Category: Co-ops in Capitalism

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The Rest of the Story:  How State and Federal Regulators Failed to Protect Space City Members in the TDECU Merger

This past weekend a Houston Business Journal article noted a 30-day gap in TDECU’s disclosure of its failure to receive regulatory approval for its  Sabine Bank purchase versus the date of the Bank’s online post.  During this period TDECU finalized the merger of Space City CU.  During the public controversy, regulators feigned impotence to do anything about this deeply flawed transaction.

To understand the significance of this regulatory inaction,  it is helpful to recall some circumstances of this merger travesty.

On May 25th, I posted a two part analysis of the proposed merger of the $147 million Space City Credit Union with the $4.8 billion TEDCU.

The Member Notice was mailed on March 28th, providing the public for the first time the details of payments to senior staff. All member voting ended May 14th.   The result was 862 of the 12,000 eligible members voted with 82% for and 18% against.   End of story?

A Cooperative Merger Tragedy

I summarized this sleazy event as follows:  This self-dealing transaction marked by conflicts of interest, lax board oversight and member manipulation is the latest example of internal corruption in the $2.3 trillion cooperative system. . . State and federal regulators seem oblivious or powerless to stop this internal pillaging.

Here were some of the merger specifics. In distributing the surplus from Space City’s 14.6% net worth, the top three employees received $6.750 million of which $4.0 million went to the CEO. He already had a cu paid retirement plan and a $3.250 split dollar life insurance plan.  This $4.0 million total was equal to 53% of the entire retained earnings of the credit union in its 60-year history!

Two components of the total payments to the CEO and COO came directly from TDECU, not Space City’s reserves.  This total of $850,000, approved byTDECU’s CEO and board, was an  outright “gratuity.”  What was the fiduciary responsibility of these two  persons with direct responsibility for arranging the merger and its approval by members when receiving direct payments by both parties?

To top off these senior staff incentives, members were given a “bonus” dividend from their collective savings.  However, it was designed so that members with the least amounts of shares  received the greatest percent return.  Those who had the most to lose received the lowest percentage.  Specifically all members with $289 in savings or less, would receive $100 bonus.  If the vote were NO, you get nothing.

In addition to this blatant self-dealing, the basic concern with this merger was that the financial performance of TDECU, the continuing credit union.  For the prior  15 months its financial performance had deteriorated.  It reported a loss in the first quarter of 2025, and a troubled loan portfolio with 2.01% delinquency (up from 1.13% prior year) and an allowance coverage ratio one third of the peer average.  Its balance sheet loan and share  growth had flatlined under the new CEO.

Most importantly to TDECU’s future ambitions, it had announced in April 2024  the purchase of the Many, LA based $1.2 billion Sabine Bank.  A  “definitive acquisition agreement” was in place with the transaction to be completed in early 2025.

“TDECU is on a growth journey to expand across the state of Texas and beyond,” the credit union’s CEO, Isaac Johnson stated.

The Outcome and Regulatory Silence

When askng the state and federal credit union regulators, when and who had approved the merger, these were the replies:

From the Texas Commission:  preliminary approval was given by Department (Commissioner) on February 6, 2025. . .

From the NCUA:  The merger was approved by Southern Regional Director Keith Morton on March 6. . .

So long before the Space City members knew any details of the merger (Member Notice dated March 28), both credit union CEO’s knew their two regulators had approved their self-serving actions. The financial statements with the Notice were also six months old, September 2024, not even for the full 2024 yearend.

The members knew nothing until receiving the March 28 Notice, but the credit union leaders who privately put it together,  knew they had the deal approved.

All the controversy after the members and public learned of these details went for naught.  The regulators had said OK. It was all over but the shouting, which occurred in June when the merger was completed.

So at this point the merger  just seemed another example of regulatory ineptitude, indifference or perhaps other factors such as legal or poltical intimidation preventing any relook. The members were unprotected, fleeced and alone.  Those charged with protecting members’ best interests feigned impotence, or would assert, It’s just up to the members.

The Regulators’ Double Speak

But on July 3rd an article appeared in the Houston Business Journal:  TDECU delays rebrand as it closes Space City Credit Union merger, terminates bank acquisition 

The article’s main points are that the Sabine Bank acquisition is off, the Space City merger is done, and that the rebrand using Space City is on hold.

The most interesting line however is the reporter’s final comment when reacting  to this post on the Sabine Bank website about the failed purchase which reads in part: 

“On June 4, TDECU and Sabine State Bank and Trust Company (Sabine) announced their mutual decision to not move forward with the planned acquisition and to terminate their agreement . . . to which the reporter added:

The termination was also not disclosed directly by TDECU via a press release or to the HBJ until July 2.

This is the example of regulatory double speak. This “definitive acquisition agreement” of Sabine needed only regulatory approval.  This means NCUA and the Texas Commission would make the decision because  this is where the oversight of the outcome would reside.

The deal got stopped, but was not disclosed by TDECU until July 2,  Sabine’s post is dated June 4.  Why?

The obvious answer is so the Space City merger can proceed unimpeded.  The  credit union regulators refused approval of the bank acquisition because they didn’t believe TDECU was up to the task.  But go ahead and take over these 12,000 members and their future for this is an event too minor to concern us.

The TDECU regulatory hold up did not begin on June 4.  The potential problems with this purchase and TDECU’s declining performance were obvious for at least six months from call reports. But proceed with the credit union takeover.

This regulatory double speak, two TDECU transaction and two opposite outcomes, is the most concerning aspect of regulatory oversight. The Texas Commission and NCUA did not respond to the deeply concerned members who spoke out only after they first learned how disgusting  this deal would be.   They were “nobodies.”

Besides the regulators already told the credit unions it was OK.  They couldn’t  go back now and change their decisions made in private because of members’ concerns.

By all the standards most members care about, the Space City merger heist was abundantly clear.  The regulators ignored their own words such as the members’ best interest and fiduciary responsibility. The members are sheep left to the care of wolves.  In this case both state and federal regulators aided and abetted their exploitation.

The Sabine Bank purchase was stopped by credit union regulators while they stood still during the acquisition of Space City at the very same time. TDECU’s capabilities were fine for credit union members but not a bank’s customers.  TDECU is now backing away from even converting to the Space City brand—a selling point in the merger.

Today we live in a political debate  where regulatory oversight is presented as one of two extremes:  laissez-faire, that is let the market decide or, regulation protecting those powerless against market exploitation.

But there is a third possibility,  worse than these two political extremes.  This is fake regulation deceiving  the public that regulators really are on the job and have rules and processes in place to ensure compliance.  But the regulators do not enforce their own rules.

The credit union market sees this regulatory GAP clearly and the zealous and ambitions are rushing to take advantage.  The result will be that the credit union members may lose their cooperative system because of regulatory neglect.

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Board Meetings and the Responsibility of Leadership 

The public facing role of leaders is especially vital during two important circumstances–when there is a transition at the top and during a crisis or moments of great uncertainty.

NCUA’s current situation meets both tests.  There is the unprecented removal of two  of the three board members by  President Trump.  This was followed by the immediate departure of up to 250 agency personnel as a cost savings ploy.  And as noted below, there has been a sudden increase in credit union regulatory closings.

NCUA’s public responsibility includes timely and informed transparency about events under  the agency’s control.  There is uncertainty about who is on the leadership team. Who is making critical decisions? How can we trust that NCUA’s actions or inactions are being properly considered or just carried on by rote?

Four FCU Closures in 60 Days

Since April 30, NCUA has taken possession of four FCU credit unions. Two were liquidated outright, one conserved and the other merged. This is a very high number in just two months in a relatively stable operational environment.

