Month: February 2024

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What Matters in Today’s NCUA Board Meeting

The centerpiece of today’s NCUA’s board agenda is a review of the NCUSIF’s 2023 performance.  Three areas are most important:

  1. Loss management and the reserving allowance estimate.
  2. Investment performance oversight.
  3. Trends in operating expenses.

The  2023 insured share growth was published in the audit preamble, so the NOL cap for yearend 2024 is the outstanding board determination.

This annual NOL review was a commitment by Chairman McWatters when the two-person board first raised the historic 1.3% cap in the NCUSIF in 2017. This change was to retain the inflow of funds from the merger of the TCCUSF. Credit unions uniformly questioned this process and urged a return to the 1.3% as soon as possible.  It has been seven years.

The Insured Losses Rate and Allowance Level

The 2023 net cash losses in the NCUSIF were minuscule, just $1.0 million.  In comparison the banking system has paid the FDIC $761 billion in premiums  for “receivership costs” through September 2023.  

CFO Schied stated in his board update last fall: Since the last taxi failure on October 2018, actual SIF losses are a total of $53.8 million or .0031% (.31 bps) of insured shares as of June 30, 2023.  

With the full 2023 results now in, this annual loss rate is less than .10 basis point per year.  A remarkable record during five years of economic ups and downs. 

The NCUSIF’s yearend $209 allowance account is 1.2 basis points of insured savings or 12 times this  annual loss rate.  Or five times the total for all dollar losses in the past five years.  

CFO Schied told the board that this reserve amount is determined  using a macroeconomic  model.  Will the numbers, assumptions and calculations in this model be available so users of the statements know how it works and its factual validity?

NCUSIF’s  Investment Portfolio Management

The $22.4 billion (book value) in total NCUSIF investments is the only revenue source for the fund, unless the Board chooses to assess a premium.  This has occurred only four times in the past forty years.

Since December 2021 the portfolio’s market value has been less than book.

This means the portfolio is not earning current market rates.  At yearend 2023 the NCUSIF’s term portfolio had a yield of just 1.4%;  the $5.2 billion in overnight funds earned 5.4%.  The combined yield for all 2023 was just over 2.0%.

During 2023 the buildup of portfolio cash  reduced the Fund’s weighted average yield by a full year, from 3.33 years to 2.30 years. This change reduces interest rate risk.    This number is the approximate time it would take the portfolio’s reinvestments from maturing securities to reprice  if rates normalized at their current level.

In last fall’s presentations to the NCUA board, the CFO indicated that the Fund’s investment policy had not changed.  And that having achieved the initial cash target ($4.0 billion), the committee would begin considering extending out the curve—even though the interest rate curve continues to be inverted.

Interest rate risk is the primary  threat to be managed consistent with optimizing earnings.  This is what I believe an NCUA examiner would write about the current Board oversight.  The wording is borrowed from a CAMELS code 3 exam of a multibillion dollar credit union:

Risk:  Strategic    Degree of Risk:  High

CAMELS Effect:  Management, ALM, Earnings, Capital

Reason for rating:  A capital planning discipline is not in place to manage the interest rate risk (IRR) that is commensurate with the size and complexity of (credit union). . . and the exposure presented to the NCUSIF.

The Credit union’s ALM (investment) policy establishes guidelines related to capital, net income, and net economic value of equity, but does not contain specific, established interest rate risk limits. 

Examination Requirements:  Matters requiring Board attention.

The board should further develop, document, and implement a policy to measure and monitor interest rate risk. The revised policy and plan should include the following actions at a minimum:

  1. Establish and implement maximum policy limits for the interest rate risk metrices used in the ALM/investment analysis.
  2. Evaluate and provide interest rate compliance and trending reports/charts based on the existing balance sheet under current rate forecasts monthly.
  3. Update projected yearend capital ratios on a monthly basis.

I could not have suggested a better approach for the Board’s attention.

Operating Expenses

Since 2008, 93% of the operating expenses of the fund are from NCUA’s overhead allocation of its expenses via the Overhead Transfer rate.   The OTR ranged from a low of 52% (2008) to 73.1% (2016).  For 2023, NCUSIF’s operating expenses increased 12.6% using an OTR of 62.4%.

From 1979 through 1984, the percent of NCUA’s expenses paid by the NCUSIF, were never higher than 26% (pg 39 NCUSIF 84 Annual Report).  Until 2001, the transfer rate had been fixed at 50%.

The current expense level equals approximately 1.3 basis points of insured shares.  In terms of yield on the entire portfolio, this requires the fund to earn 1%.  Operating expenses are a fixed cost, right off the top of revenue. If not controlled they take resources away from the Fund’s primary insurance resources.

Calculating the Normal Operating Level

With the audit numbers and the total of insured shares from December call reports in hand, the equity to insured shares ratio can be computed at yearend.  NCUA says the NOL number is 1.3%.

This ratio determines the prospect for a dividend when the fund’s net income raises retained earnings above the NOL upper cap.   This cap is set by board action each December.

The 2022 board meeting kept the 2023 upper limit   at 1.33 even though one member expressed the view that it should revert to the historical 1.3% which had existed until from 1984 through 2017.

When will the board make this determination for 2024?

The meeting starts at 10:00 AM.  For a full review of credit union’s financial performance, Callahan & Associates presents their quarterly Trend Watch analysis at 2:00.

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The NCUSIF’s Valentine’s Day Surprise

Late yesterday NCUA released the independent CPA audits of the four credit union funds it manages.

The one that matters most for credit unions is the NCUSIF’s performance.  Plumbing through the opaque federal accounting presentation reveals much good news.

Bear in mind  when reviewing the highlights below that the FDIC is struggling to increase its insurance ratio.  It has assessed increased premiums  to pay for the hundreds of millions of bank failures in 2023.

Some NCUSIF 2023 Highlights

  • Net income increased to $210 million. This is the best operating result ever and almost double the $119 million recorded 2022.
  • Net insured losses (cash payments less recoveries) were just $1.0 million. Nonetheless he allowance account was increased to $209 million, the largest total since the taxi medallion inflated reserve in 2017.
  • Insured share growth was flat ending at $1.7 trillion. The aggregate net worth ratio for all insured credit union increased to 10.95% from 10.78% at yearend 2022.
  • The Fund’s normal operating level (NOL) grew to over 1.30% at yearend. Each basis point equals $170 million.  Adding the allowance account raises total reserves to over 1.31% or a potential $1.9 billion cushion above the NCUSIF’s lower NOL limit of 1.20%.  Since 2008, the total losses for all the NCUSIF’s preceding 15 years equal $1.877 billion.
  • There is opportunity for even greater returns in 2024. The NCUSIF’s yield on its $22.4 billion investment portfolio was just over 2% in 2023.  Overnight rates are projected to remain above 5% for the first half of 2024.   Adding the current overnights of $5.2 billion plus the $1.4 billion maturing in the first five months, gives a cash portfolio of $6.6 billion yielding 5% or higher, until the Fed begins reducing rates.

