

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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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The Unseen Cooperative Advantage

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

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

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

A cooperative virtue

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

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

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

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

Two examples of impatience

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

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

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

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

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

Progress is problem solving

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

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

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

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Bob Minor: Mentor, Counselor, Volunteer and Friend for Over a Quarter of a Century

This week ends the tenure of Callahan’s longest serving board member, Bob Minor. He has been part of multiple organizational transitions including three changes of CEO leadership since being asked to serve, as a personal favor to me in the early 1990’s. This was a time when Callahan & Associates transitioned to become a leader in credit union analysis, strategy and collaborative initiatives.

Bob is a long-term Washington hand, having attended almost every Presidential inauguration starting with FDR’s second in 1936, a practice that ended with the current White House occupant.

He graduated with BA and MA degrees from George Washington University followed by career stops with quintessential Washington organizations: the CIA, Clark Construction Company, the National Education Association and the State Department. What tied all of these positions together was his lifelong interest in helping people make good decisions about their employment/career ambitions. These were often at critical transition points in the life of the organization or of the employee.

An Organized Committee Member

I first saw Bob’s skills as a member of the Columbarium Committee of the Chevy Chase Presbyterian Church in Northwest DC. We were tasked with evaluating whether a columbarium addition on the church grounds made sense, and if so, to carry out the proposal.

No member of the five-person group had first-hand knowledge for this project. But as we visited other church’s examples, talked with contractors and evaluated different options, everyone learned together. Bob’s vital contribution was that he kept meticulous records and understood how to succeed in the internal decision making within the church. He then played essential roles in the fundraising, construction and dedication, a time span of almost two years.

Seeing firsthand his ability to work within a committee as part of a larger organization, I asked Bob if he would volunteer on a new Callahan “Advisory” Board of Directors. Advisory, because at the time Callahans was a sole proprietorship, and all decision making and authority was mine.

I believed that if Callahans were to grow beyond the vision of a single person or team, we needed a governance/advisory process that would fill the director’s role required by most organizations.

The Rest is History

Bob and fellow board members, Randy Karnes, Rosemary Hardiman and Mark Elliott guided the company through the inevitable transitions any successful organization must navigate.

The single proprietorship became a 25% ESOP in 2003, followed by a management led purchase in 2014, and a 100% ESOP conversion in 2018. All these changes were new for us and required careful consideration. Bob was vital counsel in ongoing personnel successions including three CEO transitions. While internally focused these transformations took place at a time of unceasing change in the credit union system, Callahans reported on with its data, market share analysis, and editorial commentary.

Essence of a Volunteer: The Elder’s Role

Bob’s volunteer role was always positive. He provided continuity with firsthand knowledge of the company’s history and previous decisions. Staff members sought his counsel about their careers within Callahans or beyond. He was trusted by all to be impartial. His patience for circumstance reflected his deep respect for individual choice. His counsel was based on his wide-ranging experiences of public, government and non-profit employment.

As a member of Northwest FCU since his time as a CIA employee, he understood the potential for credit unions’ contributions and Callahan’s important role in the industry.

Unique, But Not Original

Bob’s service to Callahans is just one aspect of his life. He served as an elder, deacon, choir member and on multiple committees in his over 50 years membership at Chevy Chase Presbyterian Church. Through his decade long association with the career management consulting firm, Drake, Beam, Morin Inc., he advised and coached literally hundreds of persons in their career decisions.

Bob’s vital role at Callahans is that he understands, values and enhances relationships. After the striving and recognition that is so strong a motivation for many, Bob practiced the value that matters most in the end: how we treat our fellow human beings. And that is the reality that ultimately makes all organizations a success—or not.

In credit union land, Bob’s role was not original. The fiduciary and volunteer role of credit union directors can be a critical factor in their success and sustainability. Bob’s spirit can be amplified by thousands of examples in credit unions throughout the country. His departure is a reminder of how cooperatives depend on this dedicated stewardship and oversight. So, don’t wait to recognize this dedication at a retirement event; instead reach out and give your board a hug today!

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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.

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Thanksgiving for Life’s OMG Moments

I did not understand the OMG reactions in text messages when I first saw them. Did not know what it meant. And when I learned, thought it a cliché.

I have come to recognize that these three letters are the sender’s stamp for a special experience. A kind of shorthand for a secular prayer of joy, insight or even sorrow.

Some Personal OMG Moments

An Unexpected Win

This summer I was watching an iPhone video of the SRAA National Championships rowing finals in Dillon Lake, Ohio. The boys 8-person varsity entry from Wilson High School in the District was not supposed to be there. My sophomore grandson was in the two-seat. They had not made the finals in their qualifying regatta. But the coach petitioned and received an exception entry. They were seeded at the bottom of the teams.

As the finish of the finals was being recorded live on an iPhone video, the sound of the phone’s owner became louder and louder as they ran along the shore capturing the last two hundred yards. I heard again and again: “Oh my God! Oh my God! They are going to win!” And they did. Becoming national high school champions.

National HS champions

Coming in Second: Twice

As both a freshman and a senior, my granddaughter’s high school volleyball team worked its way to the state championship rounds. As a freshman they lost in the final championship match-second place. As a senior they finished second again in the Northern California playoff. After her final senior match she sent an Instagram post to her followers as a thank you for their support. The words that stuck in my mind: “There is not a single thing about my four years with M-A volleyball I would change.” I thought OMG, gratitude, even when coming up one match short of winning it all, more than once.

Recognizing a Busker

The concert of Richard Einhorn’s Voices of Light, a choral work accompanying Theodor Dreyer’s silent film The Passion of Joan of Arc, had ended. We walked to the parking garage with the crowd of other concert goers to take an elevator to our car. A tenor singer, still in concert dress, said to hold the elevator as everyone crowded in. He walked over to the busker, between 50 and 80 in appearance, who was seated, playing an accordion at the end of the long entry hall. The singer reached into his wallet and dropped a bill into the little box at the musician’s feet. One musician out of a chorus of over 100, completing a performance in a very modern concert hall with full orchestra and silent film, pausing to recognize a person performing for change, not applause, in a parking garage entry. OMG

Life’s OMG Moments

Every day we experience OMG events. Sometimes it is as simple as seeing again the stunning beauty of a tree changing seasons:

Or, it can be as grand as the communal expressions of disbelief and joy as the Washington Nationals won the world series.

Washington National’s logo (curly W) and team colors light up the National Cathedral during the World Series.

Thanksgiving is a moment, a pause, to share OMGs. Whether it is seeing family members who have been absent for a time, sharing food from recipes handed down through generations, or just being together around a traditional table, it is a celebration of gratitude. For life’s special moments and for each other.

But try to avoid the one OMG moment we all fear: OMG, I ate too much!

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

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

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

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

Making Capitalism More Democratic

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

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

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

The Importance of Economic Democracy

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

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

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

Mergers of Healthy Credit Unions Compromise Cooperative Design

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

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

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

The Agency Challenge and Board’s Fiduciary Role

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

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

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

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

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

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

The Irrelevance of Size

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

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

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

Shredding the Legacy

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

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

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