Category: Mergers

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Ugly Truths: Mergers, Kickbacks and Apostates

“The Ongoing Corruption of the Cooperative Credit Union System’s Ideals in America”  (with edit updates on August 9)

I have previously observed that  it doesn’t take an illegal activity to destroy a firm, an industry, or even bring harm to the broader economy.

I believe the credit union system is at a turning point.   Since the passing of NCUA’s merger rule in 2017/18, the amount of asset takeovers (AKA voluntary mergers) has only accelerated.  Some think this is a good thing.  I believe numerous examples prove otherwise.

According to Credit Union Times the numbers are increasing. The majority of second quarter 2024 merged assets in this latest update have nothing to do with safety and soundness issues:  The NCUA approved 46 mergers during the second quarter of 2024, up from the 26 consolidations that received the green light to consolidate during the first quarter and the 36 approved mergers during last year’s second quarter.

As discussed below some credit union CEO’s are “gaming” regulatory disclosure requirements to hide their significant personal benefits. Credit unions acquire sound, longstanding healthy credit unions through private deals which benefit and enrich the selling executive team.  The members are given nothing but future promises and empty rhetoric, most frequently, “bigger is better.”

The transactions increasingly contradict  any common sense understanding of financial equity or fairness for members.  The information provided members and approved by NCUA is meaningless for any considered owner decision.

The cooperative system’s unique purpose and public reputation are at risk.  These deals will be  seen as just more of the same wheeling and dealing as for-profit banks.   At some point these ongoing patterns of self-dealing will become the object of a business media story, a congressional inquiry or even consumer group action.

The good will and good works of the truly credit union spirited will be overwhelmed by the depredations of an ambitious few. The system may never recover from the consequences of these blatant examples of betrayal of the trust members placed in their “elected” board leaders and regulatory oversight.

In previous posts I have detailed cases from Exceed, Infinity, 121 Financial, Finance Center, and Vermont State Employees in which my analysis of the transactions made little or no economic or business sense-except for insiders. Members, who must vote any merger, have little or no power to object or even inquire. The process gives all the resources and media power to the incumbents initiating the deals.  Member participation is presented as a purely administrative step because the regulators have “already approved the merger subject to the member vote.”

A current Example: Member One FCU transferred to Virginia Credit Union

In last week’s post, I describe the members’ “rebellion” against management’s proposal to transfer all the assets of the $1.7 billion Member One FCU to VCU.  The opposition’s blog site was filled with multiple member voices against the change.

On July 30 after the vote closed,  Member One announced the result: 3,479 voted to approve and 1,404 against.  In the same release, the credit union stated it had become a division of VCU on August 1, or 24 hours after the vote.

Case closed or not?  Certainly, the two credit unions want to give that impression. However It is important to seek the truth apart from these two “facts.”  What other context is available about this event?  Were the members’ best interests truly served?

My first observation: the voting participation seems extremely low for this controversial action.  The  number in favor of the merger, 3,479 is just 2.3% of the credit union’s 155,000 members.   The total voters, 4,883, are only  3.2% of all eligible to participate.

This result means each Yes vote supported the transferred $474,000 of total assets and $44,560 of net worth to VCU.  That outcome would itself suggest the need for greater scrutiny.

Why was the turnout so low?   Were ballots sent to every member?  How was the process managed? By whom? How does this member participation compare with other similar sized or contested mergers?

The Opponents’ Efforts

There was spirited public opposition including a news radio interview.   The website Member One Vote No recorded over 80 member comments before being taken down.   These concerns  universally questioned the merger proposal.  A  Reddit link Member One Merger Cookies, is still active and provides a sample of the  many comments in opposition.

Members posed multiple questions about the $570,000 bonuses being paid to the the credit union’s five senior executives.  The members received nothing from their collective $155 million net worth and eight decades of loyalty.

The opponent’s Vote No site also included links to nine different VCU social media with postings by VCU members sharing multiple complaints about the acquiring credit union’s service, mobile banking, culture etc.  Did Member One’s Board do any due diligence prior to announcing the merger in January 2024?   If so, why was there no information about VCU’s business model or priorities, for example the reason for its recent decision to convert to a federal charter.

Twenty-Four Hours to End Member One’s Independence

My second question: why the rush to complete the merger in 24 hours after the vote ended, that is, by August 1?  The Notice and FAQs clearly state “There are no anticipated changes to core services and member benefits.  And, it will be 2026 before there will be operational integration.  In the meantime, there will be two operational centers.  No branches will be closed .

There are least two forms that must be sent to NCUA (6308A and 6309) both of which would take more than 24 hours, especially the combined financial statements, before a merger is finalized.

Why the speed to make this a done deal? The only effect is to remove Member One’s board and to give VCU immediate access to and full control of the credit union’s financial resources.  Is VCU that much in need?

The very low vote participation and the rush to close the deal points to the need for more information about what is really going on.

The Responsibility of Credit Union Directors

There are two sets of board members who oversee each merger event.  Member One’s board is very accomplished per their public resumes.   From the June 2022 announcement of new board officers, the leadership team presents extensive professional and Roanoke community experience.

The Chair, Joseph Hopkins, signed the Member Notice of the merger’s required meeting. He retired from a long career at Norfolk and Southern, has been on the Member One board for over 30 years and is a 50-year credit union member.

Penny Hodge, Vice Chair, retired in December 2018 as Assistant Superintendent of Roanoke Country schools after 31 years.  She is a CPA and became a Member One director in 2019.

A  new board member in 2022 was Tyler Caveness who graduated from Harvard in 2014  with an economics degree.   He is “founder and principal advisor at Caveness Investment Advisory, LLC, a boutique wealth management practice providing investment, income-tax minimization, and alternative financing strategies for the self-employed.”

Member One also appoints associate Board members. On May 23, 2023 the board announced three new associate members, all with excellent professional  and local credentials. These are brief biographical excerpts in the announcement:

Armistead Lemon has an 18 year career in leading independent  school education.

Mary Beth Nash is a local government attorney with 28 years experience representing private and public sector entities.

Rebecca Owens is Roanoke County Deputy Administrator, responsible for county’s financial administration and has 30 years in local government.

Why did these three experienced, Roanoke-based professionals support the ending of their local charter in a few short months after taking office?  The merger announcement was on January  11, 2024.  One presumes there was some preliminary discussion and due diligence by the board before this public decision.

It seems highly unusual these three experienced professionals would join an organization and then quickly turn around and support an end to their leadership role within just a few short months.  What role did they play?  What information were they given?

NCUA is very clear in its statements on the fiduciary role of directors.  From two 2011 letters by NCUA’s General Counsel:

“we (NCUA)also believe that fiduciary duties are properly owed to people, and not to entities. FCU directors must understand the people who are affected by the directors’ decisions and identify which people the directors are serving.

“The danger is that, if the directors are allowed to focus only on the credit union when making a decision – without regard to how the members are affected – the directors can justify making self- serving decisions, or decisions that serve primarily the FCU’s insiders, under the guise that the directors are simply doing what is best for the credit union.”  (emphasis added)

Failing the Members

There are no factual details or future commitments in the Member Notice that would meet this fiduciary standard for this merger.  Let alone Directors’ duties of care and of loyalty.  The only specific financial details are the bonus payments totaling $570,000 to five senior executives.  Of this amount, $250,000 is due the CEO, Frank Carter,  as of the effective merger date—which we now know was 24 hours after the vote closed.

