I had the opportunity to listen to a very small slice of NCUA’s Board’s public budget process for 2025-26 by watching the video of the November 21 discussion of the CLF’s spending requests for the next two years.
Although extremely small in the agency’s overall spending totals, I fear we see clearly in this simple example, the board’s inability to substantively assess spending requests.
A Brief Background
Several items from the CLF’s board action memorandum for November 21 provide some background for the hearing including these two points:
The purpose of the CLF is to improve the general financial stability by providing member credit unions with a source of loans to meet their liquidity needs and thereby encourage savings, support consumer and mortgage lending, and provide basic financial resources to all segments of the economy. and,
“(CLF) is owned by its member credit unions and managed by the NCUA Board”
CLF’s budget proposals were for $2,307,863 for 2025 and $2,448,263 for 2026. Salaries and benefits are 96% each year’s requests.
Several facts put this credit union owned public-private effort in perspective.
Total membership is 430, an increase of 32 in 2024, and 9.4 % of all credit unions. CLF’s balance sheet is $966 million and includes $44 million of net worth/retained earnings.
The Board’s Policy Failure
Each board member remarked on some aspect or other of the financials. Otsuka had no questions. She made an unexplained reference to “protecting the insurance fund.” Hauptman called the CLF a “buffer for the American taxpayer” and cited a vague reference to $18 billion of loans sometime in the past.
He reverted to his standard routine of demonstrating how to improve the “user experience” when contacting the CLF. He showed how staff had “made it easier to access” the CLF by removing the on-hold music replaced by an automated telephone routing message. He confirmed that a credit union inquiry would ultimately end at the CLF President’s desk, if no one else picked up the call before then.
He also pointed out that 3,300 credit unions (95% of those under $250 million in assets) had lost access when the special CLF-Corporate membership authority expired. Hauptman opined that credit unions should have multiple liquid cash sources which is how he arranged his personal financial management: “a credit card, home equity line and a margin loan established with a broker.”
As Chair Harper led off the discussion, one would have hoped for a focus on CLF policy and whether its purpose above was being carried out. Instead, he supported the budget in full and noted the 31 increase of members. He did ask about the cost of membership. The 4.46% third quarter member dividend was the only recognition that the CLF’s return to the owners was below market rates including the overnight Fed Funds yield. He again complained about Congress not renewing the special CLF authority for corporates to join by funding only a subset of their members.
Business as Usual While Failing the Owners
A critical capability of any NCUA board member is discernment. What is their understanding of the key issues in a staff presentation, especially when focused primarily on budgets? Is It really about numbers? Or should it be about whether the CLF is serving its owners?
All three board members stated that the CLF existed for the benefit of NCUA and the NCUSIF, not for the credit union funding owners. What are credit unions getting for their direct support of the CLF? In the presentation the number one productivity indicator and primary 2025 Planned Activity goal is to Provide CLF Advances as needed.
However, the CLF has not issued a loan to credit unions since 2009. Almost all of those advances, 15 years earlier, were to two corporates via the NCUSIF. They were very short term and not part of any overall recovery plan. I am ignoring a token $1.0 million mini-advance made to a small credit union in December 2023 and paid off early in 2024.
A Time of System Stress
The lack of credit union support and CLF membership is not a statutory shortcoming. It is a management one, an NCUA responsibility as stated in the staff memo above. During the 2022 and 2023 rising Fed rate cycle, liquidity pressures increased throughout the system. This concern peaked when the Silicon Valley and other bank failures occurred. However the CLF was totally missing in action this entire cycle.
Instead, credit unions borrowed in record amounts from the Federal Reserve’s Bank Term Funding Program (BTFP) and the FHLB’s. For example, the September 2023 call reports show 307 credit unions with Federal Reserve borrowings of $34.9 billion, an average of $114 million. For these credit unions, the Federal Reserve represents 66% of their total borrowings. For 112 of this group, the Federal Reserve is their only source.
Credit union total assets of $2.25 trillion at 3Q 2023 were just 9.7% of total banking assets. However, their participation in the special emergency Federal Reserve lending program equaled 27% of the BTFP’s loans at yearend or three times cooperative’s share of total industry assets. And this Federal Reserve borrowing was only a quarter of all credit union borrowings at the quarter end of $130.3 billion.
During this entire liquidity crisis, the CLF was nowhere to be found, or even heard. No programs, no outreach, no public discussion. And it was not due to a poorly designed website or failure to target market. Rather the CLF’s credit union owners were completely left out and shut out of any role except sending in capital—for a below market return. The agency made no effort to assist credit unions because the board and staff view the CLF as a liquidity partner for the NCUSIF, not the industry.
Why the CLF Has No Interest is a post from May 2024 which shows that the credit union owners have been subsidizing the CLF due to its below market dividends. The CLF’s return is much less that paid by the FHLBs and corporates on their capital accounts. Even though the CLF has investment authority similar to FCU’s, its own portfolio was underwater at 2023 yearend and its yield trailed the overnight FF rate the entire year. But the board ignored those facts.
Credit unions do not view the CLF as a reliable partner in times of balance sheet stress. They have plenty of tested alternatives. Ones that don’t impose supervisory judgments on top of collateral security. The Board’s view of the CLF to serve the NCUSIF has made it a “vestigial organ” within the NCUA body serving no credit union owner-members.
What the Board Could Have Asked Staff
Following are some questions that board members might have asked if they had really focused on the CLF’s policy failures in this most recent period of liquidity need.
How many of CLF’s current members have outstanding loans elsewhere? How much and for how long?
What unused lines do CLF members report on the latest call reports?
Has the CLF developed any proactive lending programs in the two years since the Fed began raising interest rates in 2022? If yes, how were these communicated to owners?
Given the dramatic increases in credit union borrowing in both total dollars and numbers as shown below, what did the CLF do during the crisis? The chart below would be updated as context for the question.
Total Credit Union System Borrowings (June ’22 to June ’23)
Why should the CLF continue as a separate department with a staff of six and overhead charged by the NCUA board, when it could easily be a collateral responsibility with other senior examination and supervision staff?
The failure of NCUA board members to ask the most basic questions about CLF’s non-activity while routinely continuing to increase its spending is disappointing. It undermines the NCUA’s capacity to serve the owners of the fund.
The board has failed in its policy oversight role. With zero lending productivity, why is there any reason for a staff of six to keep lights on? The entire system shows increased liquidity demand and draws but relied entirely on every other contingency funding source while its own funded resource was moot.
If credit unions are to get their money’s worth from the CLF, the agency must show leadership by working with the owners. Contrary to one board member’s assertion, CLF effectiveness does not depend on its members; rather it depends on the management by NCUA. Otherwise, just merge the shop back into the bureaucracy from which it came. Save the credit unions money.
Editor’s footnote: If you want to see how another cooperative designed liquidity lender communicates with its owners, read this latest update from the FHLB’s newsletter.
Biennially, the FDIC conducts a consumer banking survey and releases the results to the public. The report produced since 2009 traditionally measures the unbanked portion of the population. The 2023 data released on November 12 added several questions about two new financial services that have attracted much credit union interest.
The Report’s headline finding is that “96 Percent of U.S. households had credit union or bank checking accounts in 2023.” A record low 5.6 million households (4.2%) remain unbanked
Further data breaks down the unbanked by race and those that were “underbanked,” 14.2% of households. These consumers rely instead on payday loans, cash and other non-bank products.
For traditional relationships, 48.3% of banked households use mobile banking and 76.4% of all households had a credit card.
Between the surveys in 2021 and 2023, the data on new payment application shows “use of nonbank online payment services such as PayPal, Venmo, or Cash App increased, while the use of general-purpose reloadable prepaid cards decreased.”
The New Data In the Report
So much for traditional product tracking. The 2023 survey asked about household use of two newer financial services: Buy Now Pay Later (BNPL) usage and crypto purchases. Both products have raised much interest in credit union land.
For example, this December 2 article in Credit Union Times reports on the first credit union in Georgia to offer a BNPL product. The article quotes the credit unions fintech/CUSO partner providing the service: “Buy Now, Pay Later is a financial service that consumers want and are increasingly expecting from their primary financial institutions.”
