Category: Buying banks

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Member-Owner Breakthrough! They Will Receive 12.2% on all Savings for Total Merger Payout of $76 Million

Pending member approval, the 51, 590 members of $805 million Thrivent FCU will receive all their credit union’s  reserves plus a dividend upon merging.  The bonus will approximate a 12.2% additional return on the members’ $628 million total savings as of June 28, 2024.  The total payments will be $76 million.

An example: if a member had $5,000 in total deposits on June 28, 2024, their estimated payout would be $610.  Plus they have full access to their savings if they do not wish to keep them with the merger partner, Thrivent Bank.

The payout is an important precedent.  For in the current system member-owners receive nothing in ownership acquisitions except rhetoric and future promises.

More vital, could this example encourage more banks to seek acquisitions by offering members a fair deal-a missing factor in today’s intra-industry private cooperative merger games?

Thrivent Bank, is a newly state-chartered Utah based FDIC insured institution.  It is indirectly wholly owned by Thrivent, a Fortune 500 company with over $114,000,000,000 in total assets at the end of 2023.

The Valuation-What is a Successful  Credit Union’s Actual Market Value?

From the member Notice:  A valuation performed by RP Financial, LC in 2021 established the merger value of TFCU to be $76,000,000. The TFCU Board of Directors has determined that in conjunction with the Merger, the members will receive a total distribution in the amount equal to the full valuation of $76,000,000. 

At June 2021, the credit union reported a book value (net worth) of $69 million.   So members are receiving more than the book value at this valuation date.  At September 2024, the net worth had declined to $59 million which included  the potential write down (FASB 115 valuation) of $21 million in underwater investments.

This is a fundamental data point that every credit union member-owner should be given in a transaction.  Today members are never told the market value of their credit union and the potential for a premium.   This has created a false market when a merger transfers operational control to an independent  party and the owners receive nothing.  Such a valuation should be part of all merger proposal going forward.

Who is Thrivent CU?

Chartered in 2012 the credit union’s mission is to help people achieve financial clarity by providing access to banking products and services that help bring balance to spending, purpose to saving, and intention to managing debt. We strive to put you at the center of everything we do, providing impeccable service and competitive rates, so you can make financial choices aligned with your values and priorities.

Why the Merger with Thrivent Bank?

The following is from the FAQ’s for the merger:

Just as TCU is different from other banks and credit unions, Thrivent intends that the Bank will continue our shared mission of helping people achieve financial clarity so they can live full and purposeful lives. It intends to build a simple and transparent full-service product suite, create easy-to-access digital experiences, and provide direct access to human support, with competitive rates.

Thrivent believes that a purpose-driven bank is differentiated in part by fewer, simpler and more transparent products. This will be manifested in simple, fair, and transparent fee structures, and experienced through behavior-influencing digital experiences that offer contextual and actionable insights and guidance that help customers advance on their path to better financial clarity and wellness.

Post merger:  All current accounts will retain their rates, function and features.  And,  the rates and substantive terms of members’ existing loans and savings products will not change as a result of the Merger 

Any Special Payments for Staff?

In many credit union acquisitions of other credit unions, the primary payouts are to the CEO’s and senior executives who set up the merger.   The same disclosure is required for this transaction.  Here are the details:

Merger-Related Financial Arrangements:

No senior executive officers of TFCU will receive an increase in salary as a result of the Merger.

On October 1, 2021, the TFCU Board of Directors voted to retain current board member Ronald S. Orrick, Sr. as the interim President and Chief Executive Officer of TFCU. A portion of Mr. Orrick’s compensation for his services as interim President and Chief Executive Officer, in the amount of $50,000, is conditional on TFCU successfully merging with and into Thrivent Bank. 

There are no change in compensation for staff.  The second fact in this disclosure is that this transaction has been underway for over three years.

The Voting Process

The proposal must  receive votes from 20% of the total members eligible to vote (47,872). At the time we reach the threshold, regardless if members are voting For or Against the recommended merger, TCU will donate $20,000 to a charitable organization.

Of the votes received, a majority must vote in favor of the merger for the vote to pass. 

Online voting will begin on  January 7, 2025 through February 5, 2025.  A mail ballot will be sent to all members that have not selected electronic communication.

Why the Merger if Nothing is Changing

A video explaining the merger and links to the member letter, official meeting Notice and FAQ’s can be found here.

There are two themes as to why this change is sought, even though the member experience may not be different in the short run.

The dominant motive is access to greater capital:  TFCU has a fraction of the capital that Thrivent Bank will enjoy. Thrivent Bank’s capital together with the existing assets of TFCU will permit Thrivent Bank to make investments in improved technology, products, and services.

The second aspect is broader growth potential:  As we look to the future, we’ve recognized the need and opportunity to grow and further our mission to serve more people with our differentiated approach to banking 

The expected merger outcome:  Thrivent Bank will offer a simple and transparent full-service banking product suite, delivered through easy-to-access digital experiences and direct access to human support, with competitive rates and fees. Ultimately, Thrivent Bank will help people achieve financial clarity, enabling lives full of meaning and gratitude.

What This Example Could Mean for the Cooperative system

In addition to a process that reveals the market value of a credit union in an acquisition, there is  potentially a more consequential outcome.

It is this:   If credit unions can buy banks an increasingly common growth strategy,  why can’t a bank with a mission, purpose and abundant capital take Thrivent’s model to other credit unions around the country.  This would open up true market options that are now not sought out in today’s rigged merger transactions. The members then have a real choice.  They can receive full value for their loyalty, choose to stay with the acquirer  or  take their relationships elsewhere if not pleased.

Today credit unions are readily paying 1.5X to 2.0X book value to acquire a bank.   But member-owners are rarely offered anything in such mergers for their ownership and years of loyalty.

