What Credit Unions Can Learn From BND

Recently the Bank of North Dakota (BND) released its 2023 Annual Report of almost 80 pages.

The Report including the bank’s history (see excerpt below) is a creative example of an alternative financial institution thriving in the privately managed financial services marketplace in America. Its ongoing success is the model for similar startups in other cities and states.

Founded in 1919, the bank is exempt from all state and federal taxes. It is funded by receipts collected by the state government and its agencies. There is no FDIC insurance but is backed by the state of North Dakota.

BND’s primarily lending activity is participation loans originated by the other financial institutions throughout the state. It is a wholesale lender. In 2011 when NCUA implemented new regulation requiring more member capital and reduced corporate operating and investment authority, the credit unions decided to close their corporate. One of the factors was the option to receive much of the corporate’s financing services from BND.

A Very Successful Year

The Dakota Credit Union Association has presented a summary of BND’s 2023 results. The highlights include total assets of $10.1 billion, record earnings of $192.7 million for a return on equity of 18.2%.

From the Association’s summary: The Bank originated and renewed 10,734 loans for more than $2.5 billion, bringing the amount of the total lending portfolio to $5.8 billion, a new record. The total portfolio increased by $394 million from last year. BND delivers both agriculture and commercial loans through 72 different financial institutions and their 218 branch offices. . .

In addition to these portfolios, BND administers more than $1 billion in legislative-directed loan programs, including school construction, state infrastructure, water projects and disaster recovery.

“Bank of North Dakota works closely with local lenders to ensure its programs are relevant and impactful,” said members of the Commission in a joint statement. The Commission, consisting of Gov. Doug Burgum as chairman, Attorney General Drew Wrigley, and Agriculture Commissioner Doug Goehring, oversees BND. “This attention to local needs is one of the reasons for the Bank’s success.”

A Bipartisan Embrace

Beyond the current success and its historical longevity, support for the Bank comes from leaders of both parties. Gov. Doug Burgum is reportedly on Donald Trump’s short list of vice-presidential prospects. Nowhere do we see opposition to this state-owned and managed financial institution that republicans or bankers in other states might call out as a “socialist enterprise.” Its track record serving the agricultural, industrial and public financing needs across North Dakota has made it a vital component of state government.

The success of BND has spawned similar startups in other jurisdictions. The Public Bank of East Bay (PBEB) has hired a former Credit Union CFO, Scott Waite, to lead its fund raising and organizational efforts. There is an attempt to pass state legislation for a city owned bank in Rochester, New York described in this June 3, 2024 article Why a Credit Union Wants the Local Government to Create Its Own Bank.

Both of these organizers cite BND as the model for their more focused local ambitions.

A Lesson for Coops?

BND’s longevity demonstrates the variety and innovative capacity of an open economy. When NCUA closed down many financial options for corporates, other institutions were available. Long time relationships and collaborative capacity were lost as the FHLB’s and other secondary market providers stepped up to serve natural person credit unions.

One might view these events as just the normal process of creative destruction that is a hallmark of competitive economies. Or. it might illustrate that options are available or adaptable when existing institutions fail to fulfill their core purpose.

More History of BND

Page 11 of this year’s Annual Report provides a summary of the Banks founding. Here is an excerpt:

If you lived in North Dakota in 1919, it is likely that you made your living as a farmer or rancher, or in a profession that supported farmers and ranchers. There wasn’t a great deal of economic diversity at the time.

When you put your grain on the railway to be delivered to an elevator in Minneapolis/St. Paul, you were given the most broken-down of the railcars, causing tons of grain to be lost along the way. You were paid for the grain that arrived in the Twin Cities, not the amount of grain you loaded in North Dakota.

You weren’t present when they tested your grain so you needed to rely on the elevator’s assessment, often thought to be more favorable to the elevator than the farmer. When a loan was needed, it most likely came from a bank in Minneapolis or Chicago, with interest rates in the double digits. It was unaffordable for most agriculture producers, and they barely squeaked by.

This set the stage for the Nonpartisan League to come into power, and as part of its platform, the 1919 North Dakota Legislature created the State Mill and Elevator, Workforce Safety Insurance, and Bank of North Dakota along with the Industrial Commission to oversee them.

North Dakota tax dollars would be used to support North Dakota residents. While it wasn’t the first or only state-owned bank to be created, it is the only one that has survived the test of time.

June 10, 2024June 10, 2024

Do Americans Want or Need More Credit Union Charters?

The answer to the first question is easy. On May 24, 2024 NCUA replied to Denise Wymore’s FOIA request for the number of new charters in any phase of the application process.

The response: “In June of last year it was reported there were 51. . .(Now) There are a total of 63 applications.”

Where is the Need?

NCUA did not provide details of the chartering efforts. Two broad examples of innovation by those looking for alternatives to the for-profit banking system have been covered in the genral press.

One example is the growing interest in “public” banks chartered by cities, counties or states to manage their funds and to support investments in local housing and other priority projects. This is an example of an Oakland, CA based effort.

The second are those groups and/or communities not being served by existing financial options.

A long description of this demand is reported in this recent Washington Post analysis, Community crowdfunding is built on trust for immigrants. The article gives two organic financial creations. One is the Korean self-funding and self-help practice called Keh. First developed in Korea following the Korean war, the financial practice was adopted in America by immigrants who were limited in the amount of funds they could take from to their new homes in this country.

