Category: Co-ops in Capitalism

Posted on

The Cooperative Way to Manage an Isolated Branch

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

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

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

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

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

A Better Way: The Branch Transfer

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

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

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

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

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

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

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

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

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

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

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

An Example of Cooperative Values and Collaboration

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

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

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

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

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

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

 

Posted on

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

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

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

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

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

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

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

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

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

The Rest of the Story

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

He sent this picture of the branch’s status:

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

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

The branch with blank signage.

Office equipment disposed, not donated.

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

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

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

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

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

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

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

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

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

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

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

Destroying Credit Union’s Moral Capital

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

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

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

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

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

 

 

 

 

Posted on

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

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

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

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

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

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

A Retired CEO’s Message

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

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

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

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

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

A Member Reacts to the Merger of His Credit Union

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

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

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

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

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

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

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

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

Posted on

Game On: The Voting Begins

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

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

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

A Gigantic Precedent

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

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

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

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

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

The Competing Slates

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

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

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

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

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

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

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

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

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

The Campaigns

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

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

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

A Unicorn Credit Union

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

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

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

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

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

Following Future Events

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

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

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

 

Posted on

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

 

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

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

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

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

Susan Conjurski, President/CEO

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

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

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

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

The Second Merger Notice

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

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

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

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

The Financial Payments and Assets Transferred

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

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

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

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

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

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

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

What Unites These Two Leadership Resignations

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

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

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

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

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

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

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

Losing the Cooperative Future

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

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

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

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

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

The Increase in System Risk

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

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

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

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

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

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

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

Posted on

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

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

SECU’s leadership went into immediate action.

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

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

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

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

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

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

Changing the CEO

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

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

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

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

The New CEO

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

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

The Board Changes Election Process and Timing

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

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

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

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

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

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

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

The Campaign and Member Vote

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

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

The Voting Outcome

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

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

Democracy Is Hard Work

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

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

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

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

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

Posted on

A Credit Union Enters the Valley of Dry Bones

The description of the  Valley of Dry Bones in Ezekiel is always brought back to life with  Halloween.  And in the song Dem Bones or the spiritual version  Dry Bones. “Toe bone connected to the foot bone, foot bone connected to the heel  bone etc .”

However this metaphorical story came to mind when reading the announcement of the proposed merger of the $1.3 billion Community Credit Union-Florida (CCU) with Launch Credit Union. also $1.3 billion.

Both are in sound financial condition with CCU maybe a step or two ahead on several vital indicators. However the main occasion for the merger appears to be the announced retirement of CCU’s  CEO, a 29year employee, in October of 2023.

This is certainly the outcome reported in the mid-August 2024 public  merger announcement:   “Joe Mirachi, president/CEO of the $1.3 billion Launch in Merritt Island, Fla., would lead the combined financial institution. Laurie Cappelli, president/CEO of the $1.3 billion Community Credit Union of Florida in Rockledge, would retire and would serve in a consultant’s role as needed through system integration.“

These two announcements meant that for almost a full year, the five member CCU board and CEO have been working on a merger versus hiring a new CEO to lead this very successful credit union into the future.

CCU’s web site About Us describes the founding in 1963 as Brevard County Teachers credit union stating:  Eight of the ten teachers signed a Certificate of Organization, and each of them subscribed to one share in the Credit Union for a total of $40.” Today the credit union manages $1.142  billion in shares for  57,938 members.  The net worth ratio is over 11%.  What happened?

Who Is Responsible for This Decision?

Who made this decision about the future of these 58,000 owners?   From the public record, just six persons: the five board members and the CEO.

CEO Cappelli joined the credit union as a member service representative in January 1996 or over  28 years ago.   She became CEO in February  2018.  She  describes herself on LinkedIn as  a “Servant and Motivational Leader, Credit Union Advocate, Positive Influencer.”

Prior positions were at Black Hills FCU  (13 years) and  Kennedy Space Center FCU ( 2 years). Her public resume shows this is a person who would be fully aware that this act pulls up the ladder she used to ascend to leadership from all those now serving with her.

The public and professional credentials of the five-person board with their service tenures are described on the CCU website.

Board Chair Patmann has been a director since 2006 .   Now retired he lists numerous community and board leadership roles.

Vice Chair Marvin has been on the board since 2016 and on the audit committee prior.  He started his own company and has served on many educational and civic positions of leadership.

Board Secretary and Treasurer Dale joined the board in 1994.  She is a CPA who owns her own firm and has served on multiple other public boards.