The FDIC survey however reports that “only 3.9% of all households used BNPL in the past 12 months.” For many consumers, this option is just an extension of an existing credit card relationship, not a separate product.
As bitcoin passes $100,000 in value and then fell back, crypto is again on some consumers financial product short list. But how big is the market?
The FDIC data showed that “In 2023, 4.8 percent of U.S. households owned or used crypto or digital assets in the previous 12 months. A significant majority of these households held crypto or digital assets as an investment (92.6 percent) while only 4.4 percent of these households used digital assets as a form of payment.”
Again the urgency to offer purchases or other transactions involving bitcoin or other crypto “currency” would seem to be tempered by both the uncertain nature of the product and its relatively low penetration of households.
The good news is that traditional financial products are used by almost all households and mobile convenience continues to expand.
My earlier analysis, part 1, of the NCUSIF’s financial performance in 2024’s first three quarters, highlighted the fund’s soundness. It concluded with Board member Otsuka’s statement about the board’s role to be good “stewards” of the fund. This post shows how that oversight role could be improved.
The Benefit of Public Board Meetings
The board’s quarterly discussion of the fund’s performance is an important responsibility. It demonstrates each board member’s “grasp” of the subject matter, their preparation and their reasoning for any conclusions. Just like a credit union board’s role, their judgment is critical in overseeing staff’s recommendation.
It is in the board’s particular roles in this quarterly review, that the public learns each member’s understanding of general policy, especially the role of America’s cooperative financial alternative.
Additionally, NCUA’s monthly publication of the NCUSIF’s performance provides the fund’s cooperative owners the opportunity to monitor how their 1% deposits are managed by following critical financial indicators. This monthly update was a condition for the open-ended funding model of the 1% deposit by credit unions. If the trends are in the wrong direction, then credit unions have the facts to speak up.
Critical NCUSIF Financial Issues
The fund’s finances have one primary revenue driver, the yield on the investment portfolio. This was by design. It was a dramatic change from the premium based approach of the FSLIC and the FDIC which was also followed for the first 15 years of the NCUSIF’s operations. That premium model proved fundamentally flawed. That history is described at the end of this post.
The NCUSIF’s Investment Underperformance
Slides from the September financials in November meeting clearly demonstrates the agency’s continuing shortcomings in managing the Fund’s interest rate risk.
The first tracks how the fund’s yield (blue line) began trailing its market indicators as of mid-2021.
The next shows that the NCUSIF portfolio has been “underwater,” that is below market in value and return, since December 2021.
The first consequence of this portfolio strategy is that the fund’s primary revenue source is shortchanging the fund and credit unions. The second is that the majority of the fund’s investments are not readily liquid in the event needed without either borrowing or selling investments at a loss.
Below is the latest investment report provided to the board in the quarterly review.
It shows an overnight yield of 4.79% on 24% of the portfolio; 1.74% on the remaining 76%; and a weighted average YTD yield of only 2.48%. This below market return is due to the fixed rate bonds purchased following a robotic investment ladder out to over seven years independent of any ongoing IRR assessments.
At September 2024, every investment maturity bucket except overnights, and recent investments for seven years, are below market value.
This update shows one investment action during the third quarter: $1.1 billion of bonds purchased on August 15, 2024 at “various” yields of 3.5% to 3.85%. Following are the other yield-investment options that same day from the Department of the Treasury.
Date
8/15/2024
1 Mo
5.53
2 Mo
5.4
3 Mo
5.34
4 Mo
5.22
6 Mo
5.04
1 Yr
4.52
2 Yr
4.08
3 Yr
3.9
5 Yr
3.79
7 Yr
3.83
10 Yr
3.92
20 Yr
4.28
30 Yr
4.18
This August investment decision yields less than all other Treasury options with maturities less than three years-shown in blue. It extends the interest rate risk as measured by the fund’s weighted average life (WAL). It follows the same pattern of activity that resulted in the fund’s past three plus years of underperformance.
With the portfolio’s current WAL, this revenue-yield shortfall could extend for another 2.5 years. Have no lessons been learned from this latest interest rate cycle?
Since 2008, the fund’s data shows that a portfolio return between 2.5% and 3.0% is more than sufficient to maintain an NOL of 1.3%. Returns above that breakeven range would give credit unions a dividend to recognize their open-ended underwriting commitment. More importantly, it rewards their collective risk management.
The Fund does not need more assets relative to risk, as some board members have stated. It needs more effective management of the portfolio investments it already receives.
The Chairman of the investment committee and two of its four members were at November board table responding to questions. This would have been the perfect time for a dialogue about whether alternative investment options were considered. This one day’s investments in August increased IRR risk, reduced liquidity and returned a lower yield than multiple other options.
Instead of explaining this decision, the board continues to put its head in the sand. It glosses over performance charts that would not get past questioning by the newest examiner should a credit union report this outcome and unexamined policy.
In the meantime, credit unions are on the hook for NCUA’s mismanagement of the fund’s return, not just the industry’s potential insurance risks.
The Lack of Transparency
There are a several calculations used in the final numbers that are vital to understanding their reliability. At times in the past these assumptions and data are shown in detail at briefings. This time only a final number is given so that it is impossible to validate the results presented.
The classic example of a lack of transparency was that until February of 2024, the staff had provided its calculation of the modeling data used for recommending the normal operating level (NOL) for the fund’s coming year. This cap determines when a dividend must be paid from net income. In February however, the board continued the 1.33% with no underlying data or assumptions presented to justify a cap higher than the long time, traditional 1.30%.
That 1.30 was exactly the actual NOL reported for December 2023. The financial model was working exactly as designed, yet the staff and board just rolled over the old higher level with no factual justification. The fund’s own performance belied the need for an NOL above the historic cap.
In the prior two years of staff’s 1.33% NOL recommendation, the underlying data were provided. But when modeled out this information did not support their recommendation. Rather it showed that the historic 1.3% cap would have covered all the forecasted model’s contingencies in the next five years. Is that why no details were given for 2024’s NOL setting?
One board member commented in the Q&A for 2024’s NOL that he did not know what the right number should be. Moreover he didn’t think it would make a difference for credit unions whether the cap was 1.3% of 1.33%. As of September 30, the fund’s equity ratio was .303% and headed higher by year end. Should the December 2024 exceed 1.3% that decision will matter greatly, causing credit unions to forego tens of millions in NCUSIF dividends.
The question is not, what is the right cap on the NOL; rather, it is what is the appropriate range for the fund’s equity so that credit unions can share in the success when all goes well. That judgment is no different from managing a credit union’s capital ratio, a decision and responsibility familiar to every credit union board member and CEO.
Other Missing Details
Another disclosure shortcoming was the investment report. Instead of listing the individual investment purchases as in past reports, “various” maturities and a range of yields (3.8 to 3.85%) were given. This suggests the individual securities were for at least 7 years. This investment choice was at a time when the yield curve offered multiple higher returns on all options with maturities less than three years.
These shorter investments would reduce liquidity risk, improve yield immediately and enhance portfolio flexibility—but no board member questioned these August 15 investment decisions.
Undocumented Projections
The 2024 year end NOL projection by staff was given in a footnote as 1.28% in the last slide. In previous December year end forecasts, the staff has presented a full NOL calculation in a single slide. The data included projected retained earnings, insured share totals and the resulting NOL outcome.
Insured shares grew only .46% in the third quarter. If that growth pattern continues in Q4, then the NOL could be much higher than the 1.303 at September. Why present such an important forecast result (1.28%), which is below the current actual level with no substantiating numbers or assumptions?
Yet no board member commented on this lack of disclosure—and its implications for credit unions.
An Increase in Allowance Account and No Losses
Another critical number is the loss expense which is used to increase, or sometimes lower, the total dollars in the reserve account. For the quarter the additional expanse was $21.7 million raising the total allowance to $232 million or 1.32 basis points of September 2024 insured shares. So far in 2024 the total actual insured losses are near zero.
