Category: Mergers

Posted on

The Art of the Steal

Financial oversight policy by the federal government is often presented as two distinct opposites: deregulate so the free market can work its wonders or regulate to prevent the worst instincts of capitalism from harming individuals or the greater economy.

However, there is a third policy option.  I call it fake regulation. The regulator takes action to prevent some excess or outright harm from occurring, but then never enforces the rule.  The market quickly sees these are only pretend guardrails. And the predatory behavior expands in ever increasing incidents.

The Merger Problem Becomes Public

In 2017 the situation of credit unions buying out and paying off their kin was written about by a number of  commentors in articles such  as:

The Dark Side of Mergers, by Peter Strozniak, March 27, 2017 Credit Union Times

Time to Talk About an Ugly Truth in Mergers by Frank Diekmann, March 6, 2017 CUToday

Credit Unions for Sale? By Chip Filson, February 14, 2017, Credit Unions.com

In response to the growing disclosures of large payments by credit unions openly seeking acquisitions, in June 2017 NCUA proposed an updated voluntary merger rule.  Folllowing  a lengthy comment period the final rule was adopted in June 2018.

It is helpful to review the specific statements and intent of this final rule when looking at concrete circumstances today.  For many actual events seem to suggest the rule isn’t in force. There are no longer any regulatory roles or constraints being exercised.

What the Final Rule Required

 

The  rule included important statements about NCUA’s role and scope of authority when approving voluntary mergers.  For example:

“Several commentators . . .suggested that NCUA’s role is limited to safety and soundness concerns.  These comments are not accurate.  The FCU Act explicitly requires the “Board’s prior written approval” before FICU mergers with another FICU. Moreover, as detailed in the preamble. . . the FCU Act requires the board to consider six factors in determining whether to approve FICU mergers.  Clearly, the FCU Act expects the Board to consider the effect of  the proposed merger on the credit union members, and gives the Board authority to deny mergers that do not, in their judgment, serve members well. . .

Several commentators stated. . .that members have no right  to the net worth of a credit union except in liquidation.  This assertion ignores the reality that hundreds of credit unions annually return excess net worth  to members. . .A credit union in good condition has the option of voluntary liquidation  instead of voluntary merger. . .

The Board agrees that mergers should not be the first resort when an otherwise healthy credit union facing succession issues or a lack of growth. . .

The Board acknowledges however that not all boards of directors are conscientious about fulfilling their fiduciary duties. . .

The Board also confirms that for merging credit unions, the NCUA’s regional offices must ensure that board and management have fulfilled their fiduciary duties under 12 CFR$701.4.

In contrast to commenters’ assertions, the statutory factors the board must consider in granting or withholding approval of a merger transaction include several factors related to safety and soundness, such as the financial condition of the crediit union. . . and the general character and fitness of the  credit union’s management. . .

Concerns with Financial Disclosures

The impetus for the updated rule was driven in large part by the financial incentives being used to acquire other credit unions.  In the initial June 2017 draft proposal, the staff was asked by a Board member what percentage of recent mergers reviewed involved increases in compensation?  The staff response said 75% to 80% had significant merger related payouts often in the low seven figures.

The final rule in 2018 had extensive examples of “merger-related financial disclosures” that must be provided members.  Several comments explained the scope and reasoning included in the new rule:

A “but for” test determines whether the senior management official or director would not otherwise receive the compensation “but for” the merger. . .

Disclosure includes, “all increases in compensation or benefits that a covered person has received during the 24 months prior to the date of the approval of the merger plan by the boards of directors of both credit unions. . . “.

The rule applies to all compensation or benefits received in connection with a merger transaction including early payout of pension benefits and increased insurance coverage. . .

. . . the proposed rule requires both the merging and the continuing credit union to submit board minutes to NCUA that reference the merger during the 24 months preceding the date of the approval of the merger plan by the boards . . .In several recent mergers, a review of board minutes has shed light on potential conflicts of interest, including a situation where a credit union chief executive officer voted on a merger proposal that included significant merger related compensation for himself. . .

Furthermore, members’ interest in the transaction extend beyond practical matters of access and service, because the merging FICU’s net worth belongs to the members. . .

The basis for NCUA’s concern about financial disclosure follows with emphasis added:

The prospect of a significantly higher salary at the continuing credit union could be a motivational factor in an individual’s choice to advocate for a merger both internally within the credit union leadership and with members.  Credit union management may well have considerable influence with members, who may look to  management for trusted opinions and advice about whether the proposed merger is in the best interest of the credit union and its members.  It is not unimaginable that the prospect of a significantly higher compensation package could affect an individual manager’s thinking about the desirability of the merger. . .

Houston, We Have a Problem

The Space City CU merger proposal with TDECU violates a number of these explicit statements as well as the intent to protect members’ interest in NCUA’s merger rule.

The initiative was led by the CEO.  The CEO and COO are paid directly by TDECU $850,000 in the transaction, a direct conflict of interest. These are described as “non compete agreements.” This is a nonsensical justification. Neither has ever worked for TDECU.  Now they turn over their entire operations to TDECU after “competing” with this $4.8 billion firm for 30 years and are paid to “non-compete.”

The CEO is to be paid $3.5 million for not working for the next ten years.  In fact he was the person who decided to close the credit union and turn over operations to TDECU and leave the workforce.  The amount, as stated was in “honor of his retirement and in recognition and appreciation of his long tenure and outstanding performance.” This rationale is belied by the facts.  Of the credit union’s net worth, only 39% is from his operational earnings and 61% from the net worth transferred by four other credit unions in mergers.

The members who own the net worth receive $346 each on average, or about 25% of their total ownership stake.  TDECU has announced a definitive acquisition agreement to purchase Sabine Bank five months before the CU merger announcement. The bank owners will certainly receive their entire net worth plus a premium.

However, the credit union owners are asked to approve the same exact economic sale transaction as the bank owners, but will receive only a fraction of their ownership stake. The five employees arranged to pay themselves an amount $1 million greater than the 12,000 members whose loyalty built the credit union.  Management is acting like owners, free to do whatever they wish with the credit union, and not as stewards for the members’ interests.

TDECU is showing credit union member-owners they are less worthy of equitable payment than bank owners.

The Manipulated Voting Process

Space City’s final defense and where the regulators could justify their intentional inaction is that the “members voted for it. “

But member voting is a process without substance.   All of the critical financial disclosures were revealed only six months after the September 2024 joint announcement of the agreement.  Once presented the facts, there was no opportunity to organize and find other options or learn critical factors in this decision.

There was no factual information why this was in their best interest or any relevant reasons why TDECU was the best option—or whether any other options were even considered.

In the Member Notice, it is “recommended” by “your” board of directors to vote yes.  And for that vote, members would receive  between $100 to $1,000.  Vote no and you will get nothing and the implied continuation of the same leaders who decided to close the credit union.

The required member vote is nothing more than a managed event to ensure there is no time or ability for anyone opposed to raise questions or mobilize a counter view.  Management in these so-called elections holds “all the cards” and resources.  Management does not respond to questions from the press or members.

The only requirement to approve is that a majority of those who bother to vote, vote Yes.  There is no minimum number as for example the 20% requirement in other charter changes.  So only a tiny fraction of members participate. Normally the majority of votes are by mail-in ballot where the board says to vote Yes.

To call this one-time vote by members democratic in any sense of that term is a mistake.  It is the same voting process followed by authoritarian governments in such well known democracies as Cuba, China, and Russia.

The System’s Problem

This relatively small voluntary merger of a 60-year old, financially viable credit union, may seem inconsequential for a $2.4 trillion system.  But the details demonstrate the complete absence of any the oversight NCUA clearly lays out in its rule.

The two credit unions publicly declare the merger must pass regulatory approval, implying all they present and do has received the blessing of NCUA.  However, it is a blessing in absentia.  The data and reasoning is misleading, overtly self-dealing and provides no substance for a member-owner to make an informed decision.  But what the heck–the regulator approved it.

The Absence of Regulatory Oversight

There is still one final step in NCUA and the Texas Credit Union Commission’s role.  They must approve the final charter cancellation.  In the past this is a nonevent.  Regulators have not even required  the results of the vote be disclosed when members ask  for details.

Will either the state or NCUA look at the totality of this event and decide  if, under the rule, members’ best interests are being served? Is this cooperative charter termination with these payments the best option?  Might a small fraction of the planned $11 million  payments be used to find new management, request new volunteer leaders from the 12,000 members and give the owners back their credit union?

That would be the common sense and right thing to do.  It would take courage.  And if done, it would send a signal to the entire movement that the era of self-dealing and hypothetical future visions is over.  If a credit union wants to buy another credit union and take over all of its resources, then members need to have a real ownership say and return.

Today there is an absence of any regulatory presence and studied inaction  in the face of misinformation and self-dealing.  This silence has encouraged mega mergers by competitors in  local markets, across state lines and, in one case, across the country.

These proposals involving credit unions with tens of billions of assets are not because some superior business benefit is now feasible for members.  These mergers are by credit unions with all the necessary resources and capability to carry out any business initiative that would better serve members.

