Category: Cooperative Design

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The Problem We All Share Part I: PenFed’s Spurious Merger Strategy

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 13th 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)

Asset Rank State Name 2015 assets 2020 assets 5 Year CAGR
7 TX Security Service $9,052,442,285 $10,081,370,509 2.18%
3 VA Pentagon $19,223,138,716 $26,257,438,559 6.44%
2 NC State Employees’ $31,162,020,508 $45,851,733,095 8.03%
8 IL Alliant $8,463,784,328 $13,027,161,832 9.01%
13 MA Digital $6,519,513,295 $10,469,689,635 9.94%
6 CA Golden 1 $9,508,199,852 $15,567,120,747 10.36%
9 CA First Tech $8,335,581,297 $14,404,660,260 11.56%
12 FL Suncoast $6,627,125,361 $12,026,016,187 12.66%
1 VA Navy $71,967,667,797 $131,620,239,595 12.83%
4 WA BECU $13,878,323,252 $25,637,148,406 13.06%
11 TX Randolph-Brooks $6,665,438,060 $12,550,850,662 13.49%
10 UT America First $7,002,583,992 $13,795,623,334 14.52%
5 CA SchoolsFirst $11,438,769,717 $22,597,939,638 14.59%
14 UT Mountain America $4,823,680,120 $11,404,026,075 18.78%
PG Credit Unions Over $10B $15,333,447,756 $26,092,215,610 11.22%

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

Annual Growth PenFed Peers
Share growth 5.9% 21.9%
Loans 5.3% 7.6%
Assets 6.0% 17.4%
Capital 6.0% 13.0%
Members 13.2% 8.2%
Operating Expense 18.9% 12.6%

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

Ratio September 2015 September 2020
Efficiency Ratio 62.6% 80.8%
Op Exp/Avg Assets 1.35% 2.33%
Assets/FTE $12.5 mn $9.9 mn
Avg Acct Relationship $23,734 k $19,094 k
Loan/Share 118.6% 108.5%
Net Worth 10.06% 10.7%
Delinquency 0.26% 1.07%

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

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More Voting Results Announced by Credit Unions

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.

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Credit Unions Investing in Other Cooperatives

Responding to the listing of America’s top 100 cooperatives by total revenue, I received the following comment from Leo Sammallahti, marketing manager for the Coop Exchange:

“Credit unions do fantastic charitable work, but do we just try to do the type of charitable work that conventional banks do, but just more and better? How about we take a different, distinct approach. Let’s help our members help themselves by fostering creation of new cooperatives. Isn’t that what Filene was all about? If the 120 million member strong credit unions are not doing this, who is? We could find great ideas and energy among those members if we look for it.”

A Case Study of a Credit Union Investing in Coops

Leo then sent me this example:

“Matthew Cropp from the Vermont Employee Ownership Center recently rediscovered a little-known credit union statute applicable to state-chartered credit unions in eight states (Arkansas, Illinois, Kentucky, Montana, Nevada, New Jersey, New Mexico and Vermont). It allows credit unions to make equity investments into cooperatives, including worker cooperatives.

As a result of this discovery, one of the largest credit unions in Vermont (VSECU) has begun to offer equity to cooperatives in its region—an unprecedented move as most credit unions, if they offer any financing for coops, offer debt financing.

The Vermont statue’s language specifies that state-chartered credit unions are authorized to invest equity of up to 10% of the shares, deposits, and surplus of the credit union into cooperatives. These investments would not count against the 12.25% member business lending cap that most credit unions are currently subject to.

VSECU has decided to make 10% of their total equity available for equity investment in coops, roughly equal to $8.5M in 2020. It appears that the VSECU is the only credit union in any of these eight states that has started investing using this statute. Its co-op capital tool kit can be found at this link https://www.vsecu.com/community/resources/co-op-capital

Consequentially, cooperative advocates are working to identify credit unions in the other eight states to follow VSECU’s lead and invest equity capital in coops. There is also talk of lobbying other state’s legislatures, then eventually congress to “follow suit by broadening the range of credit unions that are legally permitted to make such investments.”

Are there other instances of this coop investment effort readers can share?

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Chairman Hood’s House Testimony: Members’ Interest Only Matters When Selling to a Bank

In today’s cooperative system when a bank acquires a credit union, regulators require that a fully detailed, independently verified value be given members for the equity accumulated from their loyalty. There is no such protection for members in a credit union acquisition.

Chairman Rodney Hood’s House Banking Committee testimony on Thursday, November 12, 2020, included a summary of credit union bank purchases and credit union mergers. The import of his logic is devastating.

As outlined by Hood in his “state of the industry” presentation, the only way the agency will ensure members receive fair value for their equity is to be bought by a bank. The necessary action is self-evident: before any credit union board or CEO decides to end their charter and hand off their members’ future via a merger, contact a bank to determine what they think the credit union is worth. Otherwise, don’t count on NCUA ensuring members receive a fair deal.

The Chairman’s words

Bank acquisitions by credit unions were described as follows:

“. . .the number of credit unions purchasing banks is very small. Of the 36 NCUA-approved bank purchases by federally insured credit unions since 2012, 13 were banks with assets less than $100 million. Another 16 of the transactions involved banks with assets from $100 million to $250 million. Only seven of the approved transactions were banks with assets above $250 million.”