The One Missing Number

In the December’s 2022 board meeting, NCUA set an NOL upper cap of 1.33% for the NCUSIF.  Board member Hood had urged that the historical .3% upper limit be restored.

This upper cap matters. All income above this limit in a year must be distributed as a dividend to the Fund’s owners, the credit unions.  This is the fundamental promise in return for credit union’s open-ended 1% deposit underwriting.

To date I have seen no upper cap set for 2024.  Hopefully this means the long term, historically validated limit will be in place for this year.

Restoring this 1.3% cap would make this the perfect Valentine for the credit union system’s uniquely successful  cooperative Fund.  Isn’t it time NCUA shared a little love with credit unions?

 

 

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Holding the NCUSIF to Its Promised Performance

This week NCUA will report on the 2023 financial audit of the NCUSIF in two days.  This will be the 42th external, independent certified audit of the fund.

The Good News: A Ratio Showing the Fund’s Stability

Multiple financial events have presented numerous stress tests for the NCUSIF since 2008.  These include  2008/9 Great Recession followed by quantitative easing and a period of abnormally low rates. Then came the COVID national economic shutdown. The current inflation has been countered by the Federal Reserve’s rate increases, the most rapid in 40 years.

Through all these scenarios, one trend line demonstrates the Fund’s resilience. The chart below is the ratio of retained earnings to insured shares for this 14-year period.

The blue line shows the Fund’s equity at or above the historical .3% upper cap.  The orange line adds the allowance account balance, which are additional reserves already expensed from equity.

The uniqueness of the fund is more than a steady  earnings base growing in tandem with insured risk.

This cooperative funding model aligns with the values, culture and balance sheet structure of the credit union system.  Every member contributes 1 cent of every $1 share for this collective insurance. In turn it is a resource available to assist any credit union that needs cash or other 208 assistance if facing insurmountable challenges.

The unique NCUSIF design works; however the history may not be known to current board members or to some credit union leaders.   Credit unions need to remind all of this important story and what this stability has meant for their members.

The NCUSIF’s Founding-Getting the Correct Numbers

Outside audits were not the practice from the NCUSIF’s founding in 1971 through 1981.  GAO had performed an audit every two years; the report came six months or more after the audit date. The 1982 NCUSIF Annual Report described this change from GAO to a private independent firm implementing GAAP accounting standards:

“To ensure the Fund’s statements are examined in the most timely manner and to seek an assessment of accounting procedure, the NCUA contracted for the first independent audit ever conducted of the Fund’s balance sheet by an outside accounting firm. 

In the years prior to fiscal 1982, the Fund recorded losses from financially troubled credit unions at the time these credit unions were ultimately merged or liquidated.  Additionally, losses on asset guarantees . . . were recorded at the time that payments were made under guarantee agreements. 

Beginning in 1982 the Fund began the process of conforming its accounting for losses from credit unions to GAAP.   (These) principles require that the fund record losses at an earlier point in time than had previously been the Fund’s practice.   In this respect the Fund recorded estimated losses under the cash assistance program of $14.1 million and of $15.6 million on outstanding asset and merger guarantees. 

In addition, GAAP generally required that the Fund record estimated potential loss accruals for credit unions identified as experiencing financial difficulties but not receiving cash assistance. . . The Fund did not attempt to estimate these additional losses for fiscal 1982 because it was not practicable to accumulate the information needed to make the estimates.

Equally as important as the change in accounting methods were the improvements to the fund’s records.  Ernst & Whinney worked with the Fund’s accounting staff identifying areas that were not properly recorded . . . As a result the Fund is now publishing monthly statements which will help all interested parties monitor the financial results.”  (pages 7-8 NCUSIF 1982 Annual Report)

The Report’s remaining 20 pages gave details of cash assistance, guarantees and merger costs along with an overview of all insurance programs and credit union trends.  Transparency in every respect was essential for confidence in the Fund’s management.

Chairman Callahan’s view was that, “We believe our “full and fair” disclosure should be no less than what we expect insured credit unions to give their members.”

A Radical Change in Accounting Accuracy, Timeliness and Transparency

In the 1984 audit, Ernst & Whinney gave the Fund its first ever clean opinion “in conformity with generally accepted accounting principles applied on a consistent basis.”

Without this three-year effort (1982-1984) to improve the timeliness (monthly board reports), accuracy (GAAP accounting) and transparency,  the credit union system  might not have supported the radical redesign of the NCUSIF. This new approach  required  perpetual 1% deposit underwriting.

This cooperative model was passed by Congress in 1984 with full credit union support. To implement the 1% underwriting, 15,303 federally insured credit unions deposited $845 million into  the fund by January 1985.

The Last Shall Be First

The result was that the NCUSIF instantly became the strongest and, through time,  the most stable of the then three federal deposit insurance funds.

The NCUSIF never looked back or across the aisle.  The FSLIC merged with the FDIC.   The FDIC has reported negative net worth and periods of ever increasing premiums, such as now, to try to meet its minimum ratio level.

NCUA’s graph of this change in the standing of the three funds from page 37, NCUSIF’s 1985 Annual Report.

Vigilance-The Price for Performance

In a speech to credit union managers and the press following the 1984 recapitalization, Chairman Callahan gave the following “pitch”(his word):

“Don’t set it up and forget about it.  It’s unique. It’s a better way.  But just as important, it’s yours to monitor—it’s your responsibility to keep it working—because if you don’t it’ll go just like everything else the government touches.  When government gets more money, it wants to spend more.  Our goal is to spend less (on insurance). You’ll have to hold us to that promise.”

Then in 2010 there came a change in how the NCUSIF’s financials were presented.

The Change In Accounting Standards for the NCUSIF

The NCUSIF’s GAAP presentation was a financial format that all credit unions knew and followed. This GAAP audit is the only format used in NCUA’s Operating Fund and the CLF since they were both audited by independent accounting firms beginning in 1982.

On June 23, 2010 Credit Union Times printed a story with the headline, Auditors Fault NCUA’s Accounting.  The article in part:

“KPMG gave the NCUA an unqualified audit but found material weaknesses in the reporting and documentation methods.  . . NCUA Chairman Debbie Matz said the 2008 and 2009 audits (released on June 14, 2010) had been delayed because of the problems facing the corporate credit unions. . . According to the KPMG report, the NCUSIF does not have sufficiently comprehensive policies and procedures that document control activities and monitoring functions that should be embedded and/or performed within the financial and reporting process.”