Credit union professionals have been taking advantage of members in the current merger-driven, CEO’s private deal making process.   It’s time real market options are required for the members’ benefit.  Thrivent FCU’s disclosures and payments should be an example required in all future coop acquisitions.   Then members can hope to receive a fair deal.

 

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For Members’ Sake: Let’s Start Recognizing the Real  “Market” Value of a Credit Union

Today credit unions operate in two financial worlds.  One is the so called “free market.” This is where open competition, winner-take-all, buying and selling happens. Members/consumers make their buying decisions comparing options.  The winners are firms with superior value propositions including better products, service, convenience and sometimes marketing.

This is the market credit unions enter when buying banks or  investing in other firms (CUSO’s, Fintechs) to advance their credit union’s competitive position. Corporate transactions are marked by due diligence assisted by external experts, and financial projections with ROI’s and cash flow forecasts.  Often these deals are subject to close regulatory scrutiny in addition to buyer and seller’s close analysis.

Transactions in credit union’s “off market” financial  activity are not based on transparency, superior performance or even shareholder/owners best interest.  This is the “insiders game” of private deal making, self-enrichment and public misinformation and rhetoric to benefit the players’ personal agendas.

Today this is the world of credit union mergers.  It is increasingly  a cesspool of pretend member advantages disguising payoffs  to facilitate changes in control of sound long-serving institutions.

There is no owner payment or recognition as occurs in the “free market” transactions.  In fact these are totally “free” transfers  in which the continuing credit union is paid to take over the business.  The owner’s net worth is transferred intact to the acquirer. This is the complete opposite of an open market transaction.  It would never happen in a fully transparent actual market sale.

The Critical Issue

The critical question for the credit union system’s future is why aren’t members paid for their ownership interest when there is a change of control.  It happens some with market facing events, but never in mergers. Without any payments upon a charter’s dissolution, member-ownership is a fiction.

Credit unions do know how to value a financial institution, their own coops and other for profit firms.

Credit union  capacity and interest in buying other financial institutions, particularly banks is ever-increasing.   These all-cash purchase and assumptions totaled 16 in 2022, 11 in 2023 and at least 17 announced so far in 2024.

In most purchases, the transaction price ranges from 1.5 to 2.0 times book value.  Where the bank is publicly traded, the offers always exceed the last market quotation prior to the sale announcement. Here is an example.

The Most Recent Bank Purchase Announcement

Yesterday  the $9.2 billion ESL FCU announced the acquisition of the $401 million Generations bank (Nasdaq: GBNY).  Prior to the announcement GBNY’s one day high for the past year was $10.76.  Today, post announcement, it closed at $15.75 per share.

In the announcement the bank estimates the range of final cash payments for each share to be $18-$20.   From the joint press release:  “ESL Federal Credit Union will pay Generations $26.2 million in cash and Generations Bank will retain its equity at the effective time of the P&A Transaction.”

Generations Bancorp has 2,241,801 outstanding shares of common stock.  If $20 is the final disribution per share, then the bank owners will receive a total of $44.8 million, that is their equity and ESL’s $26.2 million payment.

We know there must be some pretty sharp financial analysts at ESL which is paying $26.2 million cash for an institution whose track record includes the following:

  1. The bank has lost money, every quarter, for the last three quarters.
  2. The bank has an efficiency ratio over 100%, every quarter, for the last three quarters.
  3. This means the bank lost money, before factoring in provision for loan loss expense.
  4. Since 2015, the bank has produced an ROA over 0.50% just once.
  5. It’s pretax ROA through 6/30 of this year is negative 0.90%.

How  Bank Purchases Should Inform Credit Union Owners

The example of credit unions paying cash in a bank P&A, effectively a liquidation, demonstrates credit union’s willingness to analyze market value and to pay up for performing financial assets.  In these deals, there is no charter acquired. just an operating business.

Moreover each of these transactions is reviewed and approved by at least three very interested parties:

  1. The owners who will ask is this price fair and a better option than not selling?
  2. The FDIC will examine for any residual risk to the bank fund.
  3. The NCUA will review for any safety and soundness implications and compliance with credit union regulations for acquired assets and FOM limits.

The point of this example, and almost 50 recent bank acquisitions is that credit union’s know how to value the potential future ROI of a financial institution’s assets.

So how might this skill apply to valuation of a credit union?  While there are not many recent examples, there is one thoroughly documented transaction.

The Nationwide FCU Sale to Nationwide Bank

In 2006 the sponsor of Nationwide FCU announced its intent to buy its credit union to accelerate its banking operations.   Founded in 1951, the single sponsor credit union was almost an extension of the insurance company. Almost all of its members were Nationwide employees, former employees or retirees and their families. The CU’s employees were all Nationwide Insurance employees and the CU performed very few of its administrative functions on its own.

The first question for the members was: “Will the 45,000 owners of the $564 million Nationwide FCU be offered enough money for their credit union?”

The credit union’s key numbers at December 2006, right after the vote were:  Assets $564.1 million;  Loans  $  418.3 million;  Net Worth $61.5 million (12.7%); shares $489.3 million; and Members, 45,002.  Nationwide was the 4th largest of Ohio’s 495 credit unions.

Further comments from an August 8, 2006 Credit Union Times article about the sale:

“When what is happening in so many other merger and charter conversions amounts to little more than thievery, the fact that Nationwide was willing to try to do the right thing means a lot,” said Jim Blaine, CEO of the $13 billion State Employees’ Credit Union. 

Blaine said that his comments and support for the purchase reflected the degree of transparency that the CU has offered. “If that transparency were to diminish, if the CU were to hold back on letting its members and the public at large know about how it and Nationwide Bank arrived at the $79 million price tag, then the deal might face more of an uphill climb,”  Blaine explained. 