The Post has followed this form of financing for the greater DC area over several decades. In an article in 1990, it reported the Korean Association of Greater Washington estimated 80% of Korean American households belong to at least one keh. It is the source of financing for local grocery and convenience stories, and more recently the ubiquitous food trucks serving the community.

The article states that Korean-American banks began to meet some of these local business finance needs in the late 1990’s with traditional SBA and other finance options. “But the tradition of community-based microfinance has evolved and flourished in the years since-just as the economy has been reshaped by fresh waves of newcomers.”

“Unlike a traditional investment, the keh lenders earn no interest and no equity and have no say in the business. . .Instead, it is best understood as a trust-based financial support network that’s held together by concern over reputation.” These efforts sound much like the original credit union model.

Financial Networks in the Latino Communities

The other example in the Post article is the creation of tandas among the Mexican community on both sides of the border. Like keh, the immigrant communities rely on mutual trust; “the last thing they want is to be ostracized by their own community.”

One organization that is addressing the variety of financial needs of the immigrant community and those left behind is the Mission Asset Fund in San Francisco. It is a 501(c)(3) tax-exempt organization that in 2022 had revenue of $7.7 million. Its Annual Report describes programs of micro finance, startup funding and training programs involving almost 20,000 individuals.

The Credit Union Challenge

There are multiple organic, people-centered financial solutions for individuals and communities which are not part of America’s financial mainstream, including the credit union system. They serve those at the outer boundaries of financial experience who lack the history and resources demanded by traditional institutions.

Instead, they rely on an individual’s character and local community when extending financial services. The solutions are diverse, experimental, dependent on good will and trust.

In theory the credit union charter in all its diversity and potential should be an ideal fit for these circumstances. But for that to happen there is going to have to be a reawakening of purpose and priority for the cooperative community. The charter interest and economic needs are there—but is anybody paying attention to these groups and their potential as new startups?

June 6, 2024June 7, 2024

A Student-Organized Startup On the Credit Union Runway

University incubators supporting startups and often incentivized through innovation contests are found at many higher institutions. The story of Emory University’s The Hatchery Center for Innovation is being repeated across the country.

Called a sandbox for experimentation, here is how Emory’s role is described:

A sizable selling point of university-based incubators is the freedom for early-stage testing and experimentation. Before startups become startups, products must be designed, development methods must be established, team dynamics need to be organized, and workflows adjusted. University incubators provide a longer runway to build a startup before student entrepreneurs enter into a competitive market and grapple with life’s constraints post-graduation.

This February 24, 2024 article describes the fourteen Best University Incubator and Startup programs from the prior year. The list is a Who’s Who of leading institutions. Students are looking for ways to implement the oldest of American dreams, starting one’s own business.

A Credit Union Startup on the Runway

As part of the 1984 CU-Expansion effort celebrating the 50^th Anniversary of the passage of the Federal Credit Union Act, NCUA supported the chartering of student run credit unions around the country.

The story is told in this post from 2021 which includes this introduction:

The New York Times in a lengthy 1986 article, Credit Unions Boom On Campus, opened with this brief history of student charters:

“The first student credit union was formed in 1975 at the University of Massachusetts. Students at the University of Maine formed one in 1978 and at the University of Connecticut in 1979. But it was not until 1983, when the National Credit Union Administration helped to organize its first conference for colleges, that today’s credit union movement began. Four were formed that year.”

The Winning Entry

Yesterday, students at Seattle University posted this announcement on LinkedIn of their first prize in the school’s business plan competition. The listing of administration, faculty and student supporters is impressive.

We are honored to announce that Seattle University Credit Union Initiative received🌟1st place🌟in the Harriet Stephenson Business Plan Competition for the grand prize of $20,000. This award is a testament to our team’s dedication and exceptional hard work. Thank you to the Seattle University’s Innovation & Entrepreneurship Center for organizing such an incredible event!

The HSBPC was established by Dr. Harriet Stephenson (SU faculty member) in 1998. It was designed to help students and alumni in launching new business ventures, providing participants with the chance to enhance their Seattle University learning experience, gain feedback on ideas, develop networks, and expose their ideas to potential investors.

We extend our deepest gratitude to the five esteemed judges:

Kathleen Baxley, Lindsey McGrew, MBA, John J. Ostlund, Dave Parker, and Peggy Smith, SCRP, SGMS-T (she/her), and to our coach Chris Medina.

As well as President Eduardo Penalver for allowing us to start this journey at Seattle U, Dean Joseph Phillips for giving us unwavering support in Albers, and to CMO Robin L. Meeks for your incredible guidance.

We’d like to recognize Cisco Malpartida Smith, our Chairman, who has been an invaluable mentor leading the team every step of the way.

And our team; Ana Giordano (CEO), Julian M. (COO), Ethan Sue (CIO), Emma Nguyen (Future CMO), Jonathan Tran (CFO), and Dora Becker (Acting CMO), for all their hard work, as well as the remaining cohort of student who have put incredible work into this initiative.

We also want to express our heartfelt thanks to our community and supporters who have believed in our vision and mission. This victory is not just ours but a shared success with all who have contributed to our journey.

As we look forward to the future, we remain committed to our mission of positively impacting our community and continuing to strive for excellence in all our endeavors.

We ask that you assist us in reaching our goals by Donating, Making a Social Impact Pledge, or if you’re a student, join the initiative!

