Category: Mergers

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.

 

Posted on

Several Explanations for Credit Union Mergers

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

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

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

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

Where nothing is forbidden, nothing is required.

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

And the ultimate outcome for the member owners:

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

 

 

 

 

 

Posted on

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

Today credit unions operate in two financial worlds.  One is the so called “free market.” This is where open competition, winner-take-all, buying and selling happens. Members/consumers make their buying decisions comparing options.  The winners are firms with superior value propositions including better products, service, convenience and sometimes marketing.

This is the market credit unions enter when buying banks or  investing in other firms (CUSO’s, Fintechs) to advance their credit union’s competitive position. Corporate transactions are marked by due diligence assisted by external experts, and financial projections with ROI’s and cash flow forecasts.  Often these deals are subject to close regulatory scrutiny in addition to buyer and seller’s close analysis.

Transactions in credit union’s “off market” financial  activity are not based on transparency, superior performance or even shareholder/owners best interest.  This is the “insiders game” of private deal making, self-enrichment and public misinformation and rhetoric to benefit the players’ personal agendas.

Today this is the world of credit union mergers.  It is increasingly  a cesspool of pretend member advantages disguising payoffs  to facilitate changes in control of sound long-serving institutions.

There is no owner payment or recognition as occurs in the “free market” transactions.  In fact these are totally “free” transfers  in which the continuing credit union is paid to take over the business.  The owner’s net worth is transferred intact to the acquirer. This is the complete opposite of an open market transaction.  It would never happen in a fully transparent actual market sale.

The Critical Issue

The critical question for the credit union system’s future is why aren’t members paid for their ownership interest when there is a change of control.  It happens some with market facing events, but never in mergers. Without any payments upon a charter’s dissolution, member-ownership is a fiction.

Credit unions do know how to value a financial institution, their own coops and other for profit firms.

Credit union  capacity and interest in buying other financial institutions, particularly banks is ever-increasing.   These all-cash purchase and assumptions totaled 16 in 2022, 11 in 2023 and at least 17 announced so far in 2024.

In most purchases, the transaction price ranges from 1.5 to 2.0 times book value.  Where the bank is publicly traded, the offers always exceed the last market quotation prior to the sale announcement. Here is an example.

The Most Recent Bank Purchase Announcement

Yesterday  the $9.2 billion ESL FCU announced the acquisition of the $401 million Generations bank (Nasdaq: GBNY).  Prior to the announcement GBNY’s one day high for the past year was $10.76.  Today, post announcement, it closed at $15.75 per share.

In the announcement the bank estimates the range of final cash payments for each share to be $18-$20.   From the joint press release:  “ESL Federal Credit Union will pay Generations $26.2 million in cash and Generations Bank will retain its equity at the effective time of the P&A Transaction.”

Generations Bancorp has 2,241,801 outstanding shares of common stock.  If $20 is the final disribution per share, then the bank owners will receive a total of $44.8 million, that is their equity and ESL’s $26.2 million payment.

We know there must be some pretty sharp financial analysts at ESL which is paying $26.2 million cash for an institution whose track record includes the following:

  1. The bank has lost money, every quarter, for the last three quarters.
  2. The bank has an efficiency ratio over 100%, every quarter, for the last three quarters.
  3. This means the bank lost money, before factoring in provision for loan loss expense.
  4. Since 2015, the bank has produced an ROA over 0.50% just once.
  5. It’s pretax ROA through 6/30 of this year is negative 0.90%.

How  Bank Purchases Should Inform Credit Union Owners

The example of credit unions paying cash in a bank P&A, effectively a liquidation, demonstrates credit union’s willingness to analyze market value and to pay up for performing financial assets.  In these deals, there is no charter acquired. just an operating business.

Moreover each of these transactions is reviewed and approved by at least three very interested parties:

  1. The owners who will ask is this price fair and a better option than not selling?
  2. The FDIC will examine for any residual risk to the bank fund.
  3. The NCUA will review for any safety and soundness implications and compliance with credit union regulations for acquired assets and FOM limits.

The point of this example, and almost 50 recent bank acquisitions is that credit union’s know how to value the potential future ROI of a financial institution’s assets.