Board Member Gindling is the President/CEO of Space Coast Health Foundation and a board member since 2016.

Board Member Rains serves as the Executive Director of Communications at Eastern Florida State College and joined the Board in 2022.

All six of these leaders have extensive responsible community positions, individual professional qualifications and longtime roles with the board and credit union.

Why have they decided to transfer all of the credit union’s substantial resources to a leadership team with no history, no local involvements and no legacy relationships that built their credit union’s success since 1963?

One would have expected there to be a thorough strategic assessment, an in-depth due diligence of options and explicit member-owner benefits to justify the transfer of this self-sustaining, six decade old, member-owned financial firm.

Unfortunately, the press release was full of the rhetorical cliches and absent any specific facts or data that would substantiate why this option was chosen.  Here is a typical excerpt:

“This collaboration demonstrates the credit union philosophy of ‘People Helping People,’ because together our combined resources and shared commitment enable us to offer enhanced products and services to our members while maintaining the high level of personalized service our members have come to expect,” Mirachi said. “We are excited about the opportunities this merger will bring and the positive impact it will have on our communities.”

Together, we will build on our legacies of trust, integrity and exceptional service to empower our members towards financial success,” Cappelli said. “We look forward to a very bright future together.”

Sounding Out Any Opposition

Moreover the FAQ’s with this public announcement appear to be a public “tolling” to see if there will be any  opposition to this charter’s death:

We know it is not typical for a merger to be announced while still in the pre-agreement stage, however, we believe strongly in the benefits of this merger and believe that being transparent with our employees and members to keep them involved and informed throughout this process is the right thing to do. This also means we do not have all the answers as the boards are working to ensure all details are carefully considered. As the merger process continues, Community Credit Union will keep members informed of progress, including sharing important notices, dates, and events.  

The Failing of the Cooperative Model

This case is not an isolated example of a deeply troubling reversal of the whole legislative and political justification for a non-profit credit union option in America.

Based on the public information and the latest financials, there is no member benefit to be gained, and no future service that the credit unions could not each accomplish.  CCU’s board  and CEO appear to have  failed in their most basic  fiduciary duty: to have a leadership succession plan for this 167 employee organization founded almost three generations earlier.

The CEO’s retirement announcement in the fall of 2023 was instead a mating call for other credit unions to step up with an offer.  The details of that offer by Launch have yet to be disclosed.

A Sellout Worth $300 Million

Given the board’s abdication of its most important responsibility for CCU’s self-sustaining, it is virtually certain the members and the employees will receive nothing for their decades of loyalty and effort.

This is a blatant failure of democratic cooperative governance-a board oblivious to its accountability to the member-owners.  Credit unions were designed to reflect a new and more equitable approach to consumer choice.  A critical goal was to place the welfare of the community first and not the preferences and rewards for those who gained positions of power.

This sellout to a third party is unfortunately another example in which the members receive nothing except that which they already have—the promise of future service.  This charter surrender is a betrayal of the credit union owners and the cooperative system.   We know from multiple credit union purchases of banks that the owners of an institution with this track record, financial strength and market position would easily command a price of 1.5  to 2.0 times book value –or up to $300 million in an actual market sale.

Moreover bigger does not mean more success.  This merger, like others, undermines the trust that members have placed in their leaders to do the right thing.  Without trust there is no foundation for the future.

Into the Valley of Dry Bones

The source of this leadership failure stems from a breach of faith.  This is a current example of the old story of the Valley of Dry Bones..  Instead of an organization that is focused on sustaining member welfare, the owners are left with only their separate individual resources.

Their collective future is transferred over to another board and leadership team they do not know, and did not select.  They are now disconnected from each other and from their past legacy.  Their loans and savings accounts are just a heap of dry bones with no special purpose, history or connection.

These six “leaders” have lost the passionate spirit that cooperatives require to be successful in serving the common good.  The eight founders who contributed $40 to gain a charter did not succeed because of their financial capital.  They possessed something much more important–the inextinguishable human spirit committed to the success of this singular financial enterprise.—in perpetuity.

And that is what Ezekiel‘s prophecy illustrates by the metaphor of the Valley of Dry Bones: “I will put my spirit within you, and you shall live, and I shall place you upon our own soil.”

The spiritual Dry Bones is about broken connections between people.   It also states what is required to put all these bones functioning together again.

When that spirit is missing, this most critical contribution of human capital, the  enterprise falls apart.  These one-time credit union leaders are now sending their members into a Valley of Dry Bones.

