Category: Cooperative Design

“When we lose small, we lose big”

This phrase is not about the continual decline of smaller credit unions via merger and the lack of new charters.

Rather it is the advertising lead for Goldman Sachs 10,000 Small Businesses initiative. This is an investment to help entrepreneurs create jobs and economic opportunity by providing greater access to education, capital and business support services. The firm states more than 9,700 business owners have graduated from the program across all 50 states in the US, Puerto Rico and Washington, D.C.

A Simple Cooperative Counterpart

Is it possible for the cooperative system to emulate these “small,” bank-supported start up efforts by repurposing charters under new leadership when incumbents give up? Why not identify groups in the community willing to bring fresh passion and ideas to the existing charter framework?

Despite the pandemic, new business startups are booming. On the other hand, 200-250 smaller, decades-old credit unions close each year. There was only one new charter issued in 2020. The NCUA approval process takes years.

One “big” loss is that credit union entrepreneurs are unable to be partners with local business enterprises pursuing the American dream. More consequential, without the energy and innovation from startups, the ultimate BIG loss could be the ending of the unique cooperative financial system.

NCUA and a few state regulators still profess fidelity to the field of membership concept. Credit union competitors love the idea as a political attack weapon.

The first credit unions were begun with open, community service areas. Only later were specific FOM requirements introduced by law.

Now the last bastion of this formerly sacred concept, is getting a new charter. NCUA’s process is one of attrition.  Few applicants survive the regulatory obstacle course; most give up.

Bureaucratic instincts die hard. The impulse to stretch the process interminably is because it is somebody’s lunch pail .

I was reminded of this anachronistic obsession by a CEO’s reaction to FOM commentaries on NCUA’s recent “updates.”

“Depending on your point of view, these are trade groups guarding the gates like an old dog tied to a tree; or the NCUA winning a shadow boxing match with banker’s lobbies swinging at ancient windmills. It’s a time of political theater where trades and regulators prop up their dues.”

Everyone Is Welcome

A second reminder was this website:

The Largest Credit Unions Anyone Can Join https://www.depositaccounts.com/credit-unions/anyone-can-join/

This website, Deposit Accounts–“a different kind of bank account comparison site”–is apparently supported by Lending Tree. Under each credit union name is the link “how you qualify” describing how anyone can join.

The list ranges in size from Cadets FCU in Buffalo, NY at $14.8 million to PenFed in VA at $26 billion. Some are federal and some state charters. All have a member option open to anyone.

The purpose of the listing is described as follows:

Overview of the All-Access Credit Union List

The list is now updated daily. By default, the list is ordered based on asset size. Click the column title “Credit Unions” to order alphabetically or “Branches” to order based on the number of branches.

Click on the name of the credit union to visit our hub page for that credit union. The hub page lists all of my blog posts for that credit union. It also includes the credit union rate tables, financial health, branch locations and readers’ remarks.

A Reminder

Before deregulation credit unions would frequently use the phrase, “my members,” to assert, and no one else’s. Today members have choices even among credit unions. These listings remind us that credit unions succeed not simply by whom they serve, but how they serve their member-owners.

The list of the top 100 US cooperatives by total revenue lists only five credit unions.

Do you know the co-ops operating in your communities? How are credit unions supporting cooperative solutions especially with needed, local  startups?

A proposal  from Finland where 90% of the population belongs to a co-op

It would be fair to say that the American credit union movement was born from a unique way that Edward Filene did charity. He helped reduce obstacles people face when they try to help themselves by setting up cooperatives. As it became harder and more expensive to start new credit unions, this tradition started to fade away. It could be more complex for credit unions to help people set up cooperatives, other than credit unions, because it requires different expertise. But I hope credit unions would ask themselves – if we are not carrying on Filenes distinctive civic tradition of helping start new coops, who is? 

It’s common for credit unions to donate to food banks and other local charitable efforts.  

What if some of those donations would be used to give food cooperative coupons/vouchers to credit union members who are struggling economically? Ideally the food cooperative would also provide opportunities to get further discounts by volunteering to help run the business, as is common in grocery coops. 

I think many would find this sort of mutual self-help more dignifying than being given food from a food bank – not that there should be a stigma in doing so. Perhaps especially men who are reluctant to get assistance would find this psychologically more helpful. Abstract models of comparing the logistical cost-effectiveness of providing food through food banks or food cooperatives can’t capture this difference. But can credit unions? 