Mega mergers only benefit is to the ambitions of CEO’s and their boards who believe size correlates with success.  That view shows they have not looked at the track records of their billion dollar peers about the actual outcomes when exteral acquisitions are prioritized over internal growth.  The record of the largest credit unions shows that internal growth is stronger, more stable and effective than external firm buyouts.

The Combinations Undercut Cooperative Advantage

Moreover, these mergers of sound credit unions ignore the most important system reality. In these combinations, not a single new member is added, there is no market share gained,  and no new markets entered.

Rather, these combinations reduce the number of independent firms with their own volunteers and market strategies,  eliminate leadership opportunities for employees and volunteers, reduce independent community contributors and most critically, destroy the collaborative legacy of generations of members who sought  more control over their and their children’s financial futures.

These mergers reduce the diversity and roots that have made credit unions a unique force in financial service options for America.

Who believes that the 12,000 members of Space City will now have a better financial relationship opportunity as part of a 380,000 member organization (soon to be 470,000) versus their current circumstance?  And if someone wants that option, they can join TDECU today.  But why eliminate the more intimate, personal option now available?

Transparency Does not Erase Wrong Doing

Since the 2018 voluntary merger rule was passed, transparency has illuminated an increasing cycle of cooperative self-destruction driven by institutional self-interest.

The regulators have abandoned the standards they explictly laid out as the foundation for their updated meger rule.  The rationale appears that if you tell people you are taking the members money for whatever reason, then conflicts of interest, self- dealing or simply exhorbitant enrichment are fine.

I know of no illegal activity that is absolved by disclosing the facts of the deed.  But that seems to be NCUA’s interpretation.  CEO’s are increasingly brazen, as in the Space City example, to ignore all fiduciary standards.

There is no cop on the beat.  The temptations will only worsen. In one California merger the CEO and Chair transferred $12 million of members equity to their sole control as part of the merger distributions. NCUA said and did nothing.

Merger stories are clothed with common PR phrases about similar cultures, values and enhanced opportunities for innovation in an evolving marketplace. There is nothing more than marketing rhetoric in these so-called merger plans.

How Healthy Mergers Damage the System’s Soundness

But the current harm is real. Mergers of sound, long serving credit unions destroy the legacy of relationships on which every firm depends for success.  They wipe away the past commitments and memories.  New brands then try to portray a new reality but often show how shallow the relationships have become. For example,  Empeople credit union or the retirement community sounding EastRise FCU.

For cooperatives, legacy matters. It is a design  chosen by  a community of interest wanting to take control of their future with collective action.  Carrying that legacy to the future perpetuates this human effort as opposed  to the cycles of firm destruction accepted as part of capitalism. A credit union instead conserves and passes to the future  the shared interests founded on local focus, knowledge and community spirit.

Instead of building on this foundation to work together, merging stable credit unions results in just another generic financial institution removed from any past connections, constantly seeking new markets to conquer or expand.  The past is over and done with.

While this approach might appear to work for a while, it sacrifices the most important foundation for any successful enterprise, the power of human agency.  Agency means  being part of a collaborative effort, that is a person’s belief  that I am accomplishing something important in my life.  This kind of relationship creates institutional resilience that no amount of resources can achieve. Sometimes we call these outcomes trust and hope.

Space City is just the latest poster child of this growing Art of the Steal.  Its reasons are ridiculous and it may generate member resistance far beyond Houston. For the wider problem revealed in these transaction is that some credit union leaders don’t seem to know for whom they work.

One Voice

A Space City member with deep concerns with this merger called and asked,  Who do I go to for help?  The person had spoken up, answered press questions, encouraged her friends to vote no. But she felt all this was in vain. Just her alone.

My response was you are doing exactly what democracy requires. It is not about creating a popular uprising to overthrow entrenched leaders in a moment of confrontation or voting.

One person standing up and publicly raising their voice will be seen. It will encourage other like-minded persons to learn their concerns are shared. Her courage will become contagious.  It might even spark a regulator to do the job they are empowered to do.

Just one voice. It only takes one match to light a fire. Then watch the members respond with hope and goodwill.  Credit union democracy needs many more  such member-leaders.

 

 

Posted on

Space City CU’s Board Asks Members to Reward Top Three Execs $6,750,000 for Closing the Credit Union

(Note: This analysis of Space City’s merger is in two parts. Part I follows with the overall summary and  Part II with additional details)

America’s tax-exempt, non-profit, democratically governed credit union system is at a crossroads.  Bank competitors and some analysts are questioning whether the movement has lost its core purpose.

The example below of self-dealing, conflicts of interest, lax board oversight and member manipulation is the latest example of internal corruption in the $2.3 trillion cooperative system. These mergers, marked by executive cash outs, are becoming more common. State and federal regulators seem oblivious or powerless to stop this internal pillaging.

On May 14, the 12,000 members of Houston’s Space City CU will cast their final votes to transfer all control of their 60-year old $142 million credit union, with 14.6% net worth, to the $4.8 billion Houston based TDECU.  The voting enddate was set in the official Notice of Meeting of the Members of Space City CU dated March 28, 2025, and mailed to all member-owners.

This so- called merger is just the most recent example of leaders taking advantage of their position for self-enrichment.  Five Space City executives are giving themselves 57% of the $11,750,208 equity distribution described in the Meeting Notice.  The President would receive $4 million (34%) of the $11.8 million payouts and the Chief Operating Officer   $2,250,000 (19% in distributions from the members’ collective net worth.

The top three insiders will divide $6.750 million for an average of $2.250 million while the 12,000 plus members whose loyalty built the credit union will average $412.

Even though the Notice states the Board “approved” these special payments to five people (one employee joined in 2022), these deals were arranged by the two CEO’s.

This is the September 2024 initial video released by the CEO’s side by side announcing and selling their deal together with a closing handshake.  However, the details of the special “bonus” distributions were not sent to members until the March 28, 2025 Notice or six months after this initial public announcement.

CEO Rohden’s Performance Record

Especially questionable are the actions of Craig Rohden who has been CEO for 30 years.  The board claims to “honor his outstanding performance.” His record as CEO is at best underwhelming and more recently, marked by annual losses. In the past two years the credit union reported negative net income of $611,670 for 2023 and $30,398 in 2024.

Following the 2023 loss, according to Space City’s IRS 990 filing for that year, Rohden was paid a total of $280,562 which included a bonus $46,186 and contributions to a retirement plan of $11,604.  Additionally, the credit union had a split dollar life insurance plan with a balance due of $3.275 million which would fully vest in the proposed merger.  The cash benefits, not disclosed, can often be taken tax free in the future.

However, this performance charade goes back further.  In the latest call report March 31, 2025 the credit union’s total net worth is $19.4 million or 14.6% of assets.  Of this amount 61% or $11.9 million is from “equity acquired in mergers.”  Only 39% is retained earnings from the 30 years of Rohden’s tenure.

Space City lists four mergers resulting in the collective $11.9 million addition to its net worth for free.  The largest gain was in the 2022 merger with Brazosport Teachers FCU (BTFCU). In BTFCU’s March 2022 Member Merger Notice, it disclosed that its entire reserves of $8.2 million were being added to Space City’s existing $9.2 million equity while paying the owners nothing from their collective savings.

It also said the combination would manage approximately $154 million in assets serving 12,564 members.  In the two and half years since this merger, Space City’s assets have fallen by $20 million to total $134 million and membership has decreased by 500 (data as of March 2025).  The reason for this dramatic loss of shares, loans and members is described in a comment by a former BTFCU member on Space City’s merger page at NCUA:

Hester Wende:  I am against this merger for 2 reasons. First, members of the now combined Teachers Federal Credit Union with Space City Credit Union were made numerous promises and assurances which were all fabricated. None of the promised items happened and our service has significantly declined. Student accounts were closed because they didn’t meet the standards of Space City Credit Union. Second, TDECU history over the past 10 years is horrible – numerous data breaches have occurred causing untold financial consequences to members. Their customer service is worse than Space City Credit Union.

Looking at the merger documents, it appears that this merger is all about the current President and Vice Presidents receiving a very significant buyout at the expense of Member’s earnings. 

Her  concerns about TDECU are addressed in my analysis below.

In this equity presentation of “retained earnings” versus “acquired in merger,” only 39% of Space City’s net worth is from the Rohden’s operational  performance. Rather growth has come from convincing other credit unions to transfer their firm’s entire assets to his control. The last three year’s financial record clearly shows a runoff and decline across all assets and share accounts  under Rohden’s management.

The Final Deal

Now CEO Rohden wants to make one more big deal, only this time it is to “sell” the credit union he has led for 30 years. But unlike his four acquisitions where the CEO’s received little or nothing. he wants his own Golden Parachute at a minimum of $4.0 million.

In addition to the Notice’s misleading justification of Rohden’s “outstanding performance,” two other reasons are equally nonsensical.  The Member Notice states Rohden “will not be employed post merger with TDECU and will receive a lump sum of $3.5 million which is the estimated compensation had he remained with Space City until retirement.”

This is the art of the flimflam.  The CEO negotiates the transfer of the credit union’s entire operations to a third party, retires early when he could have continued working and then wants to be paid for not working!