In a June 17, 2010 Agency bulletin, the NCUA board announced it had adopted Federal GAAP accounting for the newly authorized TCCUSF.  The same bulletin had this statement:

The National Credit Union Share Insurance Fund (NCUSIF) is required by the Federal Credit Union Act to follow U.S. generally accepted accounting principles (GAAP). The General Counsel’s opinion concluded that “section 105 of the GCC Act, as interpreted by the General Accounting Office, does not preclude NCUSIF from using an alternative set of accounting rules such as FASAB in preparing the NCUSIF’s financial statements.”

Shortly thereafter there was a change as reported in this footnote in  the NCUSIF’s 2010 yearend audit: Basis of Presentation  The NCUSIF historically prepared its financial statement in accordance with generally accepted accounting principles (GAAP) based on standards issued by FASB, the private sector standards setting body. On September 16, 2010, the NCUA board authorized the NCUSIF to adopt the FASAB standards for financial reporting, effective from January 1, 2010.   Accordingly, this is the first year of the presentation of the NCUSIF financial statements in accordance with FASAB.

A Misleading Accounting Presentation

However, FASAB’s  form and content are very different from private GAAP. The account titles, presentation and interpretation are intended for reporting entries that rely on governmental funding.  The NCUSIF is totally dependent on credit union funding.  The FASAB format is completely alien to the accounting presentations familiar to and used by credit unions and CUSO’s.

A Strange Set of Federal Accounts

Some of the NCUSIF’s balance sheet accounts that are completely novel under federal GAAP include:

Balance Sheet headings and account categories: Intergovernmental.  With the public; Insurance and guarantee program liabilities;(Loss reserve); Net Position, and its cumulative results of operations (not the same as retained earnings)

The traditional Income Statement is replaced with two other presentations. The first is, “Statements of Net Cost”.  This includes Gross Costs followed by Less Exchange Revenues and concludes with a bottom line Net cost of Operations (which is not net income).

The second Statement is Changes in Net Position.  This includes net unrealized loss or gain on investments, and interest income, the primary revenue source for the NCUSIF.

In standard GAAP, Statements of Cash Flows is replaced with the governmental “appropriations terminology”: Statement of Budgetary Resources.  This includes subtotals for Total Budgetary Resources, Status of Budgetary Resources and Outlays Net.

These accounting concepts are far removed from any of NCUSIF’s actual operations.  When staff gives the board’s NCUSIF quarterly update, it converts the income and balance sheet statement to the traditional GAAP format.  However the monthly postings are not converted. They remain in the idiosyncratic federal GAAP Accounting format.

Understanding Critical Accounting and Finance Decisions

The NCUSIF’s federal presentation is misleading in its factual representation of transactions which suggests that the NCUSIF is a governmental appropriated fund.

Certain critical  concepts and terms are absent. The most important is “retained earnings.”  One looks in vain for the number which is used to compute the NCUSIF’s normal operating level.  Another concept is “fiduciary assets” which means AMC assets are not fully recognized on the NCUSIF balance sheet.

The NCUA Board’s Opportunity:  Enhance Transparency for the Fund’s Users

Eternal vigilance is hard when numbers are presented in a federal disguise. At a minimum, the NCUA board should request the auditor also represent the yearend audit numbers in private GAAP format.  Staff should also present the monthly updates in this standard.

Then users of the statements can easily understand the trends. More importantly they can fulfill the challenge from a previous NCUA chair for credit unions:  it’s yours to monitor—it’s your responsibility to keep it working. 

Restoring easily understood transparency to  the NCUSIF’s financial presentation would be an important step forward for the NCUA Board in its upcoming annual review.  

 

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Fortunate Son:  For Real, For Sure, Four Score!

by Jim Blaine

Bucky Sebastian has reached yet another, notable milestone. On February 12, Lincoln’s Birthday, Mr. Sebastian will be rolling the oldometer over one more notch to 80! Eighty years of success in all endeavors: regulator, business entrepreneur, credit union/philanthropy CEO, husband, father, grandfather, fierce friend, free spirit.

Reared in Illinois with 7 siblings – 5 older! – it is surprising that Sebastian survived childhood. The older kids tried to make sure Bucky knew “his place” in the world – last at the table, remain silent until asked, remember you exist only to serve – us! Given the circumstances, Bucky learned early how to fight, regardless of the odds; was imbued with a servant’s heart; but never fully overcame his bashfulness and reluctance to speak.

After high school, Bucky decided to become a priest, but the Jesuits wouldn’t have him. The Jesuits evidently found Bucky a bit too “over the top”, too evangelical!.  Perhaps they feared a devil’s advocate? At that age – or at any age for that matter – subtlety was not Bucky Sebastian’s best trait.

Bucky also had some difficulty with the Jesuit vows of “poverty, chastity, and obedience”.  He could accept poverty, would work on chastity, but obedience – well he seemed to lack that gene. Anyway, he didn’t like the limited prospect of preaching only once a week! Having decided he couldn’t work for God, Sebastian made the next best choice; he decided to play at being God…and went to Loyola to become a lawyer. The Jesuits tried to hide their disappointment!

Having graduated, and having his never-really-lacking self-confidence reaffirmed with the law degree; Bucky was now even more convinced: that he knew what was right, he knew what you needed, and he was determined to make sure you knew what you needed. So, his next career choice was also entirely logical; he became a financial regulator, ending up at the NCUA.  Regulators like telling folks what to do; and, most importantly to Bucky, can usually speak at length without fear of interruption.

At NCUA, Sebastian became an oratorical outrage – and an immediate problem. A bane to pomposity and self-importance, Mr. Sebastian taunted the status quo and all infestations of mindless, conventional wisdom. He was a mischievous mocker, a red hot provocateer. Sebastian invented the novel idea at NCUA that a regulator should listen first and speak last – still reluctantly used.

Bucky Sebastian’s thinking has always  been expansive, his mouth more so – with profoundly, positive results! He made folks uncomfortable, prodding them to say what they thought, explain why, and then challenging their thinking. Stand and deliver, prove your point or die trying. Fatalities were not infrequent. But in doing so, he changed minds, he changed hearts – for the better.

But, Bucky Sebastian’s impact was profound even when in error. In 1982, Mr. Sebastian opined that federal credit unions could pretty much forget having any limits on their membership. A bench of Lawyers Supreme said, “un-huh”. An all-hands-on-deck credit union movement effort was required to convince Congress to bail Mr. Sebastian out – which they did, creating a new, brighter future for credit unions.