And these, he explained, are thoroughly regulated:

“The NCUA does not prohibit the transactions because credit unions are permitted by regulation to purchase banks. Additionally, bank-to-credit union transactions must also be approved by the Federal Deposit Insurance Corporation, per the Bank Merger Act, and the state credit union regulatory agency, for transactions involving a state-chartered credit union.”

In the reverse situation, where a bank acquires a credit union, it is carefully monitored to protect members’ interests:

“The NCUA has regulations to oversee the sale of a credit union to a bank. These regulations ensure the members’ equity is properly valued by an independent third party who establishes a market valuation of the credit union. The purchasing bank must pay the credit union at least that amount thereby ensuring the selling members are paid a fair value for their equity.” [emphasis added]

No Fair Value for Members in a Merger Acquisition

When one credit union acquires another through a merger, there is no such member protection. These acquisitions are merely a response to changing market conditions:

“. . .The majority of merging credit unions are comprised of smaller credit unions, and the most common reason for merging is to expand services, as larger credit unions tend to offer more complex products and services to their members. However, we have seen a growing number of larger credit unions use mergers and acquisitions as strategies to grow and increase market share.

Due to the pandemic, merger activity for federally insured credit unions has slowed, but may increase as conditions evolve. The NCUA will monitor these trends to ensure the continued consolidation of credit unions and system assets does not create new potential risks to the Share Insurance Fund.”

Members Short-Changed

NCUA’s monitoring of these intra-industry merger acquisitions does not include “ensuring members are paid a fair value for their equity.”

Wouldn’t credit union members be financially better served if their institution was sold to a bank for “fair value”? Then take their money and their savings to another credit union if they so choose? Or even purchase equity shares in the bank acquirer?

Mergers between credit unions are not “market-based transactions.” There is no transparency in the process. Those responsible negotiate their own self-interest behind closed doors. The opportunity for alternative “bidders” is not presented. No specific or meaningful benefits for members are detailed. Member voting is not a choice, but merely a request to ratify decisions that have already been made without their input.

A Weakening of the System

The first rule of safety and soundness is diversification, not putting all eggs in one basket. Concentration destroys diversification. The single strategy of the surviving firm replaces multiple ways of approaching the future.

While NCUA claims to monitor merger activity to verify that the continued consolidation of credit unions and system assets does not create new potential risks to the Share Insurance Fund, how it does so is a complete mystery. Even if the erosion of the industry’s soundness could be documented, what would the remedy be? Undo multiple mergers? Not practical. Stop mergers? Not realistic.

The three traditional solutions for a problem are to find a bigger healthy merger partner, liquidate, or sell to third party outsiders. Unless a more open, transparent, member-first merger process is created soon, future credit unions will reap the whirlwind of this growing short-term practice undermining system soundness.

Mergers and Growth: A Common Myth

The merging of sound, independently managed firms debases cooperative design, undermines member well-being and destroys credit unions’ reputation as the trusted alternative to market-driven financial options.

It also perpetuates the myth that somehow mergers enable growth and stronger competitive capabilities versus self-driven organic strategies. An analysis of credit unions with high profile merger efforts suggests just the opposite. This will be the focus of a later blog.

Bigger does not automatically create better value. Credit union mergers do not enlarge cooperative market presence. That requires innovative, purposed-based continuous management effort, a skill that atrophies when mergers become front and center.

A Ruinous Policy

The assumption in NCUA’s oversight of credit union acquisitions that credit union mergers are benign, whereas a bank purchase is predatory, is completely false. Multiple current examples contradict this belief.

The irony in Hood and NCUA’s differential regulatory approach to purchase acquisitions is disastrous. It requires a bank offer to activate NCUA oversight for credit union members to receive fair value. Only a bank bid brings real transparency to the insider’s merger games now being practiced. In either outcome, the members lose their credit union.

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Students: Enrolling the Next Generation of Members

In 1974, Peggy Holliday, CEO of Burbank Schools FCU, started student run branches at two Burbank High Schools. Each campus had a Student Credit Union Treasurer, who would “work” the student credit union during lunch, opening accounts and performing basic deposit/withdrawal transactions.

After school, the Student Treasurer would come to Burbank Schools FCU and reconcile the deposits/withdrawals of the day and process the membership forms to open the accounts.

The experience taught students the real-life skills of money management, budgeting, balancing cash drawers, and basic financial transactions. Students learned the concept of compound interest and making loan payments. Some went on to build careers in the credit union industry.

In 2011, the student credit union branches were disbanded. As account access became available online, the need for in-person transactions diminished. Promoting loan products became challenging, due to regulations. Checking accounts required parental authorization, difficult during school hours. Additionally, as school security increased, hallways became locked down during lunch, and access to the dedicated student credit union room became an issue. Finding student volunteers also became challenging.

But the focus on offering great service to students continued with UMe Credit Union (formerly named Burbank Schools FCU). UMe has an ATM on the quad at Burroughs High School, offers scholarships to Burbank grads, provides a student intern program and offers financial workshops and “Bite of Reality” financial simulation experiences. Additionally, UMe has some student-centric savings products created to help the younger generation get a head start on saving money.