Even more specious is this distribution:  TDECU will pay a lump sum of $250,000 per year for a total of $500,000 in consideration for a two-year non-compete, non-solicit agreement with his compensation.”

Even though CEO Rohden has never worked at TDECU, he is paid for a non-complete agreement. The term non-compete refers to a firm’s internal employees who may have proprietary knowledge to prevent their taking that information to a competitor.  For 30 years Space City and TDECU served the same market. Now he gets paid for a “non-compete” while unemployed?

This upside down reasoning is just a verbal camouflage to cover up a payoff for Rohden’s delivering the credit union’s entire resources plus its brand to TDECU’s control.

There was a similarly worded justification explaining the $350,000 two-year non-compete for COO Nikki Moore as part of her $2.250 million merger payoff.  She again has never worked in TDECU.

These so called “non-compete payment” are from TDECU’s member reserves, not Space City’s. These bonus payments to two key players who arranged and approved this free transfer of all Space City’s resources are by the credit union receiving this largess.

The CEO and directors of both boards who approved these payments should be wise to review their fiduciary responsibilities, alongside their legal counsel.

 Lack of Board Oversight and Due Diligence

The dubious financial performance history of Space City under CEO Rohden continues in these merger justifications and payouts.  Instead of being stewards of the member-owners’ funds, the merger terms reveal self-enrichment. Rohden’s role is especially suspect. He negotiated the terms as CEO, received the largest payments from both credit unions and then recommended his board approve the transaction.

Space City board chair Mick Lay, who signed the official Member Notice, joined the board in 1975.  The Treasurer Robert Sander joined in 1980.  This is a board that has failed in its basic fiduciary duties of care and duties of loyalty.  They have abandoned any pretense of stewardship in their oversight responsibilities.

What’s Next

Should this merger proceed as announced it will be another nail in the coffin of credit unions as immune from the greed and excesses of private enterprise.  While the industry may be rich in its trillions of assets, it is poorer in soul and purpose.  And it is those values that were supposed to enrich members and their communities, not self-serving insiders dividing the spoils from merger deals.

To stop these credit union predatory actions will take courage from persons in positions of responsibility, public transparency in the media, and most of all, members speaking up to oppose this hijacking of their cooperatively owned financial institutions.  

The Rest of the Story in Part II

Following are four analyses of merger details that show the questionable nature of this proposal.

  1. Buying the Yes vote. How the member bonus distribution is structured to incent their approval independent of their support for the credit union.
  2. Using the names, logos and reputation of over 50 Houston area businesses, non- profits and public firms to endorse Space City Credit Union (and then TDECU) and its services for their employees. Each organization has just one vote. But a No would send an important message.
  3. What the members should know about TDECU as the new organization managing their assets including the credit union’s recent financial trends and its intent to buy the $1.2 billion Sabine State Bank headquartered in Louisiana.
  4. The regulators’ responsibility for approving the merge.

Part II: Four Additional Areas for Member-owners’ Attention

 

  1. The Process to Incent Member-Owners to Approve the Merger

Undermining the member vote process is simple.  Vote for the merger and you will receive a minimum $100 if your account is less than $289 (as of March 2024), and a maximum of $1,000.  If you vote no, you will get nothing.

What makes this strategy so transparent is the strange cutoff points for each of the three bonus levels:

Under $289.27, member receives $100.

Under $2,892.68, member receives 34.6% of their March 2024  balance

Over $2.892.68, member receives $1,000

What the Notice fails to disclose is how many voters are in each category.  I presume this precise division, down to the penny, means there are a majority of votes (one person one vote) in smaller balance accounts.  This is a great vote buying strategy, but it was nothing to do with rewarding those member-owners whose participation contributed the most to make the credit union successful.

The average share balance held by the 12,140 members is approximately $9,500.  As in most financial firms, 20% or fewer of members will hold 80% or more of total deposits.  The bonus dividend is not based on members’ financial support. The purpose is to incent small balance members to get $100 each for approving the merger of a credit union in which they barely participate.

We know the board and CEO are aware of paying bonuses on relationships is the normal practice. This example is from its December 28,2023 special dividend: a $1 million dollar bonus dividend payout to its loyal members. . . The bonus, which is a combination of Bonus Dividends ($750,000), Loan Interest Refunds ($175,000), and Checking Rewards Points ($75,000), will be distributed proportionally to all eligible members based on their qualifying deposit balances and activity throughout the year. 

The only qualifying activity in this distribution of members’ collective reserves is to vote Yes to approve the merger.  Vote No, and you get nothing.

  1. Using Sponsors’ Reputations to Endorse the Credit Union

At least 55 Houston Area companies, unions, and non-profits have endorsed Space City for their employees to join and support.  Each of these sponsoring organizations’ reputation is used to promote the credit union and its actions.

As stated on the Space City website, these Platinum Partners can provide your employees with access to a wide range of affordable financial products and services and a clear path to financial freedom.

The sponsors’ logos on the credit unions web page include:   GE Water and Power, Houston Freightliner, Houston Ballet, Houston Housing Authority, Westbury Christian School and dozens more local organizations.

As stated in the merger FAQ’s Businesses with a unique Tax ID number will be able to cast a vote on behalf of their organization.

When these sponsoring organizations vote or are asked by employees whether they should support the merger, their own reputations will be on the line.  Would they support this kind of activity if this were in their own organizations?

  1. What Should Members Know About TDECU?

Included in the Member Notice was a September 30, 2024, financial statement with just balance sheets for each credit union and  their combined accounts. Because of the multiple distributions to members and Space City’s senior executives, the combined net worth of 9.84% is less than each credit union’s pre-merger net worth.

The reasons offered for the merger can be summed up in one word: More.   More branches, products, services, technology, cost savings and employee opportunity.  There was not a single concrete example to document one member benefit.

Right now, every Space City member is eligible to join TDECU without a merger.  Why give up a locally focused independent credit union with higher capital ratios so the 12,000 owners can now be a part of a 385,000 member organization?  TDECU reports a potential market of over 30 million.  Space City members and employees’ control and influence is now 100%; in this merger their role is would be 3%, or insignificant

But the most critical fact about TDECU is not size, but its performance and business direction. Bigger does not mean a better member experience. TDECU’s CEO  assumed office in June 2022.  For the full years 2023/24 through the first quarter 2025, TDECU’s share and loan growth have flat-lined, employee count is down 56 (from 868), and membership is off by 1,000 (from 385.8K).

What’s up is delinquency from 1.54% to 2.01%, and full year charge offs which have risen from $43.4 million to $53million.  The loan allowance coverage ratio from loss reserves is  at .56% versus a national average of  164.3%.

TDECU’s growth has stalled, and earnings are in decline. Full year earnings fell from $32.9 million in 2023 to $11.6 million in 2024. In the first quarter of 2025 TDECU reported a loss of $35,476.

But the most critical question about joining with TDECU is not mentioned at all.  Prior to the September 2024 joint merger statement, TDECU announced it was purchasing Sabine State Bank and Trust Company on April 30, 2024. This $1.2 billion bank is headquartered in Many, LA.  It is 120 years old and operates 51 branches across Louisiana and East Texas. The merger would add about 90,000 new members.  The joint press release says Sabine “specializes in commercial loans with industry concentrations in oil and gas, forestry, timber and agriculture.” 

TDECU’s justification in the release states: “Sabine’s strong commercial operations will further diversify the credit union’s loan concentration and support TDECU’s overall growth strategy.” 

TDECU is using tens of millions of their members’ collective reserves to pay out the owners of Sabine Bank to acquire its business and operations.  If this same business logic were applied to the Space City transaction, then the member-owners of the credit union should be receiving their entire book value ($19.4 million) or more), not the paltry $5 million (25%) distribution offered.

The April 2024 joint bank purchase announcement of a “definitive acquisition agreement” was to be completed early in 2025.  Over a year later, there have been no further public updates.  If this purchase has been put on hold by regulators or other circumstances, then Space City members should know why before they decide whether they want to be part of this new strategy of TDECU.

4.What is the Regulators’ Responsibility?

This proposed Space City merger, according to the joint press release, requires regulatory approvals: The transaction is anticipated to be completed later this year, subject to receiving all regulatory approvals.

The two regulators are the NCUA which insures the credit union shareholders and the Texas Credit Union Commission, which charters and has primary supervisory authority.   Both regulators have seen the Member Notice with its misinformation, disinformation, and inadequate facts which  member-owners were sent to make an informed decision.

NCUA bylaws state CU boards “have fiduciary responsibility to vote for measures in members’ best interests,”  (CU Times March 20,2007) 

A December 18, 2007 CU Times report on the attempt by Wings FCU to pay Continental FCU members $200 each to approve a merger.  NCUA stopped this effort as explained in the article:

“ . . .credit union boards have an essential role in determining whether a merger is beneficial to the credit unions and their members, said NCUA Chairman JoAnn Johnson at an April 5 Massachusetts Credit Union Governmental Affairs Day Conference. 

“The agency held to its position that it would ensure that all statutory and regulatory requirements are being followed including an assessment of the accuracy of all advertising and representations being made about the merger . . .. NCUA said it was prepared to address any inadequacies or insufficiencies that threaten member protection, transparency and fairness.