The final member Notice disclosures were significant including full details of merger costs, loss of member control, and that taxation of the bank might lower returns to savers. The article continues:

McCune and other banking analysts note that a premium of even 150% or 200% of equity for an independent CU might not be out of line and would still be considered inexpensive compared to the prices commanded by independent thrifts. . . 

“The phenomenon (of a credit union sale) is more likely to remain an occasional development where banks might approach CUs which have access to particular markets or market niches and where CU members would be willing to sell. Everyone has a price,” the analyst noted, 

The Nationwide sale was approved by a wide margin in as reported in this November 7 article:

CEO Paula Edwards said that almost 17,000 of the CU members took part in the election and that almost 90% of the members who voted cast ballots in favor of the merger. 

Approving the deal means that Nationwide’s members will receive $79 million total, or roughly 15% of their account balances as of the end of March of this year as the price for the sale. The new bank will benefit from the purchase by having a readymade customer and deposit base that would have taken it months or years to develop otherwise. 

The Significance of Nationwide FCU’s Sale

Members were returned all of their cooperative capital plus an estimated premium of $17 million more.  This represented a gain of approximately 15% on their individual share balances.  In banking sales, this valuation is often referred to as the deposit premium when valuing a transaction.

According to CU Times, there were some who thought this transaction could be an example for additional deals.

Some view the Nationwide deal as the model for the potential takeovers of credit unions. Nationwide was a very unique case, , , CEO Paula Edwards is one of the true good credit union people and had little choice in that deal. The reasons behind it can be thrown out, but what can’t be thrown out is the premium on capital Nationwide Bank was willing to pay, that’s the potential model going forward. 

“This proposed merger ensures credit union members receive a financial benefit in the transaction. Nationwide has agreed to give members a payment for their ownership interest in the credit union,” said NFCU CEO Paula Edwards.

The Irony of This Transaction

On May 7, 2018 Nationwide announced it was getting out of the retail banking business.

The insurer said Monday that it has decided to move away from operating as a full-service, federally chartered retail bank — the kind of place where people cash checks, sign up for CDs and the like. Instead, it plans to focus its bank-related services on those that support its retirement-plan business. 

Implementing this intention, Nationwide made a follow on announcement August 3rd, 2018:

Nationwide has taken a big step as part of its plan to get out of the retail banking business. 

The insurer said Friday that it is selling $3 billion in deposits at Nationwide Bank to BofI Holding, the parent of BofI Federal Bank, in a deal that is expected to close before the end of the year. The sales price was not disclosed. 

BofI Federal Bank, based in San Diego, is a nationwide bank that provides financing for single-family and multifamily residential properties and small and medium-sized business in certain target areas. 

Even selling to a new charter or transferring control does not assure financial longevity.

How NFCU and Bank Transactions Are Relevant Now

There are two immediate conversions from a credit union charter that will entail a valuation with  potential member payout.

June 23, 20 24 the FDIC announced the following:

The FDIC approved a deposit insurance application submitted by Thrivent Financial for Lutherans in relation to a proposed Utah industrial bank, Thrivent Bank. The FDIC also approved a related merger application that will permit Thrivent FCU to merge the operations of its existing credit union into the newly formed Thrivent Bank. 

The newly approved Thrivent Bank will not operate physical branch office locations and intends to deliver all bank products and services exclusively online, offering a diversified loan portfolio centered in consumer loans and funded primarily by core deposits, following a traditional bank business model.  Thrivent Bank will offer products and services without regard to religious affiliation.

Thrivent FCU has total assets of $930 million and a net worth of $129 million . What will member-owners receive in this sale to an industrial bank charter formed by the Sponsoring company?   Will it follow the Nationwide payment precedent?

The second event is the combination Arrah Credit Union with the $378 million, mortgage centric, Pittsfield Cooperative Bank.  The details are in this August  14, 2024 Credit Union Times report:

Chartered in 1929, Arrha’s 27 employees operate three locations, and manage $110 million in loans, $122 million in total shares and deposits, and $12.4 million in equity, according to NCUA financial performance reports. The credit union posted a loss of $9,222 at the end of the second quarter.

The process to combine is very cumbersome. A minimum of 20% of the eligible members are required to vote for the transaction to proceed.

Arrha’s NIMRA application, under review by the NCUA, included 15 different documents and statements such as the merger plan, the proposed merger agreement, a copy of the bank’s last two examination reports, copies of all contracts reflecting any merger-related compensation or other benefit to be received by any director or senior executive, a statement of the merger valuation of the credit union, and a statement of whether any merger payment will be made to the members and how much of a payment will be distributed among members.

The question raised by these two current events, the growth in bank purchases and the Nationwide sale and other conversion precedents is why aren’t credit union being  member-owners compensated today? When  members are asked to approve the transfer and control of all their assets and common wealth to another credit union via merger, shouldn’t they be treated as least as well as when credit unions pay out bank owners?

Time to Take a Stand and Act

Its time for those who believe in a cooperative system to take a stand and ensure that intra-industry mergers reflect the same process and member-owner payments as every other credit union financial transaction requires.

Without change, the industry will be in  a race to the bottom.   As I described yesterday, one predatory credit union, PenFed, has cancelled 30 long serving credit union charters via merger between 2003 and 2022.   Even as PenFed hits a financial stall, this activity is being imitated by others daily.

Credit unions want all the authorities and options to compete in the open financial markets, but not when it comes to their own brethren.   These industry predators want the opportunities of the free market, but not the responsibility of transparent dealing and ownership reward when taking over another credit union.

These “off market” dealings are corrupting leaders, perverting normal financial practice and encouraging credit unions to go out and “roll up” their kindred in bigger and bigger combinations.  This trend is subverting not just the traditional practice of market based firms, but driving a consolidation eliminating one of the most stratgic advantages of a credit union charter: local control, investment, relationships and community building.