So how might this skill apply to valuation of a credit union?  While there are not many recent examples, there is one thoroughly documented transaction.

The Nationwide FCU Sale to Nationwide Bank

In 2006 the sponsor of Nationwide FCU announced its intent to buy its credit union to accelerate its banking operations.   Founded in 1951, the single sponsor credit union was almost an extension of the insurance company. Almost all of its members were Nationwide employees, former employees or retirees and their families. The CU’s employees were all Nationwide Insurance employees and the CU performed very few of its administrative functions on its own.

The first question for the members was: “Will the 45,000 owners of the $564 million Nationwide FCU be offered enough money for their credit union?”

The credit union’s key numbers at December 2006, right after the vote were:  Assets $564.1 million;  Loans  $  418.3 million;  Net Worth $61.5 million (12.7%); shares $489.3 million; and Members, 45,002.  Nationwide was the 4th largest of Ohio’s 495 credit unions.

Further comments from an August 8, 2006 Credit Union Times article about the sale:

“When what is happening in so many other merger and charter conversions amounts to little more than thievery, the fact that Nationwide was willing to try to do the right thing means a lot,” said Jim Blaine, CEO of the $13 billion State Employees’ Credit Union. 

Blaine said that his comments and support for the purchase reflected the degree of transparency that the CU has offered. “If that transparency were to diminish, if the CU were to hold back on letting its members and the public at large know about how it and Nationwide Bank arrived at the $79 million price tag, then the deal might face more of an uphill climb,”  Blaine explained. 

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

McCune and other banking analysts note that a premium of even 150% or 200% of equity for an independent CU might not be out of line and would still be considered inexpensive compared to the prices commanded by independent thrifts. . . 

“The phenomenon (of a credit union sale) is more likely to remain an occasional development where banks might approach CUs which have access to particular markets or market niches and where CU members would be willing to sell. Everyone has a price,” the analyst noted, 

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

CEO Paula Edwards said that almost 17,000 of the CU members took part in the election and that almost 90% of the members who voted cast ballots in favor of the merger. 

Approving the deal means that Nationwide’s members will receive $79 million total, or roughly 15% of their account balances as of the end of March of this year as the price for the sale. The new bank will benefit from the purchase by having a readymade customer and deposit base that would have taken it months or years to develop otherwise. 

The Significance of Nationwide FCU’s Sale

Members were returned all of their cooperative capital plus an estimated premium of $17 million more.  This represented a gain of approximately 15% on their individual share balances.  In banking sales, this valuation is often referred to as the deposit premium when valuing a transaction.

According to CU Times, there were some who thought this transaction could be an example for additional deals.

Some view the Nationwide deal as the model for the potential takeovers of credit unions. Nationwide was a very unique case, , , CEO Paula Edwards is one of the true good credit union people and had little choice in that deal. The reasons behind it can be thrown out, but what can’t be thrown out is the premium on capital Nationwide Bank was willing to pay, that’s the potential model going forward. 

“This proposed merger ensures credit union members receive a financial benefit in the transaction. Nationwide has agreed to give members a payment for their ownership interest in the credit union,” said NFCU CEO Paula Edwards.

The Irony of This Transaction

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

The insurer said Monday that it has decided to move away from operating as a full-service, federally chartered retail bank — the kind of place where people cash checks, sign up for CDs and the like. Instead, it plans to focus its bank-related services on those that support its retirement-plan business. 

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

Nationwide has taken a big step as part of its plan to get out of the retail banking business. 

The insurer said Friday that it is selling $3 billion in deposits at Nationwide Bank to BofI Holding, the parent of BofI Federal Bank, in a deal that is expected to close before the end of the year. The sales price was not disclosed. 

BofI Federal Bank, based in San Diego, is a nationwide bank that provides financing for single-family and multifamily residential properties and small and medium-sized business in certain target areas. 

Even selling to a new charter or transferring control does not assure financial longevity.

How NFCU and Bank Transactions Are Relevant Now

There are two immediate conversions from a credit union charter that will entail a valuation with  potential member payout.

