Category: Co-ops in Capitalism

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Credit Unions Before NCUA, America’s Credit Unions or Share Insurance

Before the organizational titans of today’s cooperative system were created, there were tens of thousands of credit unions chartered by ordinary men and women.  Who believed in extraordinary possibilities.

A living example of this belief is Rincones Presbyterian Credit union, chartered on January 1, 1960.  This founding predates the “origins” of most of today’s credit union leaders.

At yearend 2023,  the credit union was $5.2 million in assets with 804 members.  It has three employees with an average salary of $32,745. Last year their loan originations increased 15.7% to total $2.3 million, the majority for autos.

Rincones in Spanish means a “small secluded valley,” or literally a nook. Located in Chacon, an unincorporated area of New Mexico with an elevation of 8,166 feet, harsh winters have given the area the name “Little Alaska.”

Their vision and mission are printed on the sign marking their “head office.”

Would credit unions be even more successful if they followed the Trust of these founders?

After all, that is what we print on all of our coins and  currency.

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A Study of US Credit Unions

“. . .our results indicate a serious misalignment between the legislation that establishes the credit union mission (a tax exemption in exchange for meeting the credit and savings needs of consumers, especially those of modest means) and the actual performance of credit unions under that legislation.”

Brief extract from: Who Consumes the Credit Union Subsidies? (Queen’s Management School, Research Paper 2022/03 written May 10, 2022)

The Challenge

How would your credit union respond to this academic conclusion?

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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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Reclaiming Civility in American Politics

Last night I attended a forum where Spencer Cox, Governor of u Utah and Wes Moore, Maryland’s governor discussed the idea to “Disagree Better.”  That is the initiative Cox has put forth in his term as chairman of the National Governor’s Association.

The effort is to model how leaders in positions of accountability can avoid polarization and conflict even when they disagree, but instead learn by listening to contrary points of view.

Cox initiated this approach to leadership in this joint campaign ad in 2020 with his democratic opponent:

(https://www.youtube.com/watch?v=w5_ajRH0QN8)

The two governors are supporting the Disagree Better theme by telling their learnings from each other’s policy successes.  They shared multiple examples from addressing childhood poverty, transgender rights,  and a “year of service” for high school graduates.

Their bottom line is that everyone wants to be heard—it’s the most fundamental principle of democratic governance.  Leaders need to model the ability to listen and the importance of showing up or a “presence” even if not in supporter’s districts.  They suggested  most issues are not binary, that is a right or wrong solution, but are open to multiple outcomes.

An example of a civic initiative by Moore was the year of service Maryland offers to high school graduates who may not wish to go on to college or work immediately.  Participants can choose from multiple areas of interest from environmental to personal care roles.

His observation is that “service is sticky.”  It can lead to lifelong friendships (eg military service), builds community and creates the capacity to unite to solve problems later.

In their interchange they talked how to avoid the public polarization on which much of media today thrives.  How do political leaders become the adults in the room when national politicians thrive on creating conflict?

Their response:  Never forget who put you in the position you hold.  People became angry when they feel they are forgotten.  Each of us stands on the shoulders of others who brought us to this point.

The Credit Union Lessons

Moore’s description of how ”service is sticky,” is exemplified in the most successful credit unions.  They raise up their members in the community and become an essential part of its character.

But I think the example of open, public dialogue that draws from each person’s leadership experience approach to their role, is one credit unions can learn from.

NCUA legal counsel has interpreted the law to say that two board members may not speak to each other except in the context of a public meeting.  But what if the public board meetings are not real conversations, with members reacting and learning from each other’s positions?  What if they are just written recitations of decisions arrived in advance?

The Kabuki theater of today’s public process minimizes  the professional capabilities of board members and of the professionals who are supposedly briefing them.  Instead staff read prepared answers to questions given in advance.   Credit unions and members deserve to see their leaders as actual leaders, not performers looking at slides or presenting prepared remarks.

The Public Forum

Another opportunity for real dialogue between credit unions and NCUA is the GAC.  When I was at NCUA, it was routine for CUNA’s governmental affairs committee to hold their pre-conference sessions with Washington staff and credit union members from around the country.  Ed Callahan, Bucky and I would be invited just to listen to these legislative and regulatory priorities or concerns.  Not to speak, unless asked, but to listen.

After presenting the annual Chairman’s update at theGAC, Ed and senior NCUA staff would then sit in the Hilton’s café space at tables talking with all comers—often for hours.  Impromptu conversations about whatever people wanted to say.

Today those opportunities are rare.  In discussing NCUA issues my experience has been that the dialogue often is about who is wrong or right.  It is not a search for options, or a better or more just solution.  It becomes a defense of the status quo.

This inability to learn by listening carries over to staff.  Following a board meeting last fall I wrote to ask for clarity on a single number—was the ratio on an annual basis or for the entire period? After hearing nothing for several weeks, I followed up and was told PACA had to approve the response.   The explanation came a week later.  The answer was at best unclear, and could have been taken care of in a 30 second phone call.