It could be used to demonstrate the cooperative difference of credit unions in a way no advertising campaign could. The Open Your Eyes campaign remaining budget was $50 million. What if there was an equally large campaign, where 5 million credit union members would use a $10 coupon in a new cooperative business?


It doesn’t have to be limited to food cooperatives either. Maybe a couple who open up a joint-account could be given a pair of movie tickets that could be used in a local cooperative cinema. The possibilities are endless.  

Leo Sammallahti

A Solution: Open Up Market Participation and Transparency

I believe more open competitive forces must be added to a Board’s decision to give up their charter. All merger intentions should be announced in a public notice so that any interested party is able to participate when a board decides to end its independence.

For example, why should Post Office in Madison or Sperry Employees in Long Island negotiate their members’ future in secrecy and then announce their decision without other area credit unions able to “bid” for these long-standing, local, well-capitalized ”franchises?”

Why not give members a real choice of a convenient and familiar credit union as well as one that is remote, digital only, and with no connections to the community?

Bringing more market forces could add better options for members. If two large billion-dollar credit unions want to merge locally, why shouldn’t a large credit union from outside the market be able to participate and preserve a real choice for members?

If the members are informed by an open process, they are more likely to support the board’s recommendation. Now they are forced into a combination they know nothing about and where the results are approved by only a very tiny minority of members returning the requested mail ballot.

Mergers that Enhance Safety and Soundness

Opening up the merger process would make the credit union system more transparent, responsive and relevant for members and their communities. Facts and plans would have to be laid out, not merely bland marketing assurances of “ a better future.”

Credit union safety and soundness would be enhanced because members can make an informed choice. Interested credit unions must take their time to present a relevant option. Token payouts of members’ equity to achieve a positive vote could be replaced by considered bids for the credit union’s real value, including good well.

As presented in Part I, PenFed’s five-year performance has not been enhanced by its merger-growth efforts. Its asset growth rate is half that of its peers; expenses are rising and there are no obvious economies of scale. Asset quality challenges have heightened. There is no evidence members see better value. Member relationships are declining. PenFed’s ROA and asset growth increasingly depends on acquiring other credit union’s net worth. Mergers are disguising its underperformance and slowing internal growth.

Even more pernicious is that PenFed’s mergers have eliminated 20 credit union boards of directors, CEOs and senior management teams. Twenty seeds of future innovation are gone. Multiple long-term relationships with local communities are broken. Members’ loyalty is discarded. None of these outcomes enhances the cooperative system’s financial diversity or soundness.

Transferring the financial equity from generations of members to a board and senior management with no connections to the community’s surplus further removes members from their cooperative creation.

Directors’ view of their responsibility changes in mergers. Instead of acting as stewards of a legacy they inherited, they become deal makers. They routinely ratify payoffs to other credit union’s directors and employees as just the “the art of the deal.” Values be damned.

In the end, the current secret negotiations corrupt both credit union buyers and sellers. And in so doing, the cooperative model.

The Problem We All Have

The current merger practice promotes the privatizing of members’ common wealth and the degrading of credit unions’ role in their communities. Because participation in voting is so minimal, members are left with the feeling they were not informed, or maybe even tricked. The experience is no different than when a bank is sold. Instead of being the alternative to for-profit capitalism, the industry is becoming that which it was supposed to replace.

There are two traditional approaches to system problems. The first is, let the “free” market work it all out. Give the forces of competition loose rein so the magic of the invisible hand can create the best outcome. In the end, all will be right. Winners take all.

The second is that government must step up to regulate abuses, enact better rules and enhance its supervision of the current practice of routine signoff.

But I recommend a third solution built on cooperative principles. Let the members decide. One person, one vote. Put their interests truly front and center.

There are multiple current merger practices that would give member owners the information to have a real choice about the future of their credit union. Working with the industry, regulators should design a truly “cooperative” process that enhances members’ involvement and in so doing, their commitment to the outcome.

The revitalized process would seek traditional financial and operational proposals combined with the important qualitative values credit unions promote: community connections, local focus, giving back to members, and demonstrated track records.

For many Americans, the lack of trust of those in authority is based on their perception that leaders place their interests above their own and the community’s broader shared values. PenFed is a prime example of an outside organization hollowing out local communities by cashing out its leaders.

