Author: Chip Filson

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Tonight’s Presidential Debate and “Equal Time”

There are many more critical topics on voters’ minds in tonight’s debate than how the two candidates view the contributions and financial role of credit unions  in the American economy.

Two  weeks ago I posted a blog with Vice President Harris’ remarks from an April 2023 Treasury CDFI award  announcement:

“When we invest in community lenders, we help build a future where all people—no matter who they are or where they start—have the resources they need not only to succeed but to thrive.

“These grants—representing the largest CDFI grant program in history – will enable hundreds of community lenders to invest in small businesses and entrepreneurs, and also provide home loans for families, financial services for local nonprofits, and capital for community organizations.” 

Over $590 million was awarded to 203 credit unions which was 34% of  total funding.

I stated if someone had an example of President Trump’s involvement, I would be glad to give equal time.   I received a response  the same day.

President Trump’s February 2018  Meeting with Credit Unions

 

The following text and a NAFCU article link are from Richard Harris, the retired  CEO of Caltech Employees FCU:  Although the attached article  is not a formal statement from former President Trump, it however, was perhaps the first time a sitting President engaged directly in person with credit unions. I was honored to represent the group as then Chair of the NAFCU Board of Directors. 

In addition to Richard  and the Presidents of NAFCU and CUNA,  several other CEO’s  present included:

Jeanne Kucey ,CEO of JetStream Federal Credit Union); Jim Kenyon, CEO of Whitefish Credit Unionairlines, Tyrone Muse  CEO of Visions Federal Credit Union;  Angie Owens president of American  Federal Credit Union; and Lynette Smith CEO of Washington Gas Light Federal Credit Union.

Cedit Unions and President Trump in the Roosevelt Room of the White House (February 2018).

The NAFCU article outlines several items discussed.   Richard’s description of the event: “He started the meeting by going around the table and having each credit union CEO tell who they served in their FOM and a little bit about our credit union. 

 Who were our members? How were we financially helping our members?  We went around the whole table. The President also had Gary Cohn, his economic advisor at the time, and his Chief of Staff, General Kelly, attend the meeting with us. The meeting lasted approximately one hour as I recall.

I was quite impressed with the President’s engagement with us.  Regulatory burden was the primary topic of discussion.”

Harris  continues:  “At the time, deregulation and the perceived overreach of the CFPB were front and center. The Trump Administration was actively seeking support from banks and credit unions to get behind their legislation and advocate to Congress for passing deregulation legislation. “ 

President Donald J. Trump meets with Credit Union Representatives in the Roosevelt Room at the White House, Monday, February 26, 2018, in Washington, D.C. (Official White House Photo by Shealah Craighead)

“This meeting did not take place in conjunction with any other credit union gathering in Washington DC. It was hastily arranged and the participating credit union CEO’s needed to fly to DC with little notice.” 

I asked Richard if NCUA came up:  “There was no reference or discussion on NCUA or any of his appointees. His interest seemed to be very focused on how he could help the consumer, in this case our members. “

The Importance of Your Vote

At this stage of 2024 election, pundits estimate less than 7% or fewer are undecided about whom to vote for.   Many will tune into tonight’s debate to firm up their views for Trump or Vice President Harris.

The two topics cited in the excerpts above are traditional party themes:  democrats’ support for investments in community development and republicans’ promise to reduce governmental regulation.

These examples  show credit  unions have had some visibility with  these two candidates in the past.  In this very close contest it might even be possible that credit union’s unique purpose earns a shout out from one political team or the other.

Credit union professionals are probably as divided as is the country for whom they support.  The critical point is  that every vote matters.

Whatever your presidential preference, urge your members to exercise their most important democratic right-their vote.

 

 

 

 

 

 

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The Cooperative Way to Manage an Isolated Branch

Last week I described the abrupt closing of the Madison WI branch of PenFed FCU  which it acquired via  the merger of Post Office Credit Union (POCU) in 2020.

There was no public announcement.  Some members were alerted, but many weren’t.  The employees lost their jobs.  The members no longer had a physical presence for this coop operation begun in 1935.

I described this as an example of “asset stripping” in which the continuing credit union takes the most valuable parts of a organization and then disposes of the rest.  While this approach is not unique to PenFed, it is routine in many of their  post-merger operations.

Other credit unions sometimes acquire new branches via mergers outside their home state, often hundreds of miles away.  There is no synergy or “network effects” with the continuing credit union’s primary market. Closing these “under performing” locations is seen as an acceptable management decision.

But is this the best option for members?  As credit unions point out bank branch closures to defend their FOM expansion requests, are some coops guilty of the same activity?

A Better Way: The Branch Transfer

As PenFed’s August shutdown of its Madison location was finished, two credit unions demonstrated a better way. First Harvest in New Jersey and Members 1st in Pennsylvania, announced the  completion of a cooperative approach to the challenge of an isolated member service location.

This past month, the spin off of the Williamsport, PA branch of First Harvest, acquired in a merger in 2016, was finalized. The transfer of First Harvest’s local branch members, employees and  resources to Members 1st, which operates over 60 branches, in Pennsylvania became official.

Mike Wilson, CEO of Members 1st and Mike Dinneen, CEO of First Harvest had both begun their leadership roles at the same time in mid 2023.  They knew each other from working together in different Pennsylvania credit unions.  They discussed their joint efforts in an interview ten days ago.

Upon taking over at First Harvest, Mike began evaluating his business and strategic priorities.  The Williamsport PA branch  was over three hours away from the Deptford, N.J. head office.   The distance from his primary South Jersey market focus made it difficult to support fully the employees and over 1,000 members using this location.

Closing the branch was not an option.  What solution could be  in the best interests of the members, staff and community?

In discussions with his counterpart at Members 1st in late 2023 the two CEO’s agreed to a joint  project to assess whether  a transfer of the entire operation would make sense for everyone.

Members 1st had 7,000 members in the greater Williamsport area but no location in the county. This branch with its experienced staff offered an opportunity to build out this new market area with  an in place local presence.