Whether one is an elected governor or an appointed NCUA senior leader, the most important role is modeling the behavior that you believe consistent with democratic governance.

Do you want to learn by listening or instruct by preaching?  Are you open to meeting with those who disagree, or just exchange written communications restating positions?  Are democratic norms encouraged or priorities set by a political agenda?  Do we remember we stand on the shoulders of those whose work preceded ours, or do we think the present belongs wholly to our dispensation?

Polarization or civility – can the cooperative system be the example that demonstrates  the values that America urgently needs for democratic institutions to succeed?

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

The “Home Court” Advantage

From Greylock Federal Credit Union:

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

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

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

A Video: What Good Business Looks Like

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

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

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

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

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

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

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

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

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

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

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

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

Fortunately, members are not idiots.

 

 

 

 

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A Winner’s Inside Account of a Very Close Merger

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

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

“In the Room Where It Happened”

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

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

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

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

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

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

The Critical Tactic for “Getting out the Votes”

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

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

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

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

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

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

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

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

Changing Tactics as the Opposition Organized

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

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

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

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

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

The Vital Tactical Change

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

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

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

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

Learning from the Past

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

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

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

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

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

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Three Examples of Credit Union Success

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

A Few Great Numbers (KPI’s)

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

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

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

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

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

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

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

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

Celebrating a Community That Cares

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

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

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

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

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

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

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

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

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

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

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

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

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Are Credit Union Members “American Idiots’?

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

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

The chorus of this complaint is:

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

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

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

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

The Setup

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

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

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

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

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

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

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

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

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

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

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

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

The  Members Saw Through the Scam Immediately

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

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

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

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

The VyStar Connection-It Takes Two to Tango

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

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

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

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

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

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

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

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

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

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

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

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

Where is NCUA?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Payout to Senior Executives

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

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

 

Part III

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

A Game Without Rules

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

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

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

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

Two Members Said:  The Emperor Has No Clothes

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

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

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

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

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

A second member Frederick Butterworth posted in part:

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

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

Regulatory Neglect Is Not Benign

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

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

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

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

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

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

Consequences and a Solution

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

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

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

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

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

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

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

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

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

Is There A Cure?

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

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

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

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

Transparency and Options Create a Truly Free Market

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

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

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

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

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

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

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

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

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

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

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The Pied Piper of Area Code 209,  or What Happened to the FCCU Members’ $10 Million? (Part I)

On January 26, 2022 I wrote a detailed analysis of the transfer of $10 million of members’ capital to a non profit organized by the CEO and Chair of the merging Finance Center Credit Union.  My position was that this was an improper taking of funds owned by the members, but asked,  “You be the judge.”

This is a followup analysis since the October 1, 2021 merger and funds transfer.

Synopsis:  Part I  summarizes previous events and questions raised about the money transfer.  Articles provide principals’ various explanations in  a CU Today story.

Part II presents the new Foundation’s data subsequent to the merger and former CEO Duffy’s activities as recently as January 2024.

Part III asks what happens now?

 Looking Back at the Merger Issue

Stockton’s (area code 209) Need for Credit Union Services

In the words of the CEO of a local community food kitchen for the needy, “Stockton is not a destination city.”  Its population of 322,000  residents is 42% Hispanic, 24% Asian, 19% non-Hispanic white and 13% black.  It is one the most racially diverse large cities in America, according to a U.S. News analysis based on 2020 census data.

It is not a wealthy city. Median household income is $71,612 and per capita, $29,095. (2022)  The poverty level is 15.6%.   And only 18% of the population over 25 years has a college degree.

The Stockton record summarized the city’s variable reputation in a November 2023 article:

“Stockton has topped another list and this time it’s not a bad thing.

“While Stockton’s long had a reputation of being one of America’s most miserable cities (thanks, Forbes), U.S. News & World Report is shining a positive light on Mudville.

“In its most recent report,  Stockton ranked among the best places to live in California. It ranked number thirteen, one spot below Visalia and one spot ahead of Bakersfield.”

Stockton was nationally recognized as one of the first cities in the country whose finances collapsed due, in large part, to unaffordable defined-benefit pension obligations.  This threatened its ability to deliver basic services like police protection.

The city is the ideal opportunity for a locally focused credit union.  The member needs are many.  And until October 1, 2021, this was Financial Center Credit Union’s (FCCU) long time home market. On that date the CEO and board transferred via merger all the credit union’s savings, loans, members and operational direction to Valley Strong CU whose main office is in Bakersfield, a city approximately 250 miles and a four hour drive away.

Setting Up the Transfer

On June 25, 2021 Chair Lopez and CEO Duffy of FCCU registered a non profit in California named FCCU2.   Forty two days later Chair Lopez signs the official Members’ Meeting Notice to merge FCCU into Valley Strong.  The Notice includes the transfer of $10 million to this newly established corporation, one of several merger disbursements members were asked to approve in the merger vote.

