Category: Mergers

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Several Explanations for Credit Union Mergers

While there are almost daily familiar rhetorical press releases  announcing new merger intentions, actual causal motivations are rarely plainly stated.

Descriptions from other areas of economic activity  provides some of the reasons for this ever increasing aspect of cooperative evolution.

CEO’s love unjust gain because money is their highest trust.

There’s nothing wrong with actively working (read: contributing actual value to others) and making a good living from it, but it’s wrong to turn a profit off the time, talent, effort, and creativity of others simply because you wield a capital advantage over them.

Where nothing is forbidden, nothing is required.

Executives are absolutely at a loss of what might happen if they stopped exploiting a gain off of others.

And the ultimate outcome for the member owners:

The chasm between credit union’s design and individual member benefit gets wider and wider.

 

 

 

 

 

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For Members’ Sake: Let’s Start Recognizing the Real  “Market” Value of a Credit Union

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:

  1. The bank has lost money, every quarter, for the last three quarters.
  2. The bank has an efficiency ratio over 100%, every quarter, for the last three quarters.
  3. This means the bank lost money, before factoring in provision for loan loss expense.
  4. Since 2015, the bank has produced an ROA over 0.50% just once.
  5. 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:

  1. The owners who will ask is this price fair and a better option than not selling?
  2. The FDIC will examine for any residual risk to the bank fund.
  3. 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. 

The final member Notice disclosures were significant including full details of merger costs, loss of member control, and that taxation of the bank might lower returns to savers. The article continues:

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, 

The Nationwide sale was approved by a wide margin in as reported in this November 7 article:

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 Irony of This Transaction

On May 7, 2018 Nationwide announced it was getting out of the retail banking business.

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. 

Implementing this intention, Nationwide made a follow on announcement August 3rd, 2018:

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?

 

 

 

 

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How Mergers Tear Down the Credit Union System

The front page headline in the June 18, 2003 American Banker was “Pentagon Continues Merger Binge.”

The opening paragraph provided the details:

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.

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Credit Union Mergers: The Final Solution?

A post by Jim Blaine from his blog of May 15, 2024, used 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.

https://asset---north-carolina.bldg15.net/img/4/f/4fc74af4-b323-4065-ab53-b09cd8dcf5dc/Stanly%20County%20-%20Morrow%20Mountain%20State%20Park%20Overlook-crop(1,0.636,0.000,0.334,r4).4e964e48.jpg 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.
 

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJW7_EMEcjRpmN0ZOPoAThGYDe3adg0LwJUC1ovwporaTB_k2MZsBzxtXA_Fhc0QdNT0WQcC78VQJzIyOO2hA88MSEEb_WnDoyD1s6e4cXq_wwL2wRK6-urANV7w4k2713cqHXm67R_a8/w1200-h630-p-k-no-nu/IMG_3451.jpg “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!

https://i.pinimg.com/736x/41/5b/88/415b88882030af28aaba824deda36369.jpg 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?

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The Cooperative Way to Manage an Isolated Branch

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

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

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

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

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

A Better Way: The Branch Transfer

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

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

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

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

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

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

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

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

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

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

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

An Example of Cooperative Values and Collaboration

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

The Rest of the Story

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

He sent this picture of the branch’s status:

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

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

The branch with blank signage.

Office equipment disposed, not donated.

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

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

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

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

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

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

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

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

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

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

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

Destroying Credit Union’s Moral Capital

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

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

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

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

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

 

 

 

 

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Where Did Creighton FCU’s Members $13 Million Go?

On August 7 Credit Union Times reported the story of the merger, without a member vote, of the $66.9 million Creighton FCU with the $1.2 billion Cobalt FCU.   The source was not from NCUA, but rather a joint announcement by Cobalt of the NCUA approved combination.

In the twelve months ending June 2024, Creighton’s networth fell from a positive $6.3 million to a negative $7.3 million.  A total loss of $13.6 million, all of which was recorded in the June 2024 quarter’s call report.

What happened to cause this loss of over 20% of credit union members’ total assets in just 90 days?

Until this quarter, Creighton FCU had been doing business as usual.  Tom Kjar the President for 32 years had just announced his retirement. The credit union’s chair had posted a Credit Union President open position on LinkedIn with a salary range of $114-$152K.

On April 3, 2024 the credit union’s Vice President of Operations and Finance, Vorace Packer, died.  There was no public announcement of the circumstances in his obituary.  The credit union provided  no followup successor.

What the Data Shows

For a sudden financial loss this large that is not connected to asset write offs, all of the indicators point to an internal defalcation.

In the 5300 call report numbers NCUA posted at March ’24, Creighton’s shares total $61 million.  Just 90 days later that total is $74 million. The difference is almost equal to the the total loss of $13.6 million.  Of this sudden share increase, $12 million is in regular shares.