Th allowance ratio is greater than the NCUSIF’s average annual loss experience since 2008. In the most recent five years there have been no major losses. Yet the reserve continues to grow in both dollars and relative to insured risk.
The formula being used for this reserving should be disclosed. This expense comes right out of retained earnings and thus reduces the NOL number. Just as when presenting an NOL forecast, the underlying assumptions and data should be open for board, public, and credit union scrutiny.
The State of the Board’s Stewardship
As for Otsuka’s call out of the board’s stewardship of the NCUSIF, the examples above are some of the specific opportunities to enhance this responsibility. And we haven’t even gotten to the backward looking calculation of the NOL, but that issue is for another day.
Endnote: Brief History of NCUSIF Redesign
The new NCUSIF financial design in 1984 was based on a study of insurance alternatives and the fund’s initial 15 year trends. The traditional premium approach in the first years of the 1980’s required double premiums assessed by NCUA. But even then, the fund made no headway toward the statutory goal of 1% of insured shares.
There were two major reports of this in-depth reassessment. One was a 100 page study sent to Congress on April 15, 1983 by Chairman Callahan. The report addressed specific congressional questions, provided a history of cooperative stabilization and share insurance funds, and gave recommendations for change. It also included extensive comments from credit union leaders.
When the new design, A Better Way, was established by Congress in 1984 the background analysis for a new model was explained in the video below. It was sent to all credit unions outlining this unique collaborative effort and its benefits for credit unions. For without the credit union support, there would have been no congressional action to authorize this unique cooperative approach to NCUA’s share insurance model.
I missed the November 21 NCUA board’s NCUSIF update so went back and listened to the 30 minute discussion via video. The report was incredibly positive. About both the financial performance of the fund and credit union industry trends.
There were several data “blanks” and areas that were not covered that I will discuss tomorrow.
The slides used to update the NCUSIF can be found here. YTD net is over $226 million which raised the Fund’s total retained earnings to $5.4 billion. This is .3033% of total insured shares ($1.767 trillion) at September 30, thus exceeding the .30% historical NOL cap.
Total insured losses for the year are negative, that is, recoveries of $2.0 million on prior losses have offset current writedowns of just $1.1 million. Nonetheless, NCUA has increased the loss allowance reserve to $232 million, or 1.3 basis points of insured shares in addition to the .3033 in retained earnings.
Since 2014 the NCUSIF has recorded actual net cash losses that exceeded 1 basis point of insured shares in only one year, 2018. That year the Fund wrote down the value of its portfolio of taxi medallion loans. In 2020 it sold this portfolio to a New York distressed asset fund manager (Marblegate) which benefitted from the full recovery in portfolio value as credit unions took all the write downs via the NCUSIF.
The CAMEL Trends
Even the CAMEL trends are positive. Kelly Lay Director of Examination and Supervision was at the table. The % of credit union assets classified as Code 4 & 5 declined from the June quarter. When asked about the change, Lay said it was because of improvements in specific credit union’s liquidity positions-a trend validated in Callahan’s third quarter TrendWatch analysis presented on November 12, 2024, nine days prior to the board meeting.
These two slides from that presentation show these changes in system liquidity:
She further stated that any large credit union that is downgraded in rating or with a 4/5 CAMEL ratings is examined at least annually. When pressed by a board member about potential exposure in commercial real estate loans, she replied that “there was nothing very concerning.”
External Third Quarter Data Analysis Positive
Several times board members referred to second quarter data, one citing an increase in delinquency and lower ROA at June 2024.
However both the macro-analysis in Callahan’s 3Q Trend Watch Video and the large, individual credit union performance comparisons by Jim DuPlessis of Credit Union Times all show marked improvement in the third quarter.
Two excellent data analysis by Jim DuPlessis include graphs that do not support this observation from older data:
And if the macro trends in credit unions was not convincing by itself, the final TrendWatch slide showed this perfpr,amce comparison with competitors thru June as later data is not yet released:
Stewards of the NCUSIF
In her opening statement board member Otsuka commented: Being stewards of the National Credit Union Share Insurance Fund is one of NCUA’s primary jobs—a critical component of our duty to protect members’ shares at credit unions. Thus, I continue to be encouraged by the strong performance of the Share Insurance Fund.
Tomorrow I will cover areas where the data was lacking compared to prior updates and the one primary performance topic that the board failed to address.
In future updates, the presentations could be improved if more timely data were used, so the board members have the benefit of the latest information when asking questions or making comments. Or even when testifying before Congressional committees.
As the new administration’s post election appointments and policy directions are implemented, the credit union system is on a stable foundation.
There are still latent issues of vital importance, most of which the NCUA board has adeptly avoided. But the macro-financials reported in Callahan’s 3rd Quarter Trend Watch overview yesterday are strong and heading in the right direction. This is the link to the 72 slide deck. The full recording is available here.
Some observations I noted:
Improving liquidity: In Alloya Corporate’s economic summary they presented their balance sheet trends to show the industry’s improving liquidity position as demonstrated by the growth in members’ deposit balances.
For all natural person credit unions, total borrowings have fallen and are now only 5.2% of assets, loan and share growth are in even balance, and the market value in underwater investments has recovered another $9 billion in value. Liquidity is coming back.
Slow Growth
The overall theme for this quarterly update was balance sheet growth much less than the industry’s CAGR over the past 20 years. The September 2024, 12-month share increase was 3.2% versus 6.3% over the past two decades. For loans, the latest 2.59% growth is less than half the 20 year average of 7%.
An interesting statistic about the 2.5% in additional members is analysis showing credit unions with organic growth grew faster than those institutions relying on third party loan originations, a common means of adding members.
The upside of this modest growth was that the various measures of total capital and net worth(10.8%) have all increased versus one year earlier.
Takeaways In a Changing Administration
The credit union system was financially strong before the election. Nothing has altered this fact. A change in regulatory leadership is coming. Questions credit unions might consider as this political turnover occurs might be:
How will this change affect your members’ lives? Will the direct governmental assistance of the COVD era and programs such as student loan forgiveness end?
How will reliance on market outcomes affect lending opportunities such as climate related projects or electronic vehicle sales?
Will the new normal in the Fed’s overnight rate settle in an expected range of 2.5-3.0%–or will fiscal policy drive a higher or lower level?
With a more market-oriented administration, will the unique role of credit unions be sustained, or will the industry just be seen as another option in an ever expanding lineup of fintech, bitcoin and other financial providers.
In a future blog I will explore issues of regulatory policy and present a case study of a prior time of major change in administration.
The Good News
The good news for credit unions at this moment of national policy changeover is that they are in a sound position to deliver for members on all of their traditional service options.
They can continue to help members who feel vulnerable or overlooked. And maybe they can bring to those struggling with inflation or even bigger goals such as buying a home, even more responsive financial solutions in the four years ahead.
Synopsis:This detailed analysis of Credit Union 1 (Illinois) presents a pattern of declining financial performance covered up by multiple merger acquisitions, one-time sale events and rented capital. The future fortunes of eleven local sound credit unions have been destroyed in just two years. I believe this kind of predatory activity, left unexamined by all those in positions of responsibility, will lead to a reassessment of the advantages of the credit union charter by external legislators.
The article’s length is to present as much of the facts from these events so readers can make their own assessments. The situation summarized is I believe an example of internal industry reckless actions which present a false perception of success. The question for readers is: Does something need to change?
When there are no guardrails for a financial institution, anything goes. It is the law of the jungle; or what some describe as free market capitalism.
The dictionary definition of rogue is “an elephant or other large wild animal driven away or living apart from the herd and having savage or destructivetendencies.” Another reference is to unprincipled behavior by a person or persons.
This word rogue came to mind as I reviewed the activities and results of Credit Union 1 in Lombard, Illinois, since its conversion from ASI share insurance to NCUSIF in February 2022. A summary of the credit union’s merger tempo since this insurer changeover is shown in the following table for the ten already completed or scheduled to be by the 4th quarter of 2024.
In addition, the $12 million Synergy Partners CU, Chicago announced on October 17 a members’ vote for January 2025 to merge with Credit Union 1. That would increase to 11 mergers in only two- and one-half years. These will transfer over $650 million in total assets and over 62,000 members’ financial futures to Credit Union 1’s control.
