Category: Co-ops in Capitalism

One pattern in the 150-200 credit union mergers occurring each year is CEOs nearing retirement, using merger as a “succession plan.” After decades of leadership, their final act is to dissolve the organization that gave them the top job of their professional career.

A CEO’s Responsibility and Fiduciary Duty

Every CEO contributes in multiple ways to the “ongoing concern” of the organization they are chosen to lead. These responsibilities include developing strategy, ensuring the trains run on time (performance), defining a culture, and acting as chief spokesperson for external contacts. All for the purpose of serving members better and ensuring the continuity of the enterprise.

Succession planning is integral to this purpose. This can be a process of nurturing internal candidates and/or using external consultants.

I am disappointed for members when I read that a CEO’s final act is recommending the merger of their independent institution. The credit union has been the platform for the CEO’s leadership opportunity, industry status and professional reputation for many years.

Instead of their role as a “relay” runner passing on the baton, their tenure becomes a “sprint” to the finish and no one else gets to run.

This appears to be the situation at Xceed Financial Credit Union ($942 million) where the CEO who took over in September 2006, sent an email recommendation to members this July. The letter announced (after 14 years as the leader), the best future course of the credit union was to merge with Kinecta FCU ($5.1 billion) “to better serve you.”

The Reasons Given Members

The email listed six reasons including “a broader product lineup, higher dividends, lower fees, more robust digital banking, full Saturday banking, and expanded branch network including 22 locations in Southern California.”

No comparative facts were provided other than citing the 22 additional Kinecta branches. Of Xceed’s current nine branches, only one is in Southern California. It would seem unlikely that members using Xceed’s locations in San Jose and Menlo Park , CA (several hundred miles to the north) or the six locations in Rochester, NY, Parsippany, NJ, and Leesburg, VA, would see this “expanded” network as “better service.”

The key logic justifying this step is “joining forces will give us economies of scale” and “the combined credit union will be the 35^th largest in the country with approximately $6 billion in assets.”

So, after 14 years at the helm, the CEO and board determined the credit union was no longer capable “to effectively compete in the future or deliver the products and services that you need and want.” The only solution is to merge.

The CEO assures the members the loss of their independent charter will be OK: “I fully support this merger. . . I will also be staying on as president of the combined credit union and fully intend to ensure your needs and interests remain a top priority. . .”

This assurance seems questionable after telling members the credit union is no longer viable after the CEO’s 14-year reign.

Kinecta’s East Coast Base?

The July 16 joint press release reported the CEO of the combined operations would be Kinecta’s CEO. He is quoted: “This will be great news for members of both credit unions. . .and will enhance access for Kinecta’s east coast members.”

How important is this “east coast” member base? According to Kinecta’s HMDA filings, the credit union originated no mortgages in New York in 2019 and only 17 (1.1% of their total) on the entire east coast. In 2018, the numbers were 27 east coast mortgages (2.7%); in 2017 the total was 19, 1.4% of all mortgages. Again, the purported “east coast member base” rationale seems dubious.

Members Vote After NCUA’s “Approval”

The first sentence of Xceed’s member letter states that the credit union is “seeking approval from the National Credit Union Administration,” implying that this is an action that will be duly vetted by the regulator. Only much later is it stated that “you will have the final say when a member vote takes place early next year.”

NCUA’s role is administrative, not substantive. The most important function is to approve the required member disclosures of any financial benefits gained by Xceed’s CEO and/or other employees from the merger. Until then, these personal interests are secret.

How Can Members Assess This Recommendation?

Both the press release and member letter are filled with glowing promises that everything is going to be better. There are no factual product comparisons. How can members determine if this really is a bona fide action?

Is there a way to go beyond the marketing rhetoric and vacuous assertion that size makes us better?

Or is this just a convenient exit for a CEO and board unwilling to work through succession?

The CEO and Board’s Track Record

One way to assess these promises is to look at the track record of the leadership proposing this action. How has the stewardship of Xceed’s board and CEO in the last 14 years built the credit union and served members?

In December 2006, shortly after the current CEO was chosen, the credit union reported $734 million in assets; 70,588 members, 14 branches and a net worth ratio of 11.65%.

In the June 2020 call report the same numbers are $943 million in assets; 49,280 members, 9 branches and 9.91% net worth. Three of these four measures of institutional performance are in steep decline.

The credit union’s compounded annual (CAGR) asset growth for the past five years is a negative (-0.67%) per year. The CAGR for the 14-years is 1.39% or less than a quarter of the industry’s 5.77% annual growth in the same time period. The 1.39% annual growth also includes five mergers that added $200 million in external assets and over 30% additional members during this time.