These numbers show shares were under reported a pattern often used to cover irregular transfers of funds.   Because the total amount is so large,  a single diversion of $500,000 or $1.0 million would cause attention or a cash flow problem.  It seems likely this diversion has probably taken place over many years.   For example at $1.0 million per year the cash outflow would be only $250,000 per quarter.

To accomplish this cash diversion and reducing reported member share balances, there would have to be two sets of books—the incorrect numbers for the auditors and examiners, and then the actual records so members would not see shortfalls in their account statements.  The fact that the under reported balances were totalled so quickly, suggests this second set was readily discovered.

There are other patterns in the data going back over ten years that should have raised questions.  For example the credit union would report positive net income for each quarter, but the total net worth did not change until the final call report filing for December.  The pattern of reporting “reserves” was changed in March of 2022,

Why Did the Members Lose their Credit Union?

NCUA has said nothing about its actions in this event.  Cobalt is the source of the merger announcement.  It is that credit union’s members who will cover the $7.6 million hole in Creighton’s balance sheet, subject to any valuation adjustments.

Cobalt reported, before this event, a $1.8 million loss for the first six months of 2024 along with negative loan and share growth.  NCUA said that there will be no impact on the NCUSIF from this event, so Cobalt members will be the rescuers.

Will there be bond recoveries for this loss?   What is the prospect of recoveries from where the funds were sent?  Who will pursue these and other recovery options?

The Most Important Questions Remain Unanswered

How did this apparent long-standing diversion occur?   Where did the $13 million of member funds go?

As a federal charter, when was the last NCUA exam prior to the finding of the defalcation? Was there an annual exam?  If so, were normal exam procedures followed?

The credit union reports employing the same auditor, Wipfli LLP, for at least the last five years.   Were their external CPA audits clean?  Did they or the supervisory committee do an annual  sample test verification of member share balances?   Were large disbursements of funds to third parties by the credit union reviewed?

Outside audits, supervisory committee verifications and NCUA exams are all intended to keep honest people honest.   How could these required processes have failed so hugely and over such an extended time period?

What was the CEO’s role—was there no division of duties, that is different persons authorizing transfers from those  initiating specific transactions?

NCUA’s Silence is Deafening

NCUA made no announcement of this event.   We have no idea if the board approved a conservatorship or the forced merger.   What options were presented, if any, to the board?  What was their role? Or, did they just delegate this action to staff elsewhere in the organization?

Why has there been no official explanation of NCUA’s role two months after the June 30 facts have been posted?

NCUA’s primary purpose is to prevent the loss of member funds. In this case there is a $13 million dollar shortfall between the $73 million in total shares and the purported net worth and assets to cover them.

What happened to the multiple supervisory oversight roles supposedly in place?   Until these apparent failures are understood and addressed, a much bigger problem remains.  Can the supervisory system charged with the responsibility and resources to oversee the industry’s soundness perform its basic functions?

Until there is transparency and full answers about this situation, the potential for greater difficulties is possible.  The NCUA’s silence about the members’ $13 million financial and charter loss at Creighton is a greater problem than this financial failure.

The critical question is whether the regulatory system’s processes are performing as intended?Who is willing to represent the NCUA in this episode to discuss what happened, why and any necessary changes from this event’s analysis?

 

 

 

 

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

 

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

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

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

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

Susan Conjurski, President/CEO

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

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

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

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

The Second Merger Notice

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

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

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

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

The Financial Payments and Assets Transferred

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

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

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

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

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

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

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

What Unites These Two Leadership Resignations

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

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

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

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

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

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

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

Losing the Cooperative Future

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

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

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

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

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

The Increase in System Risk

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

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

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

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

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

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

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

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A Credit Union Enters the Valley of Dry Bones

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

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

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

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

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

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

Who Is Responsible for This Decision?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sounding Out Any Opposition

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

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

The Failing of the Cooperative Model

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

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

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

A Sellout Worth $300 Million

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

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

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

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

Into the Valley of Dry Bones

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

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

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

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

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

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

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NCUA’s Spreadsheet Merger FORM: What the Agency Gets and Member-Owners Don’t

NCUA has published a dynamic excel spreadsheet to be used with merger applications. It is titled Merger Related Financial Comparison.

Its purpose as stated in the first sentence: This comparison form can assist you in determining if you are required to disclose any increases in compensation due to the merger in the member notice. You are not required to submit this form in your merger application; however, you are encouraged to do so. The information you provide may help NCUA process your request more efficiently.  (underlining added)

Here is a copy of the form.  If it is too small to read, this is a link to a PDF.  There is no NCUA number on the form or other information, such as when issued.

What the Form Says

The instructions about  what compensation must be disclosed in the Notice of merger is answered with a question: Would the payment have occurred if the credit union were not merged?

The Form’s directions and simple examples plus the Agency’s encouragement to submit illustrate its intended use.  The spreadsheet is a tool to help credit unions game the system to conform with NCUA’s requirement that only increases of 15% and greater from all compensation need be disclosed to members in the official meeting Notice.