“In the end, it was NCUA that put a stop to Wings Financial’s merger campaign. On April 20, the agency ruled that the $200 payments Wings Financial had offered to Continental’s membership should a merger go through were impermissible under the Federal Credit Act.

In this case TDECU is paying the arrangers of the merger, the CEO and COO of Space City $850,000.

Today two of the three NCUA board members have been fired by President Trump. This means the Texas regulator will have a primary role whether this self-serving effort, fraught with conflicts of interest, self-dealing and insufficient information is a valid process for member-owner decision making.

The Credit Union Commission’s decision will have significant ramifications for Space City’s 12,000 credit union members, the greater Houston business community, and the system’s reputation for integrity in Texas.

 

 

 

 

 

Posted on

What Does Your Banner Say?

I took this picture in Bethesda yesterday.  Where do you think this banner is hanging?  The local primary school, our town hall, outside a car dealership, a grocery store, a CVS drug store, or maybe a bank?

It is in the front yard of St. John’s Norwood Episcopal church.  You probably guessed this from the picture.

St. John’s has an active community presence.  My wife has volunteered at their Opportunity Shop for two decades.  A group within the congregation holds regular fund raising efforts for Ukraine in partnership with nearby St. Andrew Ukrainian  Orthodox Cathedral.

Last week the two churches held an Easter bake sale that raised $8,600.  The week before there was an appeal for 200 civilian tourniquets at $100 each.  In three days they collected over $4,000.

Welcoming the stranger,  you might say, is what churches are supposed to do. Right?

A Shared Value

That welcome is also one of the foundations of America as a land of hope and opportunity.  For at one time in our family histories, we were all strangers to this land.

Americans by and large take pride in their roots elsewhere.  In our family the kids trace their heritage back to the Scots-Irish, China, Africa and Missouri.  Why Missouri?  That’s where my Mom and Dad went to get married after Pearl Harbor because there was no required waiting period as in Illinois.

American businesses, such as Ancestry.com and 23 and Me, were created to help us trace our many heritages.  Families sometimes refer to their Mayflower or Daughters of the American Revolution relatives.   We are all immigrants for one reason or another.

However national daily events  are undermining this core American ideal and strength.

Transactions Versus Values

Would your credit union put the above sign outside your main office? Some have sought to serve recent arrivals even using alternative identification numbers.

But credit unions compete in a capitalist society in which dominance and control are sought and celebrated.  The deal maker is now as honored or more so than the entrepreneur.

Credit unions were designed as an alternative to this drive for power.  The industry’s top public policy priority at the moment is to protect their tax exempt status.  This was granted to reflect the non-profit purpose of serving those whose needs were unmet or taken advantage of by profit driven firms.

Values were core to this purpose.  Individuals could find personal economic opportunity through a cooperative structure they owned and directed.

But market realities and personal ambitions have a siren allure that is hard to ignore.  Here is the latest press release of this cooperative drive for market dominance headlined with the words:  A Powerful Partnership

San Diego, Calif., (April 11, 2025) – In a move that would change the financial landscape of Southern California, California Coast Credit Union (Cal Coast) and San Diego County Credit Union (SDCCU) have announced plans to merge, pending regulatory approval and a Cal Coast membership vote.

Upon approval, the combined credit union will boast a powerhouse organization with assets totaling nearly $13.5 billion, 65 branch locations, and more than 1,400 employees serving members in Imperial, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Luis Obispo, Santa Barbara, and Ventura counties. The organization will remain the fourth largest credit union in the state and become the 16th largest in the nation.  (emphasis added)

Size, power,  dominance, strength, resilience are all elements of a transaction versus a value motivation.

Both institutions are financially strong, viable, creative and successful.   However the cooperative merger math is that 1 + 1= 1.   No longer are their two boards, two management teams and business strategies seeking to better serve their longtime member-owners.   Not a single benefit is listed that is not already available for a person choosing to join either credit union.  The industry has in fact reduced not expanded its reach.

The Stones Will Cry Out

One would hope that the long standing service of these credit union directors would have given them some insight into what makes credit unions different and successful.  It is not size, ranking within their state or nation, or even the number of branches or ATM’s.

Values inform purpose.  Together they can make credit unions a force to serve where for-profits will not.  Without these integrated in the institution, the cooperative difference is lost.

Values are talked about at funerals.  I attended performances of Brahms German Requiem this weekend.

Two English translations summarize the realities we all face:

“All flesh is as the grass, and all the glory of mankind is as the flower of grass.  For the grass withereth and the flower thereof is fallen.”

And in case we miss the point, “Verily mankind walketh in a vain show, even his best state is vanity.”

The sign above has a little noticed two words in the lawer left hand corner.   It says “Faithful America.”

The Brahms Requiem and two words on the banner remind us of our transient and transcendent opportunities. If we are silent in these moments of responsibility, one  prophecy  says the “rocks will cry out” the truth of our behavior.  What sign will you put outside your credit union?

 

Posted on

Thrivent FCU Members Approve Sale to a Bank & Receive Full Capital Return

On February 6, the $612 million Thrivent FCU announced that its members had approved the credit union’s purchase by the Utah licensed Thrivent Bank (in formation).

More than 33% of the credit union’s 52,000 members (47,872 eligible to cast a ballot) voted with 79% in favor of the charter change.  NCUA regulations require that at least 20% of the membership must vote on this charter conversion. The “merger” is scheduled to be completed by May 31, 2025.

Special Dividend Distributes Net Worth

The member-owners will receive a special dividend of $76 million which is the credit union’s fair value as determined by an independent appraisal.  This amount equates to  a 12.2% “dividend” on the shares owned at the time of the announcement.  As described in the Members’ Notice:

The TFCU Board of Directors has determined that in conjunction with the Merger, the members will receive a total distribution in the amount equal to the full (credit union) valuation of $76,000,000. 

Members also have full access to their $617 million (December 2024) in shares should they choose not to keep them at the newly chartered bank.  The Thrivent FCU board had previously assured members there would be no changes in rates or terms on loans and savings transferred to the bank.

The First Sale Since 2006

A full description of Thrivent’s proposal is in my December 3, 2024 blog .  It provides the credit unions financial standing as of the announcement in June 2024

The last time a bank bought a credit union was the sale of Nationwide FCU to its sponsor, Nationwide Insurance.  In that 2006 transaction the members received their entire net worth back resulting in a special “dividend” on shares of approximately 15%.

Depending on the financial position at the time of closing, both “merger” transactions valued the credit union at approximately 1.0 to 1.3 times book value.  For example Thrivent’s total GAAP capital was $80.8 million at December 2024.  However, if the $26.5 million decline in the market value of investments is recognized the net equity falls to $54.3 million.

Background on Thrivent FCU

Credit Union Times published a history of the credit union and the newly formed Thrivent bank’s business plan in a June 25, 2024 report:  Thrivent FCU to Merge Into Thrivent Bank.  The article states the new bank will offer digital service only from one location in Salt Lake City.  The primary reason for this conversion was to access the capital resources of the sponsor, Thrivent Financial.

The Times article pointed out that since the December 2012 date of Thrivent’s initial conversion from a bank, the credit union’s assets had doubled from $478 million to $930 million.  Loans had increased from $341 million to $635 million.

As of December 2024 Thrivent FCU’s  shares, loans, members, and assets have declined compared to the 2023 year end results.  The most recent December call report shows net worth at 10.3% and ROA of.46%.  Delinquency is only .29%.

Extending the Credit Union’s Mission

In Thrivent’s press release reporting the vote, Board Chair Beth Lewis states:  “The merger opportunity with Thrivent Bank will extend the mission of our credit union and provide our members with simple and competitive banking products, easy-to-use digital experiences and direct access to human support. Our board of directors is pleased that a majority of our members came to the conclusion that this merger is in their best interest.”

Posted on

One More Time: How Does $13.6 Million Vanish without a Trace?

The Creighton FCU insolvency resulted from the sudden discovery of a $13.6 million hole in this reportedly $67 million asset credit union.  The failure, NCUA’s largest in 2024, is apparently an unsolvable mystery.  One in which the only suspect has  died.  As I first posted, NCUA has provided not a single fact about where any of the money went.  Just speculation.

More incredible is the IG suggestion that there is no money missing, just a bunch of accounting errors. Moreover, no one seems very curious about finding out where money went. In the IG response to the Congressional inquiry he opens with the statement:  “my office was not required to perform a material loss review. Additionally, NCUA informed us that the agency was not required to conduct a post-mortem review.”  In other words, don’t look for any answers from us.

The one IG explanation is that the CFO, who died in April 2024 leading to the shortfall’s discovery. was covering up actual operating losses for up to 26 years. We’ll examine this idea later.  In the IG’s summary review, no one within the credit union or NCUA  examiners and external  CPA auditors apparently saw any indications of irregularity during  three decades.

The IG further assures Congress that an over “20 year review” of the CFO’s family records reveals no unusual credit union cash diversions. Yet this is still the person who carried out this cover up apparently alone, fooling every check and balance and division of duties for such an extended scheme.

Blaming a person no longer around, and who apparently took no funds, feels too convenient.  Let’s look at the plausibility of the IG’s theory and facts we do know.