The latest financial results are equally unsettling. In the June 30, 2020 call report, the credit union shows a year-to-date loss of $1.8 million. This compares to a positive $1.7 million for the first six months of 2019, a $3.5 million downturn.

Five Prior Mergers

During this 14 years of just over 1% annual growth, the CEO completed five mergers starting with two small ones in 2008.

On December 31, 2012, the merger of the $55 million Safeway Los Angeles FCU increased Xceed Financials’ membership by nearly 20% and added a branch in Norwalk, CA, according to Xceed’s press release.

Two other combinations were in 2016 with the $102 million Reach Credit Union, Menlo Park, CA, and the $29 million Postmark Credit Union in Harrisburg, PA.

The reasons provided in these mergers are the same Xceed now uses for combing with Kinecta: greater efficiency, larger lineup of products and services, and tremendous opportunities for growth.

After five mergers, the result is the credit union has lost over 20,000 members, recorded negative annual asset growth in the five most recent years, and reduced the number of branches from 14 to 9 since 2006.

As this member and branch downsizing occurred, the credit union’s total investment in buildings and fixed assets went from $6.5 million in 2006, to $23.5 million (350%) 14 years later.

Merging in a Time of Crisis

Xceed’s board and long-serving CEO are telling members they will be better off by turning their future over to a new board and senior management team to which they have no connection. Nearly six decades (since 1964) of member, corporate and community relationships are being jettisoned with no documented benefits or plan. Only marketing generalities.

This relationship history is especially vital during a once-a-century health pandemic and in the quarter the US economy recorded it largest GDP decline ever. From coast to coast, credit unions are stepping up efforts to respond to special member needs.

Members need their credit union now more than ever. A reliable financial partner with years of familiarity of their employer and personal circumstances, is an asset. Members impacted by today’s economy are counting on institutions they supported in better days.

They want to know their years of loyalty will be honored and their individual circumstances served when facing financial uncertainties beyond their control.

It is not size but relationships that matter. Whether the credit union is the largest, the 35th or has fewer than $10 million in assets, the key is being closer to the member than any other financial option.

Members’ confidence is based on the mutual understanding, “We are in this together.” When that value is lost, members vote with their feet. To believe a merger can reverse this shortcoming will just accelerate the steps out the door.

Neither the CEO’s letter nor the joint press release mentions anything of these immediate circumstances. That signals members’ interests are not the priority.

What’s at Stake? (“Far more than what meets the eye”)

The reasons for this merger are suspect. If the members’ best interests are not the case, what could it be?

The CEO’s words suggest the motivation. The first sentence starts, “I’m excited.” This emotion is cited twice more: “We couldn’t be more excited,” and finally, “I hope you share my excitement.”

These are the sentiments of personal ambition. This is hype hiding a $1.8 million six-month loss and the long-term decline of members and market presence. This is in fact a case study of “organizational entropy.”

A change is needed, but not that proposed in the “happy talk” letter. The merger reasons are not factually grounded. It hardly enhances “convenience” for members, the vast majority of whom are across the country and far distant from the new Southern California headquarters.

Proposal Contradicts CEO’s Own Criteria

Xceed’s CEO wrote a 2010 op-ed on mergers in the Credit Union Times with the following assertions:

“At the end of the day, credit union mergers must be based on what’s best for the member (of both credit unions). At Xceed FCU, although we operate across the country, we wouldn’t merge a credit union just for the sake of expanded asset size. There’s far more at stake than what first meets the eye. . . Mergers call for serious consideration and although I appreciate the unprecedented difficult operating environment we find ourselves in today-let’s continue asking the question “What’s in it for the member?””

That’s the question members should be asking. The CEO has disowned her own criteria: “We wouldn’t merge a credit union just for the sake of expanded asset size.” That statement alone should raise doubts not just for members, but across the cooperative system.

A Test of Cooperative Democracy

This is about common good versus private interest. Credit unions have shown they cannot be beaten from the outside, but they can be undermined from the inside. The essential bonds of trust, transparency and integrity which every credit union requires are hanging by a thread.

When something appears illogical, devoid of member consideration and not right, it is time to speak up.

NCUA has proven incapable of protecting members’ best interests in mergers. That responsibility will fall on concerned members, volunteers and employees. This is a test whether democratic governance can prevail. A cooperative system is sustained only if people are willing to stand up and fight for it.