The two CEOs established a process to involve the local employees and members in the evaluation.  NCUA required that  a transfer of branch be done following steps similar to a merger:  the members would be given notice, vote on the option, and a third party monitor  results. The final decision  would be by the members.

Following NCUA approval in February of 2024 both credit unions held meetings with employees and  in multiple member open forums.  Both credit unions’ leaders attended, including evening sessions so all could ask questions.

The voting took place in April.   The transfer was overwhelmingly supported  with between 20-25 % voting  participation, a much higher rate than for a traditional merger.

Mike Wilson stressed that the key  success factor was staff retention and their support.  Mike Dinneen noted that the “spin off” was not a performance  issue but a proximity one.   In his view the critical factor was finding the best cultural fit for staff and members.

An Example of Cooperative Values and Collaboration

These two credit union CEOs were guided by values that put their members’ and employees’ well-being foremost.  There were also institutional advantages for both firms if the transfer was thoughtfully conducted.

The members were deeply involved in the process.   The two credit unions took almost a year to evaluate how the spinoff might best work and to develop and communicate the advantages of this change.

By this effort they maintained the goodwill and reputation of not only their individual  institutions, but also for the member-centric public reputation  of credit unions.

PenFed cut and ran when closing their Madison branch.  This operational presence  had  been in the community for over 89 years.  Consider what a different impression these 3,000 or so members would have if there had been an effort to transfer the operations to a local  cooperative willing to continue  service for the community.

But that choice would have required PenFed to put members’ interests first.  Instead they took all the “free” capital and other valuable resources from this previously independent credit union.  The members were forced into a remote, digital-first service model.  The local commitment and presence of nine decades was over.

This contrasting approach is a  reminder to credit unions enraptured by a credit union’s rhetorical promises during courtship, that the marriage rarely lives up to the hype.  Especially for the member offspring.

 

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Lookback:  The Rest of the Story of Post Office CU’s Merger with PenFed

On December 28th, 2020 the 85-year, $35 million Post Office Credit Union (POCU) in Madison, Wisconsin ceased to be an independent charter. After voting, the 3,196 members and their savings, loans and abundant reserves (22% net worth) were transferred to the $26 billion PenFed Credit Union in Virginia.  (Source:  Seeking 25 Credit Union Faithful)

As detailed in The Problem We All Share, this merger proposal was too rich for the CEO to pass up:

“The Wisconsin credit union, chartered in 1934, has a net worth ratio of 22%, seven employees, one branch and serves all of Dane County. It is sound, well-run and lonserving. https://www.pocu.com/our-story

“In the October 15, 2020 Special Meeting Notice, the required disclosures show that the CEO will receive a five-year employment contract with an increase in annual salary to $125,000; the Vice president has a comparable gain.

“Select” employees will get a 10% retention bonus and all, a three-year employment offer. If either the CEO or Vice President terminates employment, they are eligible for one-time payments of up to $614,900.

“Each eligible member will get a one-time $200 capital distribution “if the merger is approved and consummated.” This would be from the credit union’s 22% net worth of $7.6 million and is estimated at only 8% ($640,000) of this total. (or in total less than the onetime payments to the CEO and Vice President). The remaining $7.0 million reserves transfers to PenFed as other operating income, that is free money.

“The payments are in plain sight, all contingent on a merger. The member notice provides not a single rate, fee or factual service benefit from this action. In the merger Notice the wording about the future of the single office location is vague: “PenFed intends to maintain the current POCU branch at. . .”

But now we know the rest of the story not just the branch’s status, but for the promised betterment of the 3,200 member-owners

The Rest of the Story

A week ago I received a text from a former CUNA employee and member of PenFed at their Madison branch.   He asked if I knew what had happened to the former POCU head office after finding an earlier post I had written about the merger.

He sent this picture of the branch’s status:

He had seen this sign when he visited on August 2, saying the branch would close forever on August 23, 2024 at 1:00 PM.  He had opened his account in-person and received no closure notice.  Two other members he knew who had opened their accounts online and also had no notice.

The land and building were owned by POCU/PenFed, the location right across the street from the main Post Office.  Presumably it will now be sold with PenFed booking a gain on the book value of the property.  This is the final act of what is commonly called “asset stripping” when a takeover occurs and the buyer keeps the most valluab;e assets and sells the rest.

The branch with blank signage.

Office equipment disposed, not donated.

The commitment to keep the office open, with its employees, local convenience and legacy relationships lasted three and a half years.  All the transition expenses of the merger, the payouts, the conversion costs to new systems, the termination of vendor contracts are “sunk costs.”  There is no enhancement to member value.

The merger itself ended all local governance and representation.  The closure of this local presence means no local oversight of investments or loans in the community, no further ( if there was ever any) of the promised $50,000 annual local donations , no employment and no participation in the credit union system in Wisconsin.

PenFed made no announcement of this closure.   In the quarterly call reports, it states its FOM potential is the entire population of the US.   So members in Madison now have a relationship no different from any other person who joins remotely.   And all they got from this deal was $200 to give up their extraordinarily successful 85-year charter.

The rest of the story is that PenFed acted in its self-interest to close a location that it must have deemed “unprofitable” and/or contrary to its focus on digital first members.

That is not what was promised.   But we now know, as we did then, that all the promises were nothing more than phony baloney.  Here is an excerpt from the  initial story link above:

How can one know this is not a considered, well intentioned decision to enhance members’ future? After all, the Post Office board of directors affirmed in their Notice that the merger is desirable for the following reasons:

  • Our board evaluated strategic possibilities to ensure that you our member, will continue to receive the full range of products and service you deserve.
  • We have been diligently seeking to find alternatives.
  • Only one option meets the full range of our objectives: growth of membership, expansion of product offerings, infusion of investment in IT cybersecurity, improved training and enhanced community service. . .PenFed is in the best interests of our members.