Two examples of reactions to the announcement:

Emma Nguyen

Student at Seattle University | Passion for Artistic Creativity and Entrepreneurship

Still in disbelief of this accomplishment! So much hard work and dedication went into this accomplishment, and i could not be more thankful and proud of the entire team who contributed towards this milestone!! Excited to see what comes next for the Seattle University Credit Union Initiative

Cisco Malpartida Smith

Credit Union Executive | Adjunct Professor @ Seattle University

This is one of my proudest moments at Seattle University. Literally 20 years in the making. We are launching a new credit union! It’s getting exciting!

Engaging the Next Generation of Coop Entrepreneurs

This and other examples such as the George Washington Credit Union Student Initiative suggest the interest and enthusiasm by students to chart their own financial course.

Shouldn’t the cooperative movement be taking advantage of this generation’s interest and enthusiasm? It is not the size of the startup that matters, but the passion of the founders. That is something from which we could all benefit.

May 16, 2024May 16, 2024

Credit Union Mergers: The Final Solution?

(This post was composed by Jim Blaine and reprinted with permission)

Credit unions are changing…

… and disappearing.

Badin Employees Federal Credit Union used to be tucked up against the Uwharrie Mountains on the banks of the Yadkin River, about 40 miles east of Charlotte – the hometown of banking giants Bank of America,Wells Fargo and Truist.

The Uwharries are thought to be the oldest mountains in the U.S. These mountains are well-worn and rounded; the Rockies they ain’t! Uwharrie is an old Indian word. It’s a bit tricky to pronounce, much like La Jolla, Yakima, Albuquerque, and Butte. “Yew-whar-eee” is correct; “you’re hairy” is not.

Been searching for years for the original Indian meaning of that name. Recently, a friend told me he knew the origin. He said, it’s in the dictionary: “Uwharrie” means “unknown”. Really? Asked him for a copy of that reference for my files. Sure enough, the following week, in came a copy of the dictionary definition. It said: “Uwharrie – adj., probably from an ancient tribal name; meaning unknown.” Perhaps I just need to pick better friends….

Badin is a company town. In 1917, Alcoa dammed the Yadkin River to generate hydroelectric power for a new aluminum ingot plant. The lake and town which sprang from those efforts are quietly picturesque – but, all things revolved around the plant. Driving into town, down Falls Road, under an unwashed denim sky, is a journey home, a journey back in time The town is just two blocks long, but makes the most of it.

“Downtown” the candy-striped awnings and improvised handicap ramp of Badin Town Hall and Police Department adjoin the Masonic Lodge #637. Then comes the post office with its single window, fleet of post office boxes, and well-used community bulletin board. Shading the post office is Memorial Park, flanked by a cedar tree honor guard for the seven Badin soldiers who died in World War II. And, out of sight up a short dirt road, is the best named roadhouse on the planet: The Bottom of the Barrel Disco and Cafe; now vacant, having recently burned to the ground. Bet that last party was a great one. Sorry to have missed it!

But, the center of attraction in town was the Badin Employees Federal Credit Union. The Credit Union was housed in a one story, red brick building with blue shuttered windows and a bright, “no-way-to-miss-it”, burgundy door. The Credit Union always closed for lunch from 12:30 to 1:30 pm, but you could sneak a look into the office through the partially drawn, real-wood Venetian blinds. It was a comfortable, inviting looking place. The kind of place you could sit a while, have a cup of coffee, talk to the manager, y’know think it through a bit.

Badin Employees Federal Credit Union was prosperous with assets reaching $4 million, capital 18%, loans available to all, delinquency negligible. Everyone in town was a member; no local banks remained. Badin Employees FCU had achieved “market dominance” without ever spending a penny on “engagement, member experience, or passions of self-importance”. The “word around town” took care of all that. Yep, folks in Badin had a strong opinion about their Credit Union. They were the kind of folks – as you might suspect – who didn’t need “thought leaders”, “X”, or talk radio in order to form an opinion!

The beauty of Credit Unions used to be something you couldn’t easily wrap, bottle, or “spin”. Badin FCU is no longer there to make a difference – gone the way of merger. There are no longer any banks or credit unions in Badin. The aluminum plant, too, is gone.

… are we getting close to the Bottom of the Barrel on a lot of important things in our Country, including credit unions?

April 15, 2024April 15, 2024

Sharing Purpose & Meaning With Effect

Communication transforms when it touches a person’s emotions. It transcends the moment. It becomes art. It helps us see beyond what we knew before.

The most difficult challenge for any organization is telling anyone why they should be interested in joining with you.

Messaging is more than competing for our attention with a product commercial or a clever brand. Ultimately, it must appeal to something inside. It should make us care.

He Gets Us is a video campaign that attempts to represent the “greatest love story ever told.” It suggests the relevance of christen belief in today’s context of religious decline or misuse.

This creative group states its purpose as follows:

We’ve done a lot of homework on our culture. We researched how people feel about each other and what they think about Jesus and Christianity. We’ve connected with thousands of people of various faith traditions and those who claim no religion. We spoke to all kinds of people — different backgrounds, beliefs, and, yes, political affiliations.

And this is what we’ve learned: From politics to sexuality and religion, so many of us feel like our values, beliefs, and identities are under attack by the ideological “others” around us. Many perceive those who differ with them on issues of justice, dignity, and humanity as not just wrong or misguided but also as evil. As enemies. We often see these “others” as close-minded, selfish, hypocritical — and if we’re honest, many of us respond in kind.

