The analysis in the first two parts documented the extraordinary success of Sperry serving its Nassau County market. In public, the CEO extolls the credit union’s performance and long-term market positioning into the summer. In private, he and the board agreed over a half a year earlier to merge the charter into an institution 100 times Sperry’s size and leaving no local operations.
Conflicts of Interest and Self-Dealing
Kevin Healy originally joined the Sperry board as Vice Chair in March 2010 while employed as COO, General Counsel and Director of American Defense Systems, Inc. In December 2012, he became Sperry’s CEO, but still retained his Vice Chair position on the board.
As both CEO negotiating the terms of his employment contract and severance compensation with PenFed, and as a director approving the merger terms, he has a direct conflict of interest.
Publicly, he praises the credit union’s advantages and strengths. Privately, he negotiates a five-year contract and/or severance up to three times his annual salary (presently $336,000) if he leaves within the first 24 months after the merger.
This hypocrisy, or worse, is not confined to the CEO. The Chair who signed the letter recommending merger was honored by the New York Credit Union Association as the winner of the “Statewide Volunteer of the Year Award.” The Sperry press release dated June 11, 2020, describes the basis for this honor:
Garden City Park, NY, June 11, 2020 – Gary Barello, Sperry Associates Federal Credit Union’s Chairman of the Board, has been recognized by the New York Credit Union Association (NYCUA) as a 2020 “Volunteer of the Year.”
The award serves as recognition of Mr. Barello’s long record of service within the credit union industry. With Sperry, Mr. Barello was instrumental in helping to stabilize the institution’s finances as well as with bringing in a new executive management team to lead the credit union. These actions included the hiring of Kevin J. Healy, Sperry’s current CEO and Vice Chairman of the Board.
“Gary Barello’s philosophy of people helping people is highlighted by his conviction to the principles that credit unions stand for,” the NYCUA said in a statement announcing Mr. Barello’s Volunteer of the Year award.
“At Sperry, we couldn’t be prouder of Gary for getting well-deserved recognition from the NYCUA,” Mr. Healy, who nominated Mr. Barello for the award, said. “As a steadfast credit union volunteer, Gary continues to prove himself to be a critical factor in Sperry’s successes.”
Mr. Barello has served as Chairman of the Board at Sperry Associates FCU since December 2010 . . .”
CEO Healy, Vice Chair, nominated his Chair for this award. Barello, in turn was Chair when the board chose Healy, then on the board, to be CEO in 2012. Healy’s statement that his Chair “continues to prove himself to be a critical factor in Sperry’s successes” is made as the chair participated in and approved the merger to end Sperry’s independent charter half a year earlier, but still secret.
Within six weeks of this statewide public selection, Chair Barello wrote Sperry’s members asking them to vote to close the credit union he chairs. The chairman’s role is the primary basis for his Volunteer of the Year honor.
The New York Association’s award states that “Gary Barello’s philosophy of people helping people is highlighted by his conviction to the principles that credit unions stand for.”
Rather, Barello’s actions and “principles” betray every cooperative value that members and credit unions depend upon from volunteer leaders.
PenFed’s Complicity
PenFed is an experienced hand in these acquisitions.
But first it is important to note that these two credit unions created two very different business models. Sperry is a traditional member-community focused credit union. Member relationships are the foundation of their success. Their average member relationship (total loans and shares divided by members) at June 2020 is $26,017 or 37% greater than PenFed’s $19,016. Sperry’s average relationship grew 2.6% while Pentagon’s fell 10.3% for the 12 months ending June 2020. Even though it is the third largest credit union in the US, PenFed’s member relationship is lower than the average of all 5300 credit unions.
PenFed’s credit union business model is that of a commercial financial firm focusing on acquisitions, investing in ancillary businesses, and increasing use of wholesale financing. In 2019, for example, member shares fell by $1.6 billion while FHLB borrowings increased over $1.0 billion (PenFed 2019 Annual Report pg. 17) to total $3.7 billion, or 17% of total funding.
Acquisitions and PenFed Financial Performance
For over five years “$0 cost acquisitions” have been a critical contributor to PenFed’s bottom line and balance sheet size. In 2019, it booked a total equity increase of $92.4 from mergers. “Bargain gains from mergers”(negative good will) totaled $74.2 million and $18.2 million was added equity value. Of the credit union’s $151 million 2019 net income, over half is from transferring the accumulated surplus from other well-capitalized, merged credit unions to PenFed where it is recorded as “other operating income.”
This 2019 one-time income boost came from three mergers: Progressive with total assets of $382 million; McGraw Hill with $383 million; and Magnify at $78.6 million for a total of $843 million. PenFed’s reported asset growth was only $300 million. Without these three mergers it would show a balance sheet decline of $500 million.