When leaders seek to end the 50-year legacy from which they personally prospered, member-owners must confront this leadership abdication. The cooperative does not belong to any one CEO or board, but to all the members.

Call To Action

Cooperatives conquer challenges based on the will of their owners to do the same. They connect with persons who see more in their cooperatives than simply a banking channel, a kiosk, a website, a phone center, etc. These owners see an organization, a community, and personal solutions worth building.

COVID has accelerated our digital persona skills. Sound the virtual alarms via Twitter, Facebook, and all networked connections. The collective’s future is at stake. The proof of the cooperative difference will be democratic action to halt this sell out of Xceed Financial Credit Union.

For further analysis read: Thoughts on Mergers: The Tallest Candlestick Ain’t Much Good Without a Wick

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The headline seemed newsworthy: Bank Credit Union Merger News

The problem: it was not accurate. Credit unions and banks cannot and do not merge. The brief story did state that a credit union had completed its acquisition of a bank. But then the story continued the fiction by stating “this is the seventh merger of a bank into a credit union this year.”

Why the Misstatement?

Writers have a point of view. In this case the post was to promote the idea that banks and credit unions are much alike. So much so that bank/credit union mergers are not that different from the several hundred merger transactions occurring between credit unions annually.

However, these transactions are purchases in which credit unions pay cash to the owners of the bank in order to acquire the selling bank’s assets and liabilities. They are whole bank acquisitions. These sales are negotiated, often with the help of brokers, accountants, lawyers and other third-party experts to navigate both the business details and the regulatory approvals.

The documentation is very distinct from credit union mergers. The agreements will include representations, warranties, covenants and possibly non-compete and/or employment clauses on top of the detailed financial commitments. By contrast, the NCUA approves real mergers with a template, two paragraph, half-page general statement about transference of assets and liabilities to the surviving credit union.

Normalizing the Abnormal

The effort to portray credit union acquisitions of banks as just another kind of “merger” is supported by a host of intermediaries who benefit financially from the transaction It also provides a thin veneer of “normality” to those credit union leaders who use the accumulated reserves of members to buy out competitors or to enhance institutional size.

These are not, as one NCUA board member characterized them, just market-based transactions. For there is no market accountability before or after the event as there would be in a publicly traded stock. The deals are negotiated in secret, not in an open process. The members have no say; rarely would the transaction provide them any direct benefit. And if the deal does not work out, the owners of the credit union, unlike a bank’s shareholders, have no course of action.

Avoiding the Real Issues

An event may not be illegal, but that does not mean it is wise. Credit unions’ whole bank purchases raise important questions about the role of tax-exempt cooperatives. Should their tax-free accumulation of reserves enable them to buy tax paying banks? How do such transactions promote the unique role of cooperatives in financial services? What are the benefits to existing members? How transparent should the transactions be to members and the public to ensure accountability?

Banks are chartered to make money for their owners. The owners sell when they see it in their personal interests to cash out and reinvest elsewhere or spend their funds for individual purpose. Credit unions are founded on the principle of paying forward the wealth created by generations of members to be used for future members. It is common wealth, not private.

By blurring the lines by using terms like “bank credit union mergers,” the interests of a host of vendors is enhanced and the public perception of credit unions as no different from banks is promoted.

It also enables lazy strategy on the part of credit union CEOs. Organic growth requires innovation, constant focus on enhancing member value and an understanding of the competitive advantages of cooperative design. Buying out competitors may work in the open markets; that is not why cooperatives were formed.

It is hard to know if credit union bank purchases are working out or not. Are they in members’ best interests? Are the terms reasonable? How will the financial benefits be realized?

One difficulty in these deals is that only one side is required to disclose the terms: the selling bank. That disclosure can be further limited if the bank is privately held.

The Importance of Transparency

Because credit unions do not have stock and the resulting marketplace pressures that this reality places on boards and managers, it is difficult to track whether a credit union bank buy is working or not.

From 2015-2019 consulting firms estimate that the average premium to book value on bank mergers has ranged from a low of 136% (2016) to a high of 175% (2018).

This is just one element of disclosure for public companies. The bigger the transaction, the more details provided. For a stock company being merged, the details matter in that competitors might offer a competing bid if selling shareholders feel the price is too low.

For an acquirer, the impact of a transaction on future performance is an important factor to justify paying premiums over book value.

An Absence of Public Information

In credit unions, there is limited disclosure on the front end of a purchase. There are rarely any projections of future performance. There are undoubtedly reams of financial information required to gain both board and regulatory approval. But this data is not shared.