The four with summary data from the March 30 call reports are:

Name          Date NCUA  Action       1Q ‘25 Assets          1Q Net Worth

 

Unilever       April 30 liquidated       $ 47 million         9%

Aldersgate  June 18 conserved      $ 10.6 million             10.2%

Soul Community June 20 liquidated   $308K      100%

Butler Heritage  June 30 merged   $9.6 million               4.92%

Some notes on each case.

For Unilever this immediate liquidation without a conservatorship, suggests a major financial loss similar to the Creighton FCU $13 million shortage in June 2024.  NCUA has provided no explanation for the sudden insolvencies in either case.

Aldersgate with 10% capital, was chartered in 1956 to serve the Methodist church employees. It was conserved without explanation or even notice of who is now running the operations. NOTE: this morning NCUA stated it liquidated the credit union.

Soul Community was chartered on December 9, 2024.  At March, it reported 21 members with $308K in assets, but no loans or expenses.   All capital.   How can a new charter which naviagates NCUA’s arduous charter steps including both credit union mentors and examiner oversight, end up stillborn?

Butler Heritage is the one example of financial underperformance, but still with 5% net worth.   An ironical message on the credit union’s website assures members they are in good hands with NCUA oversight:

BHFCU is charted and supervised by the National Credit Union Administration.  NCUA performs annual examinations of the credit union’s records, policies, and procedures.  This ensures the credit union’s financial soundness and verifies operations are conducted in compliance with applicable laws and regulations.

This number of regulatory closings in two months is highly unusual.  The lack of any factual information about these FCU’s circumstances is unsettling.

This failure to inform the public undermines trust in NCUA’s supervision, not to mention a credit union’s reputation with sponsors like Unilever.  These are, or should be, unusual events.  No one is explaining them.

The silence raises the question whether NCUA is using their authority to coverup supervisory or examination shortcomings with NCUSIF funding. Were there annual exams? Supervisory contacts?Especially troubling are the similarities between Creigton and Unilever’s sudden dramatic losses of published net worth.

The Importance of NCUA Board Meetings

In this time of leadership transition and growing uncertainty, public board meetings are critical to understand what the agency’s leadership is focused on.

For the past 18 months,  NCUA’s board meeting schedule has been at best erratic.  In 2024 Chairman Harper was on medical leave for several months and Ostka on maternity leave.

Even when a full board was present, the substance was limited and hard topics or discussions avoided.

In the first six months of 2025  only two public meetings have occurred.  One was with the full board in February and Hauptman’s solo meeting in May.

The NCUA has said the schedule of future board meetings is “tentative.”   In a June 6th press announcement the Agency stated:  dates of NCUA Board meetings should be considered tentative until the issuance of a formal meeting notice. All future meetings’ agendas and schedules are subject to change at any time. 

Some have gone further to assert there is no requirement to hold a monthly meeting period. Rather board meetings need occur only when the need arises.

Public NCUA board meetings are both a responsibility and a recognition that the Agency’s leadership is accountable to credit unions and the public.

Some credit unions  have asked to end their mandatory monthly board meeting.  At this point I yield my pen to Ancin Cooley.

His response to the suggestion that  board meetings should be optional applies to both credit unions and NCUA.  They are an inherent responsibility of what it means to be a board member as he explains below:

Monthly Board meetings are not the problem.

They serve one critical purpose: cadence.

That cadence builds a culture of reporting, transparency, and member-focused accountability. It keeps the board engaged—not just symbolically but structurally. It’s a space to learn, ask, challenge, and listen. It’s where the member’s voice is supposed to show up. 

And if your board meetings are dragging or bloated? There are better ways to fix that than eliminating the meeting altogether. . .

There is a free-market capitalism running its playbook inside the cooperative movement.  . . 

We are watching it unfold in full view: 

  • Opposition to mandatory succession planning.
  • “Fiduciary duties of Credit Union Directors” 12 C.F.R. § 701.4? Routinely unenforced—more decorative than functional.
  • Supervisory committees? Once a critical layer of oversight, now neutered and marginalized—weakened to the point of impotence 

Each move—on its own—can be rationalized.

But taken together? It’s a pattern. A roadmap. Its “open season” on credit unions. . .

Let me get ahead of the most common rebuttal:

“It’s just removing the requirement to meet monthly. A credit union can still choose to meet every month if it wants to.” 

Yes, technically, they could.

But that’s not the point.

This isn’t about convenience or choice. This is about institutional welfare. 

There are some safeguards you don’t leave to chance, because they protect the collective health of the system. 

That’s why we don’t suggest seatbelt use. We don’t recommend elder abuse protections. We mandate them—because of the public trust at stake. . . 

This is the cooperative movement. And with that comes a higher standard of care—because the people advocating for these changes did not build these institutions with their own money. They inherited them. And now they’re chipping away at the very frameworks that make them trustworthy. 

I would hope all NCUA staff would read his words. Public duty is a public trust.  Regular public board meetings are an essential  aspect  of an NCUA board member’s obligation to well and faithfully discharge the duties of the office.

 

 

 

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Transforming the Unicorn-Members Fight for a Say in the Future of SECU-NC

For four decades (1979-2017) the State Employees Credit Union was led )by Jim Blaine. He believed in the power of cooperative design, principles and purpose to provide members a better financial option.

His approach was so successful that SECU soared in his tenure to become the second largest credit union in America.  At March 30, 2025 the credit union reported assets of $55.3 billion, members of 2.8 million with 275 branches (one in every county) employing 8,100 FTE positions.

Growing a Unicorn

Blaine’s studied belief in the power of cooperatives infused dozens of operational and strategic decisions.  He eschewed mergers preferring to partner with other credit unions such as Latino Community and Local Government FCU to support a strong state eco-system of credit unions.

His focus was strictly within North Carolina, not seeking to invest outside the members’ home state.  Within the FOM the focus was on those who were unlikely through economic circumstance or financial understanding to get a fair deal from traditional for-profit consumer financial options.

Creative Product Designs

His implementation of these beliefs resulted in some unusual product decisions.  The lending focus  was on home loans as the best way to build long term member wealth.  Products such as credit cards and checking were simple, low cost and without flair.  He created the only 529 on balance sheet college savings option by a credit union in America.

He provided  off balance sheet investment options in a partnership with the Vanguard Mutual Fund family of low-cost index funds. The credit union founded its own life insurance company for inexpensive term life insurance.  Through a $1 a month checking account debit he funded the largest credit union directed 501 C 3 foundation.  Annually it donates tens of millions to organizations serving the needs of citizens and communities throughout the state.  These grants were the credit union’s primary marketing effort-an example of earned versus bought media.

As the credit union system adopted risk-based lending, where a member’s loan rate was determined by their  credit score, Jim fiercely resisted this almost universal pricing practice.  He believed the model was discriminatory and perpetuated some of the consumer lending practices coops were meant to counter such as, those who have the least, pay the most for their loans.

Likewise, he did not believe in indirect auto lending in which the dealer set the member’s loan price based on the credit union’s buydown rate of the loan paper.

Internally the credit union grew large by staying small.  The 275 branches were given authority to make and collect loans for their communities.  They were aided with local advisory councils of members for decisions on scholarships, grants and even denied loan appeals. Vacancies were first filled from promotions within.  No commissions or bonuses were paid to staff-just follow the principle of doing the right thing for the member.

Most importantly the credit union’s capital investments were always on behalf of  members or the local community.  From a surcharge free ATM network for all users, not just SECU members,  to housing a museum in its main office building, to the Foundation’s investments in low cost teacher housing options, the money was to benefit owners and their communities, not for the institutional prestige of SECU.