Growing loyal student members by helping teach smart money management is a continued business effort for UMe. They think of themselves more as “helpers” than bankers, which is why they believe in promoting the cooperative spirit to their next generation of members.

From High Schools to Universities

Credit unions, especially those with educational FOMs, continue to sponsor student run credit unions or branches in high schools throughout the country. Students gained financial skills and become part of a new generation of co-op members.

In 1982 to address a falloff in the number of new federal charters (only 114 in 1982), the NCUA launched a renewal program called Credit Union Expansion or CUE-84. The goal was to make credit unions available to many new members ahead of the 50th anniversary of the Federal Credit Union Act in 1984, The committee’s members were a who’s who of credit union CEOs, league and trade association leaders, and state regulators. The one surviving attendee of the 1934 founding of CUNA at Estes Park Colorado, Louise Herring, was on the committee along with Joe Scoggins, CEO of Navy Federal, the country’s largest credit union.

The three-pronged growth effort included chartering new credit unions, expanding FOMs and adding groups such as retirees to credit unions.

The College-University Initiative: Solving a Real National Problem

One important focus was organizing new charters at universities around the country. One example profiled by NCUA was New York University FCU for faculty, all university employees, trustees, alumni and students. Potential membership was 20,000.

The local poster child for this effort was Georgetown University Alumni and Students FCU (GUASFCU) in Washington D.C. Sponsored by the student government, it was open to students and alumni and managed by undergraduates who wanted the experience of running their own co-op.

NCUA changed policy to designate student credit unions as low income, enabling them to accept non-member deposits to fund low cost loans for books and tuition. As explained by NCUA Chairman Callahan:

“This opens the door to alumni through the corporations they work for to make contributions in the form of federally insured deposits which can be earmarked for student loans. Here is a vehicle that could provide a private enterprise approach to something that is a real national problem-the need for student loan funds.”

Of the 107 new charters approved in 1983, NCUA’s Annual Report included a picture of the GUASFCU’s first annual meeting. Also highlighted were charters for the University Student FCU (University of Chicago) and Skidmore Students FCU in Saratoga Springs, NY.

Recently GUASFCU’s Hoya Banking model with $17 million in assets announced a grant from the University to underwrite a secured loan for all incoming students so each could establish a credit score of 685 or greater by graduation.

Current Chartering Environment

From military recruiters, to political parties to businesses seeking the loyalty of new consumers for their products, high school and colleges are target markets for every institution that wants to remain relevant in society. Most major college campuses now have a bank branch on the grounds, or nearby, to serve students.

Gen Z and millennials embrace activism, engagement and technology to create new ways of participating in economic and social change. Starting new enterprises is one hallmark of this creative impulse.

Responding to this student interest, over 220 colleges and universities across the country provide innovation and entrepreneurship programs to encourage this activity. (https://www.acceleratorinfo.com/see-all.html)

These academic business accelerators respond to students wanting change, promote the traditional American spirit of innovation and, if successful, provide a financial return to the school. Many academic institutions now sponsor “shark tank” contests to incent new venture ideas offering dollars as well as in-kind support for winners.

One winner in the spring 2018 George Washington University’s new venture competition was a group of freshmen. They proposed a student managed credit union for their university community. They had three primary goals: provide better value services for the students; offer practical management opportunities for volunteer leaders; and create a prototype that could be easily replicated at other colleges around the country.

These students are business, finance, technical and liberal arts majors. They are volunteers in this multi-year effort receiving no pay or course credit. Now in their fourth year of trying to obtain a charter, they may earn their bachelor’s degree before NCUA approves their application.

The Problem for Credit Unions

If students are not part of credit unions’ recruiting efforts, the industry is losing the battle for the next generation of leaders and members. Unlike many areas of civic endeavor or business enterprise, cooperative solutions are best understood when experienced first-hand. They are not a dominant form of organizational design in America’s capitalist economy.

Earlier NCUA efforts, recognized the need to encourage the use and formation of credit unions for all groups. Especially students. Now less so. But the needs of Americans in 2020 and forward are not that much different from 1980.

A Cooperative Opportunity: HBCUs and NCUA

Chairman Hood has announced his ACCESS initiative (https://www.ncua.gov/access) to promote financial inclusion. To put real work, not just talk behind this concept, NCUA should reinvigorate the student credit union charter effort.

For example, there are 107 historically black colleges and universities (HBCUs) in the country. Fifty-six are private and fifty-one public. The democratic Vice-Presidential candidate is a graduate of Howard University whose credit union has charter # 648 (1935) but apparently does not include students.

Can here be a program with local credit union mentors (the Burbank Schools model) to launch credit unions at HBCUs around the country? It would bring a new generation into the cooperative experience as members and managers. Successful examples like GUSAFCU are operating. The benefits are known.

There is nothing more inclusive than the empowering persons through self-help. That is how all credit unions began.

The need is leaders willing to move forward. The ball lies in NCUA’s court. No one wants to wait four years to receive a license to start an enterprise. Especially a cooperative where community progress, not individual enrichment, is the motivation.