This week I will share several of the group’s “presentations” which look and are sometimes presented as commercials. But they are much more. They help us see, to understand more than we did before watching them.

The Credit Union Parallel

What do these “messages” have to do with credit unions? To be seen as relevant in today’s crowded social media is the same challenge credit unions confront. There are a number of organizational parallels.

The participation trend lines in most religious denominations are trending down. Smaller churches are closing. Larger ones are greying. Sunday or Saturday “sabbath” is a time for family errands, fun outings and preparation for the week ahead-not participating in a community of shared purpose. Society’s divisions are mirrored in our religious practice as presented in the group’s purpose:

The more ideologically defensive we become, the more we are willing to sacrifice things like kindness, patience, and the respect and dignity of others for the sake of victory — the righteous ends justifying the dehumanizing means. And it’s tearing us apart. We experience it in politics, in the workplace, in schools, and even in churches. And at the heart of the conflicts is a fundamental disagreement about what it means to be good.

Credit unions and churches no longer seem central to many persons’ lives. Our basic needs and core values, “to be good,” are fulfilled in other ways and commitments.

The He Gets Us videos try to show the relevance of lessons from generations ago for real people today.

My hope is to inspire rethinking for today’s coop messages. We need to move beyond the headlines and priorities of our current moment and rediscover the energy that made the industry a movement, an alternative to the status quo and rediscover who we can aspire to become.

The Immigrants

A hot button topic when people are polled about public issues for political campaigns is the flow of migrates to America.

The one-minute video, Refugee, presents this ongoing human circumstance with a specific context.

(https://hegetsus.com/en/featured-videos/refugee)

What I found equally compelling is the producer’s five-minute story telling how this video was assembled. The making of the Refugee video:

(https://hegetsus.com/en/featured-videos/the-making-of-refugee)

Does this message open one to a different way of seeing this issue? Does it stay with you after viewing? Does this human-centered perspective suggest a parallel in your credit union’s role?

February 7, 2024February 7, 2024

Big Banks Adopting a Credit Union Tactic

Yesterday’s Marketplace program on NPR had a brief report on the investments two of America’s five largest banks are making to improve their competitive position.

Technology? New Ventures? Greater staff skills? Social Marketing Influencers? Third party-fintech-origination partners? More acquisitions? All are factors, but not the newest priority.

The New-Old Strategy

JPMorgan Chase announces brick-and-mortar bank expansion in a digital age

Several of the relevant paragraphs from the story:

In the year 2024, when you think banking, you think mobile apps, online deposits, digital future, right? Not so fast. JPMorgan Chase, the country’s largest bank, announced today it’s opening more than 500 new brick-and-mortar branches and renovating another 1,700.

This follows an expansion by Bank of America last summer. So, what’s the value of banking in person in the digital age?

You don’t usually think of a bank as having a living room. But Jason Patton of JPMorgan Chase says they’ll be a staple in a handful of the bank’s new branches, which are meant to be places where people chat. . . (in cu’s this is called serving members)

“Some of these branches, we’re opening up in places where we’re not as well known,” he said. “So, in many cases, people don’t know what we have to offer.”

And it’s important to see and be seen by those people if banks are going to drum up new business, said Jaime Peters, a finance professor at Maryville University in St. Louis.

“By going and building these new branches, and having that placard on the side of the road that people pass every day, that is brand awareness, that is trust building,” she said. . .

The Only Growth Option Is Organic

Big banks have another incentive to add branches: The ones that hold more than 10% of the nation’s deposits are generally prohibited from acquiring other banks, said Michael Rose, a managing director in equity research for Raymond James.

“So because you’ve removed the ability for them to actually acquire other banks, they have to grow essentially organically,” he said.

The Credit Union Counter: Enhancing “Their” Local Environment

After posting the latest video from White Fish CU, I received a link from Jason Lindstrom CEO of Evergreen CU in Maine. This new video has a similar community theme, but different subject matter. It is an homage to Maine’s forests and the people who maintain and enjoy them.

In addition to branches, “local” means that a credit union is authentically “home-grown,” not merely a local outpost of an out-of-state or national financial firm. Bank of America or JP Morgan Chase branches are not being grown (drummed up) from the natural environment. Rather they are an invasive species, trying to replace the local habitat.

This is Evergreen’s mission, “keeping Maine wild.”

(https://youtu.be/ocJ5PGR8FM8?si=VF46w9L01uk_tEj4)

February 6, 2024February 6, 2024

Three Examples of Credit Union Success

Credit unions can be inventive when communicating their special nature. Here are three different approaches.

A Few Great Numbers (KPI’s)

This traditional view of success is from the yearend numbers of an exceptional coop. This CEO’s team focuses on the 5 key performance indicators (KPI’s) in 2023 as shown below.

metrics	goal	actual
member growth	5.10%	4.10%
net earnings	1.00%	1.23%
service quality	82.25	83.3
P&S per member	4.64	4.61
deposit growth	10.00%	12.80%

These along with many others not shown (net worth, loan growth etc.) would be outstanding in any year. However in this year of flat to down trends overall, they are extraordinary. How was it accomplished?

This credit union implements the most traditional and important strategic advantage credit unions enjoy–“relationship banking.” It provides stable deposits, long term members and intense focus on their community and its well being.