To my knowledge this transfer of member capital to the sole control of the former CEO and Board chair had never occurred.  It appeared to be a “taking  spoils” from the event. The amount, the singular nature of the transfer and the credit union’s prior five year downtrends under CEO Duffy raised the question of whether this money grab was proper.

CEO Duffy and his Sister Nora Stroh  had been the senior executives at the credit union since 1993.  At the merger date, the credit union had served the Stockton community for 66 years with Duffy as CEO for the final 22.   In the  years prior to the merger, the $635 million credit union recorded these trends:

  • A decline in loans outstanding from $176 million in December 2016, to just $102 million at the merger date. This is an annual negative growth of 10.3%.
  • Total members declined by 2,900 from December 2016 to the merger, a fall of over 2% per year. These declines in loans and membership were the exact opposite of the growth gains reported by all other segments of the credit union system.
  • Even with this decline in risk assets, the credit union continued  adding to reserves from earnings. The result was a net worth (capital) ratio of 20% at December 2018 and 17% in December 2020, nine months before the merger.  During this five years, the credit union at times reported a net worth/asset ratio of more than 100% of the loan/asset ratio.
  • In the IRS 990 filing for 2018, the three highest reported salaries of Duffy, CEO; Nora Stroh, COO; and Steve Liega, Accounting and Finance were a combined $3.1 million or 46.5% of all compensation for a staff of over 90 employees.

During this period of decline in members and loans, CEO Duffy maintained a high profile public image.  The credit union reported numerous local and statewide political donations and grants to area non profits in its annual 990 filings.

The Critique

In the years leading up to the 2021 merger,  CEO Duffy operated with the form, but not the substance, of a cooperative charter.  It was run as a family business promoting the public visibility of the CEO, versus the well-being of members.

My January 2022 post was called A Theft of $ 10 Million or Just Spreading Goodwill?  I provided multiple data points about the credit union’s loan and member decline, million dollar executive salaries, and net worth sometimes greater than 100% of the loan to asset ratio.

An example of Duffy’s personal PR efforts is a video from the Stockton Mayor’s office of a $1.0 million donation to Stockton Strong in 2020. The speakers state the money  is from the “employees of the credit union and the Michael P. Duffy Family Fund.”

The only credit union employee in the eleven minutes is Duffy. The video shows two mock checks of $100,000 each to charities feeding food insecure residents.  In the same year as this employees’ gift, the credit union’s outstanding loans declined by $40 million.

I can find no public reference to the Michael P. Duffy Family Fund in either California’s registrations or IRS 990 tax exempt filings.

CEO Duffy’s May 1, 2021 press release announcement of the merger included the following rationale:

As the CEO of Financial Center Credit Union for the past 21 years, my perspective on mergers has evolved . . . I have marveled at what credit unions of today’s scale can accomplish when they join forces . . . this merger is a true embodiment of the credit union industry’s cooperative mind-set. . . this merger represents a strategic partnership between two financially healthy, future focused credit unions committed to providing unparalleled branch access, digital access, and amazing service for the Members and the communities they serve.

There was no data or hard facts to support this sudden strategic insight. The only concrete future service promise in the Member Notice was  access to Valley Strong’s 19 branch offices which were an average of 250 miles from the former Stockton headquarters.

Press Followup of the $10 Million Question

CU Today published an extended story following up  the $10 million transfer to Duffy’s control.  The story, Leaders from Merged-Out Credit Union Head New Foundation, provides the participants’ explanations as follows:

The individuals involved in setting up the arrangement say it was approved by the regulators and is designed to fulfill the new merged-out credit union’s mission, while state and federal regulators issued vague statements saying no laws were violated and that the creation of the $10 million foundation was “a business decision” on the part of the credit union. 

Duffy’s specific defense of the $10 million was,  ”It’s not a diversion, but rather an investment in the communities it serves. This ensures that the funds will be used in the manner in which it was intended: to advance and support the needs of the members” 

When asked why it was not paid to members: “The board viewed its strategic decision through three lenses: members, team and community. . .It’s a symbiosis between the three and we wanted to continue the continuation while improving opportunities through cooperation vs competition.”

After Duffy’s twenty-eight years earning a living and achieving personal standing in Stockton,  he initiates the transfer of  $634 million total assets, $102 million in loans, 29,500 members and their $540 million of savings to another credit union’s control and leadership.  Prior to merger related adjustments, this “free” transfer also encompassed the members’ $107 million of capital.

Duffy kept control of $10 million in his words, “to advance and support the needs of members.”  After transferring all his leadership responsibility for managing  $634 million of member assets out of Stockton and away from local control (but keeping his CEO level compensation) he arranges to hold back $10 million for his personal use.  In order to serve the “needs of the members” he had just sold out!

Part II tomorrow will look at data and events since the merger.