The director’s closing assurance of its considered judgment is given in these words:

“It is the recommendation of your Board that you vote “yes” to approve the merger. Please be assured that you are our valued member, and we have every confidence that you will be pleased by the level of commitment service, and value that you will receive from PenFed etc. . . “

If the financial facts were not sufficiently self-incriminating, these words  expose the dishonesty of the Board’s actions. There was no due diligence of PenFed that caused them to choose this from “ a range of options.” How do we know? Because these are exactly the same representations word for word sent to the members by Sperry Associates and Magnify, PenFed’s two most recent mergers. And the explicit “assurance” contained in the Notice, “we have every confidence that you will be pleased,” is exactly the same as in these two prior mergers.

PenFed assisted in the drafting of these notices. Since NCUA approved these wordings in the past, it will do so in the future, regardless of their veracity. NCUA endorsed Post Office Board’s assurance of due diligence even though there are no facts in the notice that would confirm this assertion. NCUA’s dereliction in ratifying these exact duplicates of alleged diligent representations of member interests, raises the question whether the agency has any clue about events.

Destroying Credit Union’s Moral Capital

So the POCU branch closing is nothing more than a continued pillaging by PenFed of the institutions whose leaders it pays to turn their members’ assets and relationships over to them.  It is a pattern repeated again and again in over two dozen PenFed mergers,  A  local, long time, financially sound credit union is merged via CEO inducements, and then closed and stripped of its best assets.

PenFed is one example, albeit a leading one, of credit unions preying on their own system.  This strategy undermines the whole cooperative advantage and model.  There is no evidence it is even a successful growth strategy for the continuing credit union.

A prior NCUA board member stated the agency’s  merger oversight responsibility as: “Our focus is on ensuring member interests are protected through the regulatory process.” That is obviously not happening.

I think a more accurate description of the situation is Mark Twain’s assessment of human motivation:

“Some men worship rank, some worship heroes, some worship power, some worship God and over these ideals they dispute and cannot unite–but they all worship money.”

 

 

 

 

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From the Field: A CEO, a Member and a Retired CEO Speak

It has been said, “Where nothing is forbidden, nothing is required.” Impulse control is certainly a valuable skill for all adolescents to learn.

But for a leader with fiduciary responsibility for common wealth, held for tens of thousands of members to benefit their financial futures, it is essential for sound judgment. Sometimes this responsibility underwrites actions that suggest little accountability to the member-owners.

Yesterday REV FCU, Charleston SC, announced the purchase of the 110 year old First Neighborhood Bank, a $152 million, three-branch firm headquartered in Spenser West Virginia.  The privately owned bank reported $556,000 in 2023 net income and $12 million in total capital.

REV CEO Jason Lee in a CU Today article said ”I’m excited to bring this mission of growth with purpose to West Virginia and enhance our ability to serve the financial needs of this region.”   The article pointed out the two institutions are 520 miles apart.  No terms were announced.

How this unknown cash outlay of tens of millions of member reserves to the bank’s owners will benefit REV members is not stated.  The rhetoric and unrelated information provided in the article, leads one to be skeptical that this action benefits them in any way.  With 14.5% net worth, REV has accumulated member reserves almost 50% greater than required.  Is this surplus  just burning a hole in this CEO’s pocket?

A Retired CEO’s Message

The strained rhetorical justifications of these serendipitous credit union purchases of bank has led some former leaders to question whether there is any meaningful belief in cooperative design.  Have some of today’s coops just become private, tax-exempt firms using their growing financial resources to fulfill personal ambition?

Following is one lament, from a very successful former CEO who recently wrote:

“I mentioned to you once a quote that “all symphonies remain unfinished.” I have moved on to the second movement of mine, so to speak. 

“Some folks in community banking have asked for my assistance in taking on credit unions, head-to-head, nose to nose. I have enthusiastically accepted. I have been scheduled for some webinars and convention sessions in the next few months.

It was my privilege to walk among giants; you, Bucky, Jim Blaine, and many others. Thank you. Sadly, Camelot is dead and the movement is no more. Members are a means to an end, that end being feeding the cash flows of executive compensation, vendors, consultants, CUNA/ NAFCU and the NCUA.”

A Member Reacts to the Merger of His Credit Union

A member wrote of his disappointment following the merger of the credit union he had joined as an employee of the sponsor.  This comment from over a year ago, and the examples he describes, have only multiplied since.

“You likely already know if this is true or not.  I wonder if national banks are aware of all the CU mergers and trying to lure disgruntled credit union member away from the new Continuing Credit Union that the member has no relationship with.  I just got an email from M&T Bank about a $250 new account offer.  The web must be tracking my bank/credit union shopping and my data is being sold like everything else we do online.  

If all the mergers are similar to Xceed/Kinecta’s, then there are a lot of officers in small CUs that are getting big paydays.  It looks like all these smaller CU executive teams must do is sell their members on the idea that a merger with a larger CU benefits each of them somehow.   I’d imagine the smaller credit union leaders are seeing their peers who are part of mergers getting big raises, bonuses or severances for a comfy retirement and want the same. 

Xceed’s President/CEO is eligible to received $1,500,000 possible maximum compensation for 3 years after the merger my notice states.  She gets an immediate raise of $71,403. The if she is terminated for “good reason” within 3 years she is eligible for a prorated severance in a max potential of $1,500,000. The others  (senior executives) all stand to gain between roughly $250,000-$600,000 under different but similar conditions. 

Possibly the word is out among the CU community that Big credit unions are looking for Small prey credit unions and if you’re lucky enough to get caught, simply agree to be eaten and those at the top of the small credit union get rich at the expense of the membership. 

You made me happy sharing my feelings if this helps others impacted by these mergers. Maybe if enough members leave after their credit unions merge, the remaining small credit union Presidents/CEOs will think twice and keep the community or employer-based CU in place.  

Sorry Chip for running on with my “It’s a wonderful life” like email.   I read back my email and laughed at myself.  Anyway, have a great rest of the day. ”  

Three separate examples.  These people are saying “Without vision the people perish,”  or more accurately, the cooperative system in America.

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Where Did Creighton FCU’s Members $13 Million Go?