Why did members receive nothing from their $155 million collective savings?  In any other institutional sale in the open market, owners would have received 125% to 200% of their book value net worth.  We know this because these are the routine multiples credit unions pay when buying banks.  Should not credit union owners be treated as well as bank owners?

From the very general information in the four-page Member Notice, the widespread member opposition published in social media, and the explicit, immediate benefits going to the CEO and senior team, this merger seems contrary to any reasonable understanding of fiduciary responsibility by the board and executives of Member One.

They not only failed the 155,000 member owners but also the greater Roanoke community and the eighty-four year legacy of prior generations that contributed to creating this $1.7 billion local institution.

The Other Board of Directors: NCUA

NCUA’s rule 708b provides the process for the Agency’s monitoring and approval of  every step of the merger process.  The agency’s merger checklist has 21 areas for potential submission and seven required forms.

The update of the rule was announced during the GAC conference in February of 2017 in response to published examples of merger self dealing and outright solicitations.  Chairman McWatters’ intent is quoted in this report of the merger landscape by Frank Diekmann in his CUToday analysis, Time to Talk About an Ugly Truth in Mergers:

McWatters: “The agency should diligently work to preserve small credit unions, as well as minority- and women-operated credit unions.  

“In addition, the agency should require all merger solicitation documents to provide, without limitation, a discussion of any change-in-control payments and other management compensation awards and agreements, and that such disclosures are written in plain language and delivered to voting members in a reasonable time prior to the scheduled merger vote.”

Since that speech, and the passage of the rule  Diekmann’s Ugly Truths have only gotten worse and disclosures minimized.

Member One’s merger is just the most recent example. No member owner, let alone an NCUA examiner,  RD or board member could make an informed judgment about this merger proposal with the information in the four-page Member Notice.

If any credit union had provided this level of detail to purchase a bank or by organizers to start a credit union, the request would have been summarily rejected.  Yet that is all the information credit union owners were given.

NCUA’s In Loco Parentis Merger Oversight

The impact of NCUA’s rule has been to put the agency’s judgement and fact review in the place of the members’ ability to make an informed decision.  Most of the information required by NCUA in its 21 point checklist is not shared with members.  For example, its review of the prior 24 months of board minutes are not disclosed along with multiple other filings.

NCUA then sends its approval of the Member Notice with its limited information which includes the date of the special meeting and ballots to vote.  Absent are any of the details NCUA used to approve the application and Notice.

Moreover, the Agency has provided an easy work-around spreadsheet to help determine what must be disclosed, if anything, about compensation commitments.  This is completely contrary to former Chairman McWatters’ statement of “without limitation” disclosures.  In essence, NCUA shows credit unions how to “game” its own disclosure rule.

Self-dealing by those who lead the organization, oversee the entire process and control all resources to communicate with members was the number one priority addressed in the 2018 rule.  Unlike state charters which must file IRS form 990 detailing board and executive compensation annually, FCU’s are not required to file or disclose any compensation data to anyone at any time.

The agency’s excel spreadsheet with sample entries helps to determine what portion, if any, of future compensation must be disclosed. Here is the form that credit unions can submit to show compliance or not, along with a required certification of No Non-Disclosed Merger-Related Financial Arrangements.

Future compensation is what the whole rule was intended to address, including conversions of previously funded SERPS and other benefit plans.

Why should NCUA be able to review this form, but not members?   In the Member One Notice only merger related bonuses of $570,000 were revealed.  However the credit union reported over $32 million in SERP and Employee Insurance Benefits in its June 2024 call report balance sheet that will either vest or be distributed under change of control clauses—but there was no disclosure of where those funds now go.

Reporting only merger related bonuses does not begin to reveal the compensation related commitments to senior employees in the merging credit union.  Most will enter into new employment contracts with the continuing credit union that are guaranteed years into the future versus being at-will positions.

To illustrate this under reporting, NCUA recently approved a merger that disclosed to members only $900,000 of bonus or salary increases for the five senior employees.  However, because the credit union was a state charter and the lengths of the new contracts were disclosed, the actual guaranteed payments were closer to $9.4 million for the  highest compensated employees.

This is how the disclosures of self-dealing are “gamed.”  NCUA has inserted its review in place of providing  essential information to the members for their decision making.  Members receive no facts, only rhetorical promises or future assurances.  In Member One’s case, this motto was “Bigger is Better” an assertion easily  contradicted by the diverse loan growth and ROA performances as of June 2024 reported by the top ten credit unions.

The Shortcomings Of the Merger Rule and an Easy Solution

There are two other serious information shortcomings in the merger disclosures.  Nothing is required to be shown about the continuing credit union’s business model, priorities, plans or culture.  In this case VCU’s social media posts suggest some potential cultural and operational issues.

If members are transferring the future management of all their assets to another organization, shouldn’t that organization’s plans and leadership intentions be part of the disclosures, even including the compensation of the continuing executives.

Voting by members in a merger is not about protecting their individual savings and loans.  If members don’t like the outcome, they can withdraw and go to another institutions.

Rather the voting is about the transfer and full control of all the assets, tangible and intangible created in a credit union’s long history, to a third party.   Now there is nothing required to be disclosed about the new organization’s taking over these accumulated resources except a summary balance sheet and income statement that is already available from call reports.

A second problem is that the voting process is deeply flawed.  It has the appearance of democracy and one person one vote.  In this case 97% of members did not vote on the future of their own credit union?  Why?

Moreover, the entire voting process and institutional resources are in the hands of one party which has a vested interest in the outcome.  Members who oppose have no way to easily contact other members, there are no resources for marketing or outreach. The credit union executives control all the messaging with its FAQ’s and in this case, free Oreo cookies.

This is not a democratic election process.  It is a monopoly managed by those in power who control all the variables in the very short time frame in which the messaging and balloting is done.  To end a charter should require a minimum number of members to vote, at least 20%, and provide a process for opponents to have access to members.

And the easy solution:  Require every voluntary merger where the dissolving credit union has 7% net worth, to issue a public RFP for bidders and that there be a minimum of two proposals received.

RFP’s are a routine process in virtually every consequential credit union decision including technology choices and even the hiring of consultants who submit proposals in response.

NCUA should lay out the minimum RFP contents and then review the numerous responses.  The credit union board has the data for why one option was chosen over another to recommend to members.  Here is how the process works in a good merger.

The Apostates

The word apostates refers to someone whose actions or inactions, suggest they have totally abandoned or rejected their core beliefs or principles.  Or maybe have no settled ones at all.

In this example of Member One’s executive suite and board’s professional credentials, the public record of merger disclosures versus  the aspirations presented on the credit union’s website, all combine to give the impression these leaders abandoned whatever belief they had in their 84-year old credit union. Rather it was the members whose voices spoke up for the credit union while those in leadership sold out. (See one example at end.)

The role of NCUA’s three person board is also critical.  What is their understanding of the  cooperative charter?  How is it different from banks, other than the tax exemption?  What are the role and rights of member-owners?   What does democratic governance, one person one vote entail, when board elections are rarely held?  When only 3% to 4% of owners vote on the continuance of their independent charter, how meaningful is this process for mergers?

If the board believes the proper policy is letting the free market work its will versus setting regulatory boundaries, why is there no support for actual transparent market solutions?   Why do bank owners reap rewards when bought by credit unions, but credit union owners receive nothing when control is transferred to a credit union third party?

Chair Harper, Vice Chair Hauptman and newcomer Otsuka have either turned a blind eye or have no problem with senior executives capitalizing on their positions for self-enrichment-and the members left holding an empty bag.