In its October 2024 Member Notice, Synergy listed 23 Credit Union 1 branch operations in six states including the head office in Lombard, Illinois. The two furthest branches are in Bradenton, FL (1,230 miles) and Henderson, NV (1,750 miles apart).
Other new or ongoing initiatives along with this accelerating merger expansion activity include:
The credit union’s continuing and new sponsorship and marketing promotions with four outside organizations:
The Western Conference tie-in: On October 3, 2024 the Big West Athletic conference announced Credit Union 1 had become its official financial and literacy partner and the entitlement partner for the Mountain West Basketball Championships and all Olympic Sports Championships.
On June 3, 2022 Credit Union 1 announced agreement to purchase the $311 million NorthSide Community Bank, located an hour north from Lombard in Gurnee, IL. Both boards approved the transaction subject to regulatory and bank shareholder approval. The deal was not completed. There was no public explanation.
In May 2023 Credit Union 1 announced it would serve New York cannabis entrepreneurs who plan to open marijuana businesses as part of the state’s CUARD coalition. The same CUTimes article reports, “Credit Union 1 has been selected to participate in the Illinois Department of Commerce’s Cannabis Social Equity Loan Program and is also the preferred banking partner of the Chamber of Cannabis in Las Vegas..”
Even with these multiple marketing and business initiatives, the core of Credit Union 1’s growth efforts are mergers. The operational intensity of acquiring and converting 11 credit unions (six outside Illinois) and all associated member and vendor relationships in just over two years would be a major operational challenge for any organization.
The immediate question is how will the members of the merged credit unions benefit?
In the Member Notices posted on NCUA’s website for these combinations, the wording used under Reasons for Merger, Net Worth and Share Adjustment or distribution are identical. Members’ collective reserves are never distributed to owners even when the merged ratio is higher than Credit Union 1’s.
But zero is not what several of the merging CEO’s and senior staff are gaining.
Rewards for the Enabling CEOs
In the case of the $34.4 million Enterprise CU in Brookfield, WI, the 24-year tenured CEO, Jeff Bashaw, will receive a minimum ten-year contract with a base salary increase of $38,000 on top of his current compensation. I estimated (absent the required 990 IRS filing) that to be a minimum of $125,000 per year plus a $100,000 bonus upon closing. Total minimum amount $$1,350,000.
The credit union is in sound shape at 10.6% net worth, a profitable, single branch with low delinquency. After turning over his CEO responsibility, Bashaw’s role if any will be a branch manager or other honorary title. This ten-year contract with a pay raise seems merely a lengthy sinecure. The 8 employees and 2,815 members receive nothing-except the retiring CFO who will receive a bonus and severance of $110,000.
A Minority Depository Institution Leader?
At the $34 million Financial Access FCU in Bradenton, FL, the situation is more complicated. The credit union prior to merging, reported a 1Q ’24 loss of $517, 310. However, its net worth was still high at 18.4% ($6.4 million) and delinquency of only .39%. Was this a temporary loss or other problem?
In this merger CEO Sherod Halliburton is receiving a total of $3.2 million composed of a bonus of $125,000, an eight-year employment contract at $200,000 per year, and 100% immediate vesting of a $1.5 million split life benefit plan. He no longer has any CEO responsibility as the credit union will become merely a branch operation. The 15 employees and 2,577 members of Financial Access received nothing for their loyalty.
In a CEO Profile published by Inclusiv in February 2022, prior the merger efforts, Halliburton is lauded for his leadership. The article remarks on “his strong community ties and business acumen and how he decided to “bet on me” when offered the CEO position” eight years earlier. Further he points out that he is “one of a limited number of African American men running a financial institution and he accepts the great responsibility accompanying that honor.”
The profile lists his efforts “toward racial equity and responsibility.” He states, “We’ve gone from a somewhat negative perception . . . to now being viewed as a vital part of the economic infrastructure.” The credit union received two technical assistance grants to upgrade technology to meet his goal to double membership in three years. He closes with this affirmation: “We’re here to change lives. I want that to be the enduring message even when I’m gone.”
This Bradenton community credit union which he described as “a vital part of the economic infrastructure” no longer exists. Halliburton is now a Market VP for Credit Union 1 for the next eight years.
An October 2024 Approved Merger
The most recent example of CEOs cashing in is the $116 million Illinois Community CU with over 11% net worth and delinquency of .5%. In this acquisition, CEO Thor Dolan will receive a minimum in immediate total benefits of $1,904,494.
This total is described in the Member Notice as follows: a retention bonus of $150,000; deferred compensation of $50,000; a salary increase of $33,724 added to his 2023 reported 990 compensation of $245,770 or $279,494 per year (no employment length given}; and immediate 100% vesting of a $1,425,000 split dollar 20-year life insurance benefit plan.
This salary increase is despite the fact he is no longer CEO, either managing branches or a regional rep, both with no CEO operating responsibilities. Every additional year he remains employed will add another $280,000 to the package. There is no indication the 38 employees (except the CEO and CFO) gain any assurances of employment; and the 10,482 members receive nothing.
The Fates of the Merged Employees and Members
Each Member merger Notice posted by NCUA which I reviewed includes two standard assertions:
The credit union’s branch location(s) will remain open and become a part of Credit Union 1’s nationwide branch locations.
Employee Representation: Employees of the credit union will be offered employment with Credit Union 1.
However intended, neither of these statements have proved lasting in practice. Comparing the branch listing in the August 2023 Kankakee Valley Notice with the latest listing in the Synergy’s October 2024 Notice, six of the branches in the earlier Notice no longer exist, including three for Emory CU in Georgia and three for Illinois credit unions with single branch operations.
As for employees’ fate, for the twelve months ending June 2024, Credit Union 1 reported a reduction of 67 FTE from 418 to 351.
As a result of Credit Union 1’s merger strategy, there will be eleven fewer local charters which were operating well, a reduction of 70-80 volunteer directors and member committees, and loss of all local relationships and legacy brands.
All member savings and loans, collective capital, liquidity and fixed assets are now in the full control of an institution for which the members have no connection or first-hand knowledge. And in some cases thousands of miles distant. Ironically, Credit Union 1 states in all its promotions that anyone can join, so if members really thought this was a better deal, they could join anytime. But that would be a much harder marketing task than just purchasing the business by paying the CEO—and getting the members’ accounts and accumulated reserves for free.
Members also have a totally new financial institution relationship to navigate. The Credit Uniion 1 material sent to each member post-voting is a 15 page pdf system conversion process and timeline. Member instructions include setting up new payment and loan options, establishing digital accounts and using online financial tools.
Depending on the version usent, the membership agreement for each merged credit union is a minimum and 20 pages. It contains essential information about fees, rates, funds availability, mandatory arbitration and multiple other disclosures which few will be able to read through. The members will learn through experience how everything has changed.
An important difference in Illinois state versus federal charters is the use of proxy voting in all member required elections, including mergers. For Illinois credit unions, proxies are controlled by the board. I did not see this fact disclosed in the FCU mergers, where proxies are not permitted. In essence, FCU members turn their voting governance power over to a new board. These directorst can routinely reappoint themselves without any member vote. More about this later.
Implementing a Capital Markets Strategy-Without the Risk
Credit Union 1’s merger campaign is an adaptation of a traditional capital market strategy of hedge funds and investment firms. Except these buyouts of numerous, smaller independent firms in an industry (think hospitals, barber shops, rental housing, or local HVAC firms) require putting their own capital at risk. These new hedge fund owners then burden their acquired firms with the debt used to finance the buyouts, strip and sell the highest value assets, reduce costs and services to pay for the debt coverage, and ultimately resell the merged business back to the market for a capital gain.
Credit unions reverse this model in mergers—they use the acquired assets, not their own members’ capital, to finance these acquisition sprees. Except when buying banks. The equity in these “mergers” is often transferred in full with no payout to the owner-members. The only necessary sales pitch required is to convince the CEO to bring the board along. There is zero risk to the continuing credit union. The “acquisition” is free. The members lose all their financial and institutional legacy and become subject to the control of a board and CEO that will be completely new to them.