On August 7 Credit Union Times reported the story of the merger, without a member vote, of the $66.9 million Creighton FCU with the $1.2 billion Cobalt FCU.   The source was not from NCUA, but rather a joint announcement by Cobalt of the NCUA approved combination.

In the twelve months ending June 2024, Creighton’s networth fell from a positive $6.3 million to a negative $7.3 million.  A total loss of $13.6 million, all of which was recorded in the June 2024 quarter’s call report.

What happened to cause this loss of over 20% of credit union members’ total assets in just 90 days?

Until this quarter, Creighton FCU had been doing business as usual.  Tom Kjar the President for 32 years had just announced his retirement. The credit union’s chair had posted a Credit Union President open position on LinkedIn with a salary range of $114-$152K.

On April 3, 2024 the credit union’s Vice President of Operations and Finance, Vorace Packer, died.  There was no public announcement of the circumstances in his obituary.  The credit union provided  no followup successor.

What the Data Shows

For a sudden financial loss this large that is not connected to asset write offs, all of the indicators point to an internal defalcation.

In the 5300 call report numbers NCUA posted at March ’24, Creighton’s shares total $61 million.  Just 90 days later that total is $74 million. The difference is almost equal to the the total loss of $13.6 million.  Of this sudden share increase, $12 million is in regular shares.

These numbers show shares were under reported a pattern often used to cover irregular transfers of funds.   Because the total amount is so large,  a single diversion of $500,000 or $1.0 million would cause attention or a cash flow problem.  It seems likely this diversion has probably taken place over many years.   For example at $1.0 million per year the cash outflow would be only $250,000 per quarter.

To accomplish this cash diversion and reducing reported member share balances, there would have to be two sets of books—the incorrect numbers for the auditors and examiners, and then the actual records so members would not see shortfalls in their account statements.  The fact that the under reported balances were totalled so quickly, suggests this second set was readily discovered.

There are other patterns in the data going back over ten years that should have raised questions.  For example the credit union would report positive net income for each quarter, but the total net worth did not change until the final call report filing for December.  The pattern of reporting “reserves” was changed in March of 2022,

Why Did the Members Lose their Credit Union?

NCUA has said nothing about its actions in this event.  Cobalt is the source of the merger announcement.  It is that credit union’s members who will cover the $7.6 million hole in Creighton’s balance sheet, subject to any valuation adjustments.

Cobalt reported, before this event, a $1.8 million loss for the first six months of 2024 along with negative loan and share growth.  NCUA said that there will be no impact on the NCUSIF from this event, so Cobalt members will be the rescuers.

Will there be bond recoveries for this loss?   What is the prospect of recoveries from where the funds were sent?  Who will pursue these and other recovery options?

The Most Important Questions Remain Unanswered

How did this apparent long-standing diversion occur?   Where did the $13 million of member funds go?

As a federal charter, when was the last NCUA exam prior to the finding of the defalcation? Was there an annual exam?  If so, were normal exam procedures followed?

The credit union reports employing the same auditor, Wipfli LLP, for at least the last five years.   Were their external CPA audits clean?  Did they or the supervisory committee do an annual  sample test verification of member share balances?   Were large disbursements of funds to third parties by the credit union reviewed?

Outside audits, supervisory committee verifications and NCUA exams are all intended to keep honest people honest.   How could these required processes have failed so hugely and over such an extended time period?

What was the CEO’s role—was there no division of duties, that is different persons authorizing transfers from those  initiating specific transactions?

NCUA’s Silence is Deafening

NCUA made no announcement of this event.   We have no idea if the board approved a conservatorship or the forced merger.   What options were presented, if any, to the board?  What was their role? Or, did they just delegate this action to staff elsewhere in the organization?

Why has there been no official explanation of NCUA’s role two months after the June 30 facts have been posted?

NCUA’s primary purpose is to prevent the loss of member funds. In this case there is a $13 million dollar shortfall between the $73 million in total shares and the purported net worth and assets to cover them.

What happened to the multiple supervisory oversight roles supposedly in place?   Until these apparent failures are understood and addressed, a much bigger problem remains.  Can the supervisory system charged with the responsibility and resources to oversee the industry’s soundness perform its basic functions?

Until there is transparency and full answers about this situation, the potential for greater difficulties is possible.  The NCUA’s silence about the members’ $13 million financial and charter loss at Creighton is a greater problem than this financial failure.

The critical question is whether the regulatory system’s processes are performing as intended?Who is willing to represent the NCUA in this episode to discuss what happened, why and any necessary changes from this event’s analysis?

 

 

 

 

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Game On: The Voting Begins

Today, September 3, voting begins in the most important election affecting credit unions in over 100 years.  This is not the presidential election-as important as that is for national policy direction.

Rather this is the second consecutive year that the members of SECU NC can choose between two slates of candidates to fill four board openings. Ballots will be mailed to all members.  Voting can be by mail-in ballot, on line (absentee) or in person at the annual meeting on October 8, 2024 in Greensboro, NC.

In 2023 the first year of contested board elections, three member-nominated candidates won their seats over the three-board nominated incumbents.

A Gigantic Precedent

SECU’s North Carolina operations are vast. From the President’s June 2024 Fiscal Year update:

The Credit Union, with 7,700 full-time and 500 part-time team members, serves members via 275 branch locations, ncsecu.org, our SECU Mobile App, ASK SECU (our automated voice response system), our 24/7/365 Member Services Support team, and nearly 1,100 CashPoints® ATMs.

SECU is America’s second largest credit union at $56 billion in assets and 2.8 million members.  Its long term track record for over five decades includes a history of iconic and innovative service decisions founded on a singular vision of cooperative design.

This example of owners having a real choice of directors will have a significant impact on SECU’s members, the credit unions of North Carolina and perhaps public perceptions of how credit union leadership should be selected.

No other credit union, of which I am aware, has had back-to-back member voting in contested board elections.   Just the opposite is the case.  Board openings are routinely filled by nominating committees approving only the number of candidates as there are vacancies.  These individuals are normally incumbents or internally sponsored. No elections are held.  The chosen few are  approved by acclamation at the annual meeting.  The member franchise and democratic selection, the foundation of credit union governance, hardly ever occurs.

