Credit Unions As A “Cornerstone” Of Freedom

A Keystone State credit union vanishes to merger but not without a fight.

 
 

The Fourth of July is here again. We Americans celebrate our independence. We also hear multiple reminders that freedom is a constant struggle. Once achieved it can be easily lost.

Most often this struggle is viewed in heroic terms — battles won or lost. We celebrate America’s historical role as a beacon of hope since the revolution of 1776 through today’s fight against terrorism and authoritarianism around the world.

These public events would seem much removed from the credit union mission and experience. Yes, cooperatives enable individuals to create and sustain economic options, but is that really the freedom referred to in our Independence Day orations?

I believe credit unions are part of the fabric that makes America the land of the free. But this is more than just the pursuit of financial “happiness”, or of sustaining cooperative choice in a market economy.

On this Fourth of July let’s remember that heroes aren’t just those courageous men and women who fight for freedom in wars. Heroes are also those who carry out freedom’s responsibilities in everyday life.

Credit unions are just one example of the dependence on institutions all of us have to enjoy our private lives and pursuits. But institutions that help each of us succeed do not protect themselves. Leaders can easily conflate their self-interest with an organization’s stated purpose. The ultimate description of this perversion is captured in the observation that power corrupts and absolute power corrupts absolutely.

This temptation occurs even in member-owned financial cooperatives. The checks and balances of timely disclosures, democratic member voting, and regulatory oversight can be manipulated for self-interest. Actions can be legal, but still corrupt. These actions not only violate a sense of fairness but also any objective standard of prudent action in the members’ interest.

The “voluntary” merger of Cornerstone Federal Community Union ($109.1M, Carlisle, PA) with Belco Community Credit Union ($470.1M, Harrisburg, PA) on July 1 is an example of this manipulation. It also shows how member freedom is easily compromised by those in power. 

The Cornerstone FCU Track Record

The #1 rated Carlisle, PA, financial institution, according to BankLocal, is Cornerstone FCU. It had created an unparalleled track record of serving members and hundreds of small businesses and community organizations in the greater Carlisle area.

At $105 million in assets, the credit union was only one of two locally owned financial institutions in its community. All the rest had been sold to out-of-town competitors or had head offices elsewhere.

In the annual report distributed to members at the credit union’s March 10 meeting significant outcomes were reported as follows: 

  • Cornerstone FCU remains strong and stable with a net worth/total assets ratio that increased from 10.05% to 10.24%.
  • Membership growth exceeded 2.5%!
  • We worked to reduce the (delinquent loan ratio) to .66% comparing favorably with our peers of .85%.
  • Net charge offs/average loans ratio remains well below peers at .26% versus .46%.
  • One way we continue to show benefit is in our low loan rates. Our yield on average loans was 4.37% compared to peers at 4.9% … saving our members more than $320,000 in interest.
  • CFCU has a strong philosophy and history of charging the lowest fees possible. Our fee income/average assets is .84% compared to 1.42% from peers, a monetary savings of $210,000.
  • We work to keep operating expenses low. Our operating expense to average assets ratio is 3.23% compared to a higher peer ratio of 3.67%.

The report goes on to list involvement with community organizations and the student-run branch at Big Spring High School. Plus, “Cornerstone has always done the right thing for members: low rates, low/no fees, new services, such as mobile banking, remote check capture, online branch and e-statements.”

So why did the board and CEO decide to merge? Why did they decide to merge with a much-larger credit union whose performance ratios were virtually all worse than those Cornerstone cited above, including an expense ratio more than 33% higher in 2016? 

That is what one member wanted to know when Cornerstone’s CEO sent the following letter on Nov. 17, 2016 “announcing our intention to join forces to provide an improved member experience and added convenience for all of our members.” The rest of the letter included general statements such as “same friendly faces” and “combined assets will keep rates on financial products and services low, and position us for continued growth and deepen our community commitment.

This initial announcement was the first members knew of the board decision. The process, or whatever the board’s prior reviews were, was done in secret. This secrecy was a first indication of the breakdown of democracy and ignoring members’ rights and interests.