We learn in the Notices that no staff or board due diligence or alternatives is presented. There is rhetoric about “technology and systems that align with members needs.” And, how “internal core values align with our own and . . . confident (that) members will experience a much needed upgrade in the quality of service.” No facts, just vague promises.
These same words were used in the eleven Notices showing the abdication of any director or CEO independent assessment. The words are merely a formula from previous transactions to pass regulatory approval. The members are given no objective measures or specifics that would identify better rates, fees or specific services. Just indefinite promises.
As for core values, institutions don’t have values, people do. So the acquirer’s goal is to find CEOs willing to cash out of their leadership role, rather than evaluate what is in the members’ best interest.
The Numbers Show the Urgency in Credit Union 1’s Merger Efforts
Some readers may believe this is just another example of self-dealing in mergers. It is. But there is a major financial imperative driving this effort.
Credit Union 1 is desperate for mergers not simply for growth, but because its financial performance is a house of cards. For the past five years it has been unable to generate a normal operating net income from its own balance sheet assets. As a result, it has turned to non-operating gains, acquired and borrowed capital (sub debt) and other financial options that disguise its very poor or sometimes non-existent internal rate of return. Here are some of the numbers.
At December 2021, Credit Union 1 had $106.8million net worth ($98.9 Undivided Earnings -UDE- and $8 m other reserves). The net worth ratio was 8.7%. Net income of $13.8 million that year was largely driven by a $7.5 million non-operating gain on sale of fixed assets.
At June 2024, the credit union reports just $88.6 million in undivided earnings, $8 million in other reserves for a total $96.6 million, that is $10 million lower than at December 2021 total.
To report an acceptable net worth ratio the credit union now includes $20.5 million in subordinated debt (borrowed capital), $45.1 million in equity acquired from credit union mergers, and a $7.1 CECL transition reserve. Without these non-operating additions to reserves, Credit Union 1’s net worth ratio would be only 5.8% versus the reported 10.2%.
But even the $88.6 million in UDE at June 2024 is misleading. At yearend 2020 the credit union reported $16.9 million in land and buildings. Three and a half years later, June 2024, the total is just $2.9 million. In the same period the credit union reported $15.1 million gains on sale of fixed assets. In the 18 months ending June 2024, the credit union also had non-operating gains on loan sales of $4.6 million.
It is not possible to determine how much of these sales are from Credit Union 1’s own assets or from the loans and fixed assets acquired via mergers. These sales amount to almost $20 million of the $88.6 reported UDE in June 2024. These are one-time events that are reported in net income thereby adding to retained earnings, but in fact are non-operating, one-off gains.
Safety and Soundness Questions
If these one-time gains are subtracted to show actual operating net worth generated from continuing operations, the net worth ratio from internal operations would be only 4.6%. Hence the credit union’s drive to raise external capital (sub debt) and acquire other credit unions’ reserves. Its dependence on external capital and one-time sales raises significant safety and soundness questions.
Internal operations are not generating sufficient capital to maintain required net worth minimums. For example, in the full year 2023, the credit union would have reported an operating loss of $429,000 except for the one-time gains on sale of fixed assets and loans. Through the first six months of 2024, the credit union’s ROA is only .39% or just .23% without extraordinary gains. (all data from NCUA tables)
The financial results are in even steeper decline than what is presented. If one considers the impact of adding merged shares and loans from the preceding four quarters prior to June 2024, there are critical balance sheet trends. These five mergers added approximately $210 million in loans and $346 million in shares to Credit Union 1’s balance sheet. Without these external gains, the credit union’s decline in outstanding loans for the 12 months ending June 2024 would have been $288 million or 24%. For shares, the falloff would be $73.3 million or a negative 5.5%, not the 4.6% increase reported. The credit union also relies on $35 million in external borrowings for funding.
Since converting to NCUSIF, the credit union has reported growth and acceptable ratios only through the acquisition and then sale of fixed assets and loans, and using the free transferred capital to maintain its required net worth.
What to Do About a Runaway Credit Union?
Once NCUSIF-insured in 2022, Credit Union 1 has been on a merger and marketing binge which is hiding serious financial performance shortcomings.
In all credit unions the Board, as a group, holds the direct, legal fiduciary responsibility for the performance of the credit union. The Board members approve all policies and hire the leadership. The buck stops with the Board members – all of them.
This is especially true in Illinois which has an unusual provision in the state act that allows the board to collect proxies from all its members, thus giving the board full decision-making authority in all areas, including mergers.
This is the reason for the extended proxy explanation in the Notices of Merger of the five Illinois chartered credit unions which reads in part:
Illinois permits voting on merger proposals only at the meeting or by proxy. If you do have a proxy. . . you may do nothing, and the board will vote in favor of the merger in your sted. . . If you have a proxy on file, to vote NO you must revoke that proxy by giving written notice to the board secretary. . . and then assign a new proxy to an attending member.
This is why all mergers of Illinois’ state-charters are reported as virtually unanimous. The process also puts a higher standard for due diligence and fiduciary responsibility on board members as they are now acting directly for the member.
There have been several recent class actions against credit unions around improperly disclosed overdraft fees and cyber breaches. When merged Credit Union 1 members confront the reality of losing their independent cooperative some may be deeply upset. With their board’s unilateral actions and failures to document their duties of care and loyalty, these transactions could become fertile ground for such actions.
Where Are the Regulators?
Except for the several federal charters merged, initial approval is by the state as Credit Union 1 is Illinois chartered. Most of the credit unions merged in MI, WI, GA, IN and IL are state chartered. All the data cited above is in public call reports and in multiple year analysis formats on NCUA’s website.
The trends for Credit Union 1 are clear, the extraordinary payments to CEOs presented in the Notices, the copy-book wording in the Notices all the same, and the vigorous public marketing communications easily reviewed for this nationally aspiring credit union.
NCUA routinely signs off on all mergers even those characterized by extraordinary self-dealing (eg. CEO contracts with change of control clauses), no clear business logic or member benefit, and Notices with misinformation, disinformation and missing critical facts for any member to make an informed vote on the issue.
There are indications that this hands-off response is the NCUA staff and board’s preferred laissez faire policy. The outcome is fewer credit unions by encouraging smaller credit unions to merge with larger ones driven by monetary payouts to achieve their policy of industry consolidation. But of course there are no asset limits as recent merger announcements have demonstrated.
The explanations for this dual chartering supervisory failure are wanting. In some instances, it may be a repeated failure by staff to do any elemental analysis. To my knowledge, there has never been a regulator “look back” to see if any of the merger commitments were followed up—even in a situation involving $12 million in members’ capital diverted to the merging CEO and Chair’s newly organized non-profit.
Regulators appear to lack a common sense understanding of events, not wanting to see or address the obvious conflicts of interest and board fiduciary failures. They thereby become part of the problem, abetting the worst aspects of cooperative leadership.
The result is no regulatory guidance or even backbone to stand up for members‘ interests or rights. There is no director-board check and balance on CEO’s ambitions or performance. And no regulatory effort to hold accountable those credit union CEOs who use their positions of power and institutional wealth to take advantage of the member-owners of acquired credit unions.
A System Circling the Political Drain?
Instead of expanding member economic opportunity, credit unions are imitating the tried and profitable capital market efforts to roll up their smaller locally focused brethren though payoffs and the rhetorical promises of better service through—even if only virtual.
Credit Union 1’s “purchased members” have lost the heritage and identity their cooperative predecessors passed on to them. Trust and loyalty earned over generations is gone. Members will vote with their feet when they learn there is no more advantage to being with Credit Union 1 versus dozens of other online financial offerings just as easily accessed.
Credit Union 1 has maintained its regulatory financial requirements only by acquiring other credit unions’ capital reserves, one-time sales of fixed assets and loans, closing local branches and letting employees go, and borrowing sub debt capital. These are efforts to buttress its balance sheet and cover its inability to earn an acceptable return on its own assets for its member-owners.