PenFed’s financial “stability” depends on “acquisitions.” These three transactions are described as follows in the 2019 Annual Report: “The fair value of the identifiable assets acquired, and liabilities assumed of $ xxx exceed the fair value of the consideration transferred $0 . . Accordingly, the acquisition has been accounted for as a bargain purchase and as a result the Credit Union recognized a gain of $ xxx associated with the acquisition. The gain is recorded in Other Non-Interest Income. . .” (page 37)
PenFed negotiates with credit union boards and senior managers offering financial incentives so they will transfer their accumulated reserves for “$0 consideration” to prop up its own balance sheet and net income.
Sperry’s “acquisition” continues this Ponzi-like pattern of cooperative takeovers. They provide PenFed the appearance of financial performance by acquiring the accumulated reserves of other well-capitalized credit unions at $0 cost-contrary to all normal market transactions.
Sperry’s “acquisition” contributes at least $15 million more to this scheme plus another $270 million in assets.
PenFed’s strategic focus is on corporate initiatives. Members are not the credit union’s mission. Rather, members are the means PenFed’s management uses to implement its commercial business model. Member relationships and community participation are simply tactical marketing promotions to its nationwide field of membership of 330 million Americans as shown in its 5300-call report.
NCUA’s Regulatory Abdication
Recently NCUA sent a letter to a person helping to organize a new credit union. It stated the following requirements:
“Before NCUA can approve the Certificate to organize. . .the Federal Credit Union Act requires NCUA to investigate your general character and fitness to serve as a prospective officer. . .NCUA has made a preliminary determination that you are competent, experienced, honest and of good character in accordance with the FOM manual. . .NCUA will continue to monitor your background and credit worthiness. . . at any time . . . should NCUA discover anything that adversely affects your character or fitness to serve as a prospective officer. . . we will notify you about this additional information and request a response. . .as an officer of a newly chartered credit union you must still maintain your character and fitness to continue your service as such. . .”
However, NCUA’s review of character and fitness appears to matter only when seeking a charter. Once in business, anything goes.
NCUA’s ONES Director and the three regional directors routinely approve these insider self-dealings devoid of any objective justification, documented member benefit or pretense of informed choice.
The so-called member vote bears no semblance to a valid decision between two market options. The effort is designed in secret, the members marketed only one point of view, no alternatives are offered, and the “campaign” period strictly limited to discourage alternative voices from being raised. The process pre-ordains the majority of outcomes.
Often this decision is the first-time members have ever been asked to vote on anything. Why should they be skeptical of their board and management’s advice? The members’ vote is a pantomime orchestrated by leaders cashing in on the outcome. All with NCUA’s blessing.
This regulatory dereliction undermines the system’s safety and soundness. NCUA overlooks the operational deficiencies of PenFed’s commercial model. These acquisitions increase concentration risk in a fallible institution disguising its weakness by booking gains with further takeovers.
System-wide, similarly inclined CEOs are emboldened as they watch for their chance for personal windfalls like the PenFed offers. Members’ future well-being is sacrificed. The uniqueness of credit unions is corrupted.
What Can Be Done?
There are several possibilities to stop this cooperative self-harm.
- One would hope the Chair and CEO of Sperry would reconsider and reverse course, bring on new board members and enhance Sperry’s unquestioned valuable role for their local community.
- NCUA might call the game off. There is a direct conflict of interest by the principals and their public duplicity with information provided members. PenFed is just adding to its financial house of cards.
- The press reports the situation for readers whose concerns cause political leaders to bring to account the enablers of this sham process.
This example and others like it, show the urgency for radical reform to protect members’ interests. One approach would be to require transparency through public auction where fully developed merger offers are openly solicited from interested credit unions, or even third parties. That would truly create a “free market” process where members meaningfully select their destiny.
The most critical factor for maintaining confidence in a financial system is trust. These secretly arranged acquisitions mock this fundamental value. Character and integrity are replaced by greed. Cooperatives’ unique focus on the common good is sacrificed on the altar of personal ambition.
Today it is Sperry’s members who are the victims of this dishonesty. Tomorrow it will be the credit union system that pays the price.
Thanks for putting it out there Chip!
Chip – It sure is quiet here on this pertinent subject matter. I hear crickets. Nothing. Nada, Zilch. The credit union community is operating in a low testosterone environment. Management gets the gain from the merger acquisition. The members get bread crumbs. And all this time we were led to believe the net worth belonged to the membership that created it. Transparency shows it is consumed by the credit union without any ROI back to the members. Honestly, why not dissolve the credit union and pay out the proceeds to the membership? Sell the assets and liabilities – there is a market for it. This would require a moral and ethical compass & those are rare to find. The piranha are cannibals eating our young. Call it economic cannibalism.