Sebastian, if you know the man, to this day still asserts that the Lawyers Supreme erred in that decision; claims that Lincoln was born on his birthday, not vice-versa; and that when President Lincoln led off his most famous speech with “Four score…”, Lincoln was simply trying to say…

Happy Birthday, Wendell “Bucky” Sebastian!

                 (… wouldn’t try to argue with him about it, if I were you!)

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Einstein’s and Others’ Thoughts on the Advantages of Credit Unions

The “Home Court” Advantage

From Greylock Federal Credit Union:

We have officially welcomed over 100,000 Members! We are deeply proud to be the hometown financial institution of choice by so many in our community and we want to say THANK YOU!

From Springfield High School’s student newspaper on the school play:

. . .One of the important aspects of high school is the opportunity to be a part of something bigger than yourself. Being involved in the production process, like Hashmi stated, has allowed students to contribute to the creation of a captivating performance. It is a chance to collaborate with a team of talented individuals and learn new skills along the way. Plus, there’s a unique sense of camaraderie that comes with being part of a play. So, if you enjoy the idea of working behind the scenes and being a crucial part of bringing a story to life, the fall play is definitely worth considering! 

A Video: What Good Business Looks Like

This short video “story” from Thailand should be  required viewing for every credit union board that has ever contemplated the merging of their long- serving coop.  It is a stunning example you won’t forget. It disproves the capitalist adage, “Everybody has a price.”

(https://www.youtube.com/watch?v=1HtaYMhDr4k)

Einstein on the critical credit union advantage in a Market Driven Economy

This week has seen another bank’s stock price fall by over half from $10 to $4 per share.

From Yahoo finance:  The Pressure on NYCB is Not Letting Up.  At yearend 2023 the bank reported $116 billion in assets and $10.8 billion in total equity.

Its history in brief: New York Community Bancorp, Inc. (NYCB), headquartered in Hicksville, New York, is a bank holding company for Flagstar Bank. In 2023, the bank operates 395 branches in New York, Michigan, New Jersey, Ohio, Florida, Arizona and Wisconsin under multiple local brands acquired via multiple acquisitions.

Einstein’s explanation of the credit union advantage, especially in times of crisis, is simple-Time: The only reason for time is so that everything doesn’t happen at once. 

The cooperative member-owner structure gives management and the owners time to straighten things out when problems occur.  Let markets cycle through their phases.  However, there is no respite in the winner-take-all world of competition when a market owned firm falls from grace.

The Justifications in Self-Serving Mergers in Which Members Get Nothing

In my recent look back on several mergers, I reached out to a participant from several years ago. Had the members seen any change for the better? The reply:   it’s just another bank without heart or soul or members, just customers…but then, we might just be American Idiots …

If we’re honest, culture forms us as much as our statements of personal values.

Human beings can live without many things, but not with an absence of meaning. In our “free” market driven economy dominated by for-profit firms, cooperative CEO’s and boards will continue to cloth self-interested actions in moralisms and myths.

Fortunately, members are not idiots.

 

 

 

 

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A Winner’s Inside Account of a Very Close Merger

On November 9, 2021 the results of one of the most contested credit union merger elections were announced.  The members of Vermont State Employees (VSE) had approved a merger with New England FCU.  The final tally was 7,622 for and 7,304 against, a margin of 318 votes.  Approximately 21% of the members voted, an unusually high participation.

I wrote a number of blogs about the contest.   The opposition put up a website Calling All Members led by the former CEO and previous board directors. It  presented powerful arguments against ending VSE’s independence.  For these longtime VSE supporters, the outcome was a surprise and disappointment.  However, they chose not to challenge the results.  Since the  merger date of January 1, 2023, VSE has operated as a division of New England FCU.  A new name/brand is promised for the future. 

“In the Room Where It Happened”

John Kennedy once said, “Victory has a thousand fathers; defeat is an orphan.”  In this case victory has a mother.

I recount this story from a much longer article about her efforts.  This insider’s account raises the question what the outcome might have been had this approach been revealed during, not 8 months after the vote.

In July 2023 this VSE senior executive who directed the merger campaign was the subject of a long account by Joel Berg. It is posted in full on the Financial Brand website, Tactics from a Nail-Biter Merger That Every Bank Marketer Can Use.

This lengthy, first-person story of the voting campaign centers on Yvonne Garand, VSE’s chief marketing manager.   The article includes examples of the mailings and other promotions from the campaign which are not included here.

Writer Berg describes Garand’s communications strategy as the “make-or-break factor.”  These included messaging to target segments at critical points in what ended up being conducted like a “political  campaign” including hiring a consultant expert in political elections.

The author believes this case “offers lessons for other institutions concerned about how customers will react to a change in ownership.”  Also an example of tactics necessary to  win.  He says the fundamental challenge in any merger or purchase-even if members vote:  “the customers or members coming on board didn’t choose to bank with the acquirer on their own.”

The Critical Tactic for “Getting out the Votes”

The critical communication tactic was segmentation.  Identify key groups and prepare different messages, tone and style for each subsector.

The two credit unions had different histories and business priorities.  Both were community charters but VSE’s (1947) legacy was its state employee origins. New England’s roots were as an IBM chartered credit union (1961) with  members outside the state from the beginning. These two Vermont based credit unions had created different business models, cultures, and brands.

Garand called her communications strategy a “human-centric approach” that ensured the “messages were empathetic.”  In this short  video link in the article she summarizes her approach with this point–the campaign couldn’t be a typical merger story about greater scale and efficiency.

“All of those things are important. But that’s our inside jargon. And we knew that if we came out with messaging and communications that sounded like that, people might not understand it, and it might even feel a little intimidating.”

(https://www.youtube.com/watch?v=Xtc2GWunoZY&t=55s)

Several key segments included “digital natives,” environmentally minded members,  and those located around New England’s branch structure in Burlington.

But the most group was VSE members who lived near the state capital of Montpelier.  As the longest tenured members, “We knew that this was probably the segment that would feel the greatest sense of loss because they grew up with VSECU. We really wanted this group to know that they were still going to have the same experiences that they have today.”

As Berg notes in the article, “knowing many “no” votes would come from the state capital area, the credit union focused on reaching potential voters in other areas of Vermont who might be more receptive to the merger plan.”  He quotes Garand: “We strategically focused on the Burlington market — Chittenden County — as well as other smaller regions in Vermont, to encourage those members to vote. And it worked.”

Changing Tactics as the Opposition Organized

Garand’s reaction to the opposition, “It did take us off guard just a little bit, how effective this opposition was in the central Vermont area.”