Why can’t the Nationwide outcome be the standard for all credit union mergers as well.  From the above event:

what can’t be thrown out ( of the outcome) is the premium on capital Nationwide Bank was willing to pay, that’s the potential model going forward. 

Shouldn’t that be the model today for all change of control credit union transactions?

 

 

 

 

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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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What Should the Role of TDECU Member-Owners Be In a Major Bank Purchase?

Yesterday the $4.7 billion TDECU announced its intention to purchase the $1.2 billion Sabine State Bank and Trust whose head office is in Many, LA

The joint press release  states:  Founded in 1901, Sabine has a footprint of 51 branches across Louisiana and east Texas and had approximately $1.2 billion in assets as of March 31, 2024. Sabine is an active lender in its markets and specializes in lending to the oil and gas, forestry, timber and agriculture sectors.

The CU Today article quotes TDECU’s CEO’s ratiionale for the purchase as: “TDECU is on a growth journey to expand across the state of Texas and beyond.”

The transaction is for cash. No financial details except broad asset totals were given.

The size of this $1.2 billion transaction (25% of TDECU’s balance sheet) the probable cash outlay of several hundred million if the price is in the 1.5 to2.0 times book value, and the operational/business expansion (51 more branches added with the 34 already),  plus new risk exposure to commercial lending raise critical questions:  What is the members’ role in this $1.2 billion purchase?  What should board and senior management be informing them about an action that could transfers as much as 50% of TDECU’s $465 million of collective savings to the bank’s owners?

TDECU’s Performance

TDECU’s 2023 yearend performance shows slightly  negative loan (-2.19%) and share growth (-2.55%). External borrowings total $310 million, a 14% increase over 2022. The credit union’s loan to share ratio has hovered around 100% for the past several years.   Delinquency is at 1.59%, ROA is .70% and net worth 10.06%.  Steady but not superior performance.

The credit union reports 386,000 total members out of a potential of 30 million.

What is the Members’ Role?

TDECU held its annual members meeting on March 23.  Was the CEO’s ambition of embarking on “a growth journey in Texas and beyond?” outlined there.  Or, were members not informed about board and management’s efforts to commit a significant portion of their net worth to a bank purchase?

The members are the owners. It is their collective savings accumulated over decades that has provided the ability to consider such an acquisition.  But what is in it for them?  What will be the return on their equity as TDECU’s ROE historically is in single digits?  How will this out-of-market expansion better serve their needs?  How will the “cash” be raised–will the credit union have to increase expensive external borrowings or seek subordinated debt to complete this transaction?

Putting TDECU’s Future on the Line

The financial size and business scope of this transaction puts the future of TDECU on the line. Members should be given full financial details including how large the intangible Goodwill asset created by the event will be.

Without full disclosure, the customary process in public bank to bank transactions, the members are left in the dark.  Management is not being held to any performance outcomes.  The traditional member-focused core service model is being put at risk to underwrite an expansion that has yet to be explained in any relevant detail.

Presumably full financial projections are being presented to the regulators who must approve this deal.  Shouldn’t the member-owners who are bankrolling this transaction be given the same details?

This transaction is not just a financial event; it is an obligation for TDECU’s board and senior management to be fully responsive to THEIR owners’ interests in this most consequential step.

 

 

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Wisdom for Life from Children’s Stories

The Giving Tree by Shel Silverstein

Time to say ENOUGH!

This children’s book is overtly about the relationship between a tree and a young boy.

He first asks to pick the apples from the tree to sell.  The tree says OK. He then requests to take  branches to build a house. Again the tree agrees.

As the boy grows older the tree lets the boy take its trunk to build a boat.

For some this is a heartwarming tale that explores the selfless nature of unconditional love.  It is a relationship of tree and a boy, a metaphor that teaches valuable lessons about the joy of giving and the importance of gratitude.

For others the morale is more straightforward and simple: it teaches the dangers of being selfish.  When life has no boundaries, we just take and take until we end up destroying the source of our well-being.

Current day readers have generated interpretations far removed from what may have been the author’s initial intention.  Some argue the boy’s behavior is narcissistic and the tree an enabler.

The power of a good story is to draw forth multiple reader reactions.  So at the risk of some reader’s understanding of The Giving Tree, I want to apply its lessons for credit unions.

A Metaphor for Credit Union Behaviors

I believe one takeaway is that the current view of some credit leaders that theirs is an organization with no limits (internal or external), subverts and could destroy the integrity of the cooperative model.

There is no logic or reason between cross-country mergers or even those many states and miles away eg. Maine and Illinois. The continuing credit union’s home market and legacy has no relation to the newly acquired members or local community.

These deals corrupt the merger process making the executive sellers rich and the members poorer. The member-owners who are victims in these  financial empire building combinations are asked to give away their accumulated value for nothing.

The justification for buying banks, sometimes completely out of the credit union’s market, is also suspect. These bank owners often reap above market returns.  The credit unions readily pay premiums to bank owners, but acquire members’ accumulated wealth in mergers for free.

Both cases use members’ mutual savings accumulated over decades to enable corporate ambition, not improve member benefit. The intangible value and goodwill that created this common wealth becomes the means of transforming the coop’s purpose into a market-driven, tax exempt financial hybrid.

Instead of a more equitable and just financial system,  the result is a greater concentration of wealth and power often outside all local connections–the antithesis of the cooperative model’s intent.

There is no virtue in being a tree and allowing someone to take away everything created until there is nothing left.  The free market defense of these open-ended expansions, destroys the mutuality on which credit unions depend.

The irony of these takeovers is that they eliminate the critical source of credit union’s abundance-the trust and belief by member-owners that coops are different.

Boundaries are critical for knowing when to say yes and when to say no.  It’s time for credit unions to say enough!  Let’s remember who we are and how we earned our standing.