June 23, 20 24 the FDIC announced the following:

The FDIC approved a deposit insurance application submitted by Thrivent Financial for Lutherans in relation to a proposed Utah industrial bank, Thrivent Bank. The FDIC also approved a related merger application that will permit Thrivent FCU to merge the operations of its existing credit union into the newly formed Thrivent Bank. 

The newly approved Thrivent Bank will not operate physical branch office locations and intends to deliver all bank products and services exclusively online, offering a diversified loan portfolio centered in consumer loans and funded primarily by core deposits, following a traditional bank business model.  Thrivent Bank will offer products and services without regard to religious affiliation.

Thrivent FCU has total assets of $930 million and a net worth of $129 million . What will member-owners receive in this sale to an industrial bank charter formed by the Sponsoring company?   Will it follow the Nationwide payment precedent?

The second event is the combination Arrah Credit Union with the $378 million, mortgage centric, Pittsfield Cooperative Bank.  The details are in this August  14, 2024 Credit Union Times report:

Chartered in 1929, Arrha’s 27 employees operate three locations, and manage $110 million in loans, $122 million in total shares and deposits, and $12.4 million in equity, according to NCUA financial performance reports. The credit union posted a loss of $9,222 at the end of the second quarter.

The process to combine is very cumbersome. A minimum of 20% of the eligible members are required to vote for the transaction to proceed.

Arrha’s NIMRA application, under review by the NCUA, included 15 different documents and statements such as the merger plan, the proposed merger agreement, a copy of the bank’s last two examination reports, copies of all contracts reflecting any merger-related compensation or other benefit to be received by any director or senior executive, a statement of the merger valuation of the credit union, and a statement of whether any merger payment will be made to the members and how much of a payment will be distributed among members.

The question raised by these two current events, the growth in bank purchases and the Nationwide sale and other conversion precedents is why aren’t credit union being  member-owners compensated today? When  members are asked to approve the transfer and control of all their assets and common wealth to another credit union via merger, shouldn’t they be treated as least as well as when credit unions pay out bank owners?

Time to Take a Stand and Act

Its time for those who believe in a cooperative system to take a stand and ensure that intra-industry mergers reflect the same process and member-owner payments as every other credit union financial transaction requires.

Without change, the industry will be in  a race to the bottom.   As I described yesterday, one predatory credit union, PenFed, has cancelled 30 long serving credit union charters via merger between 2003 and 2022.   Even as PenFed hits a financial stall, this activity is being imitated by others daily.

Credit unions want all the authorities and options to compete in the open financial markets, but not when it comes to their own brethren.   These industry predators want the opportunities of the free market, but not the responsibility of transparent dealing and ownership reward when taking over another credit union.

These “off market” dealings are corrupting leaders, perverting normal financial practice and encouraging credit unions to go out and “roll up” their kindred in bigger and bigger combinations.  This trend is subverting not just the traditional practice of market based firms, but driving a consolidation eliminating one of the most stratgic advantages of a credit union charter: local control, investment, relationships and community building.

Why can’t the Nationwide outcome be the standard for all credit union mergers as well.  From the above event:

what can’t be thrown out ( of the outcome) is the premium on capital Nationwide Bank was willing to pay, that’s the potential model going forward. 

Shouldn’t that be the model today for all change of control credit union transactions?

 

 

 

 

Posted on

How Mergers Tear Down the Credit Union System

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

The opening paragraph provided the details:

Pentagon FCU was approved to acquire its third credit union in the past six months, the $26 million Fort Hood Military FCU, in Fort Hood Texas, NCUA said Tuesday. That follows two December acquisitions for the $5.8billion credit union, those of $46 million Fort Shafter FCU in Hawaii and $13 million Coast Guard Employees FCU in Maryland.

This twenty year old description was before mergers of sound, long serving independent credit unions became much more widespread. A decade later credit union system CEO’s, consultants and regulators openly promoted these acquisitions as a quick and easy alternative to internal organic growth.  After all isn’t success just a factor of size?

This industry competition for acquisitions was based on offering private personal inducements for CEO’s and senior managers.  The practice became so blatant that in 2017 NCUA passed a rule to bring more transparency to the process.   The rule didn’t slow the wheeling and dealing.   It may have even legitimized these payoffs.