The Cash Came In

We know the members deposited the cash and the funds which went missing.   When the $13.6 million shortfall was discovered, this hole was covered by underreporting shares by an almost equal amount.  Shares balances in the March 30, 2024 call report were $61 million.  Ninety days later the total reported by NCUA in their exam and the June call report  was $74 million.  This is the exact total change in net worth. And the same order of magnitude ($74 million) for Creighton members’ share liability when merged with Cobalt.

But where did the cash go?   Here is the IG’s “official explanation” after reviewing all the information he reviewed:

NCUA officials believe the credit union failed due to bad accounting and financial statement fraud. The large deficit was hidden by the former CFO who exploited Creighton’s weak accounting system that allowed back posting, forward posting, deleting transactions, and hiding general ledger accounts when generating reports. Because no money was found to have left the credit union through this, NCUA officials believe the former CFO committed the fraud not for personal financial gain, but to make the credit union appear to be thriving in the eyes of its Board and membership.  

The IG’s “Thriving by Hiding” CFO Motivation

Reread what the IG just asserted.  Although we know the $13 million member deposits came in, “no money was found to have left the credit union.”   This CFO was cooking the books just to hide operating losses for 26 years.  This is what the IG wants us to believe?

Cash shortfalls creating a cumulative deficit can only occur if the credit union pays out that cash in some form (hidden operating expenses, fraudulent loans, fake withdrawals, phoney investments etc) What were those payouts? Some entity or person received these cash diversions hidden by accounting coverups for decades.

A brief IG reference is made to the management of the credit union’s 150 ATM’s for which the accounting was difficult to reconcile.  This should have prompted questions such as, what accounts were used to fund the ATM operations?  Who managed the cash deliveries and cash drawer balancing when machines were serviced?  Was there an external servicing contract or were cu personnel responsible? The IG letter states:  Fraud auditors reviewed ATM and lease payment accounting transactions. The regional director stated that the ATM accounting was extremely complicated due to Creighton having over 150 ATMs and the multiple ways in which income and expenses could be divided.”    

The IG statement is an NCUA and auditor admission they could not figure out what was going on. Managing 150 cash receiving and paying ATM’s is similar to having to reconcile 150 teller cash drawers periodically.  Cash comes from deposits and checks, and cash is with withdrawn by members from their share accounts.

NCUA’s Regional Director is reported to find that “ATM accounting was extremely complicated.”   This is what should be expected from covering up a missing $13 million.  But not a single instance of imbalance or shortfall is cited.   Or even a reference to how the machines were managed.

And the closest we get to the smell of a smoking gun is not from NCUA or outside auditors, but from Cobalt which is quoted in the IG report:

“NCUA officials advised (note the passive voice) that in early October 2024, they learned from Cobalt that after the merger, Cobalt determined that the former CFO understated expenses related to the ATM network to artificially boost Creighton’s income statement to appear to achieve a steady net income.  The IG continues:

“Cobalt surmised that the former CFO was either not booking the monthly ATM expenses at all or was severely understating the expenses. Cobalt indicated the ATM costs alone should have been $255,000 each quarter. They determined the CFO booked around $120,000 per quarter to the office Operations account. Cobalt officials explained to NCUA officials that this would account for an approximate $500,000 to $550,000 reduction in net income per year if no other expenses were booked to the Office Operations account. 

Cobalt officials explained that over more than 26 years, such an understatement would easily account for the $12.5 million deficit.”

One can only say Wow! to this explanation from Cobalt.  NCUA did not make this finding. ATM expenses are for cash outlays for withdrawals and network operations.  The bottom line is that someone or some entity was paid the money.  Who wrote and signed the checks for these underreported expenses? The IG report makes it appear it was all just confusing bookkeeping.

Putting the Blame on a Fall Guy

Cash from members shares came in and $13 million cash ended up missing.  For 26 years it was all the “fault” of a person no longer living.   Which means that all of those who were simultaneously responsible for the safe and sound operation are let off the hook.

Among these listed in the IG letter are the CEO of 32 years, a senior accountant, the board, the supervisory committee, the outside auditor, special auditors and multiple NCUA officials from the supervisory examiner, problem case officers up to the RD’s office.

These were not just persons called in to observe a financial autopsy. They were directly responsible for this institution’s safe and sound operation  in their various  capacities in the many years before this failure came to light.   Yet we read not a word about their roles including the person who oversaw the CFO and his senior accountant staff this entire time.

The Reported and Reconstructed Net Income

Here is what we know from the most recent eleven yearend call reports prior to June 2024.

Creighton FCU’s Reported Financial Performance

OK performance, but certainly not world beating.  If one believes the IG’s theory, then the real result in this most recent eleven years was an operating loss of $5.5 million from ATM “expenses” plus false net income of $2.0 million. A $7.5 million difference somehow  hidden by creative accounting.

However if one presumes a steady cash diversion as the problem, then adding back the estimated $500,000 or more per year means the credit union actually made $7.5 million—most of which was “expensed away.”  This earnings  would equate to an average ROA of 1.2% or four times the net in the call report.  And a reasonable possibility.

The cash from member share growth came in. The cash went out the door as an “operating expense” somehow, somewhere.

A diversion of this magnitude for this long would seem to require several participants.  Presumably the ATM’s were not deployed all at once.  A system of diverting cash was initially set up and expanded as the network grew. Was some entity or person(s) servicing the machines somehow involved?  Other credit union employees had to balance the ATM total cash receipts and disbursements to the general ledger.  There had to be a system for quickly producing expense and suspense entries to cover up the missing cash for exams and auditors.  No one person could fill all these roles.

Since the share shortfall was quickly found suggesting a second set of books, there is probably a similar recurring system for diverting cash to sustain this activity for decades.

All the people listed in the IG reports were in the room when this happened.  But none of them was apparently asked for an explanation of how this could have occurred on their watch. For example how could the CFO have “managed” the expected net income without first talking to the CEO about the results?

After reviewing 20 years of the deceased CEO’s family records, and finding  “no improper transfer of credit union funds”, the IG’s simple explanation is that “that the CFO hid this $12 million deficit by exploiting the credit union’s weak accounting system.”   But how long had this “weak accounting system” been in place?

The lack of any IG mention of NCUA exam and CPA  responsibility for “weak accounting” suggests a reluctance to learn who is accountable for what in this failure.  Instead put the blame on the person no longer available, and who took nothing.

Questions the IG should have asked include: What were the examiners’ CAMEL ratings in the most recent years?   What did the supervisory committee do?   How did examiners record the problems of” back posting, forward posting, deleting transactions, and hiding general ledger accounts”  now offered to explain the inability to find the shortfall?  Did the CPA firm give a clean audit opinion?

The NCUA and IG’s failure to look at the standard processes for oversight and accountability reflects a flaw in the agency’s own structure. Handing problems over to another credit union to cover up NCUA’s supervisory failures, will only lead to more such failures.

Throwing a Credit Union Under the Bus

Cobalt FCU and their members are taking the hit for Creighton’s financial and supervisory failures. The immediate results of the Creighton merger in the September 2024 quarter include a share inflow of over $73 million; a reduction in undivided earnings of almost $7.0 million (from $115.6  to $106.5–( i.e. Creighton’s negative net worth); and an increase of 6,700 members versus declines in the immediate prior quarters.

Additionally, Cobalt’s net income from ongoing operations reported a $400,000 third quarter loss. The year to date net income is a negative $2.2 million. These combined changes resulted in Cobalt’s net worth falling to 8.1% from 9.2% at the September 2023 quarter end.

A Case Study of Failure-at All Levels

In the IG’s reply to Congress, he states one of the objectives was to report on:

the effectiveness of the National Credit Union Administration’s (NCUA) examination and oversight processes in detecting and preventing financial irregularities, and the role and performance of external auditors in this case.  The letter covers none of these issues. 

At this time no one yet knows where the missing cash has gone.  NCUA has not worked very hard to get critical information on the event. The IG mentions a possible explanation suggesting there is no missing money-just accounting confusion.   But the $13 million of member funds is gone.

NCUA seems to have distanced themselves from any further explanations, even citing Cobalt for the latest accounting examples.  Yet overseeing the safe and sound operations of credit unions is NCUA’s number one priority.   NCUA failed totally and quickly moved on  in this case.  They have literally closed the books, fended off queries and  said there is nothing more to see here.

If this sudden $13 million failure is not a wakeup call, when will the senior leaders of the agency step up to the mike and take responsibility?  The NCUA board is responsible for governing the agency, not staff.

The Board’s silence and turning over responses to the IG for a Congressional inquiry for its largest cu failure in 2024 is a leadership failing.  The agency’s no comment and the IG’s second and third hand reporting,  undermines pubic trust and confidence in NCUA’s administration.  Congress, credit unions  and the public want to hear from their leaders in a crisis, not the bureaucracy.

Perhaps it is time for a real change at the NCUA board.

Posted on

What is Credit Union’s Destiny: Capitalists or Cooperatists?

The following essay is by Ancin Cooley a credit union consultant, educator and strategic thinker.

As cooperatives enter the new year and new administration, he asks what kind of system will we become: An increasingly capitalistic driven or a member-centric one?