If NCUA were to initiate such an effort it would stop working its way out of business and start seeding the economy with a new generation of cooperators. It would also:

  • Turn the industry to a new vision for itself.
  • Extend the NCUAs role in the expansion and success of cooperative solutions.
  • Point credit unions to new heights for mutual benefit, versus consolidation.
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The Top 100 Coops at Year-end 2019

For 30 years, the National Cooperative Bank (NCB) has published the annual NCB Co-op 100, America’s top 100 Cooperatives by total revenue. In 2019, these member-owned and controlled businesses had total revenues of $228 billion.

https://impact.ncb.coop/hubfs/assets/resources/NCB-Co-op-100-2020-final.pdf

Who is on the list?

Five credit unions are in the top 100. Navy is #7; State Employees (NC) #22; PenFed #30; BECU #57; and SchoolsFirst #78.

There are several well known consumer brand names of firms such as SunKist Growers, Land O’Lakes, Ocean Spray, Welch Foods and ACE hardware. In addition to finance, larger co-ops also serve the farming, energy, health care, grocery and hardware sectors.

The total assets of these leaders are $733 billion.

The compiler of the list, NCB, was created to address the financial needs of an underserved market niche: people who join together cooperatively to meet personal, social or business needs especially in low income communities. Chartered by Congress in 1978, NCB was privatized in 1981. Owned by its more than 3,100 customer-owners, it has $7.9 billion in assets under management. As part of its enabling legislation, NCB was tasked with ensuring that 35% of the capital it deploys will benefit low income communities.

A Credit Union Opportunity?

The question for the $1.7 trillion cooperative credit union community’s 5,200 institutions: What are we doing to enhance cooperative solutions for the American economy beyond consumer finance?

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Democracy and Voting in Credit Unions: Does it Mean Anything?

In an election late last year 157,655 members were asked whether they should merger their eight-decade old, successful, super performing community charter with over $2.1 billion in assets.

Here are the voting results certified to the NCUA:

  • 7,331 or 4.65% of members voted
  • 6,658 or 4.4% voted in favor
  • 473 or .3% voted against the merger

150,324 or 95.35% of members did not vote on the future of their credit union.

Of those voting only two did so in person, the rest by mailed ballot.

Is This What Cooperative Democracy Should Be?

Is this “democratic” when only 4.6% of the share owners vote?

Were members even aware of what was happening to their credit union?

How could such low participation occur on such a consequential issue?

Most important, is this perfunctory, minimalist process right for members? Their community? The credit union system? And cooperatives’ role in America’s economy?

Does Your Vote or Even Voting Matter?

We are all living in an election season where everyone is being urged to vote. Court battles are being waged over time limits on early voting, number of drop boxes, how long after November 3rd ballots can be counted, and numerous other election processes.

Every media outlet is tracking not just candidate debates and policy positions, but the voting activity itself. Will the outcome be seen as fair? Are votes being suppressed by changing rules?

Voting matters. We all get this. In a democracy public acceptance of the outcome depends on the perceived legitimacy of an election. For every level of government. Or any other election determined event.

While people will have different interpretations of the numbers from Schools Financial’s member vote to merge with SchoolsFirst, I think we would agree on one observation: This is not what a democratically labeled outcome should look like.

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Is This Who We Are? Part III: Self-Dealing and Complicity

The analysis in the first two parts documented the extraordinary success of Sperry serving its Nassau County market. In public, the CEO extolls the credit union’s performance and long-term market positioning into the summer. In private, he and the board agreed over a half a year earlier to merge the charter into an institution 100 times Sperry’s size and leaving no local operations.

Conflicts of Interest and Self-Dealing

Kevin Healy originally joined the Sperry board as Vice Chair in March 2010 while employed as COO, General Counsel and Director of American Defense Systems, Inc. In December 2012, he became Sperry’s CEO, but still retained his Vice Chair position on the board.

As both CEO negotiating the terms of his employment contract and severance compensation with PenFed, and as a director approving the merger terms, he has a direct conflict of interest.

Publicly, he praises the credit union’s advantages and strengths. Privately, he negotiates a five-year contract and/or severance up to three times his annual salary (presently $336,000) if he leaves within the first 24 months after the merger.

This hypocrisy, or worse, is not confined to the CEO. The Chair who signed the letter recommending merger was honored by the New York Credit Union Association as the winner of the “Statewide Volunteer of the Year Award.” The Sperry press release dated June 11, 2020, describes the basis for this honor:

Garden City Park, NY, June 11, 2020 – Gary Barello, Sperry Associates Federal Credit Union’s Chairman of the Board, has been recognized by the New York Credit Union Association (NYCUA) as a 2020 “Volunteer of the Year.”

The award serves as recognition of Mr. Barello’s long record of service within the credit union industry. With Sperry, Mr. Barello was instrumental in helping to stabilize the institution’s finances as well as with bringing in a new executive management team to lead the credit union. These actions included the hiring of Kevin J. Healy, Sperry’s current CEO and Vice Chairman of the Board.

“Gary Barello’s philosophy of people helping people is highlighted by his conviction to the principles that credit unions stand for,” the NYCUA said in a statement announcing Mr. Barello’s Volunteer of the Year award.

“At Sperry, we couldn’t be prouder of Gary for getting well-deserved recognition from the NYCUA,” Mr. Healy, who nominated Mr. Barello for the award, said. “As a steadfast credit union volunteer, Gary continues to prove himself to be a critical factor in Sperry’s successes.”

Mr. Barello has served as Chairman of the Board at Sperry Associates FCU since December 2010 . . .”