The Competing Slates

The two competing groups for the four open seats are the board-nominated candidates and the member-nominated group.  In short, the Ins versus the Outs.

Brief profiles of all eight can be read at this link.   The Ins are all current SECU board members who list multiple volunteer roles.   The member-nominated are long standing SECU members including three former SECU employees. The 4th Jean Blaine did not work at SECU but lived with someone who did.  She was a teacher in the public school systems in four different counties while raising five children.  She has been active in the last two years at multiple public forums raising concerns about SECU’s direction.

A general statement of the four incumbents’ recent decisions is presented in this excerpt from the  CEO’s August 2024 Fiscal Year update:

Our volunteer Board of Directors (composed of current, past, and former state employees representing your best interests (the interests of state employees)) took action to eliminate numerous fees at SECU. The Credit Union no longer charges a stop payment fee, NSF representment fee, overdraft transfer fee, verification of deposit fee, or a returned item fee! SECU’s fees are among the lowest in the country among our credit union peers.  

To better serve all 2.8 million members, the SECU Board also made some changes to our tier-based pricing model (where loan rates are determined by a member’s credit score) on auto and consumer loan products. In April of 2024, the Board reduced SECU’s 5-tier model to 3 tiers, with A credit score borrowers receiving an A rate, B borrowers receiving a B rate, and C, D, and E borrowers, as well as borrowers with no score, receiving a C rate.

Before the introduction of tier-based pricing, SECU provided “one rate for all” that was a B- to C+ rate. The move to a 3-tier model also complemented the August 2023 rollout of a Board-approved 0.50% discount program1 on closed-end consumer loans for certain qualified current or retired State of North Carolina employees, adding even more value for SECU’s base membership.

The primary issues raised by the member- nominated candidates have been much covered in Jim Blaine’s daily blog SECU-Just Asking!  These topics include the credit unions embrace of risk based pricing for consumer lending.  More recently the decline in financial performance trends including growing delinquency/charge-offs, stalled share growth, and an increasing expense ratio.

Blaine has also been an ardent critic of bylaw and other process changes which make it more difficult for members to exercise their role at the annual meeting.  For example this is his response to the restrictions announced for the upcoming 2024 Meeting: SECU Board Election Cycle-How Can It Get Any Worse?

Jim’s writing is blunt and pointed.  He uses memes to reinforce his message.  For example his recent blog supporting the four member nominated candidates, lists five priorities under the general headline SECU Employees Need a Change at the Top.

The Campaigns

The Ins are certainly using the power and resources of incumbency to prepare and spread their point of view.  The Outs have the passion and enthusiasm of volunteers committed to making a  difference.

Both sides use social media.  Ads and videos featuring their candidates are up or in the works.   SECU For All is the campaign theme and the member-nominated web presence.  The site has candidate videos, event updates, articles and statements from supporters. The group has also created a Facebook page:  https://www.facebook.com/SECUforAll/

More SECU institutional updates are in the works to provide  the positive points for the current board candidates priorities and accomplishments.

A Unicorn Credit Union

SECU’s position in credit unions combined with two contested elections makes it a true unicorn in the cooperative system.   Member-owners have the unique opportunity to see how their candidates present themselves and their visions for the credit union’s future.

Although integral to cooperative design, members at no other credit union will have this distinctive experience of seeing contrasting positions from competing board candidates.

But the learning will be more than a debate about risk-based lending, financial priorities, or convenience upgrades. This voting choice  demonstrates to these member-owners, and maybe others who read about it,  the true nature of cooperative democratic governance.

If we are honest about the state of credit union governance today, most leadership teams (boards and CEO’s) view the members as customers.  They are primarily inputs (profit centers) for their institution’s growth and financial success.  The members are only a means to  building public renown and rewards for the organization’s leaders.

In extreme cases this attitude results in the exploitation of the members’ trust when these leaders chose to transfer their institution’s resources and members to a third party for self-gain via mergers.  It happens every week in plain sight.  This is a recent example where five board members and the CEO chose to lead their 58,000 members and $1.3 billion institution into a merger (The Valley of Dry Bones).  There was no rhyme nor reason, except the CEO’s retirement.  And the members are led to believe their approval is just an administrative check the box exercise.

Following Future Events

SECU’s board election is about much more than a final vote tally in October.  In my view it could be the one event that demonstrates the potential for cooperative design to fulfill its unique destiny.

I plan to follow events and the positions with more posts before the October 8th annual meeting.  I believe illustrating both the tactics and substance of this campaign could be a turning point for other credit unions who wish to reinvigorate their institution’s distinct cooperative spirit.

For the full pdf package for SECU’s 2024 Annual Member meeting notice, click here.  Per Sandra Jones, Senior Vice President for Communications, the October 8 Annual meeting will be broadcast live as in 2023.

 

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Are Members “Gaming” Their Credit Union?

From the field. A recent story by a colleague working on site with a client.

I just wrapped up a meeting with a $6 billion CU that does a lot of indirect lending.

  1. Used car values are falling.
  2. Manufacturers are providing strong incentives for new vehicle purchases.
  3. Some credit unions are desperate for income and are attracting business with below market rates via their indirect relationships.

The CFO shared that members with an expensive to own, drive, and insure car are going out and buying another car that is much cheaper to own, drive, and insure–both new and used models.   But from a different funding source. For example,  another credit union who will extend credit because the member’s credit score is still good, but about to take a nosedive.

The member knows they can’t afford to keep their existing vehicle.  Then after they purchase the “cheaper to own” car, they bring the “expensive to own” vehicle to the credit union and hand over the keys.

The result is that the credit union is experiencing higher than expected losses because used car values are falling, and the cars being turned in are more expensive to own.

Long Story Short

The  member lowers monthly payments and the cost to own a vehicle.  The old car is turned back to the credit union.  The member is unconcerned about how it impacts their credit score going forward.