NCUA’s current board has taken no action on the growing number of examples where the fiduciary duties of all decision makers to protect members’ best interests have clearly fallen short of the clear standard presented by its General Counsel.

In the end this benign neglect will erode the financial and reputational foundations of the cooperative model.

Creating An Unsound Cooperative System

Ultimately this intentional or unintentional fiduciary  abandonment by all parties will only spawn greater and greater incidents of insider sell outs in the pursuit of growth and greed.  The result is  more and more risk put into fewer and fewer baskets.

This increasing concentration decreases the traditional advantages of local relationships and stability and reduces overall financial and business diversity within the credit union system.  The soundness of the system is narrowed; the variety of business models is reduced; and the traditional credit union advantages of local knowledge, control and earned loyalty are lost.

The unique design of democratic member-owned financial alternatives serving their communities faithfully over generations is sacrificed on the altar of bigness.

The cooperative model has been turned upside down.  It no longer serves members interests first, but rather the personal ambitions of the institution’s leaders.

One Member’s Voice

When those in governmental or private positions of authority forget where their accountability is owed, the prospect of member rebellion grows.  Who can forget the taxi drivers attending NCUA board meetings to lobby for member-focused solutions?

In the case of Member One, a person who served the credit union in leadership posted his logic for why this merger was not in the members’ interest on NCUA’s website.  When posting comments NCUA “will review, redact and post submitted comments” and “also reserve(s) the right not to post a comment that we believe is false, egregious, or unrelated to the proposed merger.”

Sometimes we call these critics prophetic.  When current leaders forget to whom their duties of care and loyalty are due, this comment presents a well reasoned, informed appeal for a return to core credit union principles.

The following is what this member “sees” versus what those in positions of authority  choose to ignore:

I, Dwight Holland, MD, PhD STRONGLY OPPOSE THIS MERGER AT THIS TIME as a former 7 year Supervisory Committee Member of M1FCU, and 2 years as a successful Chair of that Committee. My background:

I was on the Supervisory Committee of M1FCU from 1996 to 2003, with the last 2 years as the Chair. So, I know what I am talking about regarding Credit Union matters.

I was also the guy that pushed hard in 1996 to get on-line banking into the Credit Union when some of our Board Members weren’t sure what a domain name was, or why we should do this. So, I AM NOT opposed to change and adapting when necessary or it makes sense for our members.

The reasons I am opposed:

1. We lose LOCAL CONTROL and influence in the governance of the Credit Union because we are being swallowed by a bigger fish. The smaller fish in the pond of merger always loses its identity, culture and influence with time, despite promises by the Board and CEO of both Credit Unions.

2. We are a HEALTHY, overall well-managed credit union that has grown to around 1.6 Billion dollars. Why surrender this LOCAL achievement and control to a financial entity in Richmond?

3. MemberOne started out as the N&W Credit Union, and grew with our own economy, mergers and healthy acquisitions of struggling credit unions in a non-predatory way. That rich history and legacy will disappear with this merger into the mists. As member number 4404 that started as a 6 year old, I personally don’t like that notion. I can see people in leadership, and talk to them directly, and they will listen. Having control going to Richmond will dilute that “personal touch” dramatically.

4. I am the Treasurer of a state-wide Military Organization that uses a national credit union (over 10 Billion in size) for its banking purposes. Trying to get help with such a large organization is just like dealing with a large bank. It is tedious to get anything done, when something doesn’t go well, it took me and national level leaders in our organization over 1.5 years to get a very simple, but critical thing settled. The larger an organization is, the harder it is to get through the layers of bureaucracy. Staff sometimes in large orgs just doesn’t “need” to care about you for their performance reviews. That’s not true for more locally controlled orgs.

5. As M1FCU member, we often give forbearance to our friends and neighbors regarding loans and the like if they as for it, and work with them to help. Larger, more distant Credit Unions, cannot, and generally will not do this to the extent that a well-run locally controlled one will.

6. There are more reasons not to merge that relate to insurances, benefits, control of wages locally, etc, but I’ll let others deal with those.

The “incentives (for executives) to stay” at the end of the meeting notice seem extraordinary – why is such an incentive needed? There would certainly be others available to hire who are well qualified should these people choose not to stay.

Well more than a half million dollars is being promised to these five individuals! That amount would best serve members in so many other ways: beefing up certificate and savings rates or assisting those who need loans, for example, would certainly serve the members better than this huge amount flowing into individual pockets.

I do not see numbers that benefit members of the credit union except those receiving incentives to stay. Respectfully, there is no way those employees are worth that much to stay. How much would the rest of the members receive to stay rather than to take our business elsewhere? I see no way this merger benefits the members except the 3 or 4 mentioned in the letter we received.

 

 

 

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A Merger Made For Members

(This is a story by Marc Rapport published on creditunions.com on April 24, 2017.  Reprinted with permission)

Gas & Electric Credit Union in Rock Island, IL, has set the standard for transparent transactions that ensure any movement on a merger is for the members’ sake.
RID Federal Credit Union had 600 members, $4 million in assets, and a dim future when it sought a suitable merger partner in the Quad Cities.

CU QUICK FACTS

Gas Electric Credit Union
Data as of 12.31.16

HQ: Rock Island, IL
ASSETS: $71.3M
MEMBERS: 5,169
BRANCHES: 2
12-MO SHARE GROWTH: 0.02%
12-MO LOAN GROWTH: 3.1%
ROA: 0.60%

That was in 2013. In 2015, the credit union, which served the local Army Corps of Engineers, merged into Gas Electric Credit Union($71.3M, Rock Island, IL), culminating a process that could serve as a template for how to merge a credit union in a way that benefits both organizations and their members.

The Challenge

After years of considering a merger, loan defaults and investment returns that couldn’t keep up with operational costs forced the board’s hand at RIDFCU.

Karen Hagerty, a biologist and project manager with the Corps who was an RIDFCU board member at the time, says the board delayed merging mainly because it didn’t want members to lose an institution that had been around for a long time, and it didn’t want the credit union to lose its identity.

But independence was not in the future.

After serious strategizing and belt-tightening, it became obvious our credit union was not sustainable, Hagerty says. We began looking at merger options.

RIDFCU had experienced staff but could not offer internet banking, debit cards, or other basics members expected. The credit union had just stopped growing.

(photo: Karen Hagerty is a project manager with the Rock Island District of the U.S. Army Corps of Engineers and a board member of the former RID Federal Credit Union)

It had been losing money for several years and its net worth had declined as a result, says Daryl Empen, president and CEO of Gas Electric. It also had an engaged board of directors and experienced staff. I think they truly tried to turn things around, but they were simply unable.

The Process

The RIDFCU embarked on the merger process with some specific goals.

We wanted to keep our local office open and were looking for a well-developed network of locations as well as online banking, credit and debit cards, and ATMs, Hagerty says. We originally thought a credit union with many locations would be a better fit for our dispersed workforce. Technology allows remote access but nothing takes the place of someone who cares enough to know your name.

The board sent eight requests for proposals (RFPs) and interviewed five credit unions. That original group did not include Gas Electric. It was an RIDFCU board member, who was also a member of Gas Electric, who suggested the credit union talk with Empen about his credit union and its two mergers more than a decade ago.

The board was so impressed with Daryl’s leadership and philosophy that we also extended an RFP to Gas Electric Credit Union, Hagerty says.

Insights From Vetting

The RFP and interview process was eye-opening.

We learned everyone wanted to merge with us and most of them were interested in using our locations to expand their operations, Hagerty says.