Posted on

A CEO’s Lived and Led Business Strategy

“Empathy emancipates making us greater than hate or vanity;

That is the American promise powerful and pure.”

(A phrase from poet Amanda Gorman’s, The Sacred Scene, read on August 21, 2024, Chicago)

I reached out to Great Basin FCU’s CEO Jennifer Denoo to discuss three topics:

  1. To learn about the credit union’s announcement of an affordable housing project with the FHLB San Francisco. How would this help and what was their role?
  2. Why a 2010 video of an interview of the  first President and his wife about the credit union’s founding in 1951 was linked to their website.
  3. The reasons why that website presents a very different “vibe” than most.

The Financials

At June 30, 2024 Great Basin reported strong financials, partly due to a recent small merger with another Reno, NV credit union.

Total assets:  $313 million; Loans $215.5 million; Net worth 11%; Delinquency .47%; and ROA of 1.93% and share growth in double digits, results helped by the merger.  It serves 25,000 member-owners.

The Affordable Housing Initiative and Goodwill

The credit union had joined the San Francisco FHLB in 2023 to have a liquidity backup.  Jennifer asked questions about other FHLB services offered. As a member-owner, she wanted to learn if services could be more than a transaction.  Was it a relationship opportunity?  She learned that few other Nevada financial firms were taking advantage of recent federal government funding and FHLB grants to support affordable housing projects (AFP) in the state.

One such program was undertaken by a non-profit developer, Sunwood Housing. It approached the credit union to partner in a new development in Lovelock (pop. 2,000), the only incorporated town in a very rural county.

The credit union’s role was to monitor the disbursement of the $663,000 FHLB’s AHP grant.  The oversight required their expertise and time; there was no interest or fee income.  The grant then freed up other federally authorized funding for this 24-unit development for low income residents.

Jennifer said the credit union’s support for this affordable housing project could open further possibilities with the developer, the county commissioners and residents, and the FHLB.  The expertise, market awareness and goodwill could lead to future AHP partnership opportunities; but the immediate gain is the positive impact on a small community she serves.

 The Founding Video-History Never Gets Old

The credit union created a video interview of its first President Jack Dunn and his wife Laura in 2010.  It tells the story of the beginning in 1951 as the Reno-Bell Phone Company Employees FCU.

NCUA required the credit union raise $25 in shares to receive a charter.  The eight organizers were $12.50 short.  So, Jack put up the rest and became the first President.  At the end of the first year there were several hundred members. Records were kept in a founding member’s garage. The credit union was offering loans to members that banks would not, because the volunteer leaders knew their members as “family.”

Jennifer said the video was created so every employee understands “who we are.”  She explained, “As we grow the FOM, now covering 12 counties, it would be easy to be seen like a bank.  We never forget how we were started.  We show it to every new employee so they can feel the passion and mission of the credit union. History never gets old.”

Bank Like a Boss: Members Are the Owners

Jennifer became CEO in 2018.   She began as a teller thirty years earlier but had trouble balancing out her cash drawer. The CEO at the time saw something in Jennifer and suggested she apply for another position–being a collector.  The result: “Best job I ever had.  My goal was to recover payments and assets through empathy and understanding of the member’s situation.  To make them feel like their current financial situation did not define who they were.”

When she was 30, that same CEO and her cherished mentor in the credit union died unexpectedly. She thought about going back to school to become a hospice nurse while raising her three children.  Jennifer saw a parallel between what a hospice nurse does and what a credit union leader does – they teach, they hold hands, they give dignity and grace.  Once she realized she was doing what she was already passionate about– leading with empathy – she chose to stay at the credit union as it evolved its member-centric focus.

Making Member Love a Reality

The credit union’s website feels different.  Here are two prominent statements:

We give a DAMN about every member.

Let us show you why we’re not just member-owned, but member-loved, too.

As CEO she continued the mission and vision of member love.  She admitted the site may feel quirky, but it was based on communicating a fundamental business competitive advantage: employee empathy.  It drives everything the credit union does.  It is the number one skill every employee develops.

Her personal commitment to this effort is shown in her first video as CEO, Just Ask Jennifer.

The skill is practiced in training sessions.   Scenarios with the words to use that first acknowledge how the member feels, in a non-patronizing way–“Say it, to live it.”—before resolving a problem or opening a new service.

Even when the member is not always right, empathy is the first action when taking responsibility for a solution. For example, an older member came into the credit union angry that the credit union would not give him his tracking number for an insurance payment.  He insisted the credit union had it; but he was using the wrong word. He needed the routing number.