The independence effort was led by Steven Post the former CEO of 26 years and other directors and senior executives.  Their website offered multiple, thoughtful reasons for sustaining VSE’s unique values based, Vermont-centric model. I wrote several blogs presenting their position that VSE’s continuation was in the members’ best interest.

The Vermont State Employees’ Association and the Vermont Retired State Employees’ Association, opposed the merger. Given this backing, “we thought we were going to win,” says Post the previous long term CEO.

What made the difference?  The opponents say it was VSE’s resources used to promote  the merger.  If one looks at the increase in marketing and professional services spending in 2022 versus the prior year, it would seem to confirm one critic’s estimate that over $1.0 million was used to convince members to support management’s decision.

From Berg’s article, “If we had had money to put ads on TV, I don’t have any doubt that the outcome would have been different,” says Jerome W. Diamond, the state AG from 1975 to 1981 and a former chair of the credit union’s board.”

The Vital Tactical Change

As the opposition organized Garand changed tactics from a traditional company marketing-messaging effort to a political campaign.  Even bringing in outside consultant with election expertise.

Berg’s article includes more details with marketing collateral.  This is an insider’s account of her role to persuade members to support VSE’s termination. She avoids debates about member benefits, rather the member communications focus on “feel good” concepts:  “Better Together,”  “Leading from the Future,” and “Enriching the Quality of Life.”

Garand rejects traditional business logic for mergers-scale, efficiency, innovation- to solicit votes.  Recognize the opposition, but don’t engage with the critics.

The credit union controls the communication channels to reach the members including branch signage and multiple message marketings. Focus on advertising a potential bright future not on whether members should give up control over all the resources, relationships and community focus they have created and own.

Learning from the Past

Once eliminated via merger, there is no going back to resuscitate a vital legacy over 75 years in the making.  When reporting on the outcome I described the losses that occurred not only for VSE members, but the state credit union system and its citizens.

New England FCU’s acquisition  not only eliminated its principal competitor, it also created one credit union controlling  47% of the state’s credit union assets and 40% of members at the merger date.   A big egg for one basket.

Tomorrow I will look at the results of the merger one year out.  How are members responding?  What are the financial trends?  It is especially important for a look back while the events and points of view are still remembered.

We can change the future if we are willing to learn from the past.  And then take seriously the differing judgments about the event’s consequences. One group lost an election about a credit union’s future role.

However everyone loses when the event is merely another successful example of the power of propaganda, or marketing, whichever interpretation best fits this recounting.

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Big Banks Adopting a Credit Union Tactic

Yesterday’s Marketplace program on NPR had a brief report on the investments two of America’s five largest banks are making to improve their competitive position.

Technology?  New Ventures? Greater staff skills? Social Marketing Influencers?  Third party-fintech-origination partners?  More acquisitions?  All are factors, but not the newest priority.

The New-Old Strategy

JPMorgan Chase announces brick-and-mortar bank expansion in a digital age

Several of the relevant paragraphs from the story:

In the year 2024, when you think banking, you think mobile apps, online deposits, digital future, right? Not so fast. JPMorgan Chase, the country’s largest bank, announced today it’s opening more than 500 new brick-and-mortar branches and renovating another 1,700.

This follows an expansion by Bank of America last summer. So, what’s the value of banking in person in the digital age?

You don’t usually think of a bank as having a living room. But Jason Patton of JPMorgan Chase says they’ll be a staple in a handful of the bank’s new branches, which are meant to be places where people chat. . . (in cu’s this is called serving members)

“Some of these branches, we’re opening up in places where we’re not as well known,” he said. “So, in many cases, people don’t know what we have to offer.”

And it’s important to see and be seen by those people if banks are going to drum up new business, said Jaime Peters, a finance professor at Maryville University in St. Louis.

“By going and building these new branches, and having that placard on the side of the road that people pass every day, that is brand awareness, that is trust building,” she said. . .

The Only Growth Option Is Organic

Big banks have another incentive to add branches: The ones that hold more than 10% of the nation’s deposits are generally prohibited from acquiring other banks, said Michael Rose, a managing director in equity research for Raymond James. 

“So because you’ve removed the ability for them to actually acquire other banks, they have to grow essentially organically,” he said.

The Credit Union Counter: Enhancing “Their” Local Environment

After posting the latest video from White Fish CU,  I received a link from Jason Lindstrom CEO of Evergreen CU in Maine.  This new video  has a similar community theme, but different subject matter. It is an homage to Maine’s forests and the people who maintain and enjoy them.

In addition to branches,  “local” means that  a credit union is authentically “home-grown,” not merely a local outpost of an out-of-state or national financial firm.    Bank of America or JP Morgan Chase branches are not being grown (drummed up) from the natural environment.  Rather they are an invasive species, trying to replace the local habitat.

This is Evergreen’s mission, “keeping Maine wild.”

(https://youtu.be/ocJ5PGR8FM8?si=VF46w9L01uk_tEj4)

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Three Examples of Credit Union Success

Credit unions can be inventive when communicating their special nature.  Here are three different approaches.

A Few Great Numbers (KPI’s)

This traditional view of success is from the yearend numbers of an exceptional coop. This CEO’s team focuses on the 5 key performance indicators (KPI’s) in 2023 as shown below.

metrics goal actual
member growth 5.10% 4.10%
net earnings 1.00% 1.23%
service quality 82.25 83.3
P&S per member 4.64 4.61
deposit growth 10.00% 12.80%

These along with many others not shown (net worth, loan growth etc.) would be outstanding in any year.  However in this year of flat to down trends overall, they are extraordinary.   How was it accomplished?

This credit union implements the most traditional and important strategic advantage credit unions enjoy–“relationship banking.”  It provides stable deposits, long term members and intense focus on their community and its well being.

The organization does this by putting people first. The CEO tells employee and member care stories as a central part of his monthly updates.  Not words, but deeds, sometimes confessing honest shortcomings.

The credit union leadership has set boundaries, what to do well and what not to attempt.  No mergers, no bank buys.  They are in a market dominated by a super coop competitor ten times their size.

For those who believe scale is necessary for success, this credit union grew to over $700 million in 2023. It did so while recording the fifth consecutive year of lowering its operating expense to average assets ratio. In this five years the ratio has fallen every year going from 3.08% to 2.55%.

That result  is lower than the majority of credit unions over $5 billion.  It is because they know who they are as a credit union.

Celebrating a Community That Cares

For any credit union striving to communicate its role in the communities served, I would urge you to look at this latest video from Whitefish Credit Union in Montana.

It is from Josh Wilson, Senior Vice President for Marketing.  The video centers around people in all walks of life serving their community in local food banks.

It is a moving documentary.  So powerful it should be entered in the Sundance film festival. The stories honor those who serve and are being served.  It is a tribute to the small rural towns and the natural environment in which the credit union operates.