The organization does this by putting people first. The CEO tells employee and member care stories as a central part of his monthly updates. Not words, but deeds, sometimes confessing honest shortcomings.

The credit union leadership has set boundaries, what to do well and what not to attempt. No mergers, no bank buys. They are in a market dominated by a super coop competitor ten times their size.

For those who believe scale is necessary for success, this credit union grew to over $700 million in 2023. It did so while recording the fifth consecutive year of lowering its operating expense to average assets ratio. In this five years the ratio has fallen every year going from 3.08% to 2.55%.

That result is lower than the majority of credit unions over $5 billion. It is because they know who they are as a credit union.

Celebrating a Community That Cares

For any credit union striving to communicate its role in the communities served, I would urge you to look at this latest video from Whitefish Credit Union in Montana.

It is from Josh Wilson, Senior Vice President for Marketing. The video centers around people in all walks of life serving their community in local food banks.

It is a moving documentary. So powerful it should be entered in the Sundance film festival. The stories honor those who serve and are being served. It is a tribute to the small rural towns and the natural environment in which the credit union operates.

Watching it makes you feel good about this example of caring for others. There is not a word about Whitefish’s financial services, which says everything you need to know about the credit union. Enjoy.

(https://youtu.be/9t7xl3IQRw4)

The Special Opportunity for Credit Union Leaders- I Feel Like Makin’ Love

Yesterday I linked to a song by the rock group Green Day. A fan, Bob Bianchini, sent me their latest video from two weeks ago. It is a real picker-upper to start your day.

You might ask who is Bob Bianchini? He is the only League President who simultaneously served in the state legislature. That was in an era when credit union leaders knew how to get things done.

This video reminded me of Rex Johnson’s exhortation to the credit union audiences who attended his many lending symposiums. He would close by telling them, “your job is to treat your members so well that they become fans for your credit union.”

Here is what genuine fandom looks like-in a New York subway station from Bob and Green Day.

https://www.youtube.com/watch?v=EiF28zBaOlI

(https://www.youtube.com/watch?v=EiF28zBaOlI)

February 1, 2024February 3, 2024

The Pied Piper of Stockton (Part II)

This is a three-part look back of a January 26, 2022 article on the transfer of $10 million of members’ capital to a non profit by the CEO and Chair as a result of merging Finance Center Credit Union.

Part I summarized the previous events and articles offering principals’ explanations.

Part II below presents data subsequent to the merger from the Foundation and CEO Duffy’s activities through January 2024.

Part III will address what happens now?

Part II: Updating the FCCU2 Story To the Present

How is the newly expanded Valley Strong Credit Union doing? After the first full year post-merger, (ending December 2022) the credit union was going gangbusters. However as of September 2023, the same indicators suggest the credit union has hit a brick wall.

Ratio/ Measure December 22 Dec ’23

Loan growth % 49.1% -6.6%

Share growth 8.7% 1.5%

Members 16.4% 6.8%

Total Assets 21.3% -3.8%

Net Income (46.0%) 8.6%

ROA .44% .44%

Net Worth 8.1% 8.5%

Loan Originations 58.5% (51.4%)

Delinquency 1.1% 1.2%

Net C-O loans $25.4 M $68.8 M

# employees-FTE 625 570

Two notes from 4th Quarter numbers. The credit union reported a non-operating gain of $15.2 million or 84% of total net income on which ROA is computed.

The compound four year CAGR annual ROA growth (2019-2023) is negative 18.9. In the same period the annual CAGR for average salaries and benefits grew 12.2% per year.

The two years’ trends show a dramatic slowdown in key balance sheet accounts, rising loan charge offs and a staff reduction of 50 employees. Mergers can create an initial “sugar-high” growth appearance, but sustainability depends on a firm’s ability to develop relationships, that is grow organically. How FCCU members view their new credit union is hard to discern from this macro data.

The Data from IRS Filings

The 990 IRS non profit filings for FCCU2 and Valley Strong (both for 2022) provide important data.

From Valley’s 990, we learn that all of the senior FCCU employees listed in the Member Notice, remain employees and qualified for their $800,000 in total 2021 merger bonuses. Their total compensation for 2022 is listed as :

Michael Duffy, EVP Chief Advocacy Officer $1,088.045.

Nora Stroh, Legacy Ambassador $361,814

Steve Leiga, VP Accounting $354,748

David Rainwater, Sr. Project Mgr $362,747

Amanda Verstl, HR manager $353,542

The data is from Valley Strong’s 2022 Schedule J partially shown below.

Total compensation of the five senior FCCU executives on this schedule is $2, 521, 696.

The FCCU2 IRS Information-A $2.0 Million Bonus Contribution

The FCCU2 foundation’s 990 for 2022 provides information about the transfer and use of FCCU members’ funds from the merger.

The most stunning fact is that the Fund did not receive the $10 million listed in the official Member Notice. Rather the total sent to the foundation in 2021 was for $11,959,462 or almost $2.0 million more than disclosed to and voted on by members.

No explanation is provided where these additional funds came from? Why were they taken from members or not transferred to Valley Strong as part of the equity transfer? Who approved this $2.0 million additional amount? What was NCUA’s role?