The credit union has limited recourse because the “member” has just a “$5 savings account” required to join the credit union.  (This is an indirect relationship only)

I am hopeful for a soft landing from this financial substitution scheme, but not everyone is on the same flight.

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Credit Unions and the Presidential Contest

Presidential candidates Trump and Harris are unlikely to engage in any dialogue that directly address credit union issues.

Nonetheless,  one’s voting preference  from a purely credit union perspective may be influenced  by reference to more generic policy positions such as regulatory burdens, affordable housing plans or even commitments to community development.

At this point I know of only one datapoint from either candidate that may be relevant.

In his new book, Community Capital Race, Equity, and the Credit Union Movement author Clifford Rosenthal tells of the decades of efforts to secure political support and government funding for community development institutions.   In 1980 he joined the National Federation of Community Development Credit unions.  It is the cause to which he has dedicated the rest of his professional life.

He would later spend two years at the CFPB trying to supporting these instituions.  His successor in 2012 was Cathie Mahon who in 2019 would rename the organization as Inclusiv and expand to an even  more ambitious role funding community development efforts.

In the final chapter of his book, Rosenthal brings the government’s funding  up to the recent covid driven programs in the Biden administration.  On page 249 he describes inaugural grants totaling $1.73 billion from the US Treasury’s CDFI Fund for the Equitable Recovery Program (ERP).

Vice President Harris in the April 23, 2023 Treasury press announcement is quoted as follows:

“When we invest in community lenders, we help build a future where all people—no matter who they are or where they start—have the resources they need not only to succeed but to thrive.

“These grants—representing the largest CDFI grant program in history – will enable hundreds of community lenders to invest in small businesses and entrepreneurs, and also provide home loans for families, financial services for local nonprofits, and capital for community organizations.” 

The press release lists the number of grants and total dollars by CDFI sector.  The 203 credit unions recipients were awarded a total $590.3 million, or 34% of all funding.

This is the only specific reference I can find at this point from either side.  Obviously much bigger issues are at stake in this campaign about America’s future. However, I would welcome any further examples readers may discover about candidates’ awareness of credit union topics.

As for Cliff Rosenthal, to honor his pioneering role in supporting community development as a policy priority, on October 3 he will be inducted into the Cooperative Hall of Fame in Washington D.C.

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Two Leadership Departures:  What They Suggest About the Future of Credit Unions

 

(Text updated in PM of August 28 from initial posting)

Last week and approximately one year ago in 2023, two leaders announced their departure from senior positions of organizational responsibility.

CEO Susan Conjurski’s merger announcement  was in the now familiar language of the required merger Member Notice. In this case there were two disclosures due to  the simultaneous combinations of her dual oversight of both credit unions.  Here is the wording from the first member Notice:

NCUA Regulations require merging credit unions to disclose certain increases in compensation that any of the Merging Credit Union’s officials. . . (who) have received or will receive in connection with the merger above a certain threshold. The following individuals are eligible to receive such compensation, which is reasonable and commonplace in the financial services industry:

Susan Conjurski, President/CEO

  • Ms. Conjurski will continue employment as the Continuing Credit Union’s Vice President of Strategic Initiatives under a five-year employment agreement and will be eligible to receive a one-time retention bonus of (gross) $14,000 (less lawful deductions) if she remains with the Continuing Credit Union for at least 6 months after critical post-merger information technology systems integration.
  • Ms. Conjurski, President/CEO of Printing Industries Credit Union, serves simultaneously as the President/CEO of both Printing Industries Credit Union and Pacific Transportation Federal Credit Union. The members of Pacific Transportation Federal Credit Union are also voting on a merger with Credit Union of Southern California. Ms. Conjurski does not have a supplemental retirement plan with either Credit Union. To reward her meritorious service and to retain her services going forward, as part of our Credit Union’s merger, Ms. Conjurski will receive a Supplemental Executive Retirement Plan (SERP) with a maximum of $300,000 after five years of employment with Credit Union of Southern California.

While not connected to this merger, Ms. Conjurski will receive a SERP in connection with the merger of Pacific Transportation Federal Credit Union and Credit Union of Southern California with a maximum of $700,000 after five years of employment with Credit Union of Southern California. Ms. Conjurski would be eligible for a reduced benefit if her employment is terminated for Total Disability and she would forfeit benefits if she voluntarily resigns or is terminated for cause before reaching the final vesting date in 2028.

  • The total maximum potential amount Ms. Conjurski will be eligible to receive in connection with this Merger is (gross) $314,000 (approximately $188,400 after taxes assuming a 40% tax rate). After taxes, this equates to approximately $885 for each month of service from Ms. Conjurski’s first day of service with Printing Industries in July 2020, to the end of the plan, thereby recognizing Ms. Conjurski’s combined 17 years of meritorious service to the combined credit unions.

Prior to these concurrent CEO roles, Conjurski had been Executive Vice at Arrowhead Credit Union from 1979 – Jan 2009, 30 years and 1 month, where she presumably participated in their retirement benefit plans.

The Second Merger Notice

Following is the parallel disclosure required in the simultaneous merger of Pacific Transportation FCU:

“Ms. Conjurski will continue employment as the Continuing Credit Union’s Vice President of Strategic Initiatives under a five-year employment agreement and will be eligible to receive a one-time retention bonus of (gross) $8,000 (less lawful deductions) if she remains with the Continuing Credit Union for at least 6 months after critical post-merger information technology systems integration.

Ms. Conjurski, President/CEO of Pacific Transportation Federal Credit Union, serves simultaneously as the President/CEO of both Pacific Transportation Federal Credit Union and Printing Industries Credit Union. The members of Printing Industries Credit Union are also voting on a merger with Credit Union of Southern California. Ms. Conjurski does not have a supplemental retirement plan with either Credit Union. To reward her meritorious service and to retain her services going forward, as part of our Credit Union’s merger, Ms. Conjurski will receive a Supplemental Executive Retirement Plan (SERP) with a maximum of $700,000 after five years of employment with Credit Union of Southern California. . .