RIDFCU’s assets were in decent shape because it had started the merger process relatively early, Hagerty says. And all but one of the credit unions were responsive and eager to share information.


(photo: Gas Electric Credit Union President and CEO Daryl Empen poses for a holiday party photo with his staff behind him.)

We were shocked by the lackadaisical attitude of one credit union that had been pursuing us for many years, she says. I guess it took for granted we would want to merge with it.

Darron Niles, an RIDFCU board member who now fills the board seat Gas Electric reserved for the merged credit union, attended meetings with prospective merger partners and says he learned some were just looking to gobble up RIDFCU. That wasn’t the case with Gas Electric.

Gas Electric, with its closed charter, looked at us like an additional member group, he says. The numbers worked financially, but our members became part of something bigger and better without losing RIDFCU’s identity completely.

The Decision

RIDFCU members agreed to merge with Gas Electric by a vote of 145-6 on Dec. 16, 2014.

The completed merger in 2015 was the culmination of a process that began with that initial meeting with RIDFCU’s board where Empen says he answered questions such as: What questions should RIDFCU be asking? Could it make it on its own? If so, how?

The board members engaged in a deliberative, thoughtful process to make the best decision for their members, Empen says. That’s what impressed me the most. It was clear this was what was best for the members, not just the board of directors.

“There is nothing wrong with growth. We all need to grow, but it should be based on member benefit.” Daryl Empen, President/CEO, Gas Electric Credit Union

For its part, Gas Electric tried to be transparent.

We were required to have a membership meeting to approve the merger, Empen says. We could have done the bare minimum for notifications, but we advertised it heavily. We wrote a detailed article in our newsletter about the proposed merger and the reasons behind it. We invited members to the meeting to vote.

That transparency also helped ease the fears of RIDFCU’s membership, Hagerty says.

We struggled to keep the rumor mill under control, she says. Members appreciated the clear communication of why we were pursuing the merger and what would happen if we didn’t.

The Aftermath

Gas Electric kept the RIDFCU office open and its longtime manager, Bev Rice, stayed on, providing a sense of familiarity and a cheerleader.

When you have the support of the staff, it makes the process smoother, Empen says. She’s (Bev Rice) has been a fantastic promoter of the credit union and the new services.

The main office of Gas Electric Credit Union, one of two branches, is also located in Rock Island, IL.

Those new services include debit cards, a checking option that returns 2.25% in rewards, internet and mobile banking, bill pay, and mobile deposits. Gas Electric also offers better rates on saving and loan rates than RIDFCU did, and a $250,000 bonus dividend paid out in 2015 didn’t hurt relationships.

That was a nice feeling to be able to reward all our members, including the new members from RIDFCU, Empen says.

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Credit Unions For Sale?

(This May 14, 2017 post by Chip Filson is from  creditunions.com.  Tomorrow I will present the latest example of this industry-wide practice of selling a credit union in a transaction in which all the benefits go to the acquiring credit union and the selling credit unions senior executives.  The member-owners received nothing.)
Forty years ago there were more than 20,000 active credit union charters in the United States.  Now fewer than 6,000. (update note: the number is less than 4,500 today)

Much of that attrition has been from unavoidable forces of market economics, such as liquidations and involuntary mergers that are the result of inability to expand products and services, withering SEGs, or the inability for to attract new senior managers.

But a disturbing trend has emerged. We now are seeing some so-called voluntary mergers that are nothing more than sales orchestrated by boards and senior managers at the expense of members whose interest they’re obliged to represent.

That’s not true of all consolidations, of course, but a look at the pre-merger books and aftermath for some of these takeover targets reveals financially sound institutions sold to larger credit unions for pennies on the dollar, in merger processes opaque at best, followed by senior managers bailing out with golden parachutes.

Left behind, local staff that spent years building those personal relationships now working under a new regime, distant in philosophy, priorities, and practice from the people who had co-existed for years on either side of the teller line and desk. Many move on, and the cooperative financial charter and all it represents sustains another blow.

It doesn’t have to be that way. Here’s a look at what’s happening.

How The Sales Process Work?

A credit union seeking mergers will send offers to smaller credit unions that include:

  • Significant bonuses and/or severance packages for senior managers that are multiples of their current annual salaries (the golden parachute so associated with Wall Street excesses).
  • Ongoing benefits for board members who now become advisors.
  • Offers to employees to continue their employment or receive significant severance offers.
  • A one-time nominal special dividend to members.
  • A recitation of expanded services, branches, and products available for members.
  • A very brief period for public disclosure to members of the intended merger, via the Notice of the Special Membership Meeting.
  • The special meeting in short order after the NCUA’s approval, with voting in person or via ballot to approve the merger closing at the end of the meeting.

A Managed Sale

Everything looks proper on paper, except the whole process is designed to keep members in the dark, often long after the boards initially approved the plan and applied to the NCUA for regulatory approval.

The meeting notice contains the minimum information necessary and omits the oral promises and other personal benefits guaranteed. The board’s pretense of having considered alternatives is asserted in communications without any details.

Other potential merger options are not explored. Even if there are objections raised at the special meeting, as has occurred, the merging credit union closes the ballot at the end of the meeting so there’s no real opportunity for dialogue or objections.

The vote period is kept short and often the majority of those voting ends up being a small fraction of the total membership. The process is merely a veneer of compliance with NCUA Rule 708.b.

The intent, and all too often the effect, is to remove any role for owners in the most important decision a member is asked to make.

All the direct merger costs such as the so-called bonuses, severance payments, and/or special dividends are paid from the merged credit union’s resources.

At the merger date the surviving credit union books an immediate gain from the newly added reserves, undivided earnings, and mark-to-market adjustments that is, the collective wealth of the merged credit union through its income statement. All of which, of course, flows directly to its capital account.

Ultimately, these are cases of the surviving credit union buying growth. The top executives get handsome payouts while the members get a special dividend that is a cent or two on the dollar for the wealth that has been created and transferred to the mergedcredit union.

Quite a bargain.

The Members’ Loss

So, what’s wrong with this increasingly commercial way of seeking mergers? It’s simple: The members’ financial interest, accumulated over decades of loyalty, and the ability to exercise an informed vote are compromised by the very leadership that puts its self-interest ahead of the members.

These voluntary mergers often involve credit unions that have stable if not excellent financial results accumulated over generations of member loyalty and participation.

These reserves and the intangible goodwill are in fact sold to the merging credit union and the current leadership is rewarded with one-time bonuses and/or severance packages on top of their existing employment terms. The terms of continuing-employment contracts are often designed to incent management to leave instead of staying to oversee the outcome.

These merged credit unions have built extensive, valuable franchises sometimes with locational advantages that another credit union could not acquire. This franchise value and positioning are rarely reflected in the balance sheet.

Moreover, it’s frequently the case that if members believed the surviving credit union was a better deal, they could have joined. However, the acquiring credit union is unable to compete with the credit union’s local, historical advantages, so it resorts to a private purchase to acquire what it could not win in the market.

These managed deals rarely present information about the strategic or business model of the surviving credit union other than listings of market-leading products and services or additional branch locations.  Often the suggestion is that bigger is better and scale will ensure greater benefits. That’s not so true anymore.

Today, many credit unions contrast their value of individual service to the mega-financial alternatives which are both stateless and reliant on uniform processes. This is because most members’ needs are local, whether it be auto, credit card, or housing finance.

Credit unions can adapt quickly to local environments and economic circumstances–that’s one of their advantages. However, there is no comparison of the merged and surviving credit unions’ business models. The decades of local service and presence are not even referred in management’s zeal to get members’ approval.