The employee put themselves in the shoes of the member, imagined how overwhelming it must be to set up a new insurance deduction and led with an understanding heart before fixing the problem.

Or the 11:00 PM Just Ask Jennifer member query about how to change a password.  Jennifer takes pride in answering each of these inquiries, even at night or on a weekend because she feels how unsettling it is to not access your account online.

The service promises and values stated on the web site are specific.  Take ownership of the situation, show appreciation, step in the other’s shoes, etc. All are important for making these employee skills an essential part of the credit union’s brand.

The overall strategy is to build relationships not merely transactions. For she asserts “It is relationships that will carry the organization over the next bump in the road.” 

Jennifer’s leadership skills have resulted in positions on four other credit union and financial collaborative organization’s boards.   Her bottom line is “You just have to believe in people-and give a damn.”

A sound strategy not just for leading a credit union, but for life.

 

 

 

Posted on

“I’ve Been Seen”

Real political rhetoric, much more than every day punch and counterpunch,  is in full season.  Last night I listened to the Obamas’ twin presentations at the Democratic national convention.  Afterwards all the TV channels offered their pundits’ assessments of the evening, especially the keynotes by the former President and First Lady.

Sometimes it is hard to know whether one’s reaction to an event is shared by others.  Or even what to think about it until we hear how others appraise their experience.

As the PBS panel went from person to person, one commentator’s reaction stood out from his colleagues’ traditional analysis of each speakers’ effectiveness.  His was a personal reaction, not a reporter’s professional assessment.

He had reached out to a colleague for a handkerchief during the former president’s speech, weeping.  The reason for his reaction was summarized in one phrase.  Reacting to Obama’s description of what America could be, he said “I’ve been seen.”

A Credit Union Counterpart?

His reaction reminded me of a conversation last week with a CEO’s who has an unusual approach to leadership.   I had reached out to learn about the credit union’s participation in an affordable housing program.  To prepare for the interview I went to the web site and looked up the June 2024 financials.

The numbers were impressive.  But the website had a different “vibe” than most.  It had a ten-minute 2010 video interview with the first president and his wife, a reminder of the commitment necessary to start a credit union in the 1950’s.  Then there was this vision: “To be member loved.”

Was this phrase just another cute PR effort?   How could an emotion be translated into a real business strategy?   Who was behind this approach to credit union leadership?

Tomorrow I will share my conversation with the CEO who developed this unique effort of “seeing others.”  It is the central tenet of the credit union’s business model and market advantage.  It takes effort, and it works.

 

 

 

 

Posted on

Ugly Truths: Mergers, Kickbacks and Apostates

“The Ongoing Corruption of the Cooperative Credit Union System’s Ideals in America”  (with edit updates on August 9)

I have previously observed that  it doesn’t take an illegal activity to destroy a firm, an industry, or even bring harm to the broader economy.

I believe the credit union system is at a turning point.   Since the passing of NCUA’s merger rule in 2017/18, the amount of asset takeovers (AKA voluntary mergers) has only accelerated.  Some think this is a good thing.  I believe numerous examples prove otherwise.

According to Credit Union Times the numbers are increasing. The majority of second quarter 2024 merged assets in this latest update have nothing to do with safety and soundness issues:  The NCUA approved 46 mergers during the second quarter of 2024, up from the 26 consolidations that received the green light to consolidate during the first quarter and the 36 approved mergers during last year’s second quarter.

As discussed below some credit union CEO’s are “gaming” regulatory disclosure requirements to hide their significant personal benefits. Credit unions acquire sound, longstanding healthy credit unions through private deals which benefit and enrich the selling executive team.  The members are given nothing but future promises and empty rhetoric, most frequently, “bigger is better.”

The transactions increasingly contradict  any common sense understanding of financial equity or fairness for members.  The information provided members and approved by NCUA is meaningless for any considered owner decision.

The cooperative system’s unique purpose and public reputation are at risk.  These deals will be  seen as just more of the same wheeling and dealing as for-profit banks.   At some point these ongoing patterns of self-dealing will become the object of a business media story, a congressional inquiry or even consumer group action.

The good will and good works of the truly credit union spirited will be overwhelmed by the depredations of an ambitious few. The system may never recover from the consequences of these blatant examples of betrayal of the trust members placed in their “elected” board leaders and regulatory oversight.