In the same 2022 IRS filing we learn:
- The Foundation has changed its name to The 54 Fund. No public explanation of the reason can be found in any media.
- The address is no longer at the former credit union’s office but in the building below, that is 2616 Pacific Avenue #4081. It is the local post box not an office.

The new foundation lists no website address or other contact information. When I emailed Foundation director Steve Liega on the IRS return, I received no reply. When dialing the phone number, it is “not in service.”

We do see the $250,000 donation listed in Valley Strong’s contributions, its largest single grant.

We also learn all of the initial funds were invested in a firm called the Dana Group. What does this have to do with credit unions or prudent investing?

After adding $2.0 million more of members’ funds, all these registration/location changes further remove the Foundation from public scrutiny and accountability. The only information available is from the IRS 990 filed in October 2023, ten months after year-end.

In contrast credit union call reports are public and received quarterly. Annual state and federal exams validate reported data. The 990 provides additional information on donations, political contributions and executive salaries. In contrast, the financial details of the new 54 Fund are available once per year and then ten months after year end.

The 54 Fund Spent $0.38 for Each $1.0 Donated

Even though limited, the Foundation’s first full year report gives insight how it manages its activities.

Total revenue was $368,658 including the $250,000 donation from Valley Strong. Total operating expenses were $105,858. Charitable donations were $272,479. For every $1 in donations, the Fund spent another $.38 on operating expenses.

The $272,479 donations were distributed in 86 grants ranging in size from $1,000 (45) to three at $25,000 each. The recipients include churches/temples of all denominations, multiple private and public schools, private social agencies, and the United Way of San Joaquin. The 54 Fund at 2022 yearend had more assets than at the beginning ($11.974 vs $12.058 million)

The purpose stated for all grants is “general support.” Other than seven over $10,000, the much smaller 79 amounts might be characterized by the term, “walking around money.”

Of the nine 54 Fund directors chosen by Duffy, four are former senior FCCU employees, now at Valley Strong. In 2022, all five former senior FCCU executives listed in the Member Notice received much greater annual compensation from Valley Strong than the Fund’s $272,492 in total donations to help its 29,000 former members. Is it just proving the adage “charity starts at home?” Were these five positions and pay, or others, “at will” or negotiated in contracts? Did the executives guarantee their success and not member benefits?

Three other 54 Fund directors are former FCCU board members including the Chair Manual Lopez. Another director is Ed Figeroa, listed as Executive Director, who received a salary of $46,667. Figeroa had recently retired as CEO of St. Mary’s Dining Room. In 2020 the charity received a $100,000 donation from FFCU as part of the credit union’s Stockton Strong donation (see video from Part I).

By comparison, Valley Strong CU made total 501 C3 contributions in 2022 over $1.1 million including $250K to the 54 Fund. These grants were made without the need for a foundation.

As a tax exempt organization there is no purpose for a credit union to establish a separate foundation to expense grants. This raises the question of motivation. Why was a new foundation needed “to advance and support the needs of the members”-Duffy’s characterization in Part I.

The “Tragedy of the Commons”

Why was the FCCU2 foundation established just a month before the merger announcement when it was unnecessary for charitable grants in the credit union’s previous 65 years of operations? Or at Valley Strong now?

The separate foundation registered by CEO Duffy (along with his former employees and board directors) keeps total control of the funds by Duffy. If the money had been returned to the members or transferred to Valley Strong, the ability to continue to cultivate an image as a civic patron would not be under Duffy’s control. This transfer of $12 million “privatized” members’ common wealth.

The 54 Foundation was the vehicle used to promote the personal philanthropic reputation of the FCCU CEO once he left his leadership role. His previous political and public grants activity had been funded from his credit union’s resources. He needed a new funding source.

Two examples of this reputation motivation are in recent articles. In January 2024 Michael Duffy was selected as Stockton’s 69^th Stocktonian of the year. The story begins:

“Dressed in a gray plaid suit and a red striped bow tie, the former president and CEO of the Financial Center Credit Union became the 69th person to receive the award for service and positive impact on the city.” The paper provided a series of pictures of the event.

The article cited Duffy’s past as CEO of FCCU (a responsibility he had exited 28 months earlier) and his position at Valley Strong. There is no reference to Valley Strong’s recent charity or the Foundation as the source of Duffy’s donations. But he gladly accepts the praise and publicity for giving away a tiny fraction of the $12.0 million set aside from the former FCCU members’ collective savings.

A longer article reporting the same award was published by the Stocksonian on January 29, Banker Michael Duffy Surprised by selection as Stocksonian of the Year.

He is now described as a “banker” a higher calling apparently than a former credit union CEO.

He is quoted in the article saying: “I love Stockton, and so I find every which way to be a part of Stockton,” Duffy said. “If it’s from the north, to the south, the east, the west, the tiny neighborhoods, the big events, the very small not-for-profits, the very big ones, if I can be there enjoying this city with everybody I’m there.”

Neither article notes that after gaining his living for 28 years from the credit union, he and his board failed to seek a successor to lead the city’s 66-year old and largest local cooperative financial firm. That would be standard industry best practice when CEO’s decide to leave. It is also a fiduciary duty of the Board of directors.

This is a recent case of how CEO succession normally proceeds, especially for financially strong credit unions. FCCU’s capital ratio of 16% was twice the ratio of Valley Strong.

But that process would mean Duffy would be out of a job which had been paying him over $1.0 million per year. And he would no longer have access to members’ funds to show his civic “love.”