Every credit union operating today has come through the worst financial crisis (2008/9) since the Great Depression. They have cultivated organizational partnerships, supported local schools and communities, and been an integral part of their area’s economy.

Bigger Is Better? Not Necessarily.

Members elect boards to oversee this local focus. The CEO/managers they select are to execute these principles for the greater good. Selling out to a larger credit union that doesn’t have this local experience and is simply buying unearned growth, is at best irrelevant, and at worst contradictory, to the  credit union charter advantage that is being surrendered.

Most of the problems the country faces are decentralized in nature. Creating jobs takes place in local communities, not in Washington. Credit unions are a means to empower and equip people as leaders in their communities.

However, these business contrasts are never presented. Everything is promise and hype; the new reality becomes known only after the merger is complete. Members are not given information about the earlier experiences of employees and members from the continuing credit union’s current performance or even from any previous mergers.

Once Done, It’s Done

A merger is a one-way event; it cannot be undone directly. That’s why members are required to vote to give up their charter. In conversations with employees of credit unions caught up in these situations, the circumstances after the merger are often different from the promises beforehand.

In one situation, almost half of the employees left after six months, the promised technical capabilities were less than before the merger, and, sadly, some members who qualified for loans at the merged credit union are not eligible under the new loan policies.

Not only have the service capabilities deteriorated, but the employees so carefully cultivated in the merger courtship experience a different business culture. Another example is a credit union where member service was so much the focus it was rated he employer of choice in its market area for three years in a row. The credit union had very low employee turnover. Now, after a merger, most of its experienced staff have left.

The Cooperative Model At Risk

The truth is that many of these so called voluntary mergers are managed sales. One response in defense is that everybody does it, so it must be OK.

But not everybody does it. Many boards and managers approached formally with written offers and informally with these self-serving transactions have turned them down.

A defining principle of leaders is taking responsibility for regulating their own behavior. The fact that some boards and senior managers would compromise their fiduciary responsibilities to their members and sell their members’ generations of loyalty  to another credit union and then leave the scene, does not make it right.

Examples of temptation that turn dedicated leaders into self-interested beneficiaries of their institution’s sale undermines the foundation of the cooperative model.

Cooperative ownership produces common wealth. Boards and management have the responsibility as agents of the members to always act in their best interests.

If these same boards had decided to sell the credit union under the same terms to a non-credit union entity, there would be an uproar of opposition to this dissipation of members’ financial interests. But selling the members’ cumulative legacy to a much larger credit union, where their pro rata interest and influence is minuscule, is somehow OK?

Defending these manipulated sales compromises the very core of the cooperative alternative to the for-profit banking sector. Instead of focusing on member value and impact, these sales reward an institutional greed for unearned growth.

At a time when many Americans are worried about the ability of government and large financial institutions to focus on their economic well-being, this distortion of the merger process can only reinforce members’ anxiety about their lack of power in the market.

A Perversion Of The Cooperative Model

The cooperative model is perverted when institutional size becomes the end game and not the means to improve members’ financial control of their lives. The visions of lifetime member financial partnerships become nothing more than an asset to be sold to the credit union willing to pay off senior managers and boards who have lost their moral compass.

There is little dispute that the nation’s policies and practices are heavily weighted to favor the rich. In an era in which the inequality between the top 1% of individuals and the rest of the population is increasing, these credit union sellouts compromise the individual and collective benefit cooperatives were designed to create for member-owners.

Cooperatives countervailing role in the marketplace is compromised. The promise that the collective resources of the 115-year-old credit union model can be paid forward to benefit future generations is cast in doubt.

(A current example tomorrow)

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Whistleblowers’ Elegies

Yesterday I attended a session from the Whistleblowers’ Summit in Washington DC at the Busboys and Poets restaurant.

The Summit describes itself as “a non-partisan educational and charitable conference. Whistle Blowing is apolitical; it is not about “Left” vs. “Right”— it is about Right vs. Wrong. The Summit is “trans-partisan” in nature because not only do we honor Democrats and Republicans; we also host everyone from Libertarians and Conservatives—to Liberals and Progressives.”

I was invited by Cliff Rosenthal, who with Michael McCray, published their book Community Capital– Race, Equity, and the Credit Union Movement.  It is partly Cliff’s telling of his 35+ years working with community development credit unions and the CDFI movement.

The second part is Michael McCray’s recounting of NCUA’s liquidation of Alpha Kappa Psi FCU in 2010.  His inside story includes documents from NCUA, first hand conversations from the participants, and the transcript of the court hearing appealing NCUA’s action in late 2010.

I have previously published multiple brief excerpts from McCray’s account.  It is at a minimum a story of personal conflict and a regulatory “set up,” that in Cliff’s view would not occur today.

These two credit union authors were among several book presentations by insiders, whistleblowers who go public, about the abuses of private and governmental organizations.   One author described the overreach of the guardianship authority in the US.  The second, a former State Department Human Rights Employee, detailed the coverup of the CIA’s systematic use of torture at black sites around the world.

Press and Whistleblowers

The theme of this year’s conference is “is “Media Matters—Whistleblowers, Investigative Journalists & Enterprise Reporting.”  One speaker, a former journalist at the Hartford Courant, said that a senior editor had counseled him in his initial visit to the federal courthouse beat about the importance of his role.

He was told that in many instances his account of the hearings  would be the last, best hope for the persons who have been wronged, whether in civil or criminal matters.  If their side of the story is not covered publicly, the chances that equal justice prevails is diminished.

Being a whistleblower, or even in opposition to any  organization’s public activity, is an act of courage.   For example, when I talk to persons opposing their credit union’s takeover via merger, they tell stories of threats to their jobs or even  businesses.  These accounts reference the advertising power of the continuing credit union and local media’s reluctance to cover controversy.

This was a theme of opponents in 121 Financial Credit union’s merger with VyStar Credit union.  The comments posted currently on the website of the opponents to Member One’s combination with Virginia Credit Union mention this factor.

This former Courant reporter’s observation reminded me of the work that the Credit Union Times reporter, Peter Strozniak, who routinely searches out court filings in cases involving credit unions such as the CBS FCU embezzlement.  He presents facts of institutional shortcomings at NCUA and in credit unions that reveal failings understandably absent from the official accounts.

Without credit union reporters willing to cover controversy, the fourth estate’s critical role in holding credit union leaders to account is missing.  One has to applaud the ongoing detailed coverage of the merger games being played presented in CUToday’s details from NCUA summary of merger disclosures. These include  straightforward examples of self-serving actions and no member benefits, driving combinations of large, sound institutions.

CUToday’s Cooperator-in-Chief Frank Diekmann has had the courage to editorialize as far back as 2017 on the harm these actions are doing to the system.

Sooner or later, such reporting will inspire insiders and others to come forward.  For example, this is a post by a senior employee to yesterday’s analysis of the proposed Member One combination with Virginia Credit Union:

Great article here, I’m at the csuite level at Member One and can tell you everything you stated in the article is 100% fact. Over the last year, there has been no transparency with people below the csuite level, even hearing rumors of issues with the voting as tallies have been changed.

A lot of sneaky stuff going on here and most employees know that this spells devastation for their careers as they will be let go in some form or fashion later down the road. Sadly, too late for Members to know the truth.

Doing the Right Thing

Another participant from yesterday’s session  commented that she was grateful for hearing these stories and public airings by individuals trying to do the right thing.

Their actions are often at personal risk and cost.   The disclosures may end careers in a chosen area, profession, or organization to which they have devoted much time and commitment.