The Dish Ran Away

Silverstein was not the only author offering  wisdom in a children’s idiom. If one looks at Mother Goose’s brief verses, they can be applied to many areas of our behavior.

Here’s one that is may also be relevant to the above concerns.

To See Such a Sport

The Cat and the Fiddle

Hey, diddle, diddle!

The cat and the fiddle,  

The cow jumped over the moon;

The little dog laughed

To see such a sport 

And the dish ran away with the spoon.

A nonsense poem to teach children rhyme and verse with familiar words?

Or, might one ask who is the Cat playing the fiddle?  Who is the dish running away with the spoon?

Does this seeming blather suggest the pretense that buying and selling  cooperatives is somehow benefitting members?

 

 

 

 

 

 

 

 

 

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Early Learnings from Bank Yearend Earnings

“Everyone looks like a business genius when interest rates are at historic lows and money is incredibly cheap. But when the tide goes out, you see who isn’t wearing any swimming trunks.”

(Warren Buffett, among others)

This week all major banks will report their 4th quarter earnings.  Yesterday the money center banks released their results.  Today the large regionals report.

Credit union 5300 call reports for the same period will not be available for 60 days or more from NCUA, unless individual firms post their financials independently.

There are three observations from these commercial investment and consumer banking leaders so far.

  1. 4th quarter earnings compared with the same period of 2021 are at best mixed. JP Morgan’s net is up 6%; Bank of America, 2% up; Wells down 50%; Citigroup a negative 21%. Goldman Sachs down 69% and Black Rock’s profit fell 23%.
  2. Goldman’s decline was due in part to a cumulative $3 billion loss since 2020 in its efforts to develop a consumer lending market under the Marcus brand.  The firm has since reorganized these products.
  3. The stock prices of most money center and regional banks have fallen precipitously over the past 12 months.

Some examples:

JP Morgan  -10%

Bank of America -27%

Citigroup -24%

KRE Regional banking ETF  -25%

Each institution singled out different factors affecting their results:  increase in loan loss reserves, falling revenue in certain business lines such as investment banking and trading,  operating expenses too high, rising interest rates, recession worries and economic uncertainty.

The common refrain in the earnings announcements: “These are not the results we expect to deliver to shareholders.”

There were a number of negative events called out:  Goldman’s loss in the consumer market, Wells Fargo’s $3.7 billion additional government fine, and  JP Morgan’s $175 million write off of a fintech acquisition.  Results were mixed but not troublesome from a systemic view.

Potential Questions for Credit Unions

ROA for credit unions through September 30 fell about 21% to  88 basis points versus 2021.   The largest single factor was 15 basis points in loss provision expense.

What the 12 months decline in bank stock prices suggests is that the market analysts see a more challenging year for financial performance in 2023 in all banking sectors.  Uncertainty from the  inflation-recession outlook is the major concern.

This overall decline in bank stock values raises questions for credit unions.  For the 20-30 who completed or announced upcoming bank purchase, did they overpay?   Will the purchase goodwill premiums need to be reassessed?   Will purchase offers going forward reflect the market’s valuation declines?

Goldman introduced its Marcus consumer initiative in 2016.   It announced a partnership with Apple for a new credit card.  Since 2020 these “platform” based initiatives for consumers have lost $3.8 billion.  This is one factor in the bank’s announced 3,500 immediate employee layoffs.

The question for credit unions is, if a an expert firm such as Goldman can lose this much entering a new business line, consumer banking, could credit unions face the reverse challenge?

For example, Jim Duplessis in Credit Union Times observed that total credit union commercial real estate loan production has risen 41% in the first nine months to $36.7 billion. For some credit unions these participations are a new lending effort.

Many banking CEO’s are cautious about the future.  It is not just the recession prospect, but declines in mortgage activity, drawdown of consumer savings, and economic impacts  from higher rates not yet fully played out.­

A Proven Track

To the extent credit unions follow their consumer members closely, the future should be sound.

Where the difficulties may occur is forays in areas where experience is limited.  Among these are commercial loan participations, whole bank acquisitions, and investments in “side” business such as technology startups or crypto offshoots.

One of the advantages in this economic and rate transition is that credit unions don’t have to worry about their stock price.   However the market’s negative outlook for bank stocks  should be an alert that prior assumptions in underwriting and investing may need to be reassessed.

What credit union wants to be found swimming without trunks?

 

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When The Bullet Hits The Bone…

Two credit union press releases this week reminded me of the 2012 post below by Jim Blaine.

The first was the announcement that five Minnesota credit unions had loaned $31 million to Opal Holdings, a New York real estate developer and investment firm, to purchase a 17 story office tower in Bloomington, MN.  “The financing included two senior secured notes on equal footing issued in June: One for $22.1 million at 5.1% for 36 years and the other for $8.1 million at 5.32% for 40 years.”

The second from Summit Credit Union stating it had completed the purchase of the $837 million Commerce State Bank  “in the largest credit union acquisition of a bank in the state’s history.”

“Twilight Zone”  (by Jim Blaine)

Nobody said it better than Golden Earring.  No, this is not the golden earring you fearfully imagine sprouting some day from your teenager’s nose or navel.  It’s the late ‘70s rock group and the song is “Twilight Zone”.  The question:  “Steppin’ out into the twilight zone.  Entering the Madhouse, fears that have grown.  What will become of the moon, and stars?  Where am I to go, now that I’ve gone too far?”…  The answer:  “You will come to know, when the bullet hits the bone!  Yes, you will come to know, when the bullet hits the bone!”

The Heartland….

The Amana Colonies, 26,000 acres of picturesque Iowa farmland, sheltering seven immaculate villages, are up Highway 151 about 100 miles east of Des Moines.  This is the Midwest, the Heartland.

The place where the Deere and the antelope play.  A warp in time through which, you may, perhaps, be able to catch a glimpse of the future – the future of the credit union movement.