When deals are secret, no one can learn from the experience. Secrecy can lead to a lack of accountability. The process can be manipulated by interested parties to the transaction or those directly responsible to ensure member assets are not wasted.

Public relations messages dominate the information presented. This or that purchase will increase “service to the community, enhance customer relationships, provide greater expertise and expand growth opportunities” in a new market. But rarely are facts offered to support these generalizations.

Market-Based Transactions?

NCUA Chairman Hood defended credit union purchases of banks describing them as market-based transactions. He is only half right. For credit union members receive neither the financial data that bank shareholders receive when selling, nor the subsequent performance monitoring provided by a daily stock price.

Today credit union bank purchases are unknown events. They may indeed be win-win for all parties. Only one group of “shareholders” receives the information to make that judgment. Shouldn’t credit union shareholders have the same “level playing field?”

Examples of Financial Datapoints in Press Releases of Bank Purchases

Under the terms of the transaction, shareholders of Edon Bancorp will receive $103.50 in cash in exchange for each share of Edon Bancorp common stock for a transaction valued in aggregate at approximately $15.5 million. The consideration represents approximately 135% of Edon Bancorp’s tangible book value per share as of December 31, 2019.

On a pro forma basis, the transaction is expected to be accretive to SB One Bancorp’s 2019 earnings per share by approximately 8% and approximately 1% dilutive to tangible book value per share at closing assuming a transaction close in the fourth quarter of 2018 and 30% in annual cost savings. The earn back of the tangible book value dilution is projected to be less than one year.

CAMBRIDGE BANCORP AND WELLESLEY BANCORP, INC. TO MERGE

The transaction is presently valued at $45.54 per Wellesley common share, or approximately $122 million in the aggregate, based upon Cambridge Bancorp’s 10-day average closing price of $78.53 as of December 4, 2019. On a pro forma basis the transaction is expected to be approximately 4.4% accretive to Cambridge’s 2021 earnings per share and approximately 1.6% dilutive to tangible book value per share with an expected earnback period of approximately 2.2 years.

A MUTUAL BUYS A STOCK BANK

Under the terms of the transaction, shareholders of Damariscotta will receive $27.00 in cash in exchange for each share of Damariscotta common stock for a transaction valued in aggregate at approximately $35 million. The consideration represents approximately 185% of Damariscotta’s tangible book value per share as of September 30, 2019.

When entering the Navy, the instructor as part of our orientation to military life, said we should join two organizations: USAA for auto insurance and the local military credit union for checking accounts.

His advice has caused our family to use USAA for auto, and later home insurance, for over 50 years.

We receive two bonus checks annually as part of this relationship.

The first for $412 was the annual distribution (dividend) from the Subscriber’s Account, a portion of the capital base for this mutual insurance company. USAA stated that the amount was partly from the sale of their asset management company as well as from their overall net income.

That equates to three to four months of my combined auto/home premium payments.

The Senior Bonus

But there is more to come. The senior bonus paid in mid-February is for those with at least 40 years of membership. It is a partial distribution of the capital in the Subscribers Account held in my name. It will be an even larger payout than the annual dividend based on prior year’s payouts.

A growing number of credit unions are paying special dividends, interest rebates and holiday bonuses to members when 2019’s annual results are well in hand.

One of the vital strengths of the cooperative model is their relationships with their member-owners. These year-end special payments acknowledge the owner’s stake in the cooperative.

USAA’s 40-year senior bonuses show their recognition and the importance of long-term loyalty. Is there a parallel for credit unions in this example?

Each year the National Cooperative Bank compiles the top 100 US co-ops by total revenue. The listing for 2019 is here.

Several observations:

• The top three serve the farming sector. Co-ops serving agriculture dominate the list.
• Five credit unions are in the top 100 along with three other financial co-ops.
• The co-op at number 99, NFO, Inc. lists only $27 million in assets but generated $535 million revenue
• The Associated Press is the 100th largest co-op and the only co-op under communications.

Not Covered by Mainstream Business Media

Often co-ops fly under the business reporting news sources. No stock price to follow. Few opportunities to buy or sell. As member-owned and focused, there is less “public interest” in their performance and role.

They are most often referenced when they are doing something extraordinary as in a 60 Minutes Report on Land O Lakes, the second largest co-op by revenue. The CBS report provides an illuminating insight into the power of cooperative design and innovation, and its vital role supporting American farmers in a year when over 50% farms are expected to lose money.