But she drew hope from these examples. They are not intended as disparaging tear downs. These individuals are trying to make their company, their institution or the society a better place for tomorrow, she said.

Credit Union Karma?

To illustrate her point, I close with an observation from the abrupt, unnecessary liquidation of the Kappa Alpha Psi fraternity in 2010.   Its sponsor was one of the Divine Nine sororities and fraternities formed by black students shut out of white Greek organizations on the 20th century American college campus.

In 2023, their sister organization, Alpha Kappa Alpha (AKA) formed a credit union, For Members Only FCU.  One year later that new charter holds over $4.2 million in assets for 7,500members.   One of that sorority’s members is now the Democratic nominee for President.

 

 

 

 

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Credit Union Member-Owners Rebel Against Proposed Merger of their $1.7 Billion Credit Union    

Synopsis:  Due to the length of this post, the following is a quick summary of this merger proposal.  The five highest paid executives of Member One FCU will receive $570,000 in bonuses; the continuing, Virginia Credit Union, takes over a very sound $1.7 billion balance sheet and adds $155 million new capital to its net worth, and the members receive only free cookies for their 84 year old successful credit union.

Tomorrow, July 30, 2024, member voting will end on the proposed merger of Member One FCU in Roanoke, VA with Virginia Credit Union (VACU), in Richmond.

Member One was founded 84 years earlier to serve the employees of the  N&W railway headquartered in Roanoke.  Today it is a multi-seg charter with $1.65 billion in assets, $1.5 billion in loans, 159,000 members served by 335 FTE’s in fifteen branches.  (data as of June 30, 2024)

The members will receive nothing from their $155 million of collective capital (9.57% net worth) and four generations of loyal support.

The Member Notice dated June 13, 2024 confirms that this merger is not about change but rather continuation of the business status quo:

“Same knowledgeable, Friendly Employees”

“ the credit union’s main office and branches will remain open, subject to good practices and safety and soundness.”

“Changes to services and benefits:  There are no anticipated changes to core services and member benefits.”

The only advantages referenced in the Notice are general assertions about potential future capabilities which are completely undefined either in time or factually.  An example: “we would ultimately gain economies of scale.”

This decision facing members is simply stated by member Carrie Adams on the opposition members’ website:

“Saying “no” to a merger is saying “yes” to the future you believe in.”

The Opposition’s Campaign and Web Site

The member-owners opposing this sale have established a website VoteNoMemberone.org that documents the reasons for their opposition.  It includes a countdown clock clicking to the voting deadline tomorrow, Tuesday.  It urges members to vote No.

The basis for their opposition is summarized in six points:

  • There is No Real Benefit for Members
  • This is Bad for the Roanoke Valley
  • VACU is only after the numbers
  • Different Culture, Different Fees
  • You will become a number, not a Member
  • You are NOT being communicated with

In the Your Voice Heard portion of the site, members’ comments document these statements. In the almost 100 posts one quickly senses there is nothing to be gained and much to be lost in this betrayal of members’ trust.  Here are some examples of members and the community “being left in the dark:”

I had no idea! Thanks for the information about the credit union, brings a light to us members being left out in the dark.

I sent Member One some feedback through their website and had asked some questions, expecting to hopefully get a response. I did. I got a canned response asking for my information to contact me rather than just answering my questions through their email response. . .

We can say goodbye to the hometown feeling of being a valued member to becoming just a number.  

Yet another local business being bought out by a BIG City Business. The only notice we got about the merger was a tv news report, so if you didn’t see the news or a friend tell you about it, you would never have known. They did not even send out an email notification or a notification with our statement. What the hell are you hiding Member One???

The proposed transaction announced in January 2024 is already hurting Member One’s local business reputation:

Just recently I was looking to move and purchase a home. When I talked to my realtor about financing the mortgage; I had planned on using Member One since I had loans with them in the past. My realtor told me they were not using Member One for any mortgage financing since they had announced the merger because of the uncertainty of they stability at this time. They also said they knew of other realtors not using Member One for the same reasons.

Freedom First is now charging for checking, I started to look at Member One, but seeing they are getting eaten by a larger credit union, I went in a different direction

I work for a local car dealership and found out that VACU doesn’t operate loans on Saturdays, thats going to hurt a lot of local business if we can’t get autoloans approved like they currently are at Member One.

Members’ Voices Amplified

The posts in the Member Voices portion of the website also contains comments from insiders, current and former employees:

I am currently an employee at MO at a branch and wish to remain nameless for fear of retaliation. VACU’s goal is to be a $10b CU within the next 5-6 years. MO is just a ‘cog’ in the wheel and there is no true benefit to merging for MO members. . .

Truthfully, there will be people let go at some point b/c of redundancy, while nothing will change at first, by Operational Day 1 in late 2025 or 2026, you will likely see fees change, call center moved to the one in Richmond.

And: As a former employee of MO, I recall discussions about a $10 billion deal some time ago. Initially promoted as ‘better together,’ the attitude shifted within weeks to a rush mentality focused on pushing through the merger, resembling more of a takeover than a mutually agreed merger. After getting ‘bad vibes’ from that, I left the company.

The opposition has been reported in a story on the local news radio WFIR July 24. The  report opens with  concern about Roanoke losing another local company through this “sell off.”  The credit union spokesperson replies that this is a merger of “two very healthy organizations” and that “bigger will be better” in responing to members’ criticisms.

Researching Virginia Credit Union’s Online Reputation

The opponents’ site provides links to multiple social media and other posts in a section called VACU Reviews And Information.  These 12 links include VACU’s own mobile app with 177 reviews and a rating of 2.6 out of 5. Other sites such as  Facebook, Yelp (2.2 score from 17 reviews) and Grassroots (3.5 score and 18% approve of CEO) all have similar low evaluations or scores of VACU’s services.

Needless to say, none of this rating information was provided to Member One voters being asked to transfer their future and all their collective resources to this new institution.  One wonders if there was any due diligence by the executives and board of the credit union.

So Why is This Merger Happening?

One member posed this question in a comment:  Why would our local credit union allow an outside credit union buy them out?

Two members posted their conclusions referring to  the Member Special MeetingNotice:

I read the top brass gets a big payout if the merger goes through. . .

Wow, looks like the c-suite gets a nice ‘bonus’, I bet other employees won’t see anything in the way of retention or bonus pay.

These comments refer to the $575,000 in bonuses ($250,000 to Frank Carter, CEO) listed for the five most highly compensated employees in the credit union in the Notice.

One member noted: The “incentives to stay” at the end of the meeting Notice seem extraordinary – why is such an incentive needed? There would certainly be others available to hire who are well qualified should these people choose not to stay. Well more than a half million dollars is being promised to these five individuals! That amount would best serve members in so many other ways. . .

Incomplete Information

But even this disclosure is incomplete and therefore misleading.   NCUA rules require that members be provided a “detailed description of all merger related financial arrangements.  This description must include recipient’s name and title as well as at a minimum, the amount of value of the merger-related financial arrangement expressed, where possible, as a dollar figure.” CFR $ 708b.106(b)(4)(v).

There is no disclosure of any contractual employment terms suggesting that these five are “at will” employees even though the Notice clearly states a bonus commitment and conditions.  It would be highly unusual for senior executives not to have a written contract from their new employer,  with their bonus benefits and future employment after the merger.  Those facts must be disclosed under the rule.