Many organizations including  large credit unions use their home market as a resource to open up into areas outside their core.  Members’ resources do not go back into the local economy that funded their initial success, but into new markets.

Jim’s “old-fashioned” approach was not one emulated by others. He battled NCUA time and again over capital adequacy.  “Anything over 7% is stealing from the members” was one of his truisms.  At March 30, 2025 the net worth ratio was 10%.  In short, while reporting superior market impact and financial performance, his approach was seen by most peers as archaic, impractical and not with the times.

The Two CEO Succession Rule

One observer has asserted every successful credit union coop is only two CEO successions from losing their strategic heritage and advantage.   When he retired in 2017 Jim’s successor was his CFO Mike Lord.  A good description of Jim’s ten operational priorities and the succession evet is in this creditunion.com report.  The torch was passed to a believer who had worked at SECU for 41 years, or as one headline read, “Only the Lord could succeed Blaine.”

But when Mike Lord retired the board went outside the credit union apparently seeking a change agent with a different vision for the future.  Jim Hayes took charge in September 2021 leaving the $2.2 billion Andrews FCU as CEO.  He had previous positions at  WesCorp and NCUA.

Members Challenge the New Direction

The October 2022 SEU Annual meeting was going according to the agenda until the other business item.  At that point former CEO Blaine, now just a member, rose with a prepared statement.

He asked how recent credit union actions  were in the best interests of SECU members.  The event and issues are described in this blog, SECU Members’  Spirits Awaken.  The members approved Blaine’s two motions. one asking for a response to the six areas of concern.  The second read:  The Board update, publish, and make available to all member-owners its’ Strategic Plan for SECU no later than 90 days prior to the 2023 Annual Meeting.  

Six months after credit union fireside chats and other communications responding to the motions, Jim launched a public blog SECU-Just Asking! He re-presented the issues that energized members and employees had asked him raise at the Annual Meeting.The blog became the platform for members nominating their own candidates for board openings at the 2023 Annual Meeting.

Members Electing Directors

In 2023 the concerned members nominated three candidates who supported their views for the open board seats.  Around 14,000 members voted in the contested election in which all three board nominated incumbents were ousted.  The members had succeeded in challenging the changes via the election process.

In 2024 the election was again contested and almost 100,000 members voted. This time the  incumbents were  reelected, but the top alternative candidates received almost 30,000 votes. SECU spent substantially to promote incumbent s in this second  contested election.

The 2024 meeting was broadcast live on YouTube.  My closing blog observation was:  One cannot help but come away with the feeling that this year’s event was a reaction to the two prior meetings where the board must have felt things moved out of their control.  This time the outcome which had some excellent content, especially the member questions, was an exercise in the power of incumbency.

The Public Debate Continues

Since the launch in March 2023, the Just Asking blog has cumulative views of 2.53 million  and 14k posted comments, according to Blaine.  He says interest peaks as the board election cycle gets under way in July/August. Currently views average around 2,500 per day.

By any measure it is a blog followed by a significant number of SECU members and one presumes employees.  The blog is a unique member-owner effort in its longevity and substance trying to influence the credit union’s direction .

Jim Hayes, the new CEO implementing the changes challenged in the October 2022 Annual Meeting, left in June of 2023.   The board promoted the long- time COO Leigh Brady who has continued most of the internal and member-facing changes.

The controversy has somewhat slowed  the credit union’s momentum. When Mike Lord left in August  2021, the credit union was $50 billion in assets versus today’s $55 billion (a 2.5% cagr)

A New Unicorn for Coop Believers

Today as SECU evolves into a traditional credit union provider, it remains a Unicorn  for another reason.  It is the only large credit union to have contested board elections for the past two years.  This member-owner involvement is unique and yet what the coop design was intended to ensure.  The members’ role using the democratic principle of one person, one vote, is the critical governance function.

Member choice in contested elections is essential to active owner accountability versus the habit of internal succession controlled by sitting board members.

Democratic organizations (or countries) rarely fail because of external market competition.  Rather most failures come from within.  They are leadership and commitment shortcomings.

The two CEO successions from failure observation is a critical issue for credit unions.  Financial failure is very rare, but failure to grasp and enhance the unique business design and principles that are the foundation of every credit union can be quickly lost.  New visions and corporate aspirations can take credit unions away from their special strenths.

Credit unions were founded with no capital, just human passion, When that initial belief is not sustained, the accumulated net worth can just become the CEO and board’s treasure chest, not a member-enhancing resource.

Controlling Member Involvement

SECU’s policy and financial performance continue debated in daily posts,  The credit union’s  primary response has been to limit or eliminate  the members’ role in the annual meeting activity.

In the last two years SECU’s board has changed its bylaws to better control  the annual meeting and election processes.  The agenda has been closed to open member discussion.  The timing and procedure for member nominated candidates in elections have been shortened making it more difficult for non-incumbents to get on the ballot.

In short, the board has tried to shut down the effort that raised the original concerns in 2022.   The unique coop member governance check and balance on credit union priorities is being stifled to the point of elimination.   And following recent blogs, the NC state regulator is trying to avoid any oversight of the board ‘s  efforts to eliminate all member governance rights.

Why this Members’  Unicorn Effort Matters

This issues profiled by Blaine are not an isolated concern.  Other credit union members are facing similar challenges in being heard. Rarely does a merger go by without some members asking why?  Bank purchases using members’ accumulated capital rewards bank owners, not the credit union’s owners.

The  future of the country’s second largest credit union has implications for the cooperative system as member-centric financial alternatives. Members are seeing investments  disconnected from their well being or traditional purpose.

When owner involvement is silenced at required annual  meetings, a credit union’s future is in the control of self-selected, perpetual unelected volunteers.  That is a dangerous separation of responsibility from accountability when owners are left out.

There is now over $250 billion in collective reserves under credit union boards’  control.  Keeping the 100 million  coop member-owners from  influencing how these funds are used will bring temptations from all corners of the capital markets, brokers and hedge fund investors.

Boards will feel free to do whatever they choose, initiatives unhindered by either principle or purpose.  Dramatic visions of power and influence financed with billions  of members’ collective wealth willl be in play.

With members seen as only customers, just a means to greater ends, the cooperative alternative will have lost its way.

Speaking Truth to Power

From Socrates and throughout Old  Testament stories, the prophet’s voice has been a source of wisdom and discomfort for those in authority.

The idiom “a prophet is without honor” comes from the New Testament.  It refers to someone whose message is not appreciated by their own community.

It takes unusual courage to make a public stand against those in authority.  When done by someone with expertise and experience, they will be accused of failing to give others their turn at the wheel.

Blaine is blunt even caustic at times in his writing. He does not believe in nuance.  When others are not direct, he will call out lies.

He believes coops were designed and have the responsibility to correct a fundamental flaw in consumer financial services.  In his words, “those that have the least or know the least, pay the most for financial services in America.”  The problem has only gotten worse as income inequality continues to grow.

Credit, that is consumer borrowing, is the most important way  for almost all to succeed in a free market economy.  There are no scholarships for life’s essential purchases.

Yet when CEO’s and Boards’ tenures grow to oversee hundreds of millions or billions in assets, it is tempting to gravitate towards those well-off in life.  Making Tesla or Lexis auto loans is a better opportunity than members needing to buy a car at an Enterprise used car sale.