CEO Healy, Vice Chair, nominated his Chair for this award. Barello, in turn was Chair when the board chose Healy, then on the board, to be CEO in 2012. Healy’s statement that his Chair “continues to prove himself to be a critical factor in Sperry’s successes” is made as the chair participated in and approved the merger to end Sperry’s independent charter half a year earlier, but still secret.

Within six weeks of this statewide public selection, Chair Barello wrote Sperry’s members asking them to vote to close the credit union he chairs. The chairman’s role is the primary basis for his Volunteer of the Year honor.

The New York Association’s award states that “Gary Barello’s philosophy of people helping people is highlighted by his conviction to the principles that credit unions stand for.”

Rather, Barello’s actions and “principles” betray every cooperative value that members and credit unions depend upon from volunteer leaders.

PenFed’s Complicity

PenFed is an experienced hand in these acquisitions.

But first it is important to note that these two credit unions created two very different business models. Sperry is a traditional member-community focused credit union. Member relationships are the foundation of their success. Their average member relationship (total loans and shares divided by members) at June 2020 is $26,017 or 37% greater than PenFed’s $19,016. Sperry’s average relationship grew 2.6% while Pentagon’s fell 10.3% for the 12 months ending June 2020. Even though it is the third largest credit union in the US, PenFed’s member relationship is lower than the average of all 5300 credit unions.

PenFed’s credit union business model is that of a commercial financial firm focusing on acquisitions, investing in ancillary businesses, and increasing use of wholesale financing. In 2019, for example, member shares fell by $1.6 billion while FHLB borrowings increased over $1.0 billion (PenFed 2019 Annual Report pg. 17) to total $3.7 billion, or 17% of total funding.

Acquisitions and PenFed Financial Performance

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 to PenFed where it is recorded as “other operating income.”

This 2019 one-time income boost came from three mergers: Progressive with total assets of $382 million; McGraw Hill with $383 million; and Magnify at $78.6 million for a total of $843 million. PenFed’s reported asset growth was only $300 million. Without these three mergers it would show a balance sheet decline of $500 million.

PenFed’s financial “stability” depends on “acquisitions.” These three transactions are described as follows in the 2019 Annual Report: “The fair value of the identifiable assets acquired, and liabilities assumed of $ xxx exceed the fair value of the consideration transferred $0 . . Accordingly, the acquisition has been accounted for as a bargain purchase and as a result the Credit Union recognized a gain of $ xxx associated with the acquisition. The gain is recorded in Other Non-Interest Income. . .” (page 37)

PenFed negotiates with credit union boards and senior managers offering financial incentives so they will transfer their accumulated reserves for “$0 consideration” to prop up its own balance sheet and net income.

Sperry’s “acquisition” continues this Ponzi-like pattern of cooperative takeovers. They provide PenFed the appearance of financial performance by acquiring the accumulated reserves of other well-capitalized credit unions at $0 cost-contrary to all normal market transactions.

Sperry’s “acquisition” contributes at least $15 million more to this scheme plus another $270 million in assets.

PenFed’s strategic focus is on corporate initiatives. Members are not the credit union’s mission. Rather, members are the means PenFed’s management uses to implement its commercial business model. Member relationships and community participation are simply tactical marketing promotions to its nationwide field of membership of 330 million Americans as shown in its 5300-call report.

NCUA’s Regulatory Abdication

Recently NCUA sent a letter to a person helping to organize a new credit union. It stated the following requirements:

“Before NCUA can approve the Certificate to organize. . .the Federal Credit Union Act requires NCUA to investigate your general character and fitness to serve as a prospective officer. . .NCUA has made a preliminary determination that you are competent, experienced, honest and of good character in accordance with the FOM manual. . .NCUA will continue to monitor your background and credit worthiness. . . at any time . . . should NCUA discover anything that adversely affects your character or fitness to serve as a prospective officer. . . we will notify you about this additional information and request a response. . .as an officer of a newly chartered credit union you must still maintain your character and fitness to continue your service as such. . .”

However, NCUA’s review of character and fitness appears to matter only when seeking a charter. Once in business, anything goes.

NCUA’s ONES Director and the three regional directors routinely approve these insider self-dealings devoid of any objective justification, documented member benefit or pretense of informed choice.

The so-called member vote bears no semblance to a valid decision between two market options. The effort is designed in secret, the members marketed only one point of view, no alternatives are offered, and the “campaign” period strictly limited to discourage alternative voices from being raised. The process pre-ordains the majority of outcomes.

Often this decision is the first-time members have ever been asked to vote on anything. Why should they be skeptical of their board and management’s advice? The members’ vote is a pantomime orchestrated by leaders cashing in on the outcome. All with NCUA’s blessing.

This regulatory dereliction undermines the system’s safety and soundness. NCUA overlooks the operational deficiencies of PenFed’s commercial model. These acquisitions increase concentration risk in a fallible institution disguising its weakness by booking gains with further takeovers.

System-wide, similarly inclined CEOs are emboldened as they watch for their chance for personal windfalls like the PenFed offers. Members’ future well-being is sacrificed. The uniqueness of credit unions is corrupted.

What Can Be Done?

There are several possibilities to stop this cooperative self-harm.