The total maximum potential amount Ms. Conjurski will be eligible to receive in connection with this Merger is (gross) $708,000 (approximately $424,800 after taxes assuming a 40% tax rate). After taxes, this equates to approximately $3,012 for each month of service from Ms. Conjurski’s first day of service with Union Pacific Federal Credit Union in July 2016 (Union Pacific FCU merged with Pacific Transportation in December 2019), to the end of the plan, thereby recognizing Ms. Conjurski’s combined approximately 12 years of meritorious service to the combined credit unions.”

The Financial Payments and Assets Transferred

In May 2023 the merger with Printing Industries was completed. Pacific Transportation FCU’s merger was finalized in September 2023, both with the Credit Union of Southern California (CUSoCal).

If the reported start dates as CEO are accurate, I calculate she served less than 3 years as CEO of Printing, and seven years at Pacific, for a total of ten years. The combined bonuses and SERP funding are $1.022 million.  In addition she is given a guaranteed employment contract for five years at an undisclosed salary, presumably with ongoing benefits.

In return for this payment and five year salary, CuSoCal gains $97 million in assets ($67 million in loans), 11,000 members an $15.2 million in net worth.  This free capital transfer is after the Pacific members received a special dividend not to exceed $2.2 million.  The $1.022 million and five year salary are a small fraction of the real financial value transferred to the Credit Union of Southern California.

NCUA’s Western Region Director Retires After 37 Years at NCUA

In last week’s retirement announcement, NCUA summarized Regional Director Cherie Freed’s nearly four decades of service.

After serving as an examiner, Freed took the position as a problem case officer in 1991 and later became a corporate examiner. Freed then became associate regional director for the Western Region before being selected as regional director in 2016.

Chairman Harper commented:  “Cherie’s dedication to public service and the NCUA has been nothing short of exemplary. . . She excelled at building internal and external coalitions, she was passionate about meeting organizational goals and customer expectations, and she produced results at the highest level. Cherie has exhibited sustained excellence throughout her career, inspired others, and made innumerable contributions to the NCUA.”

What Unites These Two Leadership Resignations

What is left out of NCUA’s description of Freed’s 37-year career is any specific involvements with credit union events or contributions as she progressed up  the listing of increased responsibilities.

There were significant industry and financial events during her regulatory roles.  When she joined the  agency in 1987, NCUA insured 14,520 natural person credit unions. The corporate network numbered 39 federally insured corporate credit unions.

Today there are just over 4,600 credit unions a decline of over 10,000.  NCUA’s liquidity lender, the CLF, is dormant.  New charters are as scarce as hen’s teeth.

In that first year when Freed joined NCUA, the S&L industry still had its own insurance fund, the FSLIC, overseen by its own federal regulator, the Office of Thrift Supervision.  The system’s liquidity lender, the FHLB, predominantly served the S&L’s, even though it had been expanded to include other financial real estate lenders.

Today the separate S&L system no longer exists.  All of the remaining 556 “Savings Institutions” with total assets of $1.2 trillion are FDIC insured.  Their regulation is divided between the FDIC, the OCC and the Federal Reserve.

Both persons in the NCUA announcements above began their final leadership roles in California about the same time 2016-17.   By rule, Freed oversaw the two mergers and payouts described in the Member Notices above.

In both Member Notices there is misinformation, disinformation, irrelevant data and omission of vital facts–eg. the total dollar value of Conjurski’s new five year employment contract.  The credit unions’ member-owners were ill-served by this required regulatory review and approval.

Losing the Cooperative Future

The coop industry, unlike the thrift sector is not consolidating because of safety and soundness concerns.  Rather many of these mergers are driven by personal greed and ambition.  Pacific Transportation FCU reported 21% capital at December 2022 prior to announcing its merger. Printing Industries’ net worth was 11%.

Conjurski’s windfall was not an isolated event under Freed’s administration.  Another CEO negotiated a $1.0 million merger bonus.  In a separate situation the Board Chair and CEO diverted $12 million of member equity to their recently established nonprofit.  The intent was to use these members reserves to continue their veneer of public philanthropy even though they had given up all leadership positions.

The merger examples show that credit union leaders are not immune from the “animal spirits” at the heart of market capitalism.  Cooperatives were supposed to be an alternative to the self-interest that drives “free enterprise.”

This disease of self-enrichment now infects the cooperative body.  The regulators have failed to enforce their own merger rule.   The NCUA board and senior staff board appear to lack either conviction and/or the courage to speak to this usurpation of the members’ collective wealth.

And the money being transferred has created a whole sponsoring eco-system of enablers including consultants, compensation advisors, former NCUA employees, accountants and lawyers who grease the paths and fill their own pockets.

The Increase in System Risk

The NCUA board and the regional administrators signing off on these events are mute about these examples of blatant self dealing.  They pretend not to notice as these privately arranged deals are announced followed by the asset stripping of long- standing sound credit unions after the combinations are complete.

To see the increased risk, one need only ask whether the future of the cooperative system is likely to be more sound with ten credit unions in the $500 million to $1.5 billion asset range or one $10 billion credit union with a generic brand operating over multiple states and markets?

The answer I believe is obvious.   If one doubts this, just revisit how the S&L system totally collapsed.  It was not because of small institution failures.  And the largest failures were all sold to banks.

Ultimately this pattern of corporate ambition could end up in the full conversion of the cooperative system to their exact opposite–for-profit banks.   Why should credit union leaders  buy banks at a premium when they can convert all this free reserves to private gain?

Freed oversaw and approved these self-dealing events firsthand.   The irony of her 37 years of service is that in all likelihood her professional opportunity no longer exists for someone entering the agency today.

For in the next four decades, the trends are clear—there will not be an independent NCUA.   Credit unions will have become too powerful, consolidated and independent in purpose for a separate  agency to oversee what was intended to be a cooperative, member-focused tax-exempt system.

If a system can’t learn from its past and that of its financial brethren, it has no future.