The social trust on which the cooperative model exists is enhanced by a more visible and transparent process. The public support for the industry’s tax exemption is upheld. The movement will be guided by the shared set of norms and values that created it.

Going from Spectators to Engaged Co-op Citizens

With over 99% of credit unions in NCUA’s lowest risk CAMEL ratings, it is easy to lose sight of the interdependence and cooperation on which the cooperative movement is established. The common good slowly recedes to second place versus individual institutional success.

Market forces are not motivated by the common good or subject to moral limits. Credit unions were to be a counterexample to 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.”

Current merger excesses are destroying the moral capital created by movement’s founders. Instead of active citizens we become spectators or voyeurs hoping the abuses will go away or maintaining that this is not my problem.

A Renewed Movement

However, movements are not simply a one-time past occurrence, but rather something we can all participate in our own time.

Individual economic isolation and the power of large monopolies which gave rise to the progressive movement at the turn of the 20^th century is as pervasive today as 100 years ago.

Some label credit unions as an industry. They are no longer disrupters of the status quo, but a mature segment of financial services with resources, opportunities and influence to play like the big boys. Movements are a moment of history, not the current reality they argue.

Both views can be true, but when movement is left out, credit unions become identified with the status quo and its problems, versus innovators of trusted value to members.

In its finest expression, cooperative design is an ongoing experiment to address the shortcomings of unfettered capitalism. It takes only a few leaders to stand up for change to convert perverse merger activity to a more productive outcome for members. Who will have the foresight and courage to push this to the top of the movement’s agenda?

Part I documents the flailing financial performance of PenFed’s merger growth strategy. It increasingly depends on acquisitions of sound, well-capitalized credit unions to prop up its below average financial performance.

Why should this be a concern of other credit unions? Or industry leaders? Or regulators? Aren’t mergers independent decisions by CEOs and boards claiming to do the right thing for their members? Why should others get involved in these “consenting combinations” of two distinct firms? And if there is something untoward going on, isn’t that the responsibility of the regulators to address, not other credit unions?

So far, PenFed has acquired 20 credit unions, the vast majority of whom were exemplary models of how credit unions can make a difference for their members and local communities. This value established over decades is ended by PenFed mergers and replaced by a distant, virtual model devoid of local connection and relationships.

PenFed’s actions are not only a sham strategy, they also debase and weaken the cooperative system.

Induced Consent

The process by which this is done is to pay CEO and senior staff severance bonuses and other salary and benefit increases, provide one-time staff bonuses as much as 10%, and often offer a special bonus dividend of several hundred dollars to members—all contingent upon member approval of the merger.

These incentives ensure the required member vote is a mere administrative formality. It presumes the decades of member trust and loyalty can be relied upon so they will follow the recommended action of the board and familiar management team. The member vote is largely by mail and the required in-person meeting is always on the final day of voting. That timing eliminates the opportunity for discussion of alternatives by members.

This managed process virtually guarantees approval. The percentage of members who vote in favor are always in single digits, but none the less sufficient to meet the only legal requirement– that a majority of those voting must approve the merger.

The process is both dishonest and corrupting. Member voting is charade. NCUA’s merger regulation gives legal cover to the payment of personal incentives that by any objective criteria bear all the earmarks of payoffs.

The Falsehoods of the Participants

This duplicity is confirmed by other documents. There are written statements by the leaders which contradict the merger action recommended. For example, Sperry Associates FCU’s CEO, two weeks before the mailing of the Member Notice, published an op-ed in Credit Union Times, extolling the superior strategy and performance of his ”right-sized” credit union versus larger or smaller ones in the pandemic:

A larger firm would have had to schedule meetings, create committees and navigate the rough waters of corporate politics, while a smaller firm would be working to enter the market. For us in the middle, we were the right size to react appropriately, all while using our internal talents to ensure that due diligence was conducted, and our solutions were beneficial to those we serve.

Is This Who We Are? Part I: The Proposed Merger of PenFed and Sperry Associates FCU

PenFed’s merger eliminated this credit union’s single office and ended virtually all of the local activities and relationships. The 16,303 members are now required to transact all contacts virtually.

Sperry’s Chair had been honored as volunteer of the Year by the New York Credit Union League in June 2020. He readily accepted knowing that in January he had agreed to the PenFed merger, an action not disclosed until July, after the award.