Events will influence how Blaine’s initial six concerns will resolve.  Local Government FCU, now Civic, has ended their partnership with SECU at great cost to both sides.  Risk-based pricing may or may not increase SECU’s consumer loan share.  The question is whether real estate lending continues to be a priority or whether it will convert to just another “conforming” service.

Blaine’s most recent effort to request the North Carolina regulator to preserve the rights of members in overseeing their coop may seem ironical given his history of battling NCUA when CEO.

But that issue is the bottom line now, not differing judgments about products or services. SECU is at a turning point, already taken by most. Will the rights of member-owners to be heard with their elected leadership be upheld?  Without that check and balance, there will be billions of dollars of members’ collective resources without any accountability.

I  will give Blaine the last word from this brief statement on the role of regulation in 2010.

(https://www.youtube.com/watch?v=E1tnDcE6Xjo)

 

 

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46 Credit Unions Close their Doors in Q 1 2025

Forty-six credit unions managing over $3.7 billion in assets cancelled their charters in the first quarter.   The credit union’s data is from December 2024 call reports.  Because they closed their doors, the credit unions filed no data for March 2025.

This total of closings is much higher than the 35 mergers NCUA reported in the first quarter.

The 256,000 members with with $2.4 billion in loans, have now lost their own institution some with  histories serving generations.  List with loan totals.

These credit unions ranged in size from the $560 million LA Financial to as small as $3,000  Asbury FCU in DC. This pdf with ROA and net worth is shown from largest to smallest by assets.

Not Financial Failures

On this listing, the weighted average net worth of the group was 10.7% at December.  Many had equity ratios much higher than this.  Two had net worth exceeding 30% including Gibbs Aluminum (KY) at 33% and Telco Roswell New Mexico at 34%.

Only 7 had a net worth ration below the 7% well- capitalized benchmark with the lowest two at 4.9% and 4.2% of assets. Six of these had negative ROA’s in 2024 but all were still solvent.

If these are not financial failures, why were the charters ended, largely by not entirely, via mergers?

Some would explaine that this is just the “creative destruction” that economists describe as an essential outcome from competition in a capitalist market system.  Underperformers are forced out of business and replaced with better options.  This is a necessary and healthy culling that makes capitalism strong, innovative  and prosperous for the greater community.

While there is an element of truth in this dynamic, cooperatives are supposed to be an alternative to the winner takes all mentality of market competition.  These coops are long standing with charters that go back over 100 years in some cases.

Two Internal System Weaknesses

I would suggest that these charter failures, and they are just that, of financially sound firms results more from cooperatives’ internal shortcomings, not external competition.

One critical deficiency is the lack of system support for some of these smaller credit unions who have decided to give up.  Surrendering charters versus adapting to new opportunities costs the industry between $100,000 to $500,000 each time a charter is lost.

Those amounts are the range of donated capital NCUA now requires for chartering a new credit union.  These 46 charters have a total “market” value as much as $23 million at the higher required capital level.  For example, Arise Community CU opened its doors on Juneteenth 2025 with over $1.0 million in capital donations.

New charters are extremely difficult to achieve with NCUA approving only 2-4 per year.  It would seem in everyone’s best interest, but especially leagues, CUSO’s, vendors and others supporting coop options  to find ways to preserve or transform existing charters to those willing to take the reins of leadership.  Press reports have said NCUA has over 90 new charter requests in various stages at this time. This suggests public interest in coops is still widespread.

Benign Neglect?

A tiny example of this system weakness, or neglect, is the smallest credit union on the list, Asbury at $3k and 100% capital.   The 100% net worth suggests that the credit union  has been self-liquidating for some time.  The credit union still has a web presence via a third party.  It was not invisible.

More tragically when one looks up Asbury’s history, the credit union was chartered in 1945–it is over 110 years old and insured by NCUA in 1972.  Virtually invisible and surviving, but  ignored by the system that created it.

The More Common Deficiency: Leadership Failings

The second largest credit union failure is NextMark FCU (VA) with $550 million in assets and 16.3% net worth.  The CEO and board requested members approve a merger with Apple FCU, which took place in the first quarter.

The failure of this long-time, financially well-off and large institution illustrates a second aspect of the industry’s self-inflicted errors.  There was no compelling financial, business or other shortcoming motivating this charter closure.  The CEO Joseph Thomas had served as President/CEO since October 1994 a period of 30years and 4 months before becoming Executive Vice President at Apple via the merger he orchestrated.

During his thirty years as CEO Thomas also served on many industry organizations. These positions include: a CUNA board member for 8 years; a board member of CUMA a DC mortgage CUSO for 22 years; Board member and immediate past chairman of the Virginia Credit Union League for 12 years; board member Worldwide Foundation for Credit Unions 7 years to the present; and board member for the World Council of Credit Unions, 5 years. also continuing.

NextMark gave Thomas a platform and standing to aspire to these positions  of wide spread credit union national and worldwide  responsibility. But now this opportunity and potential service paths are closed.  There is no successor CEO asThomas pulled up the ladder he climbed to participate in these other opportunities.  The independent charter ceased operations.

Mergers such as this destroy cooperative professional and volunteer leadership roles in communities, within the credit union system, across the country and, in this case, worldwide.  Fewer coop leader positions mean fewer voices and examples of professional excellence representing credit unions.

It is at best ironic that those who seemed to have benefited significantly from their CEO leadership role, would close this path that was opened for them.  What kind of leadership perspective did he bring to these other system responsibilities?

But this tragedy goes further than the  opportunities for credit union volunteers and professionals in their communities and beyond.  The following public comment is one member’s response to the merger proposal. It clearly shows that members know this kind of ending is not why credit unions were founded.

Her description is one of betrayal, not just of the cooperative principles, but moral failings by those with fiduciary responsibility to the member-owners.  Here is her perceptive  description of why this merger is so tragic and wrong not only for these members, but also for America’s coop system (subheads added).

I recognize that the merger is likely a foregone conclusion, and the number of votes cast by members will be minimal.

My experience with the NextMark Federal Credit Union dates back to 1977 when it was known as the “Fairfax County Employees Credit Union.” Over the following 20 years of membership in the Credit Union and employment with the Fairfax County Government, I served several years as a member of the Credit Committee and the Supervisory Committee.

The general concept of a credit union, combined with a defined field of membership, the value of working toward the common good of the members, and loans based on character, were central to the success and satisfaction of the credit union members. The credit union grew, as did the Fairfax County employee base.

A Change of Focus

At some point in the late 90’s or early 2000’s, the field of membership expanded in scope, the name changed to the commercial generic “NextMark” and our credit union began to resemble a commercial bank, with limited on-line offerings and variable customer service. Nothing terrible, just a move far from the underlying values of the credit union movement.

The specific observations that I believe should merit regulatory review, are the substantial financial incentives offered to several key staff members, contingent on completion of the merger. The amounts seem very high, but of greater significance is that these payments are contingent on the merger, which these key staff members are urging members to approve. I am aware of nothing that casts any doubt on these key staff members’ sound character or integrity.

Gross Conflicts

The issue is a gross conflict of interest created through this incentive process. These senior staff and volunteer members have a fiduciary responsibility to the credit union members, including advising on significant business decisions and implementing structural changes, such as mergers. The existence of contingent incentive payments for completion of the merger would seem to conflict with the fiduciary responsibility to the members. It would seem that a more sound approach might be to delay the negotiation of pay and benefit incentives until after the membership vote.  

Old Fashioned Thinking

Maybe everything is fine just as it is, and such incentives are likely commonly accepted in the commercial banking and business arena. Credit Unions are supposed to be a little different – although that may just be old-fashioned thinking.  

End comment.