This limitation is completely contrary to the intent of Chairman McWatters’ when proposing the rule in 2017:

“the agency should require all merger solicitation documents to provide, without limitation, a discussion of any change-in-control payments and other management compensation awards and agreements, and that such disclosures are written in plain language and delivered to voting members in a reasonable time prior to the scheduled merger vote”  (Source:  Time to Talk about an Ugly Truth in Mergers.)

In virtually all mergers when  the institutional’s legal charter ends, all existing employment contracts, benefits, retirement plans will cease to exist.  Change of control clauses or immediate vesting options may occur in benefit plans.  The continuing credit union will rewrite employment contracts and conditions, including bonuses, responsibilities, incentives and benefit packages.

To fulfill McWatters’ intent, all of these renegotiated terms should be provided to owners whose approval is required for the changes to be effective.  The logic is simple.  NCUA requires this information for its due diligence and approval, shouldn’t the persons who own the assets and must vote on their future  management, also have this same data?

The Data NCUA Receives

The form requires that all current compensation  indirect compensation, leave, deferred compensation and early payment of retirement benefits and other financial rewards be entered on the form for the CEO and four highest paid managers.

Member owners receive none of this data.

NCUA requires that all these same areas be reported post merger.  The Member-owners receive none of this detail.  The only required disclosure per this Form is a single dollar amount if all these post-merger payments exceed 15% of the executive’s total prior to the merger.

Take the example of CEO compensation already entered on the form.  The CEO’s salary increases from $760K to $850K after the merger.  (A typical CEO merger salary?!) Adding more leave, this total increase of $92,500 (12.17%) does not have to be disclosed to members.  It is below the 15% threshold.  The member-owners receive none of this calculation or data.

Another completed example is directors’ and supervisory members’ compensation .  In this case the directors received $1 before the merger and $10,000 post.  But this change does not have to be reported. It falls below the minimum change of $10,000.  Another executive example shows a 400% change that is not given members,  but a 21% increase that must be.

In all these examples, the member-owners receive none of these calculations.

The form states clearly what is required and highly recommended  to be sent NCUA:   

“Required per Part 708b of the NCUA Rules and Regulations: Board minutes for the merging and continuing credit union that reference the merger for the 24 months before the date the boards of directors of both credit unions approve the merger plan.“

“Highly Recommended: This comparison form and any employment contracts, retirement contracts or documents, executive session minutes, presentations, or any other documentation supporting the compensation amounts entered in the form.

The member-owners receive none of these required and highly recommended submissions of compensation and board minute details.

Why There Was a Merger Rule

When proposing the rule in 2017, NCUA staff analyzed many recent mergers and concluded that a significant portion were influenced by incentives paid to executives.

It is a human reality that those in charge of managing money can be tempted by self-dealing.  In the early years of state charters, prior to passage of the FCU act, some state laws prohibited managers and boards from borrowing from their own credit union.  Instead “central credit unions” were organized to meet those needs.

The NCUA call report today collects the aggregate number and amount of  Loans outstanding to credit union officials and senior executive staff (Account 956).  Section 4 Investments paragraph 11 shows the total of the credit union’s securities to fund employment benefit and deferred compensation plans including SERPS and other insurance.

Finally all state chartered credit unions are required to file IRs form 990 annually which details all executive and board compensation.  Federal charters have no such requirement-yet.

These disclosures are all  efforts for transparency about the compensation executives receive as stewards of others’ financial assets.

Smoothing the Paths to Temptation

Transparency in total compensation is critical to preventing the ever-present danger of acting in one’s self interest versus that of the member-owners

NCUA now withholds from member-owners, who must approve the life or death their chater, the most critical information NCUA requires for its approval in the first place.

Denying Members The Rights of Ownership

NCUA has taken over the role of the member owners.  Members are left totally in the dark about the scale of compensation commitments being entered into.  Instead of providing members with this same vital information, NCUA offers a spreadsheet to enable  credit unions to manipulate the very minimal disclosures now required.

NCUA is explicit about the facts it requires to allow the transaction to proceed.  But the members receive none of this vital information.

NCUA has preempted members’ right to make an informed choice.  The merging credit union does not have to “sell” its compensation plan outcomes to the members.  It just has to “sell” the terms to NCUA in private.

The credit union self-dealing that brought about the 2017/2018 merger rule update has not ended.  It has just been totally obscured and more critically, facilitated by NCUA.  The Agency seems powerless to understand and correct its supervision deficit over what is taking place.

But the credit union industry sees clearly.   When nothing meaningful is required to be disclosed, nothing is forbidden.  The members are kept in the dark. The ever-present temptations to cash out will only grow.

In case after case the member-owners lose control over their enormous financial legacies; they also have lost all their future choices.

These combinations will inevitably short change the credit union system’s options going forward.  They are wounds on the soul for why credit unions were created in the first place.