The Proposed Post Office Merger in Madison WI

Corruption is a form of dishonesty or criminal offense undertaken by a person or organization entrusted with a position of authority, to acquire illicit benefit or abuse power for one’s private gain. Wikipedia

PenFed’s acquisition of the $35 million Post Office CU follows the same game plan as the Sperry Associates FCU merger. 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 long serving. 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. 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 Sperry, the single office is being closed. In Post office the wording is vague: “PenFed intends to maintain the current POCU branch at. . .” This is not a commitment.

While the objective evidence of financial inducements is clear, 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, the words above 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.

As in PenFed’s other mergers, the leaders of Post Office have compromised their responsibility to their members. The member-owners will now be shorn of their credit union through their directors’ and CEO’s indifference to their legal and fiduciary duties.

NCUA Greenlights PenFed’s Conduct

The ONES office at NCUA oversees the examination of PenFed and approves all its mergers. It has seen the member notices that repeat word for word the misleading claims of due diligence and member assurance. It examines and tracks PenFed’s subpar financial performance.

NCUA has all the facts and fictions presented in Part I above. But the agency has no interest in members’ best interests, the phrase used to describe its merger oversight role.

NCUA issued its proposed merger rule in 2017 with following preamble:

In granting or withholding approval for a merger, the board is required to consider the following statutory factors: . . . the general character and fitness of the FICU’s management, the convenience and needs of the members to be served by the FICU. . . and in the case of competing proposals, “management must appropriately evaluate which. . .would be in their members’ best interests in terms of member philosophy and continued or expanded products and services.”

General character obviously is irrelevant so long as management discloses their personal gains and words of assurance—words which carry no accountability. NCUA has been aware at the highest levels of PenFed’s activity since the Ft. Belvoir merger in 2016. The Agency greenlights this avarice as long as the financial incentives promised management are divulged.

The words, character and fitness, mean nothing. NCUA’s actions are complicit and derelict in this perversion of “members’ best interests.”

Why This Is a Problem We All Share

The related and irreversible outcomes exemplified by PenFed’s mergers is that it is shutting down strong, well-run, long-serving, locally focused credit unions. These actions undermine member trust in the cooperative model. They erode confidence in the unique member-owned financial system.

As the CEO of Atlanta Postal Credit Union recently stated: “Likewise, although members of national postal organizations from other states were eligible to join APCU, doing business with a financial institution that was not in their home state probably did not come across as very practical.” Apparently Wisconsin postal workers don’t care about this practicality.

https://www.cutimes.com/2020/11/25/atlanta-postal-cu-launches-consumer-facing-credit-union-for-growth-opportunities/

PenFed’s goal for Post Office is not scooping up isolated $35 million credit unions in states where it has no presence or even legacy connection. Rather, it wants to demonstrate to a new market and another set of credit union leaders that these self-serving merger arrangements are an option for their future as well.

By putting small minnows on the hook, PenFed hopes to bring in much larger combinations. As documented above, PenFed’s organic growth has dwindled to almost nothing, 3.1%. But if this merger option is validated far and wide, along with its misleading claims about size, then as PT Barnum said, there is one born every minute.

Peeing in the Cooperative Swimming Pool

The temptations for apparent “easy growth” fueled by self-interested gains are not limited to PenFed. Other credit unions look for options to emulate this superficial outcome. Consultants line up to create “change of control” clauses in management contracts. Accelerated payments are structured upon the termination of benefit plans in mergers.

When one credit union repeatedly pollutes the water by peeing in the cooperative swimming pool, it will become unfit for all, not just where the offender swims. Ultimately the pool will be closed for good.

Orwellian Merger Logic Spreads

Not all mergers disdain member interests. But the reverse logic does not apply–that all mergers are good for members and the cooperative system.

Increasingly, merger explanations offer contrived reasoning void of fact. Others are outright sales manipulated for personal benefit. NCUA is partly responsible due to its routine endorsements. NCUA is validating flat out falsehoods and conflicts of interests. It has “legalized” the personal payoffs previously done behind closed doors.