A final note on this merger:  Senior staff and the CEO received according to the Member Notice “pay adjustment distributions to meet the continuing credit union’s salary bands, long term retention bonus, incentives already established, deferred compensation benefits, or severance opportunities” totaling almost $900,000.

The members received a $12 million bonus dividend for approving this combination and free transfer of their $409 million in loans and remaining equity to another firm.  How might these resources been re-invested in the credit union for members’ future or even seeding a dozen or more new coops?

The credit union cancelled its future and distributed a token portion of its value that members created  to be paid forward to benefit future generations.

Can a coop system with such behaviors routinely approved at all levels, ever hope to survive in the future?  Should it?

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The Loss of Member-Owner Coop Rights

This latest SECU Just-Asking! blog illustrates a growing tactic  by credit union boards to limit or end member-owner involvement in governance.  As explained below, the method is to unilaterally change the credit union’s bylaws to effectively stifle any member initiated election or annual meeting involvement.

Tomorrow I will show how this effort now in its third year has evolved at SECU.

The Full Blog (shading added)

Ms. Katrina Ray, N.C. Administrator of Credit Unions

June 20, 2025
Re:  NC Credit Union Division Failure To Protect Credit Union Member Governance Rights
Dear Administrator Ray,
North Carolinians, who are member-owners of state-chartered credit unions under your supervision, are at risk of losing their legal and statutory governance rights. This has become a safety and soundness issue for the 3+ million credit union members who hold over $60 billion in North Carolina credit unions.
As Administrator, you are not unaware of this situation given the extended controversy within our State. I would like, however, to give you a summary of what has occurred, using State Employees’ Credit Union, of which I am a member, as the example.
Lets focus on the SECU Annual Meeting: 1) In 2022 (and in all prior years back to 1937) SECU members could speak, offer resolutions and make motions at this business meeting, 2) in 2023 speaking rights by SECU members were restricted and the meeting agenda was altered to eliminate member participation in “new business/old business” discussions, 3) in 2024 the ability of members to speak was eliminated, only non-substantive resolutions were permitted, and the standard business meeting agenda was again curtailed.
In looking to the 2025 SECU Annual Meeting, a written request was submitted for a copy of procedures for SECU members to submit substantive governance resolutions in advance of the meeting for publication and consideration by the SECU membership. No procedures exist. SECU noted that advance resolutions would not be accepted at the Annual Meeting and that such resolutions could be submitted only via a separately called “special meeting” of the membership. This further restriction on SECU member governance rights was a novel invention and of course no policies or procedures for such a “special meeting” exist.
As Administrator, you are given credit for authorizing these eliminations of SECU member governance rights via the bylaw amendments approved by NCCUD on 6/30/2023. The specific amendment you approved was: “… (iii) authorize the Board to establish upon notice to the membership policies and procedures governing the order of business, format and conduct of the annual meeting.” 
 
It would appear that the SECU Board has used your general amendment authority as cover to purposefully curtail the legal, statutory governance and ownership rights of SECU members in their credit union. This has created an explicit safety and soundness risk for the future of all North Carolina credit union members.
 
If as Administrator, you did intend to authorize this abridgement and curtailment of credit union member governance rights; you have created a business entity unique among all insured financial institutions in the U.S. and have authorized governance practices which would be illegal among most public U.S. businesses.
This unparalleled and growing impairment of basic shareholder-rights is being followed carefully by the credit union and banking communities in North Carolina and on the national level.
Would hope you would use your statutory authority to address these issues on behalf of all 3+ million North Carolina credit union members.
Sincerely,
Jim Blaine, SECU
cc: SECU Board of Directors
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A Member’s Letter to the Board Chair

In the next week I will present three active situations where members are deeply unhappy with their Board leadership.  In every case the board has tried to ignore, at best, or at worst, silence, these efforts at  member engagment.

These cases are unusual but not in the board’s hunkering down and ignoring the owners. Rather it is in the members’ efforts to share publicly their frustration trying to engage as owners.

There are similar member attempts that have yet to rise to public visibility.  These cases are just a few of the concerns that members and even employees have shared with me.

Today’s example is from a member-owner and long time credit union professional who started his career with this credit union.  He then moved to manage a national CUSO of leading credit unions and became a consultant for several more credit union organizations.  In other words, he is a true believer.

This is his letter to the Board Chair.  I have added the subheads and deleted specific names or identifiers in the letter.

April, 2025

Mr. Chairman:

Since I first began to discuss the matter of board governance almost 10 years ago with (names omitted) and in my further discussions with you, I have stood on the position that it is one of the primary responsibilities of the Board to continuously improve, enhance and encourage member/owner participation.

Our credit union should represent the best principles of the co-operative business model, and my board should be acting in a manner that builds on those principles that make us different from for-profit financial institutions.  As we have discussed in the past, the continuation of the current practices surrounding the board nomination and election process and the annual meeting fly in the face of such principles and practices.

The Annual Meeting

Let’s address the issue of the Annual meeting first.  How exactly can you defend having a 9:00 am meeting on a Wednesday as having anything but a negative impact on encouraging member participation?  How can you defend the restrictive rules that control and limit the agenda and discourage any member interaction with the board at the meeting?  How can you defend the minimalist attempt to notify and promote the meeting to the owner members?  Where is the big banner proclaiming the date, time and location of the meeting on the credit union’s website? How about some signs or interactive messages in the branches? How about a social media campaign to your members using email and text messaging to encourage their participation?

I dare you to ask a teller or even a branch manager about when the annual meeting is being held, I have, and I was embarrassed for them.  How about the search function on the website?  Try entering, “Annual Meeting” and see what you get.

What are you afraid of?

What are you afraid of?  Give me one good reason why any member- owner should not be able to come to your meeting next week and ask you or XXX a question about anything they want concerning credit union governance, operations or products and services.  Why shouldn’t one of your owners be able to ask you what a board member actually does to earn around $40,000 per year, why the 2023 Form 990 reflects a Split dollar benefit loan to the former fired CEO in excess of$10 M, or what a subsidiary LLC does to earn $8.5 M per year?

Solutions Rejected

What really upsets me is that we have talked about actual solutions to these issues more than once.  I have even written and submitted sample by-laws which would require the nomination of at least two qualified members for every open board position so that there is an actual election that could be easily accommodated using electronic voting.

We have also talked about the need for term limits to make for a healthier board turnover and broader owner participation.  I have no complaint about the qualifications of the current board, but with several hundred thousand owners you can certainly identify enough other highly qualified options to have a real election for board positions.

Incumbents should be required to supply some modicum of justification for their re-election to a very important, difficult and highly compensated position.

An Oligarchy

The word “oligarchy” gets tossed around a lot today.  I would suggest that the current nomination process and pursuant “Non” election process along with the seemingly secretive and hidden nature of the Annual meeting is signal to any half-way informed owner that the credit union  is in fact a practicing oligarchy.  A governance model in which power rests in a small group.

The second of the Rochdale 7 Cooperative Principles is democratic control and the third is member economic control.  I ask that you and your fellow board members make an effort to make sure my credit union is the best representation of those principles.  I am hopeful that my suggestions will finally get the attention and action they deserve

S. A Lifelong Member

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A Member’s Question

If credit unions are a special idea about individuals’ collaborative financial efforts, we should care about human values and human rights when implementing this design.

I received the following from a member who had read several previous blog posts about mergers and just lived through the experience:

Recently, I was reading some of your articles, such as from 2017 regarding the issue of unjust enrichment by insiders in mergers. (Credit Unions for Sale) I didn’t realize what a longstanding problem this has been.   It seems like the whole structure is designed to enable those in power, in charge, to take advantage of those with less power, authority, resources, knowledge, and education.  