Watching it makes you feel good about this example of caring for others.  There is not a word about Whitefish’s financial services, which says everything you need to know about the credit union.  Enjoy.

(https://youtu.be/9t7xl3IQRw4)

The Special Opportunity for Credit Union Leaders- I Feel Like Makin’ Love

Yesterday I linked to a song by the rock group Green Day.  A fan, Bob Bianchini, sent me their latest video from two weeks ago.  It is a real picker-upper to start your day.

You might ask who is Bob Bianchini?  He is the only League President who simultaneously served in the state legislature.  That was in an era when credit union leaders knew how to get things done.

This video reminded me of Rex Johnson’s exhortation to the credit union audiences who attended his many lending symposiums.   He would close by telling them, “your job is to treat your members so well that they become fans for your credit union.”

Here is what genuine fandom looks like-in a New York subway station from Bob and Green Day.

https://www.youtube.com/watch?v=EiF28zBaOlI

(https://www.youtube.com/watch?v=EiF28zBaOlI)

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Are Credit Union Members “American Idiots’?

Do some credit union leaders, the general press and those charged with overseeing the public good believe the member-owners of cooperatives are idiots?  I believe those that think and act that way will soon be standing in front of a revolution if the behavior in mergers and other acquisitions continues as described below.

In the first decade of this century a punk rock group, Green Day, wrote a political protest song called American Idiot.   The song was a loud screed against the fear and xenophobia which they believed the public media promoted after the Bush administration’s invasion of Irag.

The chorus of this complaint is:

Welcome to a new kind of tension
All across the alienation
Where everything isn’t meant to be okay
In television dreams of tomorrow
We’re not the ones who’re meant to follow
For that’s enough to argue

Abraham Lincoln was gentler when he said,  ‘You can fool all people some of the time and some people all the time. But you can never fool all people all the time.”

Today a few hundred of the 4,700 credit unions are led by persons testing Lincoln’s assertion that you can’t fool all the people all the time.  Just insert the word member for people.

The ongoing spectacle of credit unions eating their own with the enablers stuffing their pockets to carry out this cooperative cannibalism continues.  The examples are piling up.  This continued mutual destruction could end up destroying the whole cooperative enterprise.  The latest example is the merger of 121 Financial CU with VyStar both headquartered in Jacksonville, FL.

The Setup

Some 90 years ago a group of telephone workers put their nickels, dimes, and quarters into a desk drawer to organize a credit union.  It was 1935, the middle of the Great Depression.  Over the years this telco-based group effort grew and grew.  As it became too large for self-management, the board hired full time professional staff to continue the purpose of building a “home-grown” cooperative serving the greater Jacksonville community.

At December 2023 this nickels and dimes startup had reached $710 million in assets, serving 50,000 members.  Its financial performance was strong, continuing to grow loans at 11% and achieving a net worth of 9.05% or well capitalized.   Delinquency had ticked up a bit to .64%, but the loss reserve was 140% of all past due loans.

However in November 2023, the current board and senior management decided to end this nine-decade record of member-centered community service.

As reported by CU Today in November 2023, “the credit union told members the merger will provide enhanced services, meet the evolving needs of members and employees, and make a “profound positive impact on its communities.”

It did not identify what those enhanced services would be . . .

In addition, 121 Financial . . .said the merger will further its mission to “Do Good.”

The “doing good” that was disclosed were payouts to the five senior managers of over $900,000 for additional bonuses and salaries detailed at the end of this blog.

The 50,000 members who had built and owned the credit union received nothing.  Just vague promises in return for giving away their $485 million in loans, $177 million in investments, all $25 million in fixed assets, and $63 million in equity, for free.

Who wouldn’t want such a deal?  A successful nine decade long ongoing business with a local reputation and loyalty, not sold, but handed over to a local competitor.  And the former member-owners get a new set of leaders who have nothing to do with their history or success.

One can understand why 121 Financial’s senior management wants to ensure their future.  The recipient of this largesse, VyStar, has 925,000 members, 91 branches and 2,300 employees. It doesn’t need another CEO (whatever the former CEO’s new title-legacy ambassador?) COO, CFO, Sr Lending officer, let alone another Executive Assistant. Their additional compensation was stated as over $900,000 and that does not include significant other benefits in written form from benefit plan terminations and new SERPS.

The leaders claimed that they had contacted a number of other credit unions and this was the best deal.  Whether true or not (the shopping part) it does suggest that a number of credit unions passed on this freebee and were not willing to pay the grift.

Or perhaps VyStar thought it was worthwhile to eliminate a local competitor which was outperforming them with the traditional credit union strategic advantage of “relationship banking.”  Consider how VyStar would have reacted if PenFed took the bait.

The  Members Saw Through the Scam Immediately

When the merger was announced the members immediately set up a website Stop the Merge.   The purpose was clear: We need you, The Members of 121 FCU, to help us save our Hometown Credit Union.

On the site are a number of articles describing their concerns and urging members to vote to stop this giveaway.  Their most pointed critique was on November 21, 2023, Outrageous Bonus for Top Merger Pushers.

Speaking of “Take-Over” in the merger package, it clearly states that all things 121FCU will go away….Name, Branding, etc. and more community engagement…..What that means is that Vystar will use more of the assets and value of 121 FCU to buy naming rights for sports stadiums and silly promotions. I, for one, just need to be able to trust my financial institution…And I think the 2022 Vystar debacle shows we can’t do that, at least with them. 

The bottom line is that 121’sleadership team by closing down this cooperative has broken trust with the owners.

The VyStar Connection-It Takes Two to Tango

CEO Brian Wolfburg has enunciated a clear growth strategy for his tenure.   The credit union at one point attempted to purchase the $1.6 billion Heritage Southeast Bancorporation (HSBI)with  its 22 branch locations across Southeast Georgia, through Savannah and into the Greater Atlanta Metro area.  The effort was called off after a 2022 very public failure of a home banking conversion caused a member uproar.

Even though not completed, this example is  relevant to see through this merger.  One can understand why Wolfburg wants to eliminate this very successful local competitor which is a burr under his saddle.

Mergers of strong independent firms are anti-competitive. In this case 121 Financial has stronger loan performance, long-established member loyalty and a niche nurtured over decades.  When offering to buy HSBI, VyStar offered the bank’s owners a price of 1.80 times book equity. It was also  a significant premium over the recent stock price, pre-merger announcement.

However the owners of 121 Financial were  offered $0.  Instead they were asked to give away their total capital to an entity that had nothing to do with its creation.

Treating credit union member-owners as idiots in an economy that promotes private property is a huge political and business mistake.   Members would be treated with more respect if they were bank shareholders.