This practice will eventually be found out, the mergers will end. and the credit union’s safety and soundness will be much more closely scrutinized.
However, in the meantime, eleven local credit union charters are destroyed, their professional and community leadership roles ended, members’ long-time relationships to their credit union dissolved and the industry’s reputation put at political risk.
As Credit Union 1’s financial short comings become increasingly apparent, their external relations with Notre Dame athletics, the U of I Chicago campus, the new WCC partnership and Tinley Park Amphitheater will be in jeopardy. So too the industry’s public image.
I believe Credit Union 1’s actions are a threat to the future of the cooperative model. Every system has “bad actors.” That is why there are regulators. When directors fail in their fiduciary roles, and supervisors abdicate their appointed oversight responsibilities, the system’s integrity is at stake.
When other credit unions remain silent, state regulators default in their oversight, and NCUA appears unconcerned about the consequences of these events, it is only a matter of time until cooperatives forfeit their unique role in the American economy.
And should that day of reckoning come, thousands of credit unions trying to do the right thing will be end up in the same reduced status as their rogue colleagues.
Today credit unions operate in two financial worlds. One is the so called “free market.” This is where open competition, winner-take-all, buying and selling happens. Members/consumers make their buying decisions comparing options. The winners are firms with superior value propositions including better products, service, convenience and sometimes marketing.
This is the market credit unions enter when buying banks or investing in other firms (CUSO’s, Fintechs) to advance their credit union’s competitive position. Corporate transactions are marked by due diligence assisted by external experts, and financial projections with ROI’s and cash flow forecasts. Often these deals are subject to close regulatory scrutiny in addition to buyer and seller’s close analysis.
Transactions in credit union’s “off market” financial activity are not based on transparency, superior performance or even shareholder/owners best interest. This is the “insiders game” of private deal making, self-enrichment and public misinformation and rhetoric to benefit the players’ personal agendas.
Today this is the world of credit union mergers. It is increasingly a cesspool of pretend member advantages disguising payoffs to facilitate changes in control of sound long-serving institutions.
There is no owner payment or recognition as occurs in the “free market” transactions. In fact these are totally “free” transfers in which the continuing credit union is paid to take over the business. The owner’s net worth is transferred intact to the acquirer. This is the complete opposite of an open market transaction. It would never happen in a fully transparent actual market sale.
The Critical Issue
The critical question for the credit union system’s future is why aren’t members paid for their ownership interest when there is a change of control. It happens some with market facing events, but never in mergers. Without any payments upon a charter’s dissolution, member-ownership is a fiction.
Credit unions do know how to value a financial institution, their own coops and other for profit firms.
Credit union capacity and interest in buying other financial institutions, particularly banks is ever-increasing. These all-cash purchase and assumptions totaled 16 in 2022, 11 in 2023 and at least 17 announced so far in 2024.
In most purchases, the transaction price ranges from 1.5 to 2.0 times book value. Where the bank is publicly traded, the offers always exceed the last market quotation prior to the sale announcement. Here is an example.
The Most Recent Bank Purchase Announcement
Yesterday the $9.2 billion ESL FCU announced the acquisition of the $401 million Generations bank (Nasdaq: GBNY). Prior to the announcement GBNY’s one day high for the past year was $10.76. Today, post announcement, it closed at $15.75 per share.
In the announcement the bank estimates the range of final cash payments for each share to be $18-$20. From the joint press release: “ESL Federal Credit Union will pay Generations $26.2 million in cash and Generations Bank will retain its equity at the effective time of the P&A Transaction.”
Generations Bancorp has 2,241,801 outstanding shares of common stock. If $20 is the final disribution per share, then the bank owners will receive a total of $44.8 million, that is their equity and ESL’s $26.2 million payment.
We know there must be some pretty sharp financial analysts at ESL which is paying $26.2 million cash for an institution whose track record includes the following:
The bank has lost money, every quarter, for the last three quarters.
The bank has an efficiency ratio over 100%, every quarter, for the last three quarters.
This means the bank lost money, before factoring in provision for loan loss expense.
Since 2015, the bank has produced an ROA over 0.50% just once.
It’s pretax ROA through 6/30 of this year is negative 0.90%.
How Bank Purchases Should Inform Credit Union Owners
The example of credit unions paying cash in a bank P&A, effectively a liquidation, demonstrates credit union’s willingness to analyze market value and to pay up for performing financial assets. In these deals, there is no charter acquired. just an operating business.
Moreover each of these transactions is reviewed and approved by at least three very interested parties:
The owners who will ask is this price fair and a better option than not selling?
The FDIC will examine for any residual risk to the bank fund.
The NCUA will review for any safety and soundness implications and compliance with credit union regulations for acquired assets and FOM limits.
The point of this example, and almost 50 recent bank acquisitions is that credit union’s know how to value the potential future ROI of a financial institution’s assets.
So how might this skill apply to valuation of a credit union? While there are not many recent examples, there is one thoroughly documented transaction.
The Nationwide FCU Sale to Nationwide Bank
In 2006 the sponsor of Nationwide FCU announced its intent to buy its credit union to accelerate its banking operations. Founded in 1951, the single sponsor credit union was almost an extension of the insurance company. Almost all of its members were Nationwide employees, former employees or retirees and their families. The CU’s employees were all Nationwide Insurance employees and the CU performed very few of its administrative functions on its own.
The first question for the members was: “Will the 45,000 owners of the $564 million Nationwide FCU be offered enough money for their credit union?”
The credit union’s key numbers at December 2006, right after the vote were: Assets $564.1 million; Loans $ 418.3 million; Net Worth $61.5 million (12.7%); shares $489.3 million; and Members, 45,002. Nationwide was the 4th largest of Ohio’s 495 credit unions.
Further comments from an August 8, 2006 Credit Union Times article about the sale:
“When what is happening in so many other merger and charter conversions amounts to little more than thievery, the fact that Nationwide was willing to try to do the right thing means a lot,” said Jim Blaine, CEO of the $13 billion State Employees’ Credit Union.
Blaine said that his comments and support for the purchase reflected the degree of transparency that the CU has offered. “If that transparency were to diminish, if the CU were to hold back on letting its members and the public at large know about how it and Nationwide Bank arrived at the $79 million price tag, then the deal might face more of an uphill climb,” Blaine explained.
McCune and other banking analysts note that a premium of even 150% or 200% of equity for an independent CU might not be out of line and would still be considered inexpensive compared to the prices commanded by independent thrifts. . .
“The phenomenon (of a credit union sale) is more likely to remain an occasional development where banks might approach CUs which have access to particular markets or market niches and where CU members would be willing to sell. Everyone has a price,” the analyst noted,
CEO Paula Edwards said that almost 17,000 of the CU members took part in the election and that almost 90% of the members who voted cast ballots in favor of the merger.
Approving the deal means that Nationwide’s members will receive $79 million total, or roughly 15% of their account balances as of the end of March of this year as the price for the sale. The new bank will benefit from the purchase by having a readymade customer and deposit base that would have taken it months or years to develop otherwise.
The Significance of Nationwide FCU’s Sale
Members were returned all of their cooperative capital plus an estimated premium of $17 million more. This represented a gain of approximately 15% on their individual share balances. In banking sales, this valuation is often referred to as the deposit premium when valuing a transaction.
According to CU Times, there were some who thought this transaction could be an example for additional deals.
Some view the Nationwide deal as the model for the potential takeovers of credit unions. Nationwide was a very unique case, , , CEO Paula Edwards is one of the true good credit union people and had little choice in that deal. The reasons behind it can be thrown out, but what can’t be thrown out is the premium on capital Nationwide Bank was willing to pay, that’s the potential model going forward.
“This proposed merger ensures credit union members receive a financial benefit in the transaction. Nationwide has agreed to give members a payment for their ownership interest in the credit union,” said NFCU CEO Paula Edwards.
The insurer said Monday that it has decided to move away from operating as a full-service, federally chartered retail bank — the kind of place where people cash checks, sign up for CDs and the like. Instead, it plans to focus its bank-related services on those that support its retirement-plan business.
Nationwide has taken a big step as part of its plan to get out of the retail banking business.