I don’t know who are the worst actors – the regulators who give the illusion of regulating to protect consumers, the BOD’s who are supposed to be looking out for members’ best interests, or the executive management who selfishly negotiate these deals at the expense of members, and try to convince members to give up their rights, their credit union, their net worth.   It’s a sickening rigged game. 

I see the motivation for the insiders who have millions of reasons for this, but how does the BOD benefit? Or regulators overseeing an industry decline in numbers and reputation?

A Rigged Game

Welcome to what democracy looks like with one- party government.  No loyal opposition.  In fact, no opposition, just obedience. Be a loyal consumer.  A satisfied customer, but not an owner.

The theory of cooperative design is that the one vote per member in election of their board members will act as a democratic check and balance to ensure the owners’ interest always come first.

It is an extremely rare event for those in power to fulfill this voting practice.  Boards become self-perpetuating; members are rarely encouraged to attend let along participate in the annual election.  And there is no voting, just acclimation for the board’s nominees.

The result is that boards and CEO’s believe they alone are responsible for determining the priorities and future of the members’ organization.  Even if this means transferring a long-standing, sound communal charter’s legacy  to another credit union where owners receive nothing and those last in charge cash out, often big time.

Democracy in a One-Party State

The defense offered by the regulator and the credit unions involved in these private deals is the members voted for it, often by overwhelming margins.

But what kind of a “vote” is taking place when those in charge control all the financial resources of the institution, the means for direct member and public communications, the timing and presentation of the election process, and the representation of regulatory oversight and approval?

The situation is the authoritarian’s dream of one-party governance. This is pretend democracy.  The people are told to vote for what the Board and executives will proclaim is a better future; albeit no longer under your control.

The results show the effectiveness of one-party rule.  Over 99 percent of mergers are approved.  An incumbent’s sure-fire strategy for self-enrichment.

To assert, as NCUA and state regulators routinely do, that the members’ voted for this is an  abdication of responsibility for member-owner rights. It destroys the core of credit union character. It demonstrates regulators as powerless or clueless in the face of this predatory  cooperative plundering of members’ equity. There is no governance by members, just subservience.

There Are No Limits

Ambitious CEO’s and boards see these free takeovers being negotiated daily.  There is no limit to the combinations being planned.  Just payout the initiators and receive the billions now up for grabs-for free.  The stakes will only get bigger, the payouts more creative and humongous, and the capitalistic model of acquisition dominate cooperative strategy.

But the history of one-party rule is not encouraging for the  long run.  The consolidation of power and resources grows, the lack of any meaningful role for owners is blatant,  and the sameness of all the “better products and services” becomes apparent to all.

Ultimately, the people will see what the member above observed.  The media will highlight the gaps between purpose and practice.  And the disruptions will start, small isolated at first, but real and threatening to those in authority.  Examples are already underway.

Most importantly, credit union leaders and members will learn what one-party rule means when this occurs with the federal regulator, not just in their individual institutions.  Then maybe the virtues of democracy will be embraced once again.

 

 

 

 

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A Critical Leadership Capability with Example

A professor in the Kellogg School of Management at Northwestern was asked the most important skill he learned in his consulting work.  His answer:  Asking the right questions.  He commented:

PhDs, like many students, excel at defining problems by asking the right questions.

“It’s important everywhere—in academics, in industry, and otherwise—to ask the right questions and choose what to work on, more so than actually knowing how to figure it out,” Gordon says in his keynote address for the Tepper School of Business at Carnegie Mellon University. “The skill is really crucial, and it will take you everywhere.”

I would add to his list, the most important issues of public policy which confront credit unions.

An Example: Questions of Public Policy Priorities for Credit Unions by Ancin Cooley

If Not Now, Then When?

I try to wade into these conversations with as much nuance and care as possible. I understand the layers, timing, political cycles, and just how hard it is to win in Washington.

So when I say this, I say it with full respect for the effort that went into protecting the tax exemption, again. That work is meaningful. It matters. And I don’t take it for granted.

But now that we have a slight intermission before we hit repeat on this tax fight ritual. —I have some honest questions.

Because it seems like every year, every cycle, this issue is always the centerpiece of our advocacy narrative. It’s always the rallying cry. The headline. The thing we organize around.

And my question is:

When do we get to talk about something else? Not instead of—but in addition to?

When do we apply that same level of coordination, messaging, energy, and visibility to:

Member-facing issues?
Governance questions?
Structural threats?

For example:

Can we discuss why America’s Credit Unions is advocating against succession planning requirements?

Can we discuss why America’s Credit Unions continue to pursue changes that would further weaken the role of supervisory committees? We lose several credit unions annually due to a lack of basic internal controls.

If we can mount national campaigns to protect our tax status—and we should—then why can’t we have a transparent, public conversation about the internal reforms that will shape the future of cooperative governance itself?

When’s the right time to advocate for member-facing issues to help credit unions grow and deliver more value to their communities?

Mainstreet” Issues like:

Student loan reform affects members’ financial health and directly impacts credit unions’ bottom lines (past dues, charge-offs, and additional provisions).

Corporate ownership of homes prices out local families and limits credit unions’ ability to provide mortgages (Most credit unions over $1 billion have large mortgage portfolios).

These are win-win opportunities. They intersect with both member interests and credit union sustainability. They build relevance. Trust. Brand strength.

But they rarely seem to rise to the top of the agenda if discussed at all.

I get that during the ceremonial tax battle, it may not feel like the right time for deeper, messier conversations. But that leaves me with the final question:

If not, then… and not now… When?

I would add: What Questions are you, your board or your external consultants raising for your consideration?

 

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The Art of the Steal

Financial oversight policy by the federal government is often presented as two distinct opposites: deregulate so the free market can work its wonders or regulate to prevent the worst instincts of capitalism from harming individuals or the greater economy.

However, there is a third policy option.  I call it fake regulation. The regulator takes action to prevent some excess or outright harm from occurring, but then never enforces the rule.  The market quickly sees these are only pretend guardrails. And the predatory behavior expands in ever increasing incidents.

The Merger Problem Becomes Public

In 2017 the situation of credit unions buying out and paying off their kin was written about by a number of  commentors in articles such  as:

The Dark Side of Mergers, by Peter Strozniak, March 27, 2017 Credit Union Times

Time to Talk About an Ugly Truth in Mergers by Frank Diekmann, March 6, 2017 CUToday

Credit Unions for Sale? By Chip Filson, February 14, 2017, Credit Unions.com

In response to the growing disclosures of large payments by credit unions openly seeking acquisitions, in June 2017 NCUA proposed an updated voluntary merger rule.  Folllowing  a lengthy comment period the final rule was adopted in June 2018.

It is helpful to review the specific statements and intent of this final rule when looking at concrete circumstances today.  For many actual events seem to suggest the rule isn’t in force. There are no longer any regulatory roles or constraints being exercised.

What the Final Rule Required

 

The  rule included important statements about NCUA’s role and scope of authority when approving voluntary mergers.  For example:

“Several commentators . . .suggested that NCUA’s role is limited to safety and soundness concerns.  These comments are not accurate.  The FCU Act explicitly requires the “Board’s prior written approval” before FICU mergers with another FICU. Moreover, as detailed in the preamble. . . the FCU Act requires the board to consider six factors in determining whether to approve FICU mergers.  Clearly, the FCU Act expects the Board to consider the effect of  the proposed merger on the credit union members, and gives the Board authority to deny mergers that do not, in their judgment, serve members well. . .