Secondly, Member One’s call reports list a Select Employee Retirement Plan (SERP) valued at $15.5 million and an employee life insurance fund valued at $16.5 million-a total of $32 million in benefits.  These plans’ vesting and/or payout terms will activate when Member One ceases to exist or under “change of control” clauses.  These changes in payment terms due to the merger were not disclosed.

This total compensation information is critical. CEO and executive pay  is readily available from the IRS 990 Form filed by Virginia Credit Union (VACU), as a state charter.  While an excerpt is printed in the website’s VACU Information section from CAUSE IQ, those totals are incomplete when the full VACU 990 for 2022 is analyzed.

That report’s 2022 Schedule J shows VACU’s CEOs total compensation as $2.216 million.  The top eight employees received $7.4 million in total or an average of $917,265 each (the top two received almost 50% of the amount).  VACU’s compensation approach from IRS 990 schedule O clearly states the credit union “has a compensation philosophy of paying salaries and benefits that are competitive with . . .peers in the credit union and financial industries (banks).”

As stated in the Notice, VACU CEO Chris Shockley will be President/CEO of the combined credit union.  Certainly his more recent compensation is relevant to Member One’s member-owner’s vote.

Transparency is critical for informed decisions as well as preventing self-dealing.   Member One owners should know what their leaders who made these decisions are paid now and promised in the future.  In addition to disclosing all self-interest there is another critical factor from this information.  Such data points to the character of the arrangers for this transaction.

The Values Questions

Is 2022  CEO Shockley’s total compensation of $2.2 million is almost double the amount of the total of all 18 community grants and donations made by his credit union in the same year of $1.22 million.  The phrase that “charity begins at home” would seem apt when it comes to how the leadership of VACU distributes net revenue between executives and the members in the community.

This example provides insight into one of  the benefits asserted in the Member Notice that “this merger will combine two established entities that share similar values and commitments to their members, people and culture.”  It raises the question  of what due diligence Member One Board chair Joesph Hopkins reviewed when signing this member Notice.   Or do these two boards’  understanding of fiduciary duty to members and the community only arise after their executives ambitions have been fully satisfied?

VACU has received publicity before about its implementation of coop democratic values.   In two posts The Fix is In and We Own VACU  members’ frustration in being totally ignored when submitting nominations for four board seats is described.  Member voting for directors is not the the standard VACU election process; rather the nomination committee only selects the number of their preferred candidates equal to the open seats, no outside nominations considered.  All chosen then confirmed by acclamation.

A Perpetual Coop Model?

One other perspective on the credit union model which is designed to be perpetual by paying members collective wealth forward to benefit future generations.

Member One is 84 years young in 2024.   The two senior executives, CEO Frank Carter mad EVP Jean Hopstetter  joined in 2008, or 16 years ago.  These two leaders have had their roles for less than 20% of the credit union’s history.

However their legacy is to end the credit union’s charter and turn its future over to a third party.  This is not succession planning failure.  Rather it is pulling up the ladder of opportunity so no one else will have the professional leadership and financial chances they have enjoyed.

The Consequences for the Cooperative System

As in other manipulated, self-serving mergers powered by self-interest, what happens in Roanoke will not stay in Roanoke.  VACU’s minuscule $575,000 personal payments to five Member One executives to acquire $155 million in equity and a $1.7 billion sound balance sheet will not go unnoticed.

This equity capital addition is vital to VACU as it reports a loss on the market value of its own investments of $153 million at March 2024.  The same FASB 115 adjustment for Member One  is zero.

The absence of any pretense of due diligence by Member One’s board and senior executives, the alienation of the members and Roanoke business community and the compromise of the values credit unions are supposed to reflect will resonate throughout the coop system and in political capitals locally and nationally.

Instead of credit union members being paid the full value of their ownership, a small number of executives will see the chance to cash out, to sell out the members, their community and the coop system.  VACU executives know the market value of what they are being gifted as they compare their performance with banks.  No other financial firm would ever propose such a deal to their owners-only a misguided credit union board. This backroom deal is the stuff of cutthroat capitalism, not cooperative purpose.

Where is NCUA?

The agency is fully aware of these events but have neither the courage or convictions to  implement their own merger rules.

All three board members love to debate diversity, equity and inclusion.  Only equity has no real application in practice.  Equity’s traditional understanding of fairness, transparency and equal opportunity has just become another form of virtue signaling.

When board members have have no vision for either cooperatives or for principled leadership, a certain segment in credit unions quickly learns that they can game the system for personal advantage.

If this seems like a harsh judgement, I challenge each board member and their senior staff to read the four page member notice in this case.  Then ask if they truly believe that the information presented is sufficient for any member, let alone an engaged analyst, to determine if this is a fair deal for the owners.

The basic regulatory approved disclosure document provided members  is nothing more than marketing rhetorical phrases filling out NCUA approved forms. There is no relevant information or facts to make an informed decision.  No other state or federal financial regulator would ever accept this superficial disclosure as adequate for owners’ deliberations.

I give the final assessment of this ongoing credit union system failing to a member.  This person sees clearly what any concerned credit union leader would recognize instantly about  this so-called merger proposal.  This common sense wisdom puts to shame the actions and inactions of the movers and approvers of this event:

I’m advocating for a “no” vote on the credit union merger because it’s crucial to preserve our community’s values and personalized service. Our credit union has thrived on being member-focused, providing tailored financial solutions and fostering a strong sense of community involvement.

A merger could jeopardize these qualities by potentially changing fees, terms, and services in ways that might not align with our original values. Maintaining our independence also ensures we retain decision-making power and governance autonomy, which are vital for keeping our institution accountable and responsive to our members’ needs.

Voting against the merger is about safeguarding what makes our credit union special and ensuring it continues to serve our community with integrity and dedication.

Amen

A note from IRS 990 Schedule O for 2022 stating VACU’s compensation philosophy:

PERIODICALLY, THE BOARD OF DIRECTORS ENGAGES AN OUTSIDE CONSULTANT TO CONDUCT AN INDEPENDENT REVIEW OF EXECUTIVE COMPENSATION AND BENEFITS TO ENSURE THE APPROPRIATENESS OF TOTAL COMPENSATION LEVELS.

THIS EVALUATION LOOKS AT THE AVERAGE COMPENSATION AND BENEFITS OF EXECUTIVES AT FINANCIAL INSTITUTIONS OF COMPARABLE SIZE, INCLUDING BANKS AND CREDIT UNIONS. THIS PHILOSOPHY RECOGNIZES THAT THE EXTENT TO WHICH WE ACHIEVE AND MAINTAIN THIS GOAL MUST BE BALANCED WITH THE OVERALL FINANCIAL HEALTH OF THE ORGANIZATION.

THE CREDIT UNION HAS A COMPENSATION PHILOSOPHY OF PAYING SALARIES AND BENEFITS THAT ARE COMPETITIVE WITH EMPLOYERS IN THE SURROUNDING METROPOLITAN AREAS AND WITH PEERS IN THE CREDIT UNION AND FINANCIAL INDUSTRIES.

ANNUALLY, EMPLOYEES RECEIVE PERFORMANCE REVIEWS WHICH DETERMINE MERIT INCREASES. THE PRESIDENT/CEO COMPENSATION IS APPROVED BY THE BOARD EVERY YEAR.

 

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Can Merger Incentives Be Replaced by Better Comp Plans?

Editor’s note: The following guest commentary is a response to the NCUA board’s July 18 proposed rule requiring written succession planning policies for all credit unions.  One rationale was that this action would reduce the number of mergers now occurring due to a lack of available CEO or board candidates at times of leadership transition.