A Financial Pied Piper Leads Members and Resources to Bakersfield

The term Pied Piper refers to a person who is able to charm or lure others through the use of their skills and ability to manipulate them for their own gain.

Instead of sustaining the credit union to serve its founding community, Duffy engineered the transfer of 29,000 Stockton’s members’ $635 million locally owned assets and their $110 million accumulated capital. A new board and executive team 250 miles away now controls how these resources will be used.

When initiating this change of control to a credit union with no local roots, Duffy set aside $12 million of his members’ surplus for his direct control in the 54 Fund.

He turned the Robin Hood model of wealth distribution into a financial round robin game. He first retains money, not using it for member benefits, to build reserves more than 100% higher than peers. From this extraordinary capital surplus, he directs $12 million into the new organization he controls. To justify this diversion, he says it to help those from whom he withheld the earnings benefit in the first place.

When CEO, Duffy short-changed members’ returns by building capital ratios twice the industry average. He turns to this same source for the 54 Foundation funds. Truly a double blow for those who entrusted their financial futures to his credit union leadership.

In Part III I will discuss what happens next. And share the names and writings of two persons who saw through this whole financial flim flam from the start.

(Editor’s note: Valley Strong data for December 2023 updated on February 3, 2024)

January 31, 2024January 31, 2024

The Pied Piper of Group 209, or What Happened to the FCCU Members’ $10 Million? (Part I)

On January 26, 2022 I wrote a detailed analysis of the transfer of $10 million of members’ capital to a non profit organized by the CEO and Chair of the merging Finance Center Credit Union. My position was that this was an improper taking of funds owned by the members, but asked, “You be the judge.”

This is a followup analysis since the October 1, 2021 merger and funds transfer.

Synopsis: Part I summarizes previous events and questions raised about the money transfer. Articles provide principals’ various explanations in a CU Today story.

Part II presents the new Foundation’s data subsequent to the merger and former CEO Duffy’s activities as recently as January 2024.

Part III asks what happens now?

Looking Back at the Merger Issue

Stockton’s (area code 209) Need for Credit Union Services

In the words of the CEO of a local community food kitchen for the needy, “Stockton is not a destination city.” Its population of 322,000 residents is 42% Hispanic, 24% Asian, 19% non-Hispanic white and 13% black. It is one the most racially diverse large cities in America, according to a U.S. News analysis based on 2020 census data.

It is not a wealthy city. Median household income is $71,612 and per capita, $29,095. (2022) The poverty level is 15.6%. And only 18% of the population over 25 years has a college degree.

The Stockton record summarized the city’s variable reputation in a November 2023 article:

“Stockton has topped another list and this time it’s not a bad thing.

“While Stockton’s long had a reputation of being one of America’s most miserable cities (thanks, Forbes), U.S. News & World Report is shining a positive light on Mudville.

“In its most recent report, Stockton ranked among the best places to live in California. It ranked number thirteen, one spot below Visalia and one spot ahead of Bakersfield.”

Stockton was nationally recognized as one of the first cities in the country whose finances collapsed due, in large part, to unaffordable defined-benefit pension obligations. This threatened its ability to deliver basic services like police protection.

The city is the ideal opportunity for a locally focused credit union. The member needs are many. And until October 1, 2021, this was Financial Center Credit Union’s (FCCU) long time home market. On that date the CEO and board transferred via merger all the credit union’s savings, loans, members and operational direction to Valley Strong CU whose main office is in Bakersfield, a city approximately 250 miles and a four hour drive away.

Setting Up the Transfer

On June 25, 2021 Chair Lopez and CEO Duffy of FCCU registered a non profit in California named FCCU2. Forty two days later Chair Lopez signs the official Members’ Meeting Notice to merge FCCU into Valley Strong. The Notice includes the transfer of $10 million to this newly established corporation, one of several merger disbursements members were asked to approve in the merger vote.

To my knowledge this transfer of member capital to the sole control of the former CEO and Board chair had never occurred. It appeared to be a “taking spoils” from the event. The amount, the singular nature of the transfer and the credit union’s prior five year downtrends under CEO Duffy raised the question of whether this money grab was proper.

CEO Duffy and his Sister Nora Stroh had been the senior executives at the credit union since 1993. At the merger date, the credit union had served the Stockton community for 66 years with Duffy as CEO for the final 22. In the years prior to the merger, the $635 million credit union recorded these trends:

A decline in loans outstanding from $176 million in December 2016, to just $102 million at the merger date. This is an annual negative growth of 10.3%.
Total members declined by 2,900 from December 2016 to the merger, a fall of over 2% per year. These declines in loans and membership were the exact opposite of the growth gains reported by all other segments of the credit union system.
Even with this decline in risk assets, the credit union continued adding to reserves from earnings. The result was a net worth (capital) ratio of 20% at December 2018 and 17% in December 2020, nine months before the merger. During this five years, the credit union at times reported a net worth/asset ratio of more than 100% of the loan/asset ratio.
In the IRS 990 filing for 2018, the three highest reported salaries of Duffy, CEO; Nora Stroh, COO; and Steve Liega, Accounting and Finance were a combined $3.1 million or 46.5% of all compensation for a staff of over 90 employees.

During this period of decline in members and loans, CEO Duffy maintained a high profile public image. The credit union reported numerous local and statewide political donations and grants to area non profits in its annual 990 filings.