  1. One would hope the Chair and CEO of Sperry would reconsider and reverse course, bring on new board members and enhance Sperry’s unquestioned valuable role for their local community.
  2. NCUA might call the game off. There is a direct conflict of interest by the principals and their public duplicity with information provided members. PenFed is just adding to its financial house of cards.
  3. The press reports the situation for readers whose concerns cause political leaders to bring to account the enablers of this sham process.

This example and others like it, show the urgency for radical reform to protect members’ interests. One approach would be to require transparency through public auction where fully developed merger offers are openly solicited from interested credit unions, or even third parties. That would truly create a “free market” process where members meaningfully select their destiny.

The most critical factor for maintaining confidence in a financial system is trust. These secretly arranged acquisitions mock this fundamental value. Character and integrity are replaced by greed. Cooperatives’ unique focus on the common good is sacrificed on the altar of personal ambition.

Today it is Sperry’s members who are the victims of this dishonesty. Tomorrow it will be the credit union system that pays the price.

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Is This Who We Are? Part II: Specious Merger Reasons

Yesterday, in Part I of this series, I introduced the merger of Sperry Associations FCU’s ($278.4 million) with Pentagon FCU ($25.9 billion). The merger terms in the member Notice includes this sentence: “The services currently offered by Sperry will cease to be provided and replaced by the (virtual) branch services listed in the attachment to this Notice.”

Part I described how this locally-focused, high-preforming credit union was ideally positioned in the market according to the CEO’s public testimonials. It is now to be closed in the middle of a pandemic when most needed by members. Why?

What Members Were Told About Why They Should Merge

The reasons from the FAQ on Sperry’s web site:

Q: Why did Sperry have to merge in the first place?

“In recent years, the financial services marketplace on Long Island has changed. Thanks to the entrance of more big banks and global Fin-Tech companies, it’s become more challenging for mid-sized institutions like Sperry to thrive. While Sperry is currently financially healthy and well-capitalized, our Board of Directors felt that partnering with PenFed is the best option to ensure that our membership gets the service they both expect and deserve – all while continuing the credit union mission of people helping people.”

In the required Notice of Special Meeting to Members, dated July 28, 2020,  the two paragraph explanation is:

“The directors of the participating credit unions have concluded that the proposed merger is desirable for the following reasons: In today’s landscape of digital transformation coupled with evolving technology, regulatory compliance, and increasing cybercriminal threats, our Board of Directors evaluated strategic possibilities to assure that you, our member, will continue to receive the full range of products and services you deserve.

“To ensure continuity of operations while seeking to expand product offerings and improve services, we have been diligently searching to find alternatives. We have explored a range of options, including collaborating with like institutions to consolidate key support functions, maintaining the current course alone, or merging with a strong and proven performer. While there are some benefits with each option, only one 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. After considering alternatives, we determined that a merger with PenFed is in the best interest of our members.”

This is the only reason in the required special meeting notice signed by Chairman, Gary Barrello. There are no facts supporting the reasons—no comparison of savings rates, loan programs/rates, service fees and delivery system options that any member would need to consider in making an informed choice to give up Sperry’s charter.

Along with these short, generalized assertions, the letter provides the required disclosures of merger related financial arrangements for the top five management employees. These payments potentially total $2.2 million. There is an “agreement” to donate $100,000 per year to local causes on the recommendation of Sperry’s board acting as advisors. All donations are, however, subject to PenFed approval.

A Special Member Bonus Dividend If Members Vote to Approve

Most relevant to the members’ voting decision is the proposal to pay each “eligible” Sperry member a one time “bonus share dividend” of $350, estimated to total $5.7 million. This amount is 25% of the credit union’s reserves. The remaining 75%, over $15 million, goes directly to PenFed’s pocket, as described below.

With this rhetorical logic and member incentive, is it any wonder that following the member meeting, held in the credit union’s parking lot, a 63% approval tally was announced? No information was provided about how many of the 16,000 members voted or attended the meeting; just the final approval rate.

This was undoubtedly the only time members had been asked to vote on any issue or election at the credit union. If they trust the credit union to properly manager their money, how could they be skeptical of this recommendation to merge and end the charter?

The Ending of an 84-year Community Charter

One might ask what’s untoward or possibly worse with this transaction? The members voted. They approved the recommendation of their elected leaders and long serving management. This happens every day in credit union land!

Furthermore, NCUA, the regulator, has approved all this, including the member notice wording that “a merger with PenFed is in the best interest of our members.” NCUA’s routine is for the Office of National Examination and Supervision (ONES) and the Regional Director to automatically sign off when the final documents are submitted.

This regulatory approval will occur even though the credit union’s web capabilities and the CEO’s public statements, as described in Part I, completely contradict the minimal logic in the merger letter.

But more important, the circumstances outlined below suggest the members have been duped by their leaders entrusted with the fiduciary responsibility to protect their interests.

PenFed and Sperry’s management team jointly designed this deception. They are the recipients with big paydays. The members and rest of the employees are being hung out to dry when this local operation is closed permanently.

What the Members Were Not Told

I believe the facts surrounding this transaction show the members were misled and that management-board merger communications intentionally hoodwinked them. The reality is that Sperry’s members are being sold to an organization that has no interest in their individual or community well-being.