Several commentators stated. . .that members have no right  to the net worth of a credit union except in liquidation.  This assertion ignores the reality that hundreds of credit unions annually return excess net worth  to members. . .A credit union in good condition has the option of voluntary liquidation  instead of voluntary merger. . .

The Board agrees that mergers should not be the first resort when an otherwise healthy credit union facing succession issues or a lack of growth. . .

The Board acknowledges however that not all boards of directors are conscientious about fulfilling their fiduciary duties. . .

The Board also confirms that for merging credit unions, the NCUA’s regional offices must ensure that board and management have fulfilled their fiduciary duties under 12 CFR$701.4.

In contrast to commenters’ assertions, the statutory factors the board must consider in granting or withholding approval of a merger transaction include several factors related to safety and soundness, such as the financial condition of the crediit union. . . and the general character and fitness of the  credit union’s management. . .

Concerns with Financial Disclosures

The impetus for the updated rule was driven in large part by the financial incentives being used to acquire other credit unions.  In the initial June 2017 draft proposal, the staff was asked by a Board member what percentage of recent mergers reviewed involved increases in compensation?  The staff response said 75% to 80% had significant merger related payouts often in the low seven figures.

The final rule in 2018 had extensive examples of “merger-related financial disclosures” that must be provided members.  Several comments explained the scope and reasoning included in the new rule:

A “but for” test determines whether the senior management official or director would not otherwise receive the compensation “but for” the merger. . .

Disclosure includes, “all increases in compensation or benefits that a covered person has received during the 24 months prior to the date of the approval of the merger plan by the boards of directors of both credit unions. . . “.

The rule applies to all compensation or benefits received in connection with a merger transaction including early payout of pension benefits and increased insurance coverage. . .

. . . the proposed rule requires both the merging and the continuing credit union to submit board minutes to NCUA that reference the merger during the 24 months preceding the date of the approval of the merger plan by the boards . . .In several recent mergers, a review of board minutes has shed light on potential conflicts of interest, including a situation where a credit union chief executive officer voted on a merger proposal that included significant merger related compensation for himself. . .

Furthermore, members’ interest in the transaction extend beyond practical matters of access and service, because the merging FICU’s net worth belongs to the members. . .

The basis for NCUA’s concern about financial disclosure follows with emphasis added:

The prospect of a significantly higher salary at the continuing credit union could be a motivational factor in an individual’s choice to advocate for a merger both internally within the credit union leadership and with members.  Credit union management may well have considerable influence with members, who may look to  management for trusted opinions and advice about whether the proposed merger is in the best interest of the credit union and its members.  It is not unimaginable that the prospect of a significantly higher compensation package could affect an individual manager’s thinking about the desirability of the merger. . .

Houston, We Have a Problem

The Space City CU merger proposal with TDECU violates a number of these explicit statements as well as the intent to protect members’ interest in NCUA’s merger rule.

The initiative was led by the CEO.  The CEO and COO are paid directly by TDECU $850,000 in the transaction, a direct conflict of interest. These are described as “non compete agreements.” This is a nonsensical justification. Neither has ever worked for TDECU.  Now they turn over their entire operations to TDECU after “competing” with this $4.8 billion firm for 30 years and are paid to “non-compete.”

The CEO is to be paid $3.5 million for not working for the next ten years.  In fact he was the person who decided to close the credit union and turn over operations to TDECU and leave the workforce.  The amount, as stated was in “honor of his retirement and in recognition and appreciation of his long tenure and outstanding performance.” This rationale is belied by the facts.  Of the credit union’s net worth, only 39% is from his operational earnings and 61% from the net worth transferred by four other credit unions in mergers.

The members who own the net worth receive $346 each on average, or about 25% of their total ownership stake.  TDECU has announced a definitive acquisition agreement to purchase Sabine Bank five months before the CU merger announcement. The bank owners will certainly receive their entire net worth plus a premium.

However, the credit union owners are asked to approve the same exact economic sale transaction as the bank owners, but will receive only a fraction of their ownership stake. The five employees arranged to pay themselves an amount $1 million greater than the 12,000 members whose loyalty built the credit union.  Management is acting like owners, free to do whatever they wish with the credit union, and not as stewards for the members’ interests.

TDECU is showing credit union member-owners they are less worthy of equitable payment than bank owners.

The Manipulated Voting Process

Space City’s final defense and where the regulators could justify their intentional inaction is that the “members voted for it. “

But member voting is a process without substance.   All of the critical financial disclosures were revealed only six months after the September 2024 joint announcement of the agreement.  Once presented the facts, there was no opportunity to organize and find other options or learn critical factors in this decision.

There was no factual information why this was in their best interest or any relevant reasons why TDECU was the best option—or whether any other options were even considered.

In the Member Notice, it is “recommended” by “your” board of directors to vote yes.  And for that vote, members would receive  between $100 to $1,000.  Vote no and you will get nothing and the implied continuation of the same leaders who decided to close the credit union.

The required member vote is nothing more than a managed event to ensure there is no time or ability for anyone opposed to raise questions or mobilize a counter view.  Management in these so-called elections holds “all the cards” and resources.  Management does not respond to questions from the press or members.

The only requirement to approve is that a majority of those who bother to vote, vote Yes.  There is no minimum number as for example the 20% requirement in other charter changes.  So only a tiny fraction of members participate. Normally the majority of votes are by mail-in ballot where the board says to vote Yes.

To call this one-time vote by members democratic in any sense of that term is a mistake.  It is the same voting process followed by authoritarian governments in such well known democracies as Cuba, China, and Russia.

The System’s Problem

This relatively small voluntary merger of a 60-year old, financially viable credit union, may seem inconsequential for a $2.4 trillion system.  But the details demonstrate the complete absence of any the oversight NCUA clearly lays out in its rule.

The two credit unions publicly declare the merger must pass regulatory approval, implying all they present and do has received the blessing of NCUA.  However, it is a blessing in absentia.  The data and reasoning is misleading, overtly self-dealing and provides no substance for a member-owner to make an informed decision.  But what the heck–the regulator approved it.

The Absence of Regulatory Oversight

There is still one final step in NCUA and the Texas Credit Union Commission’s role.  They must approve the final charter cancellation.  In the past this is a nonevent.  Regulators have not even required  the results of the vote be disclosed when members ask  for details.

Will either the state or NCUA look at the totality of this event and decide  if, under the rule, members’ best interests are being served? Is this cooperative charter termination with these payments the best option?  Might a small fraction of the planned $11 million  payments be used to find new management, request new volunteer leaders from the 12,000 members and give the owners back their credit union?

That would be the common sense and right thing to do.  It would take courage.  And if done, it would send a signal to the entire movement that the era of self-dealing and hypothetical future visions is over.  If a credit union wants to buy another credit union and take over all of its resources, then members need to have a real ownership say and return.

Today there is an absence of any regulatory presence and studied inaction  in the face of misinformation and self-dealing.  This silence has encouraged mega mergers by competitors in  local markets, across state lines and, in one case, across the country.

These proposals involving credit unions with tens of billions of assets are not because some superior business benefit is now feasible for members.  These mergers are by credit unions with all the necessary resources and capability to carry out any business initiative that would better serve members.

Mega mergers only benefit is to the ambitions of CEO’s and their boards who believe size correlates with success.  That view shows they have not looked at the track records of their billion dollar peers about the actual outcomes when exteral acquisitions are prioritized over internal growth.  The record of the largest credit unions shows that internal growth is stronger, more stable and effective than external firm buyouts.

