Editor’s Note: This article was originally published on Chip Filson’s blog and appears in an abbreviated version here. For the full article, go to ChipFilson.com.
By Chip Filson
On Oct. 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 the $16.1-billion SchoolsFirst FCU in Orange County.
According to the seven-page summary that can be found on the NCUA’s website, the top five managers at Schools Financial can gain $9.8 million additional compensation; 158,000 members will have one-time “special dividend” of $4.0 million–or about $25 per member– if they approve merger. The CEO could benefit by more than $8 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 be paid out of the credit union’s common equity of more than $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%.
A Token Tip for Members
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 more than $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.”
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 are Losing
The members lose control for how their $2-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.
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 Dec. 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 more than four-million, it now claims to grow it must merge with SchoolsFirst FCU in Southern California.
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.”
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.
Institutional Performance
On many productivity measures the numbers are virtually the same even though the credit unions have contrasting business models. The average member relationship is $21.500 at Schools Financial versus $25,000 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:
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.
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.
Chip Filson is the co-founder of Callahan & Associates and previously also held concurrent positions at NCUA as president of the Central Liquidity Facility (CLF) and Director of the Office of Programs, which includes the NCUSIF and the examination process. For more info: https://chipfilson.com