Now credit unions could routinely add wording to the required Notice and Disclosures of these payments and state that the regulators have approved the merger subject only to the member vote.

A Case Study Lookback

Two weeks ago I described the final step in PenFed’s 2021 merger with the $36 million Post Office Credit union in Madison, WI.  In August 2024 PenFed announced the closing of its only office in Madison. Since the 1934 chartering, Post Office’s 3,153 members (at time of merger) had received personal service.  No more.

I called this closure the final step in “asset stripping.” This is the practice in a takeover acquisition to maximize the profit and eliminate any future investment or expenses. All of Post Office’s resources, reserves, member accounts were transferred to the control of the Virginia based PenFed.  There is no longer any local presence, nuance or leadership roles in the community. With this branch closure, all member relationships are now virtual and remote.

The Final Cashout

Last week the land and building of the former Post Office location were put up for sale.

An internal view.

When the merger occurred, Post Office’s call report showed these assets with a book value of $589,222.  The real estate listing on September 17, 2024 had a list price of $1,260,000.  This is an increase of $671,000 (113%) in the three and one half years since the merger.   The net gain on sale all goes to PenFed as “other operating income.”   This is the final liquidation step of this 90-year old credit union which had 22% net worth at the merger date.

All Gain, No Risks, Members Left Behind

Paying nothing in these acquisitions for total control of  all of another credit union’s members’ net worth and reserves makes these takeovers a very profitable practice.  Systematically  stripping out all of the most valuable assets for maximum cash value puts the icing on the cake.  No worry about local commitments or member and community relationships.

Such takeovers are a common strategy in for-profit companies.   However in credit unions there is no acquisition cost, just a few crucial payouts to the CEO and perhaps,  other senior executives whose approval and pitch to the Board is required. It is literally free assets for the taking.

This practice is becoming more widespread.  It is  self-immolation, a systematic  institutional dismantling of the credit union system driven by greed and personal ambition, not member benefit.

In many situations today, the merger destroys the local advantages, loyalties and relationships that are the foundation for credit union’s success. The acquiring credit union’s field of membership, or market focus, has no center or rationale. There are no “network effects” for branding or service delivery that would create operational efficiencies.  Most critically the headquarters and leadership is  hundreds or thousands of miles away.  Local familiarity is all lost.

The consequence of credit unions preying and suborning their fellow CEO’s and boards is systematically demolishing the credit union advantage at both a market level and in the public’s eye.  The coop model is seen as no different from other financial options.  Especially in an era when virtual relationships are available from all financial providers.

And a credit union’s values are the same as every other market participant.  The winner takes all.

The rationale is that growth and size will guarantee success, an assumption frequently at odds with the facts and members’ experience.  Size does not automatically correlate with efficiency, growth or other financial metrics let alone operational excellence.

The PenFed Merger Demolition Derby Takes Off Again

Penfed pulled back from the American Banker’s “binge” strategy during the initial years of this century.  It should be noted that the three mergers listed in the article were all military bases.  One could argue that these were natural affiliations consistent with with PenFed’s focus and traditional brand.  In 2010 there was a single merger with the $11.6 million Tripler FCU in Hawaii.  And then a lull until 2015.

The Merger Frenzy Begins

In 2015 PenFed undertook an aggressive acquisition campaign that lasted until 4Q 2022.  They took over 25 credit unions located in 14 different states in under eight years.  The majority had no military affiliation, such as Post Office, McGraw Hill, Sperry Associates and Progressive.

Progressive, a New York state charter with a single office focused on taxi medallion lending.  This merger of a “troubled” institution resulted in a gain in the year acquired; more importantly it gave PenFed a field of membership open to anyone in America (the old Progressive state charter’s FOM).

The combined  assets of these 25 acquisitions at the time of merger was almost $3.0 billion.    As in Post Office’s example, control over all the assets, reserves, allowances and  member relationships were transferred to PenFed’s head office.  In some instances such as the very successful $265 million  Perry Associates single office credit union, the office was closed immediately after the merger. The employees  were let go, and all members forced into a virtual, remote service model.