The Amanas were settled in 1855 by the Society of True Inspirationists.  The sect was formed in Germany; adopted a communal structure; and had unique, idealistic, and firmly held beliefs – sound vaguely familiar?  The communities were self-sufficient and prospered richly.  

All things were shared.  Products, such as woolens, handmade furniture, meats and wines, were sold to the outside world.  A sterling reputation was built upon high standards of craftsmanship and a close attention to detail.  The “Amana” name – remember that refrigerator? – became synonymous with quality and value – sound vaguely familiar?

“Why don’t you download this app…”

The Amanas appeared to be the true Utopia, the new Eden.  But trouble, eventually, always comes to Eden.  At first, the Inspirationists called it “The Reorganization”, then “The Change”, and finally, “The Great Change”.  It started as a murmur, became a grumble, heightened to an argument, and ended in 1932 as a split.  

Eighty years of success forced onto the scaffold of change by a diminished intensity of beliefs, a cooling of religious fervor, a forgetfulness of original purpose and vision – sound vaguely familiar?

Their world, however, did not come to an end in 1932.  The Amana Colonies continued on.  The communal structure was abandoned; the religious and the secular were separated.  Homes and personal property were divided; stock was issued in the businesses and agricultural interests.

The Amana Society Corporation now controls and manages the businesses.  The Amana Church Society now deals with spiritual matters.  Today, the Amanas are on the National Registry of Historic Places and the Amana Heritage Society strives diligently to preserve the cultural heritage of the community and its descendants.  Today, the Amanas are still many things, but mostly the Amanas are a novelty, an oddity, a quaint museum of past hopes and ideas.  

Why did this happen?  The guidebook says:  The Amanas were… “a goal:  visioned through faith; created and established by faith; named for a faith and dedicated to a faith”.  And, “the first generation had an idea and lived for the idea.  The second generation perpetuated the idea for the sake of their fathers, but their hearts were not in it.  The third generation openly rebelled against the task of mere perpetuation of institutions founded by their grandfathers.  It is always the same with people.” – sound vaguely familiar?Which credit union generation is this?  Are you still living for “the idea”?  Is your heart… still in it?

“… destination unknown.” 

“Steppin’ out into the twilight zone.  Falling down a spiral, destination unknown.  What will become of the moon and the stars.  Where am I to go, now that I’ve gone too far? 

…You will come to know, when the bullet hits the bone.  Yes, you will come to know when the bullet hits the bone.”

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The Missing Framework for NCUA Success (part I of II)

It is an accepted truism for NCUA board members presenting their credentials  for Senate confirmation, or whenever the agency is justifying a new rule, reg or policy, to state their ultimate goal is “to protect the insurance fund.”

Current board members have even called that objective their goal or North Star.  Their primary job.

This assertion turns upside down the logic of means and ends.

What is NCUA’s End Purpose?

NCUA’s primary responsibility, its purpose,  is encouraging and sustaining the resilience and integrity of a cooperative financial system for American consumers.  The FCU Act states:

The term Federal credit union means a cooperative association organized in accordance with the provisions of this chapter for the purpose of promoting thrift among its members and creating a source of credit for provident and productive purposes

To achieve this end, NCUA was given multiple means in the law:  chartering, examinations, supervision, administration of charter changes, issuing regulations and providing expert guidance.   The tool least used, as it is rarely needed, is calling upon NCUSIF.

Most importantly, the FCU act specifically states the NCUSIF’s financial solvency is protected by the full faith and credit of the credit union system.   All members must deposit and maintain 1 cent of each share dollar in a credit union with the NCUSIF.  Every member is part of this collective guarantee ensuring all other member shares are indeed safe. This is a cooperative movement commitment, unique to the NCUSIF.  It is the law.

If all of NCUA’s every day tools ( the other “means”) are effectively managed, then the members should never be called upon to provide additional resources.  That is how NCUA protects the Fund.

The first four-decades of regulatory responsibility to maintain cooperative system integrity from 1934-1971 did not require the share insurance tool.

One aspect of “integrity” was certainly promoting credit union solvency as there has always been reserving and net worth requirements in the law.

But just as important, system “integrity” (as a source of credit) also included vital cooperative components to provide a distinct financial alternative for members.  These  include democratic governance, values such as education and collaboration, volunteer leadership (unpaid directors and committee members), access for all Americans regardless of financial circumstance (capital), focus on community (common bond), and contrary to the capitalist model, building common wealth versus private equity, to be used by future generations .

Over time additional characteristics have been developed including interdependence (corporates and CUSO’s) and system support augmenting the critical initial role of sponsors.

A Reward for Performance

When Congress approved the NCUSIF for credit unions in 1971, it was a reward for their performance.  As stated at that time, insurance was not due to financial problems with credit unions or the cooperative system.  Rather it recognized their growing contribution to the American economy and that they might not perceived by the public as the equal of their FSLIC/FDIC alternatives.

A Cooperative Policy Framework Is Lacking

For NCUA to faithfully fulfill its mission to protect the integrity of this cooperative financial alternative, an appropriate regulatory policy framework is necessary. Such a framework should be nonpartisan and multi-administration.  Past examples are the deregulation of shares by NCUA or the redesign of the NCUSIF.

Without a thoughtful and evolving framework, NCUA becomes a mishmash of regulatory justifications or each Chairman’s personal priorities.  What do the banking regulators do?  Or let the “free market” work its will.  Or elevating suboptimal tasks and agency operations  to define priorities.

Absent a policy framework, the unique role of cooperatives becomes increasingly confused with all the other financial activity in the marketplace.   No longer are the well-being and rights of member-owners front and center.  Bright shiny objects such as innovation and new technologies take center stage.