CEO Wolfburg’s expansion efforts at VyStar depend on two growth hormones:  renting capital via subordinated debt (currently $200 million) and acquiring other firms’ assets versus organic growth.

Both of these efforts can work for a while, especially when the cost of funds for years as at or near zero.  Now the tide is going out, and as Warren Buffet famously quipped, “we can see who is swimming without any trunks.”  Organic growth is hard, but it also is more stable and builds a fortress foundation know as goodwill, but not the intangible financial kind.

For a market indicator of VyStar’s performance this past five years, here are two benchmarks:

The credit union’s return on equity has gone from 7.9% in 2019 to 2.6% in 2023, a CAGR decline of -24% per year. In only 2021 did performance near the longterm  market average of 11.8%.

Return on assets in the same five years has gone from .68% to .18% or a negative CAGR of -28.%.  In none of the five has ROA reached 1%.

In a market traded firm, this five year record would have triggered calls for changes of leadership or strategy.

The $13.6 billion VyStar needs the financial strengths of 121 Financial to shore up its downtrends. This merger helps VyStar and offers nothing 121’s members cannot have from their credit union.

Where is NCUA?

Every challenged CEO’s defense of this rapacious behavior is excused with two points:

  • NCUA approved it;
  • The Members Voted for it.

I won’t go into the faux-voting process required by NCUA.  Rather the failure to see reality is much deeper especially at the board level.  Recall that it was staff that presented multiple examples of self-dealing in proposing the merger reg in 2017.

Chairman Harper does not believe in member-owner rights.  He sees members as just consumers.  He will protect them with a veneer of enhanced compliance exams.  Cooperatives are nothing more than another financial option.

Vice Chairman Hauptman is vague on any philosophy, but sometimes will refer to the free market.  His inferred stance is that NCUA can’t run credit unions.  However in public pronouncements he makes constant reference to the importance of crypto/blockchain innovation and paying attention to fintechs.

This month will test new board member Otsuka’s ability to bring a fresh eye to both internal and external events. Will she fall back on broad policy statements independent of data.  That is the traditional pattern of board newcomers. Or might she challenge the status quo?

CU Today reported the merger had been approved.   But neither credit union gave the details of the vote-which is unusual in a contested election.  A later story said a member wanted to continue to oppose the combination.  One has the feeling there is another shoe to drop here—or will this straw just be one more addition to the CAMELS load at VyStar.

End note: The Payoffs to 121 Financial’s Four Senior Managers and an Executive Assistant

As first reported in November 2023 by CU Today the following are the disclosures of reported  benefits:

More Than $900,000 Being Paid in Bonuses, Plus Additional Funds in SERPs, Being Paid Out to 5 Executives

A credit union that is paying more than $900,000 in merger-related compensation to five top execs—plus undisclosed amounts in SERPS—is saying it was “very important to highlight that the board of directors conducted a thorough evaluation of multiple credit  unions lasting more than a year before selecting VyStar as the ideal merger partner,” 121 Financial told members.

The $709-million credit union told members the merger will provide enhanced services, meet the evolving needs of members and employees, and make a “profound positive impact on its communities.”

It did not identify what those enhanced services would be. . .

In addition, . . .said the merger will further its mission to “Do Good,” 121 Financial added.

Payout to Senior Executives

The merger related compensation each 121 Financial executive will receive is shown in part below:

  • CEO David Marovich, who will continue for five years as SVP-Northeast Community President, with a salary increase of $15,000, two retention bonuses of $122,500 each at six and 12 months after the merger; and who will receive a supplemental executive retirement plan that will pay him 40% of his annual salary of year five upon retirement in year six for a period of five years.
  • COO Paul Blackstone, who will continue on for five years and be named SVP-special projects with a salary increase of $95,000, two retention bonuses of $126,250 to be paid six and 12 months after the merger; and the establishment of a SERP that will pay him 35% of his annual salary of year five upon retirement in year six for a period of five years.
  • CFO Cyndi Koan, who will continue on for three years as SVP-financial special projects and who will be paid retention bonuses of $35,000 six and 12 months after the merger closes.
  • SVP-Lending Cathy Hufstetler, who will retire and receive a year’s severance of $273,000, and retention bonuses of $28,000 at six and 12 months after the merger closes.
  • Executive Assistant Nichole LeBlanc, who will continue on for five years as senior executive assistant with a salary increase of $5,000 and with retention bonuses of $9,500 at six and 12 months after the merger.
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Credit Union Mergers: A Game without Rules

 

Part III

Previous parts I and II have provided a factual review how FCCU’s CEO and board chair diverted $12 million to their control via a new organization when merging the credit union.  While this example is discouraging, it is symptomatic of a much broader challenge for credit unions.

A Game Without Rules

The FCCU/Valley Strong merger is a current and common example of the private, insider deal making around mergers of successful, long serving institutions.   The CEO’s and boards arranging  these transactions put their self-interest and ambitions ahead of their member owners.  Their actions are covered with rhetorical reasons about scale, technology investments and competition threats.

CEO Duffy’s skill at deflecting any criticism is shown by how he positions those  whose official duty and/or fiduciary roles would be to protect and ensure the members’ best interests to support his action.

His board of five, on which he sits, had to approve the merger.  They are all given subsequent sinecures.  The senior staff who might have aspired to succeed in leadership is guaranteed bonuses and jobs in the continuing firm-at higher salaries and lesser responsibility (legacy ambassador vs COO).   The lawyers and accountants dutifully earn their fees for blessing the numbers and  transactions.  Like the trade associations, no one wants to lose a paying client.

And those in the community who lost their home- grown 66-year old cooperative, are not going to bite the hand that gave them an occasional handout (usually $1,000) or annual political  donation.

Two Members Said:  The Emperor Has No Clothes

To oppose someone in authority with literally millions in resources to fight back requires persons with more than insight, it takes unusual courage.

This merger confirms the modern day reality of Hans Christian Andersen’s most memorable fairy tale.   And the tale’s relevance is even more appropriate as shown by newspaper accounts of “banker” Duffy’s recent Stocksonian award. Both “leads” open by describing his  professional appearance, “looking dapper in a gray, tartan-style suit and stripped red bow tie.”

But just as in the fairy tale, the two members saw the CEO’s plan had no substance.  And they said so out loud, so all could see.  But no one wanted to note the obvious.  Here are their names, excerpts of some of their concerns, comments and questions as recorded in the CU Today story from NCUA’s website.