The NCUA says the new rule would:

  • Increase the required time for notice to members before a merger vote to at least 45 days;
  • Require the merging credit unions to disclose all merger-related compensation for certain employees and officials of the merging credit union;
  • Clarify the contents and format of the members’ notice to provide better information; and
  • Create a member-to-member communications process similar that found in NCUA’s regulations covering credit union conversions to or mergers with banks.

The Search For Answers Begins

One member who wanted more information was David Keffer, the former CEO who managed Cornerstone for 33 years prior to retiring in the fall of 2014. Following his departure, the board selected its president (or chairman), to succeed Keffer as CEO. That CEO then became the prime mover for a merger.

Keffer’s efforts to learn more facts were rebuffed at all stages of the process. He wrote the board and supervisory committee in December 2016 asking for information on the board’s due diligence. A two-sentence reply thanked him for his inquiry.

He wrote the NCUA that same month and included the letter to Cornerstone FCU. NCUA demurred on responding, saying it had not received an official notice it needed to review the approval process.

Keffer wrote about his concerns to the local press, which published one of his letters. The credit union began posting FAQs on the website, with either general process updates or more generalities about how good this bigger entity would be.

On Feb. 10, 2017, the Notice of Special Meeting was sent, including a ballot, starting the 20-day process ending in the required meeting on March 2, at which members could vote in person. Along with this notice, the credit union subsequently scheduled three meet-and-greet sessions at Cornerstone’s local branches so members could be introduced to Belco people and ask questions.

Make Your Voice Heard

  • Click here for the new merger rule as published in the Federal Register on June 8, 2017. (11 pages)
  • Click here for the full text of the proposed changes to 12 CFR Parts 701, 708a, and 708b. (52 pages)
  • Click here to submit comments directly to the NCUA, due by Aug. 8, 2017.
  • Click here to submit comments through NAFCU, due by July 19, 2017.
  • Click here to submit comments through CUNA, due by Aug. 7, 2017.

The Committee for Cornerstone Independence Is Formed

Stymied or ignored at every step in his individual efforts to learn more about this decision to end Cornerstone’s charter, Keffer decided to ask fellow members to help. He and five others organized the Committee for Cornerstone Independence to inform and, hopefully, reverse this unsubstantiated board proposal.

The committee was needed because the members were without a voice. In the face of the marketing effort funded by the board and CEO, the founders faced an uphill battle with fewer than 10 days to mobilize the opposition.

A Gerrymandered Vote

Now comprising more than a dozen volunteers, the committee undertook a grassroots campaign to ask members to oppose the merger by providing factual comparisons of Cornerstone’s superior financial performance versus Belco.

Committee members created yard signs urging a “No Vote”, recorded ads on local radio stations, and placed factual comparisons in the newspaper with the reasons why this was not in the members’ best interest. They posted press releases on Facebook and distributed copies to the Carlisle and credit union press. Throughout, the message was keeping Cornerstone’s resources, superior performance, and member savings under local control.

Just Because It’s Legal Doesn’t Mean It’s Right

The required member meeting was held on March 2. Members opposed to the merger wore T- shirts urging a vote of “no”. From the beginning, it was clear that this would not be a democratic meeting. Employees from Belco, not Cornerstone, barred visitors from attending. Legal counsel hired by the committee was denied entry. Dozens of ballots properly completed and signed were rejected by Cornerstone because the member was not present or person did not have the member’s driver’s license.

A request that the meeting be recorded was denied. During the meeting questions went unanswered or members were told they would learn the facts after the merger. Motions were made but not recognized by the chair. Discussion was cut off before many had a chance to ask questions and the ballots were ordered to be counted.

After a break the results were announced as 1,146 for the merger and 564 against. What was not announced was that members at the meeting by a 5-to-1 margin opposed the merger, a fact posted weeks later on the credit union’s website.

The mailed ballots won the day for Belco. This overwhelming rejection at the meeting demonstrated the members’ reactions when given all sides of the story.

What was lost was their freedom to determine the fate of their own financial institution, a vital piece of their own effort to ensure “life, liberty, and the pursuit of happiness.