The insurer said Friday that it is selling $3 billion in deposits at Nationwide Bank to BofI Holding, the parent of BofI Federal Bank, in a deal that is expected to close before the end of the year. The sales price was not disclosed.
BofI Federal Bank, based in San Diego, is a nationwide bank that provides financing for single-family and multifamily residential properties and small and medium-sized business in certain target areas.
Even selling to a new charter or transferring control does not assure financial longevity.
How NFCU and Bank Transactions Are Relevant Now
There are two immediate conversions from a credit union charter that will entail a valuation with potential member payout.
June 23, 20 24 the FDIC announced the following:
The FDIC approved a deposit insurance application submitted by Thrivent Financial for Lutherans in relation to a proposed Utah industrial bank, Thrivent Bank. The FDIC also approved a related merger application that will permit Thrivent FCU to merge the operations of its existing credit union into the newly formed Thrivent Bank.
The newly approved Thrivent Bank will not operate physical branch office locations and intends to deliver all bank products and services exclusively online, offering a diversified loan portfolio centered in consumer loans and funded primarily by core deposits, following a traditional bank business model. Thrivent Bank will offer products and services without regard to religious affiliation.
Thrivent FCU has total assets of $930 million and a net worth of $129 million . What will member-owners receive in this sale to an industrial bank charter formed by the Sponsoring company? Will it follow the Nationwide payment precedent?
The second event is the combination Arrah Credit Union with the $378 million, mortgage centric, Pittsfield Cooperative Bank. The details are in this August 14, 2024 Credit Union Times report:
Chartered in 1929, Arrha’s 27 employees operate three locations, and manage $110 million in loans, $122 million in total shares and deposits, and $12.4 million in equity, according to NCUA financial performance reports. The credit union posted a loss of $9,222 at the end of the second quarter.
The process to combine is very cumbersome. A minimum of 20% of the eligible members are required to vote for the transaction to proceed.
Arrha’s NIMRA application, under review by the NCUA, included 15 different documents and statements such as the merger plan, the proposed merger agreement, a copy of the bank’s last two examination reports, copies of all contracts reflecting any merger-related compensation or other benefit to be received by any director or senior executive, a statement of the merger valuation of the credit union, and a statement of whether any merger payment will be made to the members and how much of a payment will be distributed among members.
The question raised by these two current events, the growth in bank purchases and the Nationwide sale and other conversion precedents is why aren’t credit union being member-owners compensated today? When members are asked to approve the transfer and control of all their assets and common wealth to another credit union via merger, shouldn’t they be treated as least as well as when credit unions pay out bank owners?
Time to Take a Stand and Act
Its time for those who believe in a cooperative system to take a stand and ensure that intra-industry mergers reflect the same process and member-owner payments as every other credit union financial transaction requires.
Without change, the industry will be in a race to the bottom. As I described yesterday, one predatory credit union, PenFed, has cancelled 30 long serving credit union charters via merger between 2003 and 2022. Even as PenFed hits a financial stall, this activity is being imitated by others daily.
Credit unions want all the authorities and options to compete in the open financial markets, but not when it comes to their own brethren. These industry predators want the opportunities of the free market, but not the responsibility of transparent dealing and ownership reward when taking over another credit union.
These “off market” dealings are corrupting leaders, perverting normal financial practice and encouraging credit unions to go out and “roll up” their kindred in bigger and bigger combinations. This trend is subverting not just the traditional practice of market based firms, but driving a consolidation eliminating one of the most stratgic advantages of a credit union charter: local control, investment, relationships and community building.
Why can’t the Nationwide outcome be the standard for all credit union mergers as well. From the above event:
what can’t be thrown out ( of the outcome) is the premium on capital Nationwide Bank was willing to pay, that’s the potential model going forward.
Shouldn’t that be the model today for all change of control credit union transactions?
Pentagon FCU was approved to acquire its third credit union in the past six months, the $26 million Fort Hood Military FCU, in Fort Hood Texas, NCUA said Tuesday. That follows two December acquisitions for the $5.8billion credit union, those of $46 million Fort Shafter FCU in Hawaii and $13 million Coast Guard Employees FCU in Maryland.
This twenty year old description was before mergers of sound, long serving independent credit unions became much more widespread. A decade later credit union system CEO’s, consultants and regulators openly promoted these acquisitions as a quick and easy alternative to internal organic growth. After all isn’t success just a factor of size?
This industry competition for acquisitions was based on offering private personal inducements for CEO’s and senior managers. The practice became so blatant that in 2017 NCUA passed a rule to bring more transparency to the process. The rule didn’t slow the wheeling and dealing. It may have even legitimized these payoffs.
Now credit unions could routinely add wording to the required Notice and Disclosures of these payments and state that the regulators have approved the merger subject only to the member vote.
A Case Study Lookback
Two weeks ago I described the final step in PenFed’s 2021 merger with the $36 million Post Office Credit union in Madison, WI. In August 2024 PenFed announced the closing of its only office in Madison. Since the 1934 chartering, Post Office’s 3,153 members (at time of merger) had received personal service. No more.
I called this closure the final step in “asset stripping.” This is the practice in a takeover acquisition to maximize the profit and eliminate any future investment or expenses. All of Post Office’s resources, reserves, member accounts were transferred to the control of the Virginia based PenFed. There is no longer any local presence, nuance or leadership roles in the community. With this branch closure, all member relationships are now virtual and remote.
The Final Cashout
Last week the land and building of the former Post Office location were put up for sale.
An internal view.
When the merger occurred, Post Office’s call report showed these assets with a book value of $589,222. The real estate listing on September 17, 2024 had a list price of $1,260,000. This is an increase of $671,000 (113%) in the three and one half years since the merger. The net gain on sale all goes to PenFed as “other operating income.” This is the final liquidation step of this 90-year old credit union which had 22% net worth at the merger date.
All Gain, No Risks, Members Left Behind
Paying nothing in these acquisitions for total control of all of another credit union’s members’ net worth and reserves makes these takeovers a very profitable practice. Systematically stripping out all of the most valuable assets for maximum cash value puts the icing on the cake. No worry about local commitments or member and community relationships.
Such takeovers are a common strategy in for-profit companies. However in credit unions there is no acquisition cost, just a few crucial payouts to the CEO and perhaps, other senior executives whose approval and pitch to the Board is required. It is literally free assets for the taking.
This practice is becoming more widespread. It is self-immolation, a systematic institutional dismantling of the credit union system driven by greed and personal ambition, not member benefit.
In many situations today, the merger destroys the local advantages, loyalties and relationships that are the foundation for credit union’s success. The acquiring credit union’s field of membership, or market focus, has no center or rationale. There are no “network effects” for branding or service delivery that would create operational efficiencies. Most critically the headquarters and leadership is hundreds or thousands of miles away. Local familiarity is all lost.
The consequence of credit unions preying and suborning their fellow CEO’s and boards is systematically demolishing the credit union advantage at both a market level and in the public’s eye. The coop model is seen as no different from other financial options. Especially in an era when virtual relationships are available from all financial providers.
And a credit union’s values are the same as every other market participant. The winner takes all.
The rationale is that growth and size will guarantee success, an assumption frequently at odds with the facts and members’ experience. Size does not automatically correlate with efficiency, growth or other financial metrics let alone operational excellence.
The PenFed Merger Demolition Derby Takes Off Again
Penfed pulled back from the American Banker’s “binge” strategy during the initial years of this century. It should be noted that the three mergers listed in the article were all military bases. One could argue that these were natural affiliations consistent with with PenFed’s focus and traditional brand. In 2010 there was a single merger with the $11.6 million Tripler FCU in Hawaii. And then a lull until 2015.
The Merger Frenzy Begins
In 2015 PenFed undertook an aggressive acquisition campaign that lasted until 4Q 2022. They took over 25 credit unions located in 14 different states in under eight years. The majority had no military affiliation, such as Post Office, McGraw Hill, Sperry Associates and Progressive.