The five managers will receive “optional” severance payments of up to $2.2 million; members get $350 each. PenFed will book a $15.1 million windfall as other income (negative good will). Sperry’s members are paying PenFed a bounty in addition to receiving all the future income from the relationships transferred.

In a normal arm’s length “free market” transaction, the buyer would pay a premium for this future income and the owners would receive their equity surplus in full and more. Instead, management negotiated for its own benefit, not the members.

This transaction, as described, will close Sperry’s only office. That means there is no location for the 39 employees to work or for members to go for what is now 6-day in person service. PenFed’s head office in McLean, VA is 257 miles away and 4-hour drive from Sperry’s headquarters. The nearest branch is a nearly 1-hour drive to Manhattan.

The entire membership is being forced to use remote access for all transactions. Sperry’s 16,000 Nassau County members will now be competing for service with 2,049,700 current PenFed members. That number is 125 times larger than Sperry’s current operations. These remote service employees will have none of the member relationship experiences of the current Sperry staff.

Contrary to the meager merger rationale, the CEO lauded Sperry’s responsiveness in the current environment versus those in “a larger firm who would have had to schedule meetings, create committees and navigate the rough waves of corporate politics…”

This is a merger only on paper, not of operations. It merely combines the financial statements and adds new accounts to PenFed’s books. Local services are shut down. The familiar faces, loyalty, knowledge and community spirit Sperry is built upon will be gone.

Apart from the two paragraphs in the merger notice, every Sperry communication demonstrates that it is serving members and the community in an exemplary manner. It is a classic example of what a member-owned coop can do for its community. The effort to justify the merger as better for members is a farce.

The Timeline Reveals the Charade

The Member Meeting Notice, dated July 28, 2020, opens with the statement “On January 15, 2020, the Board of Directors of your credit union approved a proposition to merge Sperry FCU with Pentagon.”

This means discussions occurred sometime before then. Yet the first that members or the public knew of this secret plan was in the Chair’s member notice dated July 28, just 60 days before the voting deadline and member meeting.

The summer member newsletter, The Sperry Herald, makes no mention of this decision. There is also no reference to the board’s intent to close the credit union in the notice of the annual meeting in the same newsletter. Instead, the board nominated two current directors to fill two expired terms, with members left completely in the dark about the decision nine months earlier to close operations.

Such a disclosure might have initiated member questions or even a revolt.

In the first Newsday article on September 3, after the merger intent becomes public, CEO Kevin Healy is quoted: “The financial landscape across Long Island is rapidly changing. As large institutions continue to grow. . .it is tougher for midsized institutions like Sperry to aggressively gain market share.” This statement from the July 28 member notice completely contradicts the editorial published eleven days before extolling Sherry’s distinct advantages and COVID performance in the July 17 CU Times.

Healy’s quote defending the merger is also refuted by his own words in his March 29, 2019 CU Times “expert opinion:”

 . . .credit unions of all sizes still can thrive and grow with the right mix of strategic forethought. In the end, a thriving credit union always serves the needs of its membership.

When Healy published his July 17, 2020 article praising Sperry’s response, he knew and approved of the intent to merge, a decision made at least seven months earlier. He proclaims Sperry’s business prowess at the same time he is secretly planning to end the charter.

We know this is the case because CEO Healy is a member of the five-person Sperry board. But the problem is more serious than corporate hypocrisy.

In Part III tomorrow: Sperry’s conflicts of interest, self-dealing, PenFed’s complicity, and NCUA’s abdication.

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

Yes, as through this world I’ve wandered
I’ve seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen.

Woody Guthrie “Pretty Boy Floyd”

On October 1, a Newsday business story described the member approval of Sperry Associations FCU’s ($278.4 million) merger with Pentagon FCU ($25.9 billion). Unlike most mergers there was no press release by either credit union. Even the Oct. 6 CUToday.info report was sourced from the Newsday story. Why is the ending of this sound 84-year-old, almost $300 million charter not announced by either party? Why the silence?

Is this just a routine merger of a sound, well-positioned, successful credit union? Or is it another instance of leadership and regulatory failures hollowing out credit unions from the inside? Does this acquisition serve Sperry’s 16,345 members’ best interests? Or, is it a self-serving exodus by senior management?

Another critical issue: is this merger a continuation of PenFed’s acquisitions spree shoring up its flailing financial and business model?

Who Is Sperry Associates FCU? The Right-Sized Credit Union & Its Proven Member Value

Sperry’s June 30, 2020 call report shows a single head office employing 39 persons serving 16,341 members. The credit union opened in 1936. Its FOM is anyone who lives, works, worships, attends school, volunteers, or conducts business in Nassau County, New York. Its estimated market is 1,357,700 potential members.

The June 30 financials show a well-capitalized net worth of 7.9%, delinquency of 1.15%, YTD loan originations up 69%, and twelve-month share growth of 4.5%. The website states the credit union is “financially healthy and well capitalized.”

The website further describes numerous examples of local community involvement and member support programs:

“1. Mineola Athletic Association As a local member-owned financial institution, Sperry has partnered with local sports leagues and athletic venues in your community. From sponsorship of the sluggers who play at Mineola Athletic Association to being the official financial partner of Iceland in New Hyde Park, Sperry believes in taking stewardship of the next generation.

2. Proud to Be #MineolaMade

Sperry is proud to offer local products made by students at Mineola High School on display at our Garden City Park branch! . . .