The Combinations Undercut Cooperative Advantage

Moreover, these mergers of sound credit unions ignore the most important system reality. In these combinations, not a single new member is added, there is no market share gained,  and no new markets entered.

Rather, these combinations reduce the number of independent firms with their own volunteers and market strategies,  eliminate leadership opportunities for employees and volunteers, reduce independent community contributors and most critically, destroy the collaborative legacy of generations of members who sought  more control over their and their children’s financial futures.

These mergers reduce the diversity and roots that have made credit unions a unique force in financial service options for America.

Who believes that the 12,000 members of Space City will now have a better financial relationship opportunity as part of a 380,000 member organization (soon to be 470,000) versus their current circumstance?  And if someone wants that option, they can join TDECU today.  But why eliminate the more intimate, personal option now available?

Transparency Does not Erase Wrong Doing

Since the 2018 voluntary merger rule was passed, transparency has illuminated an increasing cycle of cooperative self-destruction driven by institutional self-interest.

The regulators have abandoned the standards they explictly laid out as the foundation for their updated meger rule.  The rationale appears that if you tell people you are taking the members money for whatever reason, then conflicts of interest, self- dealing or simply exhorbitant enrichment are fine.

I know of no illegal activity that is absolved by disclosing the facts of the deed.  But that seems to be NCUA’s interpretation.  CEO’s are increasingly brazen, as in the Space City example, to ignore all fiduciary standards.

There is no cop on the beat.  The temptations will only worsen. In one California merger the CEO and Chair transferred $12 million of members equity to their sole control as part of the merger distributions. NCUA said and did nothing.

Merger stories are clothed with common PR phrases about similar cultures, values and enhanced opportunities for innovation in an evolving marketplace. There is nothing more than marketing rhetoric in these so-called merger plans.

How Healthy Mergers Damage the System’s Soundness

But the current harm is real. Mergers of sound, long serving credit unions destroy the legacy of relationships on which every firm depends for success.  They wipe away the past commitments and memories.  New brands then try to portray a new reality but often show how shallow the relationships have become. For example,  Empeople credit union or the retirement community sounding EastRise FCU.

For cooperatives, legacy matters. It is a design  chosen by  a community of interest wanting to take control of their future with collective action.  Carrying that legacy to the future perpetuates this human effort as opposed  to the cycles of firm destruction accepted as part of capitalism. A credit union instead conserves and passes to the future  the shared interests founded on local focus, knowledge and community spirit.

Instead of building on this foundation to work together, merging stable credit unions results in just another generic financial institution removed from any past connections, constantly seeking new markets to conquer or expand.  The past is over and done with.

While this approach might appear to work for a while, it sacrifices the most important foundation for any successful enterprise, the power of human agency.  Agency means  being part of a collaborative effort, that is a person’s belief  that I am accomplishing something important in my life.  This kind of relationship creates institutional resilience that no amount of resources can achieve. Sometimes we call these outcomes trust and hope.

Space City is just the latest poster child of this growing Art of the Steal.  Its reasons are ridiculous and it may generate member resistance far beyond Houston. For the wider problem revealed in these transaction is that some credit union leaders don’t seem to know for whom they work.

One Voice

A Space City member with deep concerns with this merger called and asked,  Who do I go to for help?  The person had spoken up, answered press questions, encouraged her friends to vote no. But she felt all this was in vain. Just her alone.

My response was you are doing exactly what democracy requires. It is not about creating a popular uprising to overthrow entrenched leaders in a moment of confrontation or voting.

One person standing up and publicly raising their voice will be seen. It will encourage other like-minded persons to learn their concerns are shared. Her courage will become contagious.  It might even spark a regulator to do the job they are empowered to do.

Just one voice. It only takes one match to light a fire. Then watch the members respond with hope and goodwill.  Credit union democracy needs many more  such member-leaders.

 

 

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Whose Voice Do You Follow?

in the late 1970’s Norman Gazer was a relatively new examiner in the Credit Union Division of the Department of Financial institutions (DFI) in Illinois. He had a bookkeeping background, understood accounting, and had a very quiet, reticent almost shy demeanor.

One of the DFI’s goals was that every one of the over 1,000 state charters must have an annual exam.  This must be by the DFI examiners  or completed by an independent CPA firm using our format.

An essential part of the annual exam was the verification of lndividual loan and share account balances.  This was the primary function of the supervisory committee. In larger credit unions this would be done by an outside firm.  When there was no record in smaller credit unions, the examiners would attempt to test the accounts.

Norman did this in two ways.  He would run his own adding machine tape of the individual ledger balances to see if they equalled the general ledger total.  Were their suspense accounts?  Late entries etc?  This was before computers.  In some cases the cards were still hand posted.

I knew we verified  external investments by sending out confirmation requests to firms holding these balances. But how did he verify members?  He said it was simple.  He just looked up the names in the telephone book and called.

It was this effort to verify accounts that led Norman to discover the credit union defalcation at Scott, Forseman and Company, the publisher of the children’s first reading books: “See Spot Run.”  After repeated attempts to balance the share accounts, Norman determined the credit union manager of this $1 million single sponsor, was keeping two sets of books.

When confronted, the manager handed over the second set. The defalcation was almost $1.0 million.Norman’s documentation persuaded CUNA Mutual to cover most of the shortfall under the credit union’s fidelity bond.

Whose Voice Do You Listen to?

In America today almost anyone can set up a platform to share their views about any issue.  Politicians routinely present themselves as the voice of the neglected, unheard or angry.

We often choose the voices to follow by two criteria.   Do we generally agree with the person’s point of view whether the topic is professional, personal or political.  Secondly, we tend to believe those in leadership, or individuals whose opinions are based on their professional experiences and credentials (professors, doctors, lawyers, or regulators)

One of the commentators i respect is Ancin Cooley.  His  succinct postings are well reasoned and from extensive on the ground interactions. His comment on the recommendations of America’s Credit Union lobbiests to reduce NCUA rules caught my attention.  And reminded me of Norman’s story of why we have supervisory committees in the first place.

This is Cooley’s response to  ACU’s proposal to  eliminate supervisory committee and succession planning requirements by NCUA.

What are we doing?

“Now its eliminate succession planning and Supervisory Committee audits?

We’re literally watching member money be used to advocate against the very guardrails designed to protect them and the institutions they trust.

At some point, someone has to throw a flag on the play. Come on y’all….

Succession planning shouldn’t even be up for debate. It’s basic governance. It’s only an issue because if there is a succession plan in place, it makes it difficult to merge the credit union when a CEO retires.

And now, Supervisory Committees? Yes, they can be a pain, but the function must remain intact and unweakened.

This one’s been locked-and-loaded for a while, especially given the quiet, strategic push to weaken audit committees through legislative efforts over the last twenty years.

If we let this trend continue, the very banks we claim not to be will end up with stronger governance and audit protections for their shareholders than we offer our members.

I’ve been asking this question repeatedly: Who do our associations and leagues actually represent?

The members? The credit unions?

Or the CEOs who sign the check for the membership dues?

Because if you said members—if you truly represent the membership—let me be clear: this proposal is not in the interest of any member-owner.

No bank shareholder would vote to eliminate their audit committee. Why? Because they have their actual money at stake.

Our members deserve the same level of protection. Their collective capital deserves the same level of seriousness and protection.”

This is plain spoken common sense by a person who knows what he is talking about.  But there is still a worse outcome than bad counsel.

What could  be more disastrous? Complete silence. Especially by those in positions of responsibility for credit unions.  Tomorrow I will show how voicelessness communicates approval of bad behavior in The Art of the Steal.