The Critique

In the years leading up to the 2021 merger, CEO Duffy operated with the form, but not the substance, of a cooperative charter. It was run as a family business promoting the public visibility of the CEO, versus the well-being of members.

My January 2022 post was called A Theft of $ 10 Million or Just Spreading Goodwill? I provided multiple data points about the credit union’s loan and member decline, million dollar executive salaries, and net worth sometimes greater than 100% of the loan to asset ratio.

An example of Duffy’s personal PR efforts is a video from the Stockton Mayor’s office of a $1.0 million donation to Stockton Strong in 2020. The speakers state the money is from the “employees of the credit union and the Michael P. Duffy Family Fund.”

The only credit union employee in the eleven minutes is Duffy. The video shows two mock checks of $100,000 each to charities feeding food insecure residents. In the same year as this employees’ gift, the credit union’s outstanding loans declined by $40 million.

I can find no public reference to the Michael P. Duffy Family Fund in either California’s registrations or IRS 990 tax exempt filings.

CEO Duffy’s May 1, 2021 press release announcement of the merger included the following rationale:

As the CEO of Financial Center Credit Union for the past 21 years, my perspective on mergers has evolved . . . I have marveled at what credit unions of today’s scale can accomplish when they join forces . . . this merger is a true embodiment of the credit union industry’s cooperative mind-set. . . this merger represents a strategic partnership between two financially healthy, future focused credit unions committed to providing unparalleled branch access, digital access, and amazing service for the Members and the communities they serve.

There was no data or hard facts to support this sudden strategic insight. The only concrete future service promise in the Member Notice was access to Valley Strong’s 19 branch offices which were an average of 250 miles from the former Stockton headquarters.

Press Followup of the $10 Million Question

CU Today published an extended story following up the $10 million transfer to Duffy’s control. The story, Leaders from Merged-Out Credit Union Head New Foundation, provides the participants’ explanations as follows:

The individuals involved in setting up the arrangement say it was approved by the regulators and is designed to fulfill the new merged-out credit union’s mission, while state and federal regulators issued vague statements saying no laws were violated and that the creation of the $10 million foundation was “a business decision” on the part of the credit union.

Duffy’s specific defense of the $10 million was, ”It’s not a diversion, but rather an investment in the communities it serves. This ensures that the funds will be used in the manner in which it was intended: to advance and support the needs of the members”

When asked why it was not paid to members: “The board viewed its strategic decision through three lenses: members, team and community. . .It’s a symbiosis between the three and we wanted to continue the continuation while improving opportunities through cooperation vs competition.”

After Duffy’s twenty-eight years earning a living and achieving personal standing in Stockton, he initiates the transfer of $634 million total assets, $102 million in loans, 29,500 members and their $540 million of savings to another credit union’s control and leadership. Prior to merger related adjustments, this “free” transfer also encompassed the members’ $107 million of capital.

Duffy kept control of $10 million in his words, “to advance and support the needs of members.” After transferring all his leadership responsibility for managing $634 million of member assets out of Stockton and away from local control (but keeping his CEO level compensation) he arranges to hold back $10 million for his personal use. In order to serve the “needs of the members” he had just sold out!

Part II tomorrow will look at data and events since the merger.

December 28, 2023December 28, 2023

Credit Unions and Popular Culture

Yesterday’s post on The Bank of Dave was a tru-ish movie about an actual effort to organize a local financial institution focused on the needs of the town of Burnley. Dave Fishwick, a real person, was the hero. The antagonists were regulatory bureaucrats, lawyers and of course entrenched financial institutions.

As in It’s a Wonderful Life, the founder Dave is portrayed as someone serving the common good versus personal profit. The movie’s message is that this person’s purpose is one that present day society should honor and support.

How are credit unions portrayed in popular American culture? Are there any movies, books, plays or other artistic recognition of their special history?

Last night I attended a performance of The Seafarer, a play about Irish life by Conor McPherson. The scene is Christmas eve. The four personal friends drink for camaraderie and to cover the darkness in their lives.

A fifth character (Lockhart), the devil in disguise, enters to participate in a poker game, the main action (after drinking) of the second act.

This inebriated poker rounds are a metaphor for Lockhart’s stated intention of capturing the soul of Sharky, a character trying to give up drinking.

During the final betting round, the stakes go higher, and all raise with the last money they have on hand. At that moment the lead character challenges one of the other players, “Where are you going to get your stake? From the credit union?”

In the midst of this realistic-surrealistic tale is a direct reference to a financial reality an Irish audience would understand. The play was written in 2006 as credit unions were becoming more widely available in Ireland, a generation-long process.

Similarly, The Bank of Dave is set in the post 2008/9 financial crisis in Great Britain when consumer lending was unavailable. Current day viewers would be familiar with the real circumstances motivating Dave’s initiative.

American Culture and Credit Unions

Where and how are credit unions referenced currently or in past American literature? Is there a Norman Rockwell painting that illustrates this financial opportunity for a common person? Or a story of a local entrepreneur lifting up the community with a cooperative charter?

Is the credit union story so prosaic that the occasional coverage in the business section of the paper or on CNN/MSNBC captures our public reputation and contributions?

Have the many remarkable achievements of local credit unions been so taken for granted, that they are now just another ready option in the financial marketplace?

Have credit unions so lost their unique cooperative character that American culture and ordinary citizens, no longer see them as doing something special?