Voices From The Meeting

As people left the meeting a number were asked what happened and how they felt about the events. Those interviews are available on YouTube.

One person said she came to change her vote now that she knew all her facts. Another observed that anyone who belonged to Cornerstone could already join Belco but that fewer than 3% had chosen to do so.

Other reactions included that the board acted without “consulting about what the members want. I feel like we’ve been railroaded and sold short.”

Then there were the problems with voting. One member said eight ballots from his family members were rejected. Another said his wife’s ballot was rejected because she didn’t have her ID with her.

Others said they had voted without knowing specifically that they would be losing Cornerstone as a separate entity. 

“(The board’s) mind was made up regardless of how members felt,” another member said. 

Honest, Abe

Abe Lincoln said, “You can fool all the people some of the time, and some of the people all the time, but you can’t fool all the people all the time.”

Unfortunately, the voting process was just “some of the time.” One side controlled it — setting the voting date, distributing the ballots, giving only one point of view, and shutting down member voices at the required meeting. No observer would see the process as impartial or fair.

Despite those restrictions of information and voting access, 35% of the members ultimately said “no”, not including dozens of votes where ballots were denied.

The NCUA’s Role: Legal Even If Corrupt

The NCUA approved the outcome, despite documented voting denials, incorrect information, improper meeting conduct, and the absence of any factual justification supporting the merger.

The committee presented several appeals to the NCUA, including a request for a public hearing by the NCUA Board. In this request, the committee listed seven proposed requirements in the new merger rule that were absent in this situation.

The NCUA denied the request. “The merger was conducted in accordance with applicable law and NCUA procedures,” the regulator said. In other words, an action may be legal, yet corrupt. 

Keffer, the former CEO who led the fight to save the credit union, responded that this view contradicted a 2011 explanation of directors’ duties from the NCUA’s own General Counsel: “We also believe that fiduciary duties are properly owed to people and not to entities.”

The demise of Cornerstone FCU demonstrates how elected leaders can use their position to subvert the very institution and process that put them in the positions of responsibility in the first place.

Why A New Merger Rule Is Needed

The Cornerstone case illustrates that simply having a vote does not ensure a democratic outcome. The process depends on explicit rules, transparent procedures, and reliable information for voters to make an informed choice and produce a meaningful result.

The demise of Cornerstone FCU demonstrates how elected leaders can use their position to subvert the very institution and process that put them in the positions of responsibility in the first place.

These directors overplayed real challenges (regulation, technology, cybersecurity) to impose a change to provide fake safety (“a brighter future” in this case) instead of real freedom.

What was lost in Cornerstone was more than a superior institution serving a local community’s needs in highly effective ways; more than members’ control of their savings, their created wealth and their institution’s future; more than even their right to due process in the exercise of their vote.

What was lost was their freedom to determine the fate of their own financial institution, a vital piece of their own effort to ensure “life, liberty, and the pursuit of happiness.”

A Credit Union System That Puts Members First

Dave Keffer summed up his experience and that of his fellow committee members. “I believe in a credit union system that will always put the members’ interests first. We need to be true to who are. We cannot remain silent. Our efforts were not just for this situation, but because we believe in the unique contributions of credit unions. Cornerstone FCU may die, but cooperative ideals must live on.”

This ideal was stated in another context as: “We must always consider that we shall be as a city upon a hill. The eyes of all people are upon us.” (John F. Kennedy, Jan. 9, 1961)

Everyone who believes that credit unions provide their members unique opportunities should salute those who willingly undertake the extra effort required to ensure democracy and freedom continue hand-in-hand in the cooperative system.

Freedom’s Everyday Heroes 

So, on this Fourth of July we remember that heroes aren’t just those courageous men and women who fight for freedom in wars. Heroes are also those who carry out freedom’s responsibilities in everyday life.

To join, to participate, and to share in the benefits of America’s many institutions will at times require us to stand up and lead when others overreach or neglect their responsibility.

Everyone who believes that credit unions provide their members unique opportunities should salute those who willingly undertake the extra effort required to ensure democracy and freedom continue hand-in-hand in the cooperative system.