A  FCCU member,  Larry Matulich,  posted his objection on NCUA’s website in part as follows:

I am against the merger for several reasons.  I feel we must protect the financial stability of our local credit union. The loan to asset ratio of Valley Strong is 3 times the loans to total assets, while FCCU is only 20% of our loans to assets.  We do not need their loans, but they do need our assets.   Let’s protect  our money and keep it here in San Joaquin County.  Frankly the real strong credit union is not Valley Strong, but our FCCU. . .

A second member Frederick Butterworth posted in part:

Vote No on the proposed merger until the provision to transfer $10 million of member assets to a non-profit foundation for “community outreach” is eliminated from the proposal.  Member financial assets of any amount, especially of any amount, especially $10 million , should not be given away for any purpose.  If Financial Center Credit Union is so flush with cash that it wants to give  away $10 million, then that amount sould be distributed to the members.  I’ve written twice asking for the rationale for given away $10 million.  They have failed to answer me.  . . The so-called FCCU2 Foundation was created less than two months ago setting uup Duffy in his new give-away-our-asseets role. . .

Both saw that the rhetoric promoting the event was not supported by the facts.  Other employees and members knew these realities, but Duffy managed to outmaneuver any scrutiny, even by the regulators.

Regulatory Neglect Is Not Benign

This week NCUA announced the banning of a former president/CEO from forever participating in the affairs of a federally insured financial institution. This CEO’s misdeed was that between 2018 and 2020 she used the credit union’s credit card for personal purchases “totaling more than $12,000.”

In FCCU2’s foundation setup, the diversion for personal use was first announced as $10 million. But when the deed was finally reported to the IRS, an additional $2.0 million was added to total $12 million.

When asked, NCUA’s anonymous defense in the  CU Today story was this transfer is “a business decision left up to the credit union’s board of directors.” And further on, “ultimately in a voluntary merger (this action) is up to the members themselves.” When asked to explain its oversight, NCUA shows a regulatory middle finger to every FCCU member by stating “86% voted in favor of the merger.”

Moreover this reference to  a supposedly democratic process demonstrates how disconnected from on the ground realities NCUA leadership is.

Duffy has been politically adroit placing the regulators between himself  and his self-dealing with the members’ money.  “Duffy said neither the NCUA nor the DFI raised any red flags over the transfer of the $10 million to the foundation.  There was nothing to question.” For NCUA to followup now, it would first have to investigate itself-what it already knew.  An internal review  few organization’s leaders are capable of doing.  Rather it may require a congressional hearing or a CNN story.

It was NCUA itself that described multiple situations of self dealing and failure of fiduciary responsibility by boards and CEO’s in approving its merger regulation.  If either NCUA or DFI had bothered to look under the covers, it would find this merger violated one of the oldest rule on the books: thou shalt not steal.

Consequences and a Solution

Credit unions compete in a capitalistic system described by the fictional character Gorden Gekko as fueled by self-interest: “Greed, for lack of a better word, is good. It captures the essence of the evolutionary spirit. Greed in all of its forms; greed for life, for money, for love, for knowledge has marked the upsurge of mankind.”

The temptations are all around, even for member-owned coops.

At all levels of this process, the members’ trust and confidence have been violated.  In so doing, the cooperative reputation of thousands of credit unions that serve their members every day with commitment and purpose is stained.

Instead of stockpiling excess capital as done by FCCU, hundreds of credit unions pay special dividends explaining,” Our annual giveback bonus is what differentiates us from a typical bank.”

The system’s overall safety and soundness is lessened when more eggs are put into a single basket.

Everyone connected to this transaction loses something. The 29,000 members, their credit union; the city of Stockton a 66-year long relationship with a locally-owned financial cooperative.

Valley Strong’s senior management and Board, seduced by the prospect of adding $634 million in assets and free capital of $100 million, are now struggling when the tide of free money went away.  They thought the only cost would be several years FCCU executive salaries and $2.5 million in donations to the Duffy fund.  But nothing is free in life.  Valley Strong’s CEO,  will now have to knuckle down and run a credit union versus buying up others’ assets.

Credit unions’ public reputation as member-first organizations is contradicted by these facts. And the regulators’ conduct exposed as supervisors who “have no clothes.”

Duffy’s endgame benefitted him and some of his closest enablers.  But they will learn giving away other people’s money is a losing game when the funding drys up and the lights turned off.

Is There A Cure?

The only bright light in this case are the two members who spoke up with the truth about the event.  The solutions must empower the members with information and total transparency so that they are not just mere bystanders.

The single most important reform that would change the whole process, is to require that a minimum of 25% (or more) of members must vote in any election to end a sound credit union’s charter.

Today a minority, usually in the single digits, bother to vote.  And a smaller minority actually approve  charter surrender.  In a democratic process, presumably a majority should approve transferring their collective wealth to another party.  But in credit unions a minority of members, and and even smaller group can approve 100% or total transfer of value for everyone.

According the FCCU’s certification of the vote sent to NCUA, only 9% (2,680) of the 29,672 members voted.  Of this amount just 7.7% of all members supported giving up the charter.  Compare this with NCUA’s characterization of 86% of voters “in favor of the merger.”

Transparency and Options Create a Truly Free Market

First, much fuller disclosures should be mandatory.  All of the documents required by NCUA in their review should be part of the public record for every member to see.  All contracts for future service for any employee or board member should be public.  If an FCU is involved, they should be required to disclose the same information as a SCU files in the IRS 990.

Second, all credit union members should have a choice to take their pro-rata share of accumulated capital and close their account if the merger is approved.

Third, once the disclosures are public, members should have the opportunity to seek proposals from other credit unions who would be willing to make better offers.

Fourth,  merger agreements should include specific performance objectives so members can track whether the value promised has in fact been delivered.  For example lower operating expenses, increased loan or savings opportunities, enhanced delivery options and their usage.

Fifth, the board of the continuing credit union should be required to report to all members at the annual meeting the impact of the merger on the institution after the first 12 and 24 months.

Mergers today are the wild west of credit union activity.  They are marketed by intermediaries offering to facilitate the benefits for the selling institution and the niceties of the regulatory process–for a share of the action.

Duffy’s example is not an exception, albeit the foundation was a unique creation. Rather with no rules, everyone feels entitled to whatever they can get.

In a true market this insider dealing would not happen.  For example when credit unions buy banks, the deal is often very public and the benefits to the bank’s owners very clear.

Just this week Beacon Credit Union announced that it planned to acquire Mid-Southern Savings bank for $45.1 million in cash.  The bank’s total capital at third quarter 2023 was $28.9 million for a sale premium of 150% of book for all the bank’s owners.

In the official Member Notice Duffy and the FCCU board sent to members announcing the mrger, the headline under the credit union’s name reads: Better than a Bank.  Except when it comes to selling out the charter and all capital in return for nothing but promises and future charity.