In previous posts I have detailed cases from Exceed, Infinity, 121 Financial, Finance Center, and Vermont State Employees in which my analysis of the transactions made little or no economic or business sense-except for insiders. Members, who must vote any merger, have little or no power to object or even inquire. The process gives all the resources and media power to the incumbents initiating the deals.  Member participation is presented as a purely administrative step because the regulators have “already approved the merger subject to the member vote.”

A current Example: Member One FCU transferred to Virginia Credit Union

In last week’s post, I describe the members’ “rebellion” against management’s proposal to transfer all the assets of the $1.7 billion Member One FCU to VCU.  The opposition’s blog site was filled with multiple member voices against the change.

On July 30 after the vote closed,  Member One announced the result: 3,479 voted to approve and 1,404 against.  In the same release, the credit union stated it had become a division of VCU on August 1, or 24 hours after the vote.

Case closed or not?  Certainly, the two credit unions want to give that impression. However It is important to seek the truth apart from these two “facts.”  What other context is available about this event?  Were the members’ best interests truly served?

My first observation: the voting participation seems extremely low for this controversial action.  The  number in favor of the merger, 3,479 is just 2.3% of the credit union’s 155,000 members.   The total voters, 4,883, are only  3.2% of all eligible to participate.

This result means each Yes vote supported the transferred $474,000 of total assets and $44,560 of net worth to VCU.  That outcome would itself suggest the need for greater scrutiny.

Why was the turnout so low?   Were ballots sent to every member?  How was the process managed? By whom? How does this member participation compare with other similar sized or contested mergers?

The Opponents’ Efforts

There was spirited public opposition including a news radio interview.   The website Member One Vote No recorded over 80 member comments before being taken down.   These concerns  universally questioned the merger proposal.  A  Reddit link Member One Merger Cookies, is still active and provides a sample of the  many comments in opposition.

Members posed multiple questions about the $570,000 bonuses being paid to the the credit union’s five senior executives.  The members received nothing from their collective $155 million net worth and eight decades of loyalty.

The opponent’s Vote No site also included links to nine different VCU social media with postings by VCU members sharing multiple complaints about the acquiring credit union’s service, mobile banking, culture etc.  Did Member One’s Board do any due diligence prior to announcing the merger in January 2024?   If so, why was there no information about VCU’s business model or priorities, for example the reason for its recent decision to convert to a federal charter.

Twenty-Four Hours to End Member One’s Independence

My second question: why the rush to complete the merger in 24 hours after the vote ended, that is, by August 1?  The Notice and FAQs clearly state “There are no anticipated changes to core services and member benefits.  And, it will be 2026 before there will be operational integration.  In the meantime, there will be two operational centers.  No branches will be closed .

There are least two forms that must be sent to NCUA (6308A and 6309) both of which would take more than 24 hours, especially the combined financial statements, before a merger is finalized.

Why the speed to make this a done deal? The only effect is to remove Member One’s board and to give VCU immediate access to and full control of the credit union’s financial resources.  Is VCU that much in need?

The very low vote participation and the rush to close the deal points to the need for more information about what is really going on.

The Responsibility of Credit Union Directors

There are two sets of board members who oversee each merger event.  Member One’s board is very accomplished per their public resumes.   From the June 2022 announcement of new board officers, the leadership team presents extensive professional and Roanoke community experience.

The Chair, Joseph Hopkins, signed the Member Notice of the merger’s required meeting. He retired from a long career at Norfolk and Southern, has been on the Member One board for over 30 years and is a 50-year credit union member.

Penny Hodge, Vice Chair, retired in December 2018 as Assistant Superintendent of Roanoke Country schools after 31 years.  She is a CPA and became a Member One director in 2019.

A  new board member in 2022 was Tyler Caveness who graduated from Harvard in 2014  with an economics degree.   He is “founder and principal advisor at Caveness Investment Advisory, LLC, a boutique wealth management practice providing investment, income-tax minimization, and alternative financing strategies for the self-employed.”

Member One also appoints associate Board members. On May 23, 2023 the board announced three new associate members, all with excellent professional  and local credentials. These are brief biographical excerpts in the announcement:

Armistead Lemon has an 18 year career in leading independent  school education.

Mary Beth Nash is a local government attorney with 28 years experience representing private and public sector entities.

Rebecca Owens is Roanoke County Deputy Administrator, responsible for county’s financial administration and has 30 years in local government.

Why did these three experienced, Roanoke-based professionals support the ending of their local charter in a few short months after taking office?  The merger announcement was on January  11, 2024.  One presumes there was some preliminary discussion and due diligence by the board before this public decision.