His analysis raises several questions that merit discussion within a credit union and in national forums:

Can credit unions, as capitalist enterprises, solve the problems caused by capitalism?

Who will organize the public dialogue to work through these issues of tactics and motivation?

If Credit Unions Are Leaning More Toward Capitalism, Which Version of Capitalism Is It Going to Be?

by Ancin Cooley

Credit unions once stood for the little guy. They were the warm, flannel blanket in a frigid financial climate: member-owned cooperatives dedicated to local communities, lower fees, and a sense of shared purpose. Lately, though, you’d be forgiven if you can’t spot the difference between your neighborhood credit union and the bank building down the street—right down to the slick marketing campaigns, steel-and-glass lobbies, and ballooning CEO compensation packages. It’s like spotting an old friend who has suddenly switched wardrobes, started drinking designer water, and embraced the virtues of “disruption” at all costs.

What happened to the sense of community?

Many people would argue that good old-fashioned capitalism got in the way. But here’s the key question: If credit unions have indeed started turning into miniature capitalist juggernauts, what version of capitalism are they embracing?

A Quick Tour of “-isms”

First, let’s zoom out for a moment. Think of economic systems like religions. In the United States, you can believe (or not believe) whatever you want, but a majority happen to identify as Christian. Similarly, the U.S. largely identifies as capitalist—again, not by official edict, but by cultural consensus. Communism has typically been deemed the boogeyman in American political discourse, evoking Cold War imagery of red flags and missile crises. Meanwhile, cooporatism—the idea that economic endeavors should be collectively owned and democratically managed—sprouted here as a folksy alternative to big banks and other monopolies, which is precisely how credit unions got their start in the early 1900s.

The Cooperative Spirit That Launched Credit Unions

Credit unions are essentially the love child of cooporatism. They’re not-for-profit, owned by their members, and ideally anchored in local communities. Picture townspeople pooling their money in a local fund, offering small loans to one another, and sharing in the success of their own modest financial institution. The whole idea was to stay small, neighborly, and member-focused—an ethos that resonates with the moral sentiments championed by Adam Smith (yes, that Adam Smith). Contrary to popular belief, the “father of capitalism” had a profound moral philosophy grounded in empathy, virtue, and social well-being. He believed self-interest guided by strong moral grounding could be beneficial for society at large.

Enter the Capitalist Invasion

But as in any good morality tale, the villain (or hero, depending on your perspective) storms in. Over the past few decades, many credit unions began embracing what looks suspiciously like Milton Friedman–style capitalism. Friedman, a famous 20th-century economist, asserted that a company’s sole responsibility was to maximize shareholder profit—no matter what. Translating that to a credit union context, the equivalent might be: “Grow the institution as large as possible, centralize power, and ensure the CEO and board benefit from the increased ‘scale.’”

Mergers, Mergers, Everywhere

We can see evidence of this in the recent wave of credit union mergers. From 2016 to 2021, the number of federally insured credit unions dropped from roughly 5,785 to around 4,900, according to the National Credit Union Administration (NCUA). That’s nearly 900 institutions gone or absorbed in five short years-most financially well capitalized. Sure, there are regulatory pressures, compliance costs, and technology demands that make it hard for smaller institutions to keep up. But it’s also true that once a credit union merges, the resulting entity can boast a bigger balance sheet, which often correlates with a higher profile and executive pay and perks.

Here’s the kicker: When two for-profit companies merge, shareholders typically cash out (or at least receive new stock that might increase in value). In a credit union merger, members get… nothing. No grand payouts, no bonus checks in the mail—just a letter telling them their local branch now has a different name and brand colors, plus perhaps a new CEO and board, not of their choosing. From a purely Milton Friedman perspective—where everything is about maximizing efficiency and returns for those at the top in control—this is entirely logical. From an Adam Smith lens—or even from a Bernard Harcourt–style argument for cooporatism—it’s ethically fishy: you’re sacrificing the well-being of the collective for the ambitions of a few.

Is It Ethical—Or Just Permissible?

But the capitalist incursion doesn’t stop at mergers. Increasingly, we see credit union leadership using member funds to influence lawmakers and regulators, effectively rewriting/interpreting the rules in a way that can benefit top executives over members.

One glaring example is how some CEOs and their associated “leagues” have lobbied for legislation or regulatory policies that dilute or obstruct succession planning rules. You’d think that ensuring a robust and transparent succession process would be an obvious good—central to the continuation of the cooperative charter—yet letters from CEOs to state leagues or directly to the NCUA often argue otherwise.

Why oppose a rule that fosters leadership continuity and protects the membership? Because lacking a formal succession plan effectively empowers incumbent individuals to shape the credit union’s future behind closed doors, sidelining the membership. Worse yet, this lobbying is paid for with member dues. The same phenomenon plays out at the league level, where executive leaders create a “league of leagues” with minimal or zero board director representation—a backroom labyrinth that often makes it easier for a small circle of CEOs and league presidents to dictate priorities.

Is this consistent with fiduciary responsibility and democratic governance?  Perhaps not. But as long as it remains legal and permissible within existing frameworks, the line between “member-owned cooperative” and “CEO-centric empire” only gets further distanced.

Another Example: Overdrafts

Let’s give another example: overdrafts. The overdraft conversation, from my perspective, is played out in ways that run counter to the benefit and wishes of the majority of members. Those advocating for overdrafts to be maintained at existing fee levels often don’t dare ask their membership an obvious question—not whether members want overdraft protection at all, but rather what the actual cost should be. Should it be $30? $20? $10? $5?

Instead, the debate is too often framed as a yes-or-no proposition: You either support overdraft fees at whatever rate is charged or you’ll be forced to take a payday loan. That’s an intentional—and frankly misleading—form of argument that aims to scare members into complacency.

Meanwhile, there are far more pressing matters that credit unions could devote their time and resources to—such as the corporate ownership of single-family homes in local communities, which undercuts the credit union’s ability to provide mortgages to ordinary families. But too often, leadership is out of touch, clinging to outdated fee structures or doubling down on rhetorical defenses that only serve to alienate the very members they claim to prioritize.

The CUSO “Merger Exchange”: How Far Have We Fallen?

Now, let’s talk about the creation of a so-called “merger exchange” by a CUSO. Funded by other credit unions, this platform essentially lets CEOs put a credit union on the market—before even bringing the idea to the board or membership. Picture your realtor listing your home for sale without telling you first, then strolling back after the fact to grant you a 90-day comment period. It’s beyond absurd.

It’s also a stark symbol of just how far we’ve drifted from the original cooperative ethos. And the gall of it all—seeing credit union leaders hobnobbing at national conferences, patting themselves on the back while effectively circumventing basic member rights—feels dishonest and untrustworthy.

If we’re willing to normalize this practice, we should at least own up to the fact that the credit union movement is starting to look more like a private club for a handful of insiders than a community-driven, member-owned institution.

A Call to Conversation

As we watch the quiet suffocation of the original cooperative ideal under the weight of ever-larger, CEO-constructed conglomerates, we should ask ourselves: Are we actually okay with this? Credit unions were meant to be an alernative to the profit-at-all-costs and institutional-hubris  of the banking establishment. Is it a betrayal of their founding principles to adopt the very model they were created to disrupt, or merely the inevitable seduction of capitalistic motivation and methods?

Why don’t we ever see a CEO get on camera 90 or 100 days before the NCUA deadline and announce, “We’re merging our credit union into another one, and here’s why we’re doing it”? Why isn’t there an open town-hall discussion to engage the membership?

The answer is painfully simple: They do not want to give members the time or the platform to mobilize against a decision they’ve already made. It’s an unscrupulous reprehensible practice, and we all know it—and yet we allow it to happen on our watch.

A Time for Public Discourse

It’s worth having an open, unvarnished dialogue—among credit union members, boards, regulators, and even the broader public—about the future of institutions looking to give up their legacy purpose. Do we want them to remain true cooperatives, a vestige of “caring capitalism”  that Adam Smith might actually applaud? Or is the tide so strong that they’re destined to drift ever further toward a Milton Friedman–style corporate destiny?

One thing’s for sure: if credit unions are going to adopt more capitalist practices, they should be upfront about which version of capitalism they’re championing—and what that means for the very members they were created to serve.

Contact Information for Cooley:

Ancin R. Cooley, CIA, CISA. Principal                      Phone: 224-475-7551                                                        Email: acooley@syncuc.com

 

 

Posted on

The Second Expression: Credit Unions Member-Facing Value Stories

Yesterday I  compared credit union’s public personas  to the tragedy-comedy masks of ancient Greek theater.

The face I discussed was that of credit union’s institutional achievements:  the growing sponsorship of stadiums and sports teams, the continuing mergers of long standing organizations with no member benefit, and the rebranding from legacy origins to aspirational names (Bethpage FCU to FOURLEAF FCU).

Today’s alternate face is member focused.  They celebrate the many ways credit unions are sharing and enhancing their value for members and communities.

It is for the reader to decide which credit union expression may be tragic or life affirming.

Sharing the Annual Financial Harvest

The most frequent member-centric announcements this time of year are the numerous bonus dividends credit unions pay members.  This is a pattern of member value sharing that goes back decades.  Some examples.