Progressive, a New York state charter with a single office focused on taxi medallion lending. This merger of a “troubled” institution resulted in a gain in the year acquired; more importantly it gave PenFed a field of membership open to anyone in America (the old Progressive state charter’s FOM).
The combined assets of these 25 acquisitions at the time of merger was almost $3.0 billion. As in Post Office’s example, control over all the assets, reserves, allowances and member relationships were transferred to PenFed’s head office. In some instances such as the very successful $265 million Perry Associates single office credit union, the office was closed immediately after the merger. The employees were let go, and all members forced into a virtual, remote service model.
Dismantling the Coop System
This systematic dismantling of credit unions and their successful local market positions is being emulated by other credit unions. The hunt is supported by a host of hanger’s on who benefit by facilitating this organized tear down of the cooperative alternative.
In many of the combinations below, the members, if a merger were really necessary, would have been better off with a local option familiar with their market and bringing real operational synergies. But in these private deal makings, the largest payoff to the CEO wins. And besides no one ever looks back to see what happened. Except for the members who begin to vote with their feet.
PenFed’s Eight Year Acquisition Spree
But Does It Work?
One could still ask however if the strategy works as a growth enhancement to normal organic tactics. When PenFed completed the final Allus acquisition in 4Q 2022, it reported total assets of $35.9 billion.
At June 2024, PenFed’s total assets were $33.5 billion. It would take more time to calculate all the other merger downsides such as local branches closed, the employees laid off and the number of members who left after being turned over to an organization with which they have no connection. In its initial merger frenzy, PenFed’s growth looked easy and free of any cost or risks.
However members soon see the asset stripping and the absence of local leadership. Moreover, PenFed lost every credit union’s most important strategic advantage: the hard earned, unique value of long lasting member relationships.
When CEO’s care more about themselves then they do for members’ well being, the difference that makes cooperatives successful is gone.
PenFed is not alone in its disruptive wasting of long standing successful cooperative charters. The question for those who believe in the unique role and purpose of cooperative design, is whether this faux capitalistic model becomes the norm for the system. Or like all false idols, will be defeated by the example of those who think the credit union model is first and foremost for members’ benefit, not managers or boards’ personal ambitions.
From the field. A recent story by a colleague working on site with a client.
I just wrapped up a meeting with a $6 billion CU that does a lot of indirect lending.
Used car values are falling.
Manufacturers are providing strong incentives for new vehicle purchases.
Some credit unions are desperate for income and are attracting business with below market rates via their indirect relationships.
The CFO shared that members with an expensive to own, drive, and insure car are going out and buying another car that is much cheaper to own, drive, and insure–both new and used models. But from a different funding source. For example, another credit union who will extend credit because the member’s credit score is still good, but about to take a nosedive.
The member knows they can’t afford to keep their existing vehicle. Then after they purchase the “cheaper to own” car, they bring the “expensive to own” vehicle to the credit union and hand over the keys.
The result is that the credit union is experiencing higher than expected losses because used car values are falling, and the cars being turned in are more expensive to own.
Long Story Short
The member lowers monthly payments and the cost to own a vehicle. The old car is turned back to the credit union. The member is unconcerned about how it impacts their credit score going forward.
The credit union has limited recourse because the “member” has just a “$5 savings account” required to join the credit union. (This is an indirect relationship only)
I am hopeful for a soft landing from this financial substitution scheme, but not everyone is on the same flight.
Two days ago CNBC host Kelly Evans in her periodic column The Exchange offered the following observations (excerpts):
“Owning real estate in the “sun belt” has probably been one of the greatest money-making opportunities of the past twenty or thirty years. And Covid, and the rise of remote work, has only accelerated all of that.
“Or has it? The San Francisco Fed just put out a new study suggesting that it could be the “End of an Era” for the snow-belt-to-sun-belt migration which has been the distinctive feature of U.S. population shifts over the past 50 years. Their argument? The South is getting too hot.
“It may sound like a reach, but their data on population shifts is worth considering. It shows many more parts of the sun belt losing population from 2010 through 2020 than in prior decades. Places in particular like Western Texas and Louisiana. (Although Florida–experiencing an influx of New Yorkers in recent years–remains an exception.)
“The U.S. population is starting to migrate away from areas increasingly exposed to extreme heat days,” the researchers write, “toward historically colder areas, which are becoming more attractive as extreme cold days become increasingly rare.” Cities like Baton Rouge, Jackson (Mississippi), Shreveport, Garland (Texas); and Long Beach (California) stand out as seeing population declines both pre- and post-pandemic, according to Census figures.
“Even Phoenix’s population growth has been slowing. By last year, it grew just 0.4%–a quarter of the growth rate it enjoyed pre-pandemic. Houston saw big declines in 2021. . .
“The Midwest could be a big beneficiary of a re-shift. “Markets that are more affordable, that are enjoying 80-degree summers while other people are boiling, might become a lot more attractive–like Cleveland,” real estate expert Ivy Zelman says, which could be one market in particular to watch.
“On top of the heat and storms, sun belt populations are also grappling with issues like soaring home insurance premiums (in Florida), or flood insurance premiums (in Louisiana). Real estate prices have also risen significantly in recent years, negating a big part of the cost savings in relocating from the north.
“And you know what? New Jersey (where author Kelly lives) is lovely, actually. The towns are small and walkable. Errands are all pretty close. The hospital I had my kids at was seven minutes away. Some towns even pick up your trash from the backyard! And being close to Manhattan is a pretty nice perk. Last year was the first year since 2010 that the state actually saw positive net migration.
“If by some twist of fate this continues, parts of the country that were previously left for dead might be the biggest economic beneficiaries in years to come.”
Strategic Assumptions Turned Upside Down
A significant credit union advantage has been their local roots. This is partly a function of the field of membership and initial sponsor support; partly the limits of capital; but mostly because this market focus and knowledge created a major strategic advantage over much larger, often out-of-area competitors.
Local meant being part of the community with loyalty passed down through generations. Then multiple economic shocks and changing regulatory options provided credit unions opportunities to move beyond their historical boundaries. Select employee groups, multiple counties and even whole states defined new market potential.
After the financial crisis in 2008/09 some credit unions began to seek out of state expansions to diversify beyond their local economy into more appealing growth markets.
A major focus was the sunbelt states, especially Florida. Florida has no state income tax, strong growth, favorable weather and is a retirement destination for credit union executives from the colder states in the northeast and Midwest.
Since 2015, investments via bank purchases, mergers and some new branches have been made by out of state credit unions. Here is a current estimate of the totals of this activity in Florida by the home state of these “foreign” credit union expansions:
Florida’s Out of State Credit Union Branches
CUs
Branches
AL
2
6
CA
3
11
GA
2
2
ID
1
1
IL
1
2
MI
2
26
MN
2
2
MO
1
3
NC
1
8
NY
2
2
PA
1
1
TX
2
7
VA
3
36
Totals 23 107
These 107 branches are 10% of the 1,045 credit union locations in the state.
Some of these locations undoubtedly serve existing FOM’s such as Navy, Pentagon, and Walt Disney World. But many represent investments to diversify from cold weather states to warmer climes as in the case of the 26 Michigan branches.
In Nevada, 25 credit unions manage 120 branches. Of these totals, 11 credit unios are from out of state and manage 50 of the in-person locations. Mountain American based in Utah has the most branches in the state.
Now Climate Change
While the economic outlook, warmer weather and personal tax advantages may cause Florida and Nevada to appear as attractive expansion opportunities, managing a single branch or small system away from the home office market is a challenge. The network effects from expansion in adjacent markets are lacking. There is no brand awareness or legacy reputation in these new locations. Any existing members may live in the area only temporarily.
Are these out of state, diversification outposts hundreds or thousands of miles from a credit union’s primary service area worth it? What is the ROA of these investments?
Might more stable and innovative future growth now be in areas around major cities in the northeast and midwest such as Detroit, Cleveland, Toledo, Buffalo. Grand Rapids, Milwaukee? Will local and national infrastructure investment and less extreme climate now make these THE future growth markets?
Is a compilation of “odd lot” branches around the country via mergers or occasional bank purchases a coherent strategy or merely ambition ungrounded by reality?