It seems highly unusual these three experienced professionals would join an organization and then quickly turn around and support an end to their leadership role within just a few short months.  What role did they play?  What information were they given?

NCUA is very clear in its statements on the fiduciary role of directors.  From two 2011 letters by NCUA’s General Counsel:

“we (NCUA)also believe that fiduciary duties are properly owed to people, and not to entities. FCU directors must understand the people who are affected by the directors’ decisions and identify which people the directors are serving.

“The danger is that, if the directors are allowed to focus only on the credit union when making a decision – without regard to how the members are affected – the directors can justify making self- serving decisions, or decisions that serve primarily the FCU’s insiders, under the guise that the directors are simply doing what is best for the credit union.”  (emphasis added)

Failing the Members

There are no factual details or future commitments in the Member Notice that would meet this fiduciary standard for this merger.  Let alone Directors’ duties of care and of loyalty.  The only specific financial details are the bonus payments totaling $570,000 to five senior executives.  Of this amount, $250,000 is due the CEO, Frank Carter,  as of the effective merger date—which we now know was 24 hours after the vote closed.

Why did members receive nothing from their $155 million collective savings?  In any other institutional sale in the open market, owners would have received 125% to 200% of their book value net worth.  We know this because these are the routine multiples credit unions pay when buying banks.  Should not credit union owners be treated as well as bank owners?

From the very general information in the four-page Member Notice, the widespread member opposition published in social media, and the explicit, immediate benefits going to the CEO and senior team, this merger seems contrary to any reasonable understanding of fiduciary responsibility by the board and executives of Member One.

They not only failed the 155,000 member owners but also the greater Roanoke community and the eighty-four year legacy of prior generations that contributed to creating this $1.7 billion local institution.

The Other Board of Directors: NCUA

NCUA’s rule 708b provides the process for the Agency’s monitoring and approval of  every step of the merger process.  The agency’s merger checklist has 21 areas for potential submission and seven required forms.

The update of the rule was announced during the GAC conference in February of 2017 in response to published examples of merger self dealing and outright solicitations.  Chairman McWatters’ intent is quoted in this report of the merger landscape by Frank Diekmann in his CUToday analysis, Time to Talk About an Ugly Truth in Mergers:

McWatters: “The agency should diligently work to preserve small credit unions, as well as minority- and women-operated credit unions.  

“In addition, the agency should require all merger solicitation documents to provide, without limitation, a discussion of any change-in-control payments and other management compensation awards and agreements, and that such disclosures are written in plain language and delivered to voting members in a reasonable time prior to the scheduled merger vote.”

Since that speech, and the passage of the rule  Diekmann’s Ugly Truths have only gotten worse and disclosures minimized.

Member One’s merger is just the most recent example. No member owner, let alone an NCUA examiner,  RD or board member could make an informed judgment about this merger proposal with the information in the four-page Member Notice.

If any credit union had provided this level of detail to purchase a bank or by organizers to start a credit union, the request would have been summarily rejected.  Yet that is all the information credit union owners were given.

NCUA’s In Loco Parentis Merger Oversight

The impact of NCUA’s rule has been to put the agency’s judgement and fact review in the place of the members’ ability to make an informed decision.  Most of the information required by NCUA in its 21 point checklist is not shared with members.  For example, its review of the prior 24 months of board minutes are not disclosed along with multiple other filings.

NCUA then sends its approval of the Member Notice with its limited information which includes the date of the special meeting and ballots to vote.  Absent are any of the details NCUA used to approve the application and Notice.

Moreover, the Agency has provided an easy work-around spreadsheet to help determine what must be disclosed, if anything, about compensation commitments.  This is completely contrary to former Chairman McWatters’ statement of “without limitation” disclosures.  In essence, NCUA shows credit unions how to “game” its own disclosure rule.

Self-dealing by those who lead the organization, oversee the entire process and control all resources to communicate with members was the number one priority addressed in the 2018 rule.  Unlike state charters which must file IRS form 990 detailing board and executive compensation annually, FCU’s are not required to file or disclose any compensation data to anyone at any time.

The agency’s excel spreadsheet with sample entries helps to determine what portion, if any, of future compensation must be disclosed. Here is the form that credit unions can submit to show compliance or not, along with a required certification of No Non-Disclosed Merger-Related Financial Arrangements.

Future compensation is what the whole rule was intended to address, including conversions of previously funded SERPS and other benefit plans.