The ambitions of managers and boards seeking to outgrow their for-profit competitors become the industry’s defining priority.  Some credit union leaders chart success not by developing a better alternative to attract members, but rather using their decades of member reserves for buying out bank owners at a premium.

That activity would certainly seem contrary to the spirit of the Act.  And therefore worthy of public debate.

Credit union CEO’s, nearing retirement, game the system for personal enrichment  “selling their credit union” via merger.  They capitalize on the transfer of members’ accumulated wealth and loyalty for additional bonuses and extended payments beyond those merited as CEO.

In these transactions, the financial and relationship legacy, its goodwill, is turned over to boards and CEO’s with no prior connection.  And justified only with vague future promises that bigger is better.  The unique character of the charter and its local legacy and traditional focus are eliminated.

Tomorrow Part II, developing a policy framework.

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Friday Updates

The following are updates from posts this past week.

VyStar’s Challenges: Continuing to Expand in Georgia

Both CU Today and Credit Union Times report that VyStar has called off its $195.7  million purchase of Heritage Southeast Banking Corporation, a holding company for three local banks located outside Atlanta.

The local TV station NEWS4JAX covering the story included the following quote from CEO Brian Wolfburg :  “Following a thorough evaluation of the transaction between VyStar and HSBI, we have mutually agreed that moving forward separately is the prudent decision. VyStar will continue to expand our services in Georgia.”

This Georgia expansion seems tone deaf to the concerns of members in the credit union’s legacy Jacksonville market.  This recovery challenge appears greater than a botched conversion.

There are dozens of comments posted after every NEWS4Jax story:

Mark 2 HRS AGO

It seems that Vystar management made a poor decision with NYMBUS and are having to force it down members (co-owners) throats, regardless of the inconvenience and future inadequacies of software capabilities. The NYMBUS salesperson probably made bundle of commission off of this sales job to Vystar.

BigSwifty500 21 HRS AGO

This story is worthless and full of non-truths. The login page still says it is “temporarily unavailable”. Time to move my accounts elsewhere.

B coffey 2 DAYS AGO

N Y M B U S….this is the name of the company vystar is sharing “relations” with. They performed, designed this mess. Both companies share Board members. Nymbus  is even located in their (Vystars) building in Jax. Vystar is listed as a Nymbus investor. Starting to see a forming problem here?????

john marshall 2 DAYS AGO

This “upgrade” (that isn’t one) ought to be called Wolfburg’s Folly!

Racemedic

Translation: “We know a dumpster fire when we see one and we know to run the other way. Sincerely, HSBI”

Jthall76

Glad I switched to Community First CU

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Crypto Crash: The Selloff in Crypto Assets Resumes (CNBD Disrupter article, June 16)

Bitcoin fell again today as a sell-off in global risk assets resumed, with crypto investors reeling from a dramatic plunge over the last few days that saw the world’s largest cryptocurrency almost drop below $20,000. . .  

Bitcoin is sitting at levels not seen since late 2020. The digital currency is down more than 20% in the last week and has dropped more than 60% from its all-time high in November. . 

The current bear market is often dubbed a new “crypto winter”.  . .

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“Good Angel-Bad Angel”-The House Hearings on January 6th Insurrection

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When the Music Stopped for VyStar

On May 2, 2022 the $12 billion VyStar Credit Union celebrated its 70th anniversary with a ceremony at its founding location, the Naval Air Station, Jackson, FL.

The press release included the following announcement:  VyStar is also leading a digital transformation that includes a new website and online & mobile banking platform.  But then reality set in.

The Music Stops

On May 14,2022 the confetti hit the fan. The conversion to the new online and mobile platform failed.  As of the following Friday there were more than 13,444 comments posted on the VyStar Facebook page about the outage.

The situation as described in a CU Times story on May 22:  The brief outage, as explained to members, was planned to last for two days. As May 20 rolled around, seven days later, the $12.3 billion credit union’s 822,000 members still were offline and furious.   One Facebook posting:  “How in the Hell Does a Credit Union go a week with its online systems completely DOWN in 2022???”

The CEO Returns

Brian Wolfburg, CEO had been  on vacation overseas.  Upon his return he was interviewed by a reporter Jim Piggott for the local TV station, NEWS4 JAX.  The complete  18 minute interview is here.  The on air report excerpt  was just six minutes.

Wolfburg repeatedly references the credit union’s 70 year history to indicate that the credit union will “get it right.”   Members posted their skepticism in comments after the story such as:

Mikey19 DAYS AGO: I think the CEO should resign and the person that is in charge of this mess should be fired. Who is with me on this. Let’s email the Board of Directors to let them know our thoughts. VyStarBoard@vystarcu.org

Members File Complaints with Regulator

A June 6, CU Times article detailed member complaints with the Florida Office of Financial Regulation:

Complaint Filed May 20:  “VyStar Online Banking has been unavailable to members for 7 days now with no date given as when to expect the system to be operational. VyStar Management has been vague and evasive with little to no accountability for the botched roll out of its new online banking system. They have gone ‘dark’.   The story added:

CU Times has repeatedly asked for interviews with VyStar executives and board members. The interview requests have not been granted.

Potential Legal Trouble

A June 8 article in CU Today described the  potential of a class action suit.  Also the credit union would end its fee refund of fees incurred by the outage.

VyStar said that it proactively refunded/is refunding fees that it charged members from May 14 through June 9 as a result of the online and mobile banking conversion, but as of June 10 it will not do so.

Members Leaving

In a June 9 CU Today update, the story described members intentions to leave the credit union:

Action News Jax said it contacted VyStar CU regarding how many members have closed out memberships, but said the credit union did not provide any data. 