Common sense suggests dubious combinations completed or announced have little to do with “members best interests.” Recent examples of these contrived explanations are the following:

• Why would members of a successful $350 million community federal credit union in Maine have any interest in merging with a John Deere focused credit union headquartered in Moline, IL, more than 1,230 miles away? Moreover, the surviving state credit union would eliminate the one member one vote FCU governance model. It would be replaced by proxy voting in all situations and in which all votes are weighted by the amount of member shares. The Maine CEO’s assertion that this merger would “retain local control” when DECU’s board, not the members, make all the decisions is nonsensical. https://www.cutimes.com/2020/10/20/maine-credit-union-seeks-merger-with-an-illinois-based-cu-again/
• Why should the members and employees of NorthStar Credit Union be forced to follow their CEO by merging with the credit union their CEO joined for a significant pay increase? Due to proxy voting, the members had no say in this transaction as the NorthStar board controlled the votes via proxies. https://www.cutimes.com/2020/08/18/seven-credit-unions-in-six-states-announce-new-mergers/
• How do members, employees or the community benefit when two strong, long-serving independent billion-dollar credit unions merge in Minneapolis? Why should they give up the freedom of choice and the cooperative system lose the diversity and contributions of two independent leadership teams? https://www.cutimes.com/2020/05/05/billion-dollar-minnesota-credit-unions-plan-2021-merger/

Mergers become an addiction, not a strategy. The fix needs to keep happening or the whole enterprise starts to decline. Unable to innovate for organic growth, merging creates only greater size and a temporary illusion of success.

Mergers based on rhetorical flourishes are not plans, but chimeras. They turn the credit union model upside down. Instead of pursuing common benefit, personal ambition and gain become paramount.

As administered by regulators today, the merger process has become a blueprint for larceny. Better rules might provide an improved process. However, laws preventing wrongdoing do not prevent robbery.

Part III will outline a solution to this growing merger exploitation.

The traditional reasons for mergers of sound, well-run credit unions are the following: the credit union must get bigger quickly, to achieve scale necessary for greater efficiency, and to acquire more resources and internal capacity to improve member value.

On the surface the logic seems plausible. The challenge is that it is not self-fulfilling in practice.

Pentagon FCU (PenFed) has been the preeminent practitioner of this business approach. But a review of its results demonstrates how shallow and dubious the logic of a merger “growth strategy” can be.

PenFed’s Five-Year Merger Efforts

From September 2015 through the third quarter 2020, PenFed has implemented a very public, nation-wide effort and acquired 18 other credit unions via merger. The largest was the $420 million McGraw Hill FCU in May 2019. This followed the emergency January 2020 merger of the $320 million Progressive CU–with its open NY state charter–which enabled PenFed to serve anyone anywhere in the US.

The final stand-alone call reports from these 18 credit unions showed total assets of $2.4 billion. This total does not include the addition of the $265 million Sperry Associates FCU finalized in October, nor the proposed December merger of the $34 million Post Office CU in Madison, WI.

The Results of PenFed’s Merger Strategy-Faster Growth?

Since September 2015 the compound annual growth (CAGR) in Pen Fed’s total assets is 6.4%. Without the added mergers and $1.2 billion in additional borrowings, its organic growth rate is only 3.1%. In the five years prior with no mergers, PenFed’s annual internal growth was 5.3%.

The five-year peer growth rate for the 14 credit unions over $10 billion at September 2020 is 11.22%. None has a merger strategy similar to PenFed’s. PenFed’s 6.4% growth is only 57% of the peer’s pace and places them 13^th or at the bottom of the peer table.

Five Year Annual Asset Growth for Credit Unions over $10 Billion in assets

( data: September 2015 & September 2020 assets)

If the comparison is expanded to all 49 credit unions over $5 billion, PenFed’s growth is still much slower than this peer group’s 10.8%.

But what if a new strategy takes time? The September 2020 annual numbers show an even greater fall off from the peers’ results compared to the five-year trends:

September 2020

Greater Efficiency?

The second reason for a merger strategy is that growth brings greater efficiency. PenFed is already the third largest credit union in America. So it should be at a high level of efficiency already. However, when comparing different measures of operational efficiency before and after these eighteen acquisitions, the operating results show a dramatic decrease in efficiency even as Pentagon has increased assets over $7 billion.

PenFed Efficiency Trends as of Sept 2015 and 2020

The ratios show a dramatic deterioration in efficiency and productivity. With the same balance sheet structure and net worth as five years earlier, PenFed has higher costs, members have smaller average relationships, and the expense ratio increased 73%. Delinquency is four times higher.