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The Members Awaken at SECU: Part II-the Board Responds

In my earlier blog about SECU’s October 2022 Annual Meeting, former CEO Jim Blaine made a lengthy statement asking questions about six areas of SECU’s direction.   The members’ approved two motions he moved which requested the Board and management respond to the issues and publish SECU’s strategic plan.

SECU’s leadership went into immediate action.

The board and senior management held three “fireside chats” with employees, advisory board members and invited speakers.  In January 2023 SECU released an hour and 50 minute video which  “pulls clips from speakers across all three days and covers the full content of the event.”

Presenters included CEO Jim Hayes, board members, Dwayne Naylor, CEO of Local Government Employees FCU, the CEO of the North Carolina league and even a SECU manager who explained the reasons for discontinuing the Tax Preparation Service.

In tandem with this video report of the dialogues, Chairman Ayers and CEO Hayes released a six minute video summarizing SECU’s vision, mission and strategic plan.   It presented  SECU’s four strategies along with the tactics and goals to achieve them.   As of January 2023, the video registered 2,912 views.

Blaine continued  his daily blog  expressing  frustration and disagreement with several of responses to the issues  he had outlined in the meeting.   A reader can skim his posts for examples . He  engaged with HB 410 which state-chartered credit unions and the NC League submitted to the state legislature.to create broader authority for North Carolina credit unions.

The most salient issue for Jim at an operational level was the introduction in mid 2023 of risk based lending (RBL).  This replaced the uniform pricing approach in which each member paid on the same interest rate for loan products. Now each member’s loan rate would depend on their FICO score.

SECU was the only large credit unions that had not implemented RBL.  Multiple blogs laid out his views that this new pricing approach was discriminatory and inconsistent with cooperative purpose.

Changing the CEO

As Blaine’s blog challenges to SECU’s direction continued, one new critique was questioning the hiring of CEO Hayes.   He specifically singled out Hayes’ role at WesCorp which was taken over by NCUA in 2009 and liquidated in2010.

Jim’s challenge of this CEO selection prompted  SECU’s board to send an extended letter to staff on May 23, 2023 which began:

The SECU Board of Directors writes this letter to address recent conversations and rumors about the leadership and direction of our credit union. We recognize that changes bring questions and uncertainty, and we want to ensure that we provide clarity to you, the people delivering value for our members every day.

The board of Directors fully and unanimously stands behind Jim Hayes as CEO and is excited about his ability to lead SECU through the advancements and improvements our members demand and deserve. .

The New CEO

On June 13, 2023 SECU announced that Hayes had resigned to become CEO of State Department FCU.   Leigh Brady was appointed as the new CEO.  She is a thirty-five  year SECU employee who was Senior VP of Operations.   She introduces herself in this two minute video.

She along with board then began a six-city tour meeting with advisory board members, employees to present her views and the need for change.   This video summarizes the messaging as: “We Are SECU: On The Road” tour, coming together to discuss progress at SECU, listen, and connect.”

The Board Changes Election Process and Timing

While these public controversies continued, SECU’s board on April 2023 adopted new board nomination and election procedures.  Then on June 30 the board adopted new bylaw changes which altered the 2023  Annual Meeting format and order of business.  Per Chairman Ayers the reasons for these changes as given in this North Carolina Business article  “are designed to ensure the annual meeting remains orderly, respectful and true to our primary purpose” of electing directors.”  Blaine opined the changes were meant to stop change.

These two procedural modifications ended the traditional meeting agenda of other business and outlined extensive changes for member-nominated, versus board selected, candidates to fill open positions.   Blaine repeatedly asked if these changes required the approval of the North Carolina’s Administrator of Credit Unions.

Jim’s complaint:  it is simply illegal for the SECU Board of Directors to exclude any SECU member, who is 18 years old and willing to serve, from independently petitioning to become a candidate for the SECU Board of Directorswent unanswered.

The new election procedures had tight deadlines for “outside” candidates to be nominated if not chosen by the board.

Thursday, July 20 was the deadline for members to apply to run for the SECU Board of Directors and the three open positions.  However the nomination committee did not announce its approved slate until August 11, 2023.  Their candidates were all current board members.

If not selected to be the official slate of candidates, a member who wishes to self-nominate must obtain the signatures of 500 members to be eligible to run. The “New Election Procedures” added  a requirement that those signatures must be obtained on an “Official Nominating Petition,” which the SECU Board did not release publicly until August 11, 2023.  These petitions had to be returned by August 21, 2023,  a period of just ten days to become “member-nominated.”

Members who shared Blaine’s concerns followed the new member-nomination procedures,  submitted petitions with the required number of signatures and placed three candidates to oppose the three incumbents nominated by the Board.

The Campaign and Member Vote

Blaine’s blog then turned into a platform supporting the three member-nominated candidates in September and October.  The first post was on August 28,  Why Not Vote For The Member Nominated SECU Board Candidates?

In addition to introducing the three challengers Perkins, Stone and Clements, he also took on the positions of the incumbent candidates.   Every post included links for how to vote in person or absentee, a process that began on September 1 and extended to the Annual Meeting in October.   The campaign’s theme was “Let’s put members back in charge of the credit union.”

The Voting Outcome

I cannot find posted at this time the complete video of the 2023 SECU annual meeting.   At minute 1:28 through 2.33 is the member forum with multiple comments about the direction of he credit union.

At the conclusion of the meeting, Ernst and Young provided the results from all absentee and in-person voting for the Board Election. All three member-nominated candidates won.

Democracy Is Hard Work

This account shows the tenacity and effort needed to implement meaningful member involvement in credit union governance, especially at the annual election.

Those in charge, volunteers and senior executives, will pull out all the stops to keep control of the process.

SECU shows that member involvement takes informed commentary, organized and continuous monitoring and most importantly issues or positions that resonate with members.   Blaine is not the only former CEO who has opposed a successor’s decisions—most frequently the merging of the credit union.

What is unique is his website platform and skills as an advocate.  In a later post I will summarize the state of play in this year’s election to the Board.

However in this public clash of personalities , there is a much deeper issue at play.   That fundamental topic is what is a credit union’s purpose and whose interest is it meant to serve.