Class Action Suit Filed

June 13, CU Today reported on a class action suit:

In an interview with FirstCoastNews.com two weeks after the solutions went down, Attorney Austin Griffin, a partner in StoryGriffin PA, a consumer justice law firm in Jacksonville Beach. Fla., told FirstCoastNews VyStar members could go after the credit union with three possible claims: negligence, breach of contract and fiduciary duty.

Griffin told the publication that since VyStar is a credit union and not a bank, there is “an expected higher standard of care.”

VyStar’s Status Today

The latest update on VyStar’s web site reads:

Online statements now available. Access your accounts and make External and Internal Transfers via your computer, tablet or mobile device at online.vystarcu.org. Please note: We will continue to have planned daily maintenance from 1 a.m. to 4 a.m. EST when system access may be unavailable.

The Credit Union Times latest summary  is as of June 14.  Over 28,000 comments have been posted by members frustrated with their experience.

Context for the Event: VyStar Invests $20 Million in Nymbus

There are more factors to this story than a botched conversion.

In  July 2021, VyStar signed a deal with the Jacksonville, Fla.-based Nymbus as the credit union’s online and mobile banking partner.

This statement by Joe Colca, Seniro Vice President of Digital Experience was part of the release:  “Our previous investment already demonstrated our confidence in Nymbus. We’re now proud to lead by example for other credit unions seeking a trusted fintech partner to implement sophisticated technology, people and processes to offer progressive products and member experiences.”

In October 6, 2021 Credit Union Times reported Nymbus had moved into VyStar’s head office location.  “A fintech with credit union funding is moving from Miami Beach to the campus that houses the headquarters of VyStar Credit Union in Jacksonville, Fla.

Nymbus said in a news release Tuesday that it made the move because of its relationship with VyStar ($11 billion in assets, 778,348 members). VyStar invested $20 million in April to help develop Nymbus’ month-old Nymbus CUSO to better extend its services to credit unions. In July, VyStar chose Nymbus as its new online and mobile banking solution partner.

In September 2019, VyStar created a $10 million fund to invest exclusively in fintech companies. VyStar has said it has supported Nymbus because it provides a way for it and other credit unions to keep up with members’ rising expectations for sophisticated online services. Nymbus’ website said it saves banks and credit unions “decades” in developing such services.”

Two senior managers of VyStar were also  members of Nymbus’s Board. Joe Colca, VyStar’s SVP on the board was quoted:

“Nymbus has proven to be an effective, valuable partner in our efforts to improve the member experience at VyStar and strengthen the credit union industry as a whole,” Colca said.

 VyStar’s FOM Expansion and Bank Purchases

Vystar’s first bank purchase was announced on January 15, 2019 with the  purchase of First Citizens Bank: VyStar Credit Union announced it plans to acquire $280-million Citizens State Bank, a Florida state-chartered bank headquartered in Perry. CSB has four locations: two branches in Gainesville, and branches in Perry and Steinhatchee, Fla.

The article continued that this purchase was possible because of an FOM expansion:

In November 2018  VyStar received approval from the Florida Office of Financial Regulation to significantly expand its field of membership by 27 counties—more than doubling the original 22 counties—to include all 49 counties of Central to North Florida. This expansion included Taylor County, where CSB’s Perry and Steinhatchee offices are located. VyStar currently serves the Gainesville community with two branch locations with plans to open additional offices in Alachua and Ocala by mid-year, the CU said.

Subsequently,  on March 31, 2021 VyStar’s purchase of the $1.6 billion Heritage Southeast Banking group  for $189 million was announced.  The closing has been deferred three times.   This would be the largest purchase of a bank by a credit union.

Largest Subdebt Placement by a Credit Union

To support these bank purchases and rapid growth, VyStar issued $200 million of subordinated debt in the first quarter of 2022.  This is the largest subdebt capital placed in credit unions to date. Arranged by Olden Capital, the issue was sold to 41 investors including credit unions, banks, insurance companies and asset managers.

Without this external capital infusion, Vystar’s net worth would have been 7.9% of March 31, 2022 assets.  With the debt and using a four quarter asset average as the denominator, VyStar reported a net worth ratio of 10.15%.

“Values-centric” brand campaign: “Do Good. Bank Better.”

From an October 2021’s CU Today story  New Branding Campaign:

VyStar Credit Union has launched a new “values-centric” brand campaign, “Do Good. Bank Better.”

VyStar said the multimedia campaign has been inspired by the people, businesses and organizations that it serves, and that it elevates VyStar’s “powerful promise to support its members and communities by offering better banking options and giving back to strengthen the places it calls home.”

“We proudly live by the words, Do Good. Bank Better., and this is just the beginning of our efforts to continue sharing our nearly 70-year story,” said VyStar President/CEO Brian Wolfburg in a statement. “As we evolve as an organization, we remain true to our roots by upholding our standard of leading by example and showing goodwill in everything we do.”

The Member’s Chance for a  Choice

VyStar has been on a very ambitious multiyear growth spurt:  converting charters and expanding the FOM, purchasing whole banks, investing in multiple fintech companies, raising external capital and launching a new public relations and branding campaign.

Members’ reaction to the online conversion failure shows how much confidence has been lost in these many expansion efforts.  The situation calls into question multiple initiatives especially the credit union’s investment and role in Nymbus plus its thrice-deferred bank purchase.

This episode and its background are now occurring in a rapidly changing economic and financial environment.  Investments and other assets that appear sound when the cost of funds is near zero now have a very different risk profile.

Once again the regulators have been on vacation.

The credit union’s reputation is being stained. Its operations, business initiatives and internal capabilities appear strained on several levels.  The net worth ratio is created, not earned.

The best solution may be to follow the advice of the member who posted:  Let’s email the Board of Directors to let them know our thoughts. VyStarBoard@vystarcu.org 

Members are the owners.  They should do more than vent frustration by exercising their power to choose their representatives for the board.  They should take back their “home” if they truly want to see the credit union “do right” for its members and communities.