Why should NCUA be able to review this form, but not members?   In the Member One Notice only merger related bonuses of $570,000 were revealed.  However the credit union reported over $32 million in SERP and Employee Insurance Benefits in its June 2024 call report balance sheet that will either vest or be distributed under change of control clauses—but there was no disclosure of where those funds now go.

Reporting only merger related bonuses does not begin to reveal the compensation related commitments to senior employees in the merging credit union.  Most will enter into new employment contracts with the continuing credit union that are guaranteed years into the future versus being at-will positions.

To illustrate this under reporting, NCUA recently approved a merger that disclosed to members only $900,000 of bonus or salary increases for the five senior employees.  However, because the credit union was a state charter and the lengths of the new contracts were disclosed, the actual guaranteed payments were closer to $9.4 million for the  highest compensated employees.

This is how the disclosures of self-dealing are “gamed.”  NCUA has inserted its review in place of providing  essential information to the members for their decision making.  Members receive no facts, only rhetorical promises or future assurances.  In Member One’s case, this motto was “Bigger is Better” an assertion easily  contradicted by the diverse loan growth and ROA performances as of June 2024 reported by the top ten credit unions.

The Shortcomings Of the Merger Rule and an Easy Solution

There are two other serious information shortcomings in the merger disclosures.  Nothing is required to be shown about the continuing credit union’s business model, priorities, plans or culture.  In this case VCU’s social media posts suggest some potential cultural and operational issues.

If members are transferring the future management of all their assets to another organization, shouldn’t that organization’s plans and leadership intentions be part of the disclosures, even including the compensation of the continuing executives.

Voting by members in a merger is not about protecting their individual savings and loans.  If members don’t like the outcome, they can withdraw and go to another institutions.

Rather the voting is about the transfer and full control of all the assets, tangible and intangible created in a credit union’s long history, to a third party.   Now there is nothing required to be disclosed about the new organization’s taking over these accumulated resources except a summary balance sheet and income statement that is already available from call reports.

A second problem is that the voting process is deeply flawed.  It has the appearance of democracy and one person one vote.  In this case 97% of members did not vote on the future of their own credit union?  Why?

Moreover, the entire voting process and institutional resources are in the hands of one party which has a vested interest in the outcome.  Members who oppose have no way to easily contact other members, there are no resources for marketing or outreach. The credit union executives control all the messaging with its FAQ’s and in this case, free Oreo cookies.

This is not a democratic election process.  It is a monopoly managed by those in power who control all the variables in the very short time frame in which the messaging and balloting is done.  To end a charter should require a minimum number of members to vote, at least 20%, and provide a process for opponents to have access to members.

And the easy solution:  Require every voluntary merger where the dissolving credit union has 7% net worth, to issue a public RFP for bidders and that there be a minimum of two proposals received.

RFP’s are a routine process in virtually every consequential credit union decision including technology choices and even the hiring of consultants who submit proposals in response.

NCUA should lay out the minimum RFP contents and then review the numerous responses.  The credit union board has the data for why one option was chosen over another to recommend to members.  Here is how the process works in a good merger.

The Apostates

The word apostates refers to someone whose actions or inactions, suggest they have totally abandoned or rejected their core beliefs or principles.  Or maybe have no settled ones at all.

In this example of Member One’s executive suite and board’s professional credentials, the public record of merger disclosures versus  the aspirations presented on the credit union’s website, all combine to give the impression these leaders abandoned whatever belief they had in their 84-year old credit union. Rather it was the members whose voices spoke up for the credit union while those in leadership sold out. (See one example at end.)

The role of NCUA’s three person board is also critical.  What is their understanding of the  cooperative charter?  How is it different from banks, other than the tax exemption?  What are the role and rights of member-owners?   What does democratic governance, one person one vote entail, when board elections are rarely held?  When only 3% to 4% of owners vote on the continuance of their independent charter, how meaningful is this process for mergers?

If the board believes the proper policy is letting the free market work its will versus setting regulatory boundaries, why is there no support for actual transparent market solutions?   Why do bank owners reap rewards when bought by credit unions, but credit union owners receive nothing when control is transferred to a credit union third party?

Chair Harper, Vice Chair Hauptman and newcomer Otsuka have either turned a blind eye or have no problem with senior executives capitalizing on their positions for self-enrichment-and the members left holding an empty bag.

NCUA’s current board has taken no action on the growing number of examples where the fiduciary duties of all decision makers to protect members’ best interests have clearly fallen short of the clear standard presented by its General Counsel.

In the end this benign neglect will erode the financial and reputational foundations of the cooperative model.