Dismantling the Coop System

This systematic dismantling of credit unions and their successful local market positions is being emulated by other credit unions.  The hunt is  supported by a host of hanger’s on who benefit by facilitating this organized tear down of the cooperative alternative.

In many of the combinations below, the members, if a merger were really necessary, would have been better off with a local option familiar with their market and bringing real operational synergies.  But  in these private deal makings, the largest payoff to the CEO wins.  And besides no one ever looks back to see what happened.  Except for the members who begin to vote with their feet.

PenFed’s Eight Year Acquisition Spree

But  Does It Work?

One could still ask however if the strategy works as a growth enhancement to normal organic tactics. When PenFed completed the final Allus acquisition in 4Q 2022, it reported total assets of $35.9 billion.

At June 2024, PenFed’s total assets were $33.5 billion.   It would take more time to calculate all the other merger downsides such as local branches closed, the employees laid off and the number of members who left after being turned over to an organization with which they have no connection.   In its initial merger frenzy, PenFed’s growth looked easy and free of any cost or risks.

However members soon see the asset stripping and the absence of local leadership. Moreover, PenFed lost every credit union’s most important strategic advantage: the hard earned, unique value of long lasting member relationships.

When CEO’s care more about themselves then they do for members’ well being, the difference that makes cooperatives successful is gone.

PenFed is not alone in its disruptive wasting of long standing successful cooperative charters.  The question for those who believe in the unique role and purpose of cooperative design, is whether this faux capitalistic model becomes the norm for the system.  Or  like all false idols, will be defeated by the example of those who think the credit union model is first and foremost for members’ benefit, not managers or boards’ personal ambitions.

Posted on

Credit Union Mergers: The Final Solution?

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

      Credit unions are changing…

     … and disappearing.  

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

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

https://asset---north-carolina.bldg15.net/img/4/f/4fc74af4-b323-4065-ab53-b09cd8dcf5dc/Stanly%20County%20-%20Morrow%20Mountain%20State%20Park%20Overlook-crop(1,0.636,0.000,0.334,r4).4e964e48.jpg Been searching for years for the original Indian meaning of that name. Recently, a friend told me he knew the origin. He said, it’s in the dictionary: “Uwharrie” means “unknown”. Really?

Asked him for a copy of that reference for my files. Sure enough, the following week, in came a copy of the dictionary definition. It said: “Uwharrie – adj., probably from an ancient tribal name; meaning unknown.” Perhaps I just need to pick better friends….

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

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJW7_EMEcjRpmN0ZOPoAThGYDe3adg0LwJUC1ovwporaTB_k2MZsBzxtXA_Fhc0QdNT0WQcC78VQJzIyOO2hA88MSEEb_WnDoyD1s6e4cXq_wwL2wRK6-urANV7w4k2713cqHXm67R_a8/w1200-h630-p-k-no-nu/IMG_3451.jpg “Downtown” the candy-striped awnings and improvised handicap ramp of Badin Town Hall and Police Department adjoin the Masonic Lodge #637. Then comes the post office with its single window, fleet of post office boxes, and well-used community bulletin board.  Shading the post office is Memorial Park, flanked by a cedar tree honor guard for the seven Badin soldiers who died in World War II. And, out of sight up a short dirt road, is the best named roadhouse on the planet: The Bottom of the Barrel Disco and Cafe; now vacant, having recently burned to the ground.  Bet that last party was a great one. Sorry to have missed it!

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

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

https://i.pinimg.com/736x/41/5b/88/415b88882030af28aaba824deda36369.jpg The beauty of Credit Unions used to be something you couldn’t easily wrap, bottle, or “spin”.   Badin FCU is no longer there to make a difference – gone the way of merger. There are no longer any banks or credit unions in Badin. The aluminum plant, too, is gone.

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

Posted on

The Cooperative Way to Manage an Isolated Branch

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

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

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

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

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

A Better Way: The Branch Transfer

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

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

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

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

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

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

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

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

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

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

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

An Example of Cooperative Values and Collaboration

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

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

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

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

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

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