The largest  yearend bonus in credit union history.  That is how the Ogden, Utah Goldenwest Credit Union described its recent $3.5 million  bonus dividend.  It added, “During the last 21 years, Goldenwest has returned more than $30 million to its members.”

These distribtutions are is not new or unusual.   If one types “bonus dividends” into the search box on CU Today’s  home page, 2,482 matches are listed.  Some stories go back decades of coops sharing success their with member-owners.

These payments can be structured in many creative ways.  On December 2, 2024 CEFCU (Peoria, Il) announced a $55 million Extraordinary Dividend:  $52.25 million shared equally between borrowers and savers, and $2.75 million going to CEFCU Debit Mastercard users. The video announcement  states the credit union has distributed over $500 million in bonus dividends since 2000. Listen to CEO Matt Mamer’s explanation for why and how this bonus was paid.  You may view one of many member’s stories featured on the site, that of a single women buying her first home.

The $1.9 billion Tyndall CU paid $1.6 million using the following formula:   To get their holiday cash, members had to participate in everyday banking activities, such as online banking, bill pay, direct deposit, card usage, e-statements, and loans. Each member had the opportunity to receive up to $700.

More Than Special Dividends

Being part of a community is more than sharing financial success.  It is leaders’ personal participation in special events as described in these LinkIn posts:

From the CEO of Desert Financial:  My family and I had the opportunity to volunteer with the Desert Financial team at a special Hometown Heroes event last night at the Phoenix Zoo. The highlight of the night was seeing the kids’ faces light up as they picked out gifts and met Santa. This initiative is a small gesture of gratitude for the sacrifices these veteran and first responder families make for our community and country.

From San Francisco Fire’s CEO: This is my favorite time of year when SF Fire Credit Union staff volunteer alongside members of the San Francisco Fire Department and others to give out toys to children in our local community as part of the annual SFFirefightersToyProgram. Thanks to all who joined us and everyone who supports this amazing program.

Special Community Investments

From the December 11, 2024 Youngstown Business Journal:

YOUNGSTOWN, Ohio – The city has selected 717 Credit Union to administer $13 million in American Rescue Plan Act funds across three programs to improve housing. 

As part of the Youngstown Affordable Loan Program, the city allocated $8 million for the construction and/or rehabilitation of quality affordable housing. The credit union proposed to parlay the $8 million into not only funding for housing development, but also $35 million worth of discounted mortgage financing.

To begin development, 717 will create a $5 million revolving commercial development fund to be used for developers to rehabilitate vacant downtown buildings into residential condos, to build homes on vacant lots and to develop neighborhoods. After renovation or construction, the units will be sold to individual buyers and the funds recuperated to be invested in additional projects. 

A press release yesterday from SECU North Carolina:

SECU Foundation Initiates Phase Two Disaster 
Relief Package of $1.75 Million for Western North Carolina 
RALEIGH, N.C. – SECU Foundation’s Board of Directors approved a phase two disaster relief package with an additional $1.75 million in grants to three organizations, providing intermediate assistance to the hardest hit residents and communities impacted by Hurricane Helene. Funds awarded will help address temporary housing needs, financial crises, and food insecurity. Grantees include:

  • Baptists on Mission – a $1 million grant to support its Essential Rapid Repairs program.
  • The Salvation Army of the Carolinas – a $500,000 grant to expand its capacity and help ensure impacted families receive financial aid to recover effectively.
  • MANNA Food Bank – a $250,000 grant for a six-month produce distribution pilot program beginning December 2024 that will expand accessibility of fresh fruits and vegetables to impacted communities.

Phase two funding builds upon the Foundation’s $3.75 million relief package announced in October to help expedite provisions of water, food, supplies, shelter, and other emergency services to Western North Carolina.

Credit Union Teams Having Fun Supporting their Community

The annual polar plunge with purpose video from Affinity Plus FCU (St. Paul, MN) for the Special Olympics program.

Polar Plunge With A Purpose

(https://creditunions.com/features/polar-plunge-with-a-purpose/)

A Credit Union’s Example of It’s  a Wonderful Life

Every day in numerous communities, credit unions put their members’ well being first in all they do.  They are the current expression of  George Bailey’s mutual savings and loan in Frank Capra’s memorable film .

Here is one real life example from Wright-Patt Credit Union in Dayton, Ohio:

(https://www.youtube.com/watch?v=yMJT0nneRaM&t=18s)

The Credit Union Challenge

Which mask, the corporate or the member facing one, will the American public see in  credit unions today?

Will it be the continuing acquisitions fueled by payments to senior leaders, the public branding campaigns and naming rights on buildings, suplemented with continued efforts to purchase banks?   Or, wlll member-owners recount stories of goodwill, shared financial success  and innovative projects with partners to advance their communities?

If institutional success dominates public discussion and headline events, the results could be tragic for a separate, member-owned cooperative system.  Does American really need more growth maximizing financial firms fueled by internal and external acquisitions?

If special member value delivered results are the lead story, America could certainly benefit from these modern day George Bailey-like coops.   Ones where purpose for member and community progress are the priority.

I believe it is clear which expression members prefer; but will their leaders meet this moment for their institution’s choice?  And the movement’s future?

Posted on

The Two Faces of Credit Unions Today

 

In  theater comedy and tragedy are a pair of masks, one crying and one laughing. Originating in the theatre of ancient Greece, the masks were said to help audience members far from the stage to understand what emotions the characters were feeling.[1]

Today these two masks are a metaphor for two contrasting public faces of the credit union movement.  One is the corporate face. The other the member one.  I will present one persona today of the corporate face; tomorrow the member one.

The reader can decide which of the Greek interpretations might apply to their credit union face.

A Critique of the Credit Union’s Corporate Persona

Here is an excerpt from an October 2024 article by Aaron Klein a senior fellow and financial regulatory commentator with  the Brookings Institute.  The full article is called Why Are Non-profit Employee Credit Unions Spending Members’ Money on Stadium Naming Rights?   An excerpt of one example in his analysis:

Northwest Federal is quite small, America’s 91st largest credit union. Two years ago it spent a total of $2 million on advertising. But in August, it secured naming rights to the Commander’s home stadium – now Northwest Stadium. According to news reports, the deal runs eight years at a higher cost than the roughly $7.5 million a year that previous rights-holder FedEx paid.

How is this a safe and sound decision in the best interest of Northwest Federal’s members? Why would CIA employees want their credit union’s name on a football stadium? How can one argue that money is better spent on the side of a building than on serving the needs of Northwest’s members, particularly those living paycheck to paycheck? 

I asked the nation’s top credit union regulator, NCUA Chairman Todd Harper, about credit unions buying stadium naming rights. His response was spot on: “If I were on a credit union board, I would be advocating that rather than spending that money necessarily on naming rights, I’d be pointing in the direction of what can we do to lower the prices of our loans and increase the service to our members”. 

But Klein could have chosen many other examples of this growing marketing practice. In October Dort Financial Credit Union announced a ten year extension of naming rights to the Dort Financial Center Flint Firebirds hockey team through the 1934-35 season.  The first sponsorship agreement was signed in 2015.

Two months later, Credit Union Times on December 17 reported that Flagler CU Signs Major Naming Rights Deal With Florida Atlantic Athletics.  

The article points out that the $2.3 billion Dort Financial’s head office is in  Grand Blanc, MI.  In 2023 the credit union  purchased the $513 million Flagler Bank in West Palm Beach.  CEO Brian Waldron in the purchase announcement noted. “This is a big step in Dort Financial’s strategy, allowing us to better serve our members who spend winters in Florida.”

When completed  the bank was renamed Flagler Credit Union, a Division of Dort Financial.  Dort also shows over $68 million of goodwill in its latest call report, presumably the premium paid the bank’s owners in excess of its net book value.

Dort gave no data to support the number of members who visited this part of Florida.  However it follows a pattern of two other Michigan credit unions, Dearborn and Lake Michigan, who purchased banks with a similar rationale.  It makes one wonder what Michigan members who vacation in Arizona think of these justifications.

Subsequently, CBS News reported in a December 16 article that:  Florida Atlantic’s board of trustees is expected to approve a $22.5 million, 15-year deal that would give Flagler Credit Union the naming rights to the school’s football stadium.

The deal — both in terms of total and average value — would be the biggest publicly known naming rights agreement for any school in the American Athletic Conference currently with an on-campus stadium.

The Flagler bank purchase and naming rights with FAU means that the Michigan based Dort will have invested almost $100 million of members’ money in their Florida expansion.

Reversing the Plot Line of It’s a Wonderful Life

 

The most memorable movie replayed again and again this time of year is the story of George Baily’s savings and loan.  It is the story of a local financial institution which served its community faithfully, only to face a takeover by Potter, a financial predator to whom George owed money.

Credit unions are increasingly reversing this whole story line.  It shows Potter’s fundamental negotiating error.  Instead of just paying off George in a private deal, he tried to take the mutual direct from its local owners who turned up to support George when he most needed their cash.

Here’s how the reversal plays out in credit union land now. Two days ago the $2.6 billion Addition Financial Credit Union in Lake Mary, Fla., and the $871 million Envision Credit Union in Tallahassee, Fl announced their intent to merge by the end of 2025.