Creating An Unsound Cooperative System

Ultimately this intentional or unintentional fiduciary  abandonment by all parties will only spawn greater and greater incidents of insider sell outs in the pursuit of growth and greed.  The result is  more and more risk put into fewer and fewer baskets.

This increasing concentration decreases the traditional advantages of local relationships and stability and reduces overall financial and business diversity within the credit union system.  The soundness of the system is narrowed; the variety of business models is reduced; and the traditional credit union advantages of local knowledge, control and earned loyalty are lost.

The unique design of democratic member-owned financial alternatives serving their communities faithfully over generations is sacrificed on the altar of bigness.

The cooperative model has been turned upside down.  It no longer serves members interests first, but rather the personal ambitions of the institution’s leaders.

One Member’s Voice

When those in governmental or private positions of authority forget where their accountability is owed, the prospect of member rebellion grows.  Who can forget the taxi drivers attending NCUA board meetings to lobby for member-focused solutions?

In the case of Member One, a person who served the credit union in leadership posted his logic for why this merger was not in the members’ interest on NCUA’s website.  When posting comments NCUA “will review, redact and post submitted comments” and “also reserve(s) the right not to post a comment that we believe is false, egregious, or unrelated to the proposed merger.”

Sometimes we call these critics prophetic.  When current leaders forget to whom their duties of care and loyalty are due, this comment presents a well reasoned, informed appeal for a return to core credit union principles.

The following is what this member “sees” versus what those in positions of authority  choose to ignore:

I, Dwight Holland, MD, PhD STRONGLY OPPOSE THIS MERGER AT THIS TIME as a former 7 year Supervisory Committee Member of M1FCU, and 2 years as a successful Chair of that Committee. My background:

I was on the Supervisory Committee of M1FCU from 1996 to 2003, with the last 2 years as the Chair. So, I know what I am talking about regarding Credit Union matters.

I was also the guy that pushed hard in 1996 to get on-line banking into the Credit Union when some of our Board Members weren’t sure what a domain name was, or why we should do this. So, I AM NOT opposed to change and adapting when necessary or it makes sense for our members.

The reasons I am opposed:

1. We lose LOCAL CONTROL and influence in the governance of the Credit Union because we are being swallowed by a bigger fish. The smaller fish in the pond of merger always loses its identity, culture and influence with time, despite promises by the Board and CEO of both Credit Unions.

2. We are a HEALTHY, overall well-managed credit union that has grown to around 1.6 Billion dollars. Why surrender this LOCAL achievement and control to a financial entity in Richmond?

3. MemberOne started out as the N&W Credit Union, and grew with our own economy, mergers and healthy acquisitions of struggling credit unions in a non-predatory way. That rich history and legacy will disappear with this merger into the mists. As member number 4404 that started as a 6 year old, I personally don’t like that notion. I can see people in leadership, and talk to them directly, and they will listen. Having control going to Richmond will dilute that “personal touch” dramatically.

4. I am the Treasurer of a state-wide Military Organization that uses a national credit union (over 10 Billion in size) for its banking purposes. Trying to get help with such a large organization is just like dealing with a large bank. It is tedious to get anything done, when something doesn’t go well, it took me and national level leaders in our organization over 1.5 years to get a very simple, but critical thing settled. The larger an organization is, the harder it is to get through the layers of bureaucracy. Staff sometimes in large orgs just doesn’t “need” to care about you for their performance reviews. That’s not true for more locally controlled orgs.

5. As M1FCU member, we often give forbearance to our friends and neighbors regarding loans and the like if they as for it, and work with them to help. Larger, more distant Credit Unions, cannot, and generally will not do this to the extent that a well-run locally controlled one will.

6. There are more reasons not to merge that relate to insurances, benefits, control of wages locally, etc, but I’ll let others deal with those.

The “incentives (for executives) to stay” at the end of the meeting notice seem extraordinary – why is such an incentive needed? There would certainly be others available to hire who are well qualified should these people choose not to stay.

Well more than a half million dollars is being promised to these five individuals! That amount would best serve members in so many other ways: beefing up certificate and savings rates or assisting those who need loans, for example, would certainly serve the members better than this huge amount flowing into individual pockets.

I do not see numbers that benefit members of the credit union except those receiving incentives to stay. Respectfully, there is no way those employees are worth that much to stay. How much would the rest of the members receive to stay rather than to take our business elsewhere? I see no way this merger benefits the members except the 3 or 4 mentioned in the letter we received.