Greater Member Value?

PenFed’s product driven focus may provide competitive choices for members in specific circumstances. Their credit card and first mortgages can be excellent value in some markets. Building member relationships is not the focus of its strategy, however.

Several numbers illustrate this product versus member-centric focus. The share draft penetration, ( a primary financial institution indicator) is 14.1% versus the peers’ 67.4%. The average member relationship has declined from $23.7K to $19.1K over the five years. The number of share accounts per member at 1.41 trails the peer’s of 2.03.

Rather than building member relationships, the credit union’s approach is akin to commercial financial firms that move in and out of markets pursuing different product priorities as suggested by circumstances.

Investments to Enhance Competitive Capabilities?

A final rationale for mergers is that more assets provide more capacity to underwrite greater investments in technology, staff and other fixed assets to maintain or enhance competitive position. The single largest investment by PenFed was in 2016 when it purchased a new head office in McLean VA. (https://patch.com/virginia/mclean/penfed-purchases-new-corporate-hq-tysons-0

PenFed CEO James Schenck explained the reasons for the purchase, which has resulted in a 580% increase in building and fixed assets in just four years:

“In order to attract the best and brightest employees, a firm needs to not only pay a competitive salary with benefits, but needs to offer a best-in-class work environment with a meaningful mission.

“PenFed has an insatiable appetite for talented, educated professionals to provide perfect service to our members. Locating our corporate headquarters in Tysons will continue to enhance our operational efficiency and it will be conducive to sustaining growth of the intellectual capital required to keep pace with our members’ needs and deliver exceptional value and superior service.”

Before the merger strategy, PenFed reported total building and fixed assets investments of $91 million (4.8% of net worth). Five years later the $530.5 million total equals 19.4% of net worth. In this same period, the number of fulltime equivalent employees has increased just 73% from 1,539 to 2,662.

The average salary and benefits per employee of the current staff is $101,969, a 5.1% annual growth from the $79,616 five years earlier.

In addition to this growth in average salary, the credit union has increased its balance sheet assets funding employee benefit and deferred compensation plans with investments not authorized under Part 703 of NCUA Rules. This five-fold increase over five years, from $126 million to $732.2 million, includes $130.1 million in Charitable Donation Accounts.

The Strategic Mirage

PenFed’s “growth via mergers” has resulted in slowing rates of both internal and total asset growth, increased expenses, reduced average member relationships and a dramatic increase in fixed investments with uncertain return. Instead of an example of improved performance from growth, the results are at the bottom of its peer group.

PenFed’s floundering performance is being propped up by taking in as other operating income (negative good will) the equity from other strong, long-serving credit unions. As described in the analysis of the Sperry Associates FCU merger:

For over five years “$0 cost acquisitions” have been a critical contributor to PenFed’s bottom line and balance sheet size. In 2019, it booked a total equity increase of $92.4 from mergers. “Bargain gains from mergers” (negative good will) totaled $74.2 million and $18.2 million was added equity value. Of the credit union’s $151 million 2019 net income, over half is from transferring the accumulated surplus from other well-capitalized, merged credit unions which PenFed recognized as “other operating income.”

This 2019 one-time income boost came from three mergers. . . PenFed’s reported asset growth was only $300 million. But without these three mergers it would show a balance sheet decline of $500 million.

Credit unions’ advantage is their relationship with members. PenFed’s mergers help disguise the pitfalls of its open field of membership. For it has no market focus, no niche, and nowhere to effectively mine for organic growth. Its minimal performance outcomes are a veneer. They can be sustained only by finding more sound, established and well-capitalized credit unions willing to become further victims of this Ponzi-like business model.

And that raises the second, and more consequential issue. That is the irreversible shutdowns of strong, well-run, long-serving, locally focused credit unions built on generations of member loyalty.

I will address this challenge in Part II: Mergers’ Impact on the Cooperative System

The recent national elections demonstrated the essence of democracy is voting. Credit unions as co-ops are unique in their governance. All federal credit unions and most states establish member authority as “one person one vote.” The amount of one’s shares or size of loans  does not change this basic equality. Rather, that is how private corporate and public companies are governed.

No proxies are allowed for FCUs although seven states permit limited proxy voting for their charters. In one state (IL), proxy voting is permitted in all cases including merger. In states permitting proxies, members give their voting power to the board, unless specifically revoked prior to the vote.