3. Sperry Lends A Hand in Glen Cove, N.Y.

Recently, team members from Sperry Associates FCU were happy to lend a helping hand at the Island Harvest Senior Mobile Food Pantry in Glen Cove, N.Y. . . .

We Are Always Collecting to Benefit Long Island Cares with our Sperry Harry Chapin Food Bank Donation Bin!

4. Sperry Supports the Garden City Park Fire Department at Member Appreciation Day

5. Sperry Volunteers Prepare Meal for Families at the Ronald McDonald House of Long Island“

Members Come First: Extensive Member Service and Delivery Choices

Member value is portrayed on the website as follows:

“Convenient Banking, Lending and More – All with Local Connections. From our quick and easy online loan applications to giving you 24/7 account access, Sperry makes sure your accounts are never out of reach. Need to bank-on-the-go? Our award-winning mobile app, available for Apple and Android devices, makes it easy. Even better, Sperry members have access to over 5,600 shared service centers and 30,000 surcharge-free ATMs across the country

Our Members Come First. As a Sperry member, you are actually an owner, rather than a customer, of our financial institution. We don’t pay stockholders; instead we invest our earnings back to our membership – That means lower fees, better rates on loans, and higher rates on deposits! 

So, don’t miss out on experiencing the credit union difference of Better Rates…Better Service…Better Banking at Sperry! Branch hours are six days per week including Saturdays.”

In addition to these multiple service channels, the credit union provides a complete product line of consumer and mortgage loans (with rate locks), multiple savings options, and posts its full fee schedule.

One example of its multi-generational approach is a 5% Youth Savings and Youth Checking account with free Visa debit card. A financial counseling partnership with Greenspace is offered.

Sperry’s comprehensive locally focused member value is shown in this video that describes Sperry as a “right-sized credit union.”

(https://www.youtube.com/watch?v=TOHRHV4xsHM)

CEO Healy Affirmed Sperry’s Unique Value and Resilience in Two Op-eds

Sperry’s CEO has published several articles about the credit union’s unique positioning. In a Credit Union Times opinion article on July 17, 2020, CEO Healy asserted the credit union’s effectiveness responding to the COVID crisis [emphasis added]:

“At Sperry Associates Federal Credit Union ($273 million in assets), we’ve found a happy balance in maintaining the services and products our core members love such as free checking and competitive loan rates, while at the same time offering niche and specialized lending products that match emerging needs. These past few months, we’ve offered specialty loan products to those impacted by the coronavirus pandemic, and we’ve been diligently working with our small business partners to secure for them Paycheck Protection Program funding. As community-centric institutions, our responsibility is to ensure that the friends and neighbors we serve are able to weather this storm.

“These products were the direct result of Sperry taking advantage of its market positioning. We’re a mid-sized credit union, member-owned and proudly serving the Long Island market for over 80 years. While we like to think bigger, we also act on the local neighborhood level.

“For the mid-sized institution looking to grow and better understand the pulse of the markets, it’s critical to put your organization’s best foot forward in the community. With a strong business development team at their disposal, executive management at a mid-sized firm can accurately assess these emerging needs and adapt their scope of services to meet them, all thanks to a boots-on-the-ground approach that is often not used by larger entities.

“Throughout the pandemic, which hit New York hard and is now spreading elsewhere, our team heard from friends, business owners and members that these larger events had local impacts, and using our community-rooted approached, we took action.

“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.

“In the end, it comes down to approach. By seeing the unique market challenges faced by a mid-sized organization as an opportunity, one can yield larger-than-life results.”

I quote this in full, because this appeared just eleven days before the credit union sent its Special Meeting Notice to members recommending merger with PenFed.

This was not the first time CEO Healy promoted the advantages of Sperry’s mid-size, strong local positioning. On March 29, 2019, CUTimes published his “expert opinion” extolling Sperry’s agility in a time of changing technology. Selected excerpts follow.

“. . .Despite the challenges these new approaches from unorthodox financial services competitors like Apple present, credit unions of all sizes still can thrive and grow with the right mix of strategic forethought.

“At Sperry Associates Federal Credit Union, we serve our membership within the highly competitive New York metropolitan region. As such, we’ve taken to embracing the philosophy that both member service and compelling products can offset some of the advantages that larger competitors such as Apple have at their disposal.

“The concept of member service still means something when it comes to banking, but the notion is further strengthened when paired with convenient, consumer-friendly products that make the lives of our members easier.

“For credit unions, which collectively are traditionally conservative and cautious institutions, a bit of private-sector risk-taking can pay off in the long run. In order to expand our horizons, Sperry closely monitors both market dynamics and changing trends – as such, we have have been seeing more and more shifts to the digital realm, as well as the need for more niche lending products. . . 

“In the end, a thriving credit union always serves the needs of its membership.”

Sperry’s members’ loss is most consequentially illustrated by the COVID environment. Comparing the two credit unions’ PPP loans as of June 30, Sperry reported 6 loans totaling $439,751; Pentagon, 100 times larger, reported $0. Given Sperry’s extraordinary capabilities and member focus, and the CEO’s public expressions of confidence, why did the Board and management decide to end Sperry’s independent charter?

In Part II tomorrow: Sperry’s brief explanation for merging.