As reported in the Credit Union Times article the reasons for this $3.5 billion  combination according to each CEO include:

“This merger will significantly increase the ability of Addition Financial to serve more members, and support both communities,” Addition Financial President/CEO Kevin Miller said in a prepared statement. “By joining forces with Envision Credit Union and the people-first culture they have cultivated for 70 years, we can provide even greater value to our collective members and team members and continue our shared mission of supporting our communities.”

And, “This merger enables us to provide more access to services, broaden offerings of innovative products, and deliver personalized support to every member and future member.” 

The final paragraph of the article may best describe the motivation behind the rhetorical flourishes in the announcement:

If the consolidation is approved, Worrell is expected to continue on in a strategic role with Addition Financial through his planned retirement in 2027, according to an Envision spokesperson.

Just another example of a CEO who reached the peak of credit union leadership, and then pulled up the ladder so no one else will have the same opportunity.

It should be noted that in this as in most mergers, members are promised nothing that they don’t already have the capacity to receive from their own independent cooperative. 

An even larger merger announcement of two successful credit unions was announced earlier in this Christmas, Wonderful Life, season.

On December 5, the members of LA Financial Federal CU were sent a formal letter by the Board chairman announcing the credit union’s intent to merge into the Credit Union of Southern California, creating a $3.9 billion combination.  LA Financial’s official Member Notice can be read here.

Members will receive nothing from the merger that they do not already have.  However, the CEO Carol Galizia, who has worked at the credit union for just 11 years will receive a 7-year contract for giving up her leadership role. Her new title: Chief of Strategic Initiatives. Four other senior executives will receive various bonus amounts for helping complete the merger, but the member letter makes clear they are “at-will” employees.   A term that undoubtedly extends to all other employees of the credit union.

Chartered in 1937 the member-owners will receive nothing for their 87 years of loyalty, their collective shavings of $483 million, $409 million of performing loans and accumulated net worth of over $ 47 million.

If this privately negotiated deal had been a public transaction at true market value as in the Flagler Bank purchase by Dort credit union, the owners would have been paid upwards of two times their net worth in cash.  Or one can compare this to the member-owners of  Thrivent FCU which received their entire collective reserve plus a premium at 12% of each members total savings in selling to Thrivent Bank.

Instead, the CEO gets a 7 year contract, at an undisclosed amount, for turning over the entire credit union’s resources and members to a credit union they know nothing about and had no role in their success.  This change of control is the exact opposite of the Wonderful Life outcome.  Potter’s approach was all wrong—all he had to do was to payoff George and he could have controlled the mutual for free.

Except in this case Credit union of Southern California is getting paid almost $50 million for merging this very stable, long serving and successful credit union.  The member-owners get nothing.

Which Credit Union Mask Will the Public See

Both tragedy and comedy are present in Greek theater.  But which face will the public see in these corporate announcements? Is Aaron Klein’s critique fair?

Tomorrow I will describe some of the member facing announcements by credit unions.  Then the reader can decide which mask best expresses their credit union’s circumstances.

For the stories that resonate with the public, professional analysts and ultimately political leaders are the ones that will shape the future of the cooperative option for America.

 

 

 

 

 

 

Posted on

Member-Owner Breakthrough! They Will Receive 12.2% on all Savings for Total Merger Payout of $76 Million

Pending member approval, the 51, 590 members of $805 million Thrivent FCU will receive all their credit union’s  reserves plus a dividend upon merging.  The bonus will approximate a 12.2% additional return on the members’ $628 million total savings as of June 28, 2024.  The total payments will be $76 million.

An example: if a member had $5,000 in total deposits on June 28, 2024, their estimated payout would be $610.  Plus they have full access to their savings if they do not wish to keep them with the merger partner, Thrivent Bank.

The payout is an important precedent.  For in the current system member-owners receive nothing in ownership acquisitions except rhetoric and future promises.

More vital, could this example encourage more banks to seek acquisitions by offering members a fair deal-a missing factor in today’s intra-industry private cooperative merger games?

Thrivent Bank, is a newly state-chartered Utah based FDIC insured institution.  It is indirectly wholly owned by Thrivent, a Fortune 500 company with over $114,000,000,000 in total assets at the end of 2023.

The Valuation-What is a Successful  Credit Union’s Actual Market Value?

From the member Notice:  A valuation performed by RP Financial, LC in 2021 established the merger value of TFCU to be $76,000,000. The TFCU Board of Directors has determined that in conjunction with the Merger, the members will receive a total distribution in the amount equal to the full valuation of $76,000,000. 

At June 2021, the credit union reported a book value (net worth) of $69 million.   So members are receiving more than the book value at this valuation date.  At September 2024, the net worth had declined to $59 million which included  the potential write down (FASB 115 valuation) of $21 million in underwater investments.

This is a fundamental data point that every credit union member-owner should be given in a transaction.  Today members are never told the market value of their credit union and the potential for a premium.   This has created a false market when a merger transfers operational control to an independent  party and the owners receive nothing.  Such a valuation should be part of all merger proposal going forward.

Who is Thrivent CU?

Chartered in 2012 the credit union’s mission is to help people achieve financial clarity by providing access to banking products and services that help bring balance to spending, purpose to saving, and intention to managing debt. We strive to put you at the center of everything we do, providing impeccable service and competitive rates, so you can make financial choices aligned with your values and priorities.

Why the Merger with Thrivent Bank?

The following is from the FAQ’s for the merger:

Just as TCU is different from other banks and credit unions, Thrivent intends that the Bank will continue our shared mission of helping people achieve financial clarity so they can live full and purposeful lives. It intends to build a simple and transparent full-service product suite, create easy-to-access digital experiences, and provide direct access to human support, with competitive rates.

Thrivent believes that a purpose-driven bank is differentiated in part by fewer, simpler and more transparent products. This will be manifested in simple, fair, and transparent fee structures, and experienced through behavior-influencing digital experiences that offer contextual and actionable insights and guidance that help customers advance on their path to better financial clarity and wellness.

Post merger:  All current accounts will retain their rates, function and features.  And,  the rates and substantive terms of members’ existing loans and savings products will not change as a result of the Merger 

Any Special Payments for Staff?

In many credit union acquisitions of other credit unions, the primary payouts are to the CEO’s and senior executives who set up the merger.   The same disclosure is required for this transaction.  Here are the details:

Merger-Related Financial Arrangements:

No senior executive officers of TFCU will receive an increase in salary as a result of the Merger.

On October 1, 2021, the TFCU Board of Directors voted to retain current board member Ronald S. Orrick, Sr. as the interim President and Chief Executive Officer of TFCU. A portion of Mr. Orrick’s compensation for his services as interim President and Chief Executive Officer, in the amount of $50,000, is conditional on TFCU successfully merging with and into Thrivent Bank. 

There are no change in compensation for staff.  The second fact in this disclosure is that this transaction has been underway for over three years.

The Voting Process

The proposal must  receive votes from 20% of the total members eligible to vote (47,872). At the time we reach the threshold, regardless if members are voting For or Against the recommended merger, TCU will donate $20,000 to a charitable organization.

Of the votes received, a majority must vote in favor of the merger for the vote to pass. 

Online voting will begin on  January 7, 2025 through February 5, 2025.  A mail ballot will be sent to all members that have not selected electronic communication.

Why the Merger if Nothing is Changing

A video explaining the merger and links to the member letter, official meeting Notice and FAQ’s can be found here.

There are two themes as to why this change is sought, even though the member experience may not be different in the short run.

The dominant motive is access to greater capital:  TFCU has a fraction of the capital that Thrivent Bank will enjoy. Thrivent Bank’s capital together with the existing assets of TFCU will permit Thrivent Bank to make investments in improved technology, products, and services.

The second aspect is broader growth potential:  As we look to the future, we’ve recognized the need and opportunity to grow and further our mission to serve more people with our differentiated approach to banking 

The expected merger outcome:  Thrivent Bank will offer a simple and transparent full-service banking product suite, delivered through easy-to-access digital experiences and direct access to human support, with competitive rates and fees. Ultimately, Thrivent Bank will help people achieve financial clarity, enabling lives full of meaning and gratitude.

What This Example Could Mean for the Cooperative system

In addition to a process that reveals the market value of a credit union in an acquisition, there is  potentially a more consequential outcome.

It is this:   If credit unions can buy banks an increasingly common growth strategy,  why can’t a bank with a mission, purpose and abundant capital take Thrivent’s model to other credit unions around the country.  This would open up true market options that are now not sought out in today’s rigged merger transactions. The members then have a real choice.  They can receive full value for their loyalty, choose to stay with the acquirer  or  take their relationships elsewhere if not pleased.

Today credit unions are readily paying 1.5X to 2.0X book value to acquire a bank.   But member-owners are rarely offered anything in such mergers for their ownership and years of loyalty.

Credit union professionals have been taking advantage of members in the current merger-driven, CEO’s private deal making process.   It’s time real market options are required for the members’ benefit.  Thrivent FCU’s disclosures and payments should be an example required in all future coop acquisitions.   Then members can hope to receive a fair deal.