Member voting primarily in the annual election of directors is the most frequent means cooperative governance is practiced. But it is especially critical when a board recommends the merging of a sound, long standing credit union into another institution.

A Multi-tiered Democratic Nation

Cooperative democracy is a micro example of the broader political society in which we live. One co-op commentator described this context as follows:

“Democracy is seen by the public as making decisions regarding laws, taxes and public spending. These tools are necessary, but alone are limited in their ability to improve society. We need to expand our tool-kit and harness our collective imagination and intelligence to utilize not just the mechanisms of democratic governments, but also in cooperatives.”

(https://coop.exchange/blog/5afea409-45ea-11ea-8997-06ceb0bf34bd/democracy-beyond-the-state-elections-in-trade-and-credit-unions-building-societies-and-co-ops-need-r)

Co-op democracy only works if members believe their role matters and they are encouraged to exercise their voice. This is not the process being followed in most mergers. If 90% or more voters failed to participate in any political election, many would consider it a façade. “My vote won’t matter so why bother.” Unfortunately this is the pattern in almost all credit union mergers. Two recent examples:

From Ypsilanti, MI : The CEO of Washtenaw announced that 457 or 8.0% of eligible members voted in an election to decide the future of the credit union’s potential merger with the $566 million Financial CU. The $50 million dollar credit union, chartered in 1949 reported 16% share growth, well-capitalized net worth of 7.54% and no delinquencies at September 30. 6.7% of the members voted yes, and 1.3% voted no. Over 92% of the member-owners did not vote to decide the credit union’s future.

The CEO explained the merger with CP Financial CU: “We are extremely proud of the lasting legacy that the good people and good work Washtenaw Federal Credit Union has provided the community for the past 70+ years. That BEST of who we are will still live and breathe at True Community Credit Union (new name); moreover, the sum of CPFCU and WFCU is greater than we were individually. Our credit union family is not dissolving, it is simply growing larger. CP FCU has welcomed us with open arms not solely because they are good people, but because “real recognizes real” and our members aren’t losing a credit union but gaining another one.”

From Garden City Park, NY: 1,843 members of the $265 million Sperry Associates FCU voted on the Board’s recommendation to merge with the $26 billion PenFed, located in Mclean, VA. 68.3% (1,166) of those voted in favor; 35.7% (677) voted no. Of the total membership of 16,303, only 11.4% of the share-owners participated in the merger decision which will end this charter issued in 1936.

The CEO’s justification for merger: “For over a decade, Sperry’s board and executive management team has worked to successfully strengthen the credit union’s standing, and this is the next step in that process.”

Co-op democracy or something else?

In both instances above, over 92% of members did not vote or voted against the merger of these two sound, long-serving credit unions with strong local presence. What does this lack of participation suggest about member interest in the surviving credit union? If they did not value their own institution’s service and record enough to participate, will they have any allegiance to their new one?

Is the so-called democratic process of member voting just an administrative fig leaf covering the naked ambitions and personal agendas of those in charge? What is the meaning of a “vote” when over 90% of eligible members do not participate?

If a credit union is sold to a bank or converts to private cooperative insurance, by rule a minimum of 20% of members must vote for the decision to be approved. There is no participation requirement, however, to end the life of a charter. If a minimal level of member awareness is required in these two situations, is it even more appropriate for the decision to end the life of a charter? Does the fact no required participation is needed, lead to a controlled process to ensure alternative points of view are not raised?

A Special Relationship?

As these consolidations routinely proceed with less than 10% member participation, is this just quickening the pace ending the distinctive credit union cooperative advantage? For if members are treated just like customers being told what is good for them, how is that any different from banks? The CEO’s rhetorical statements justifying their merger decisions contain no facts, no specific member benefits. Only the increase in financial gain by the CEO and senior staff is provided, and that only because it is required by regulation. Surely member owners deserve a fuller explanation than marketing mantras before giving away their institution.

Democracy is not a rule, set of bylaws, or even an idea. Rather it is a discipline requiring personal actions. That involvement was the essential good will that got almost all credit unions started as there was no start up capital. . Today the phrase member relationship is used to define this critical difference in cooperative design. It is a skill and capability that needs continuous effort to sustain this advantage not just once a year at the annual meeting.