By Ancin Cooley

The succession planning discussion during last week’s NCUA proposed rule is about who will control the future of an organization’s resources: the member-owners versus transferred to an outside third party’s control?

Here’s the key question to keep in mind as you read my views:

Is the members’ loss of their charter and capital comparable to the costs of Board/CEO succession planning by any measure?

Bridging the Gap: “The Middle Way”

The solutions below are born of fatigue from reading about merger abuses and pragmatism. I’d rather a Board give a CEO what they feel he or she has earned in a manner similar to community bank compensation versus that same CEO attempting to convince their Board to merge for a “backend” payout from the surviving institution.

If we don’t openly address “backend” payouts post-merger, we won’t have a serious conversation on this issue. (Source: CU Merger Update Part II: More Management Comp Deals, Some Member Payouts, Usual Reasons and, Sometimes, No Reasons are Cited for Combinations)

Practical Solutions for Succession Planning

Let’s get down to business.

  1. Incentivize CEOs with Bonuses for Succession Planning Tasks: Offer financial incentives to CEOs for the annual completion of board succession tasks. This ensures that succession planning remains a priority and is executed effectively. (A colleague on LinkedIn thought this was a horrible idea, stating that CEOs are already getting paid to do their jobs. I agree with her logic, but I have also been working in financial institutions for 20 years. It won’t happen without a carrot.)
  2. Allow CEOs to Benefit from Capital Growth: Create a system where CEOs can benefit from the internal capital growth within their organizations, fostering a sense of ownership and alignment with the credit union’s success. For example, if a CEO starts with $8 million in capital and grows it to $24 million by retirement, they should access some of those funds in the form of a “liquidity event.” This approach reduces the risk of CEOs seeking payouts through unnecessary mergers.

Implementing these actions addresses the “elephant in the room” of self-interest driven mergers while aligning personal and organizational outcomes. The goal:  fewer mergers and more stable, mission-driven leadership transitions.

Who is going to object to the solutions I’ve provided above?

  1. Credit unions that rely on one solution for their continued growth-more mergers
  2. Firms that provide secondary capital that support mergers
  3. Lawyers that offer merger services
  4. Financial firms, brokers and consultants that provide merger services

This collective group drives the marketing and PR surrounding mergers, shaping the narrative to their advantage. During the comment period, this same group will prompt state leagues to oppose what is truly in the best interest of the members, thus prioritizing their own financial gains.

The institutional efforts to grow via industry consolidation is a feasible external growth strategy. But it belongs in the banking open-market world, not the credit union cooperative model. Credit unions with merger growth plans are playing tackle at a flag football game.  Cooperatives were intended to be perpetual by paying results forward, a different outcome entirely from private wealth accumulation. 

Common Rebuffs Against Succession Planning

  1. Regulatory Burden:

Ah, the classic “regulatory burden” argument—how many times have we heard this one? It’s a tired refrain. But let’s break it down: What is the regulatory burden, and for whom? For the management teams who find it cumbersome? What if this so-called burden is a safeguard for the members?

If we truly embrace free markets, then if one CEO finds succession planning too burdensome, the members, through their directors, can find a CEO who sees it as a manageable task. The framing of regulatory burdens should always consider who is complaining and why.

During the recent open discussion on the matter, NCUA Board Member Kyle Hauptman mentioned a CEO who claimed that implementing succession planning would force his credit union to merge.

Is it the managers’ place to suggest to their members that putting effort into leadership continuity—to protect their charter—is going to result in a merger? Imagine if you owned a commercial building and asked your property manager to implement a succession plan. If your manager rebuffed with, “If you make me put this succession plan in place, we’ll be forced to sell the property,” what would your response be?

  1. Flexibility Concerns:

Some feel that a one-size-fits-all rule for succession planning would not consider each credit union’s unique needs. The NCUA proposal allows for broad discretion in implementation, enabling each credit union to tailor its succession plans according to its specific circumstances and needs.

  1. Cost of Implementation:

While developing and maintaining a succession plan involves some time and cost, these are minimal compared to loss of the charter. NCUA’s new charters are required to raise a minimum of $500,000 t0 $1.0 million to open for business.  Thus, the loss of any charter for the membership, the community and the credit union cooperative system is huge. 

Conclusion

Succession planning is not just a procedural necessity; it is an organizational imperative to ensure the continuity of the mission and values of credit unions. As we navigate the complexities of leadership transitions, let’s prioritize the long-term health and cooperative principles that define our organizations. By doing so, we can safeguard the future of credit unions and continue to serve our communities effectively.

Implementing practical solutions, such as incentivizing succession tasks and allowing CEOs to benefit from capital growth, can harmonize personal and organizational interests, leading to a more stable and mission-focused future.

In short, THERE AREN’T TOO MANY CREDIT UNION TRUE BELIEVERS LEFT. COOPERATIVE IDEALS SEEM TO BE A THING OF THE PAST. IF THE MOVEMENT HAS ANY CHANCE OF SURVIVING, FOLKS GOTTA GET PAID. 

P.S. To all the institutions relying on mergers as their primary driver of growth.

The day after the merger, all the problems that existed before your merger will still be there. Only now they’re scaled and compounded.

Mergers teach you one thing: how to merge. You haven’t learned how to execute a strategy, build your brand, or manage the risks of a larger organization. You haven’t developed a talent pipeline. And candidly, you won’t have time to address any of these issues because you’ll be too busy dealing with the residual effects of the merger, such as core integrations and member withdrawals.

Mergers should accelerate a strategy that’s already working, not as the ignition for your growth. God bless and happy hunting.

If you are interested in further conversation, please reach me at acooley@syncuc.com or check out my YouTube channel here.

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When There Were Two National Credit Union Trade Associations

If you have ever speculated about what is lost in a merger of credit unions, leagues or trade associations, the following example may be a helpful reminder of why choice matters.

CUNA’s Letter on NCUA Leadership

The Credit Union National Association’s August 6, 1973 letter to the White House:

Dear Mr. President:

The members of the Executive Committee of CUNA, Inc respectfully and unanimously urge you to replace Herman Nickerson, Jr as As Administer of the National Credit Union Administration.  . .

We are urging General Nickerson’s replacement because we feel that his actions as Administrator are creating growing bitterness and antagonism throughout the credit union movement, and this is causing a serous loss of confidence and trust in his administration.  . . we would particularly like to call your attention to the following:

  1. General Nickerson’s arbitrary and authoritarian attitude in deail with credit union problems. . .
  2. General Nickerson’s excessive issuance of burdensome regulations. . .
  3. Diminishing morale among employees at the NCUA. . .
  4. General Nickerson’s refusal to cooperate on legislative matters. . .
  5. General Nickerson’s poor public image. . .

Signed by the entire executive committee including Herb Wegner.

NAFCU Responds

On August 10, 1973, NAFCU’sExecutive Vice President Jim Baarr wrote the White House:

Dear Mr. President:

We have received a copy of  the August 8, 1973 letter from CUNA  . . . signed by all members of the Executive Committee.

The letter contains a series of five charges against  General Nickerson. . .

We totally disagree with the five allegations contained  in the  August 8 letter.  . .

Allegation (4):  He has always cooperated whenever possible with this Association. . .

Allegation (5);  “General Nickerson’s poor public image.”  . . .I was not aware that  Mr Jack Anderson (and his column The Washington Merry-Go-Round) was the final authority in assessing an individual’s public image. . .

In conclusion, may I add that as a representative of the credit union industry, I am appalled that a letter of this type would be directed to you by a sister trade association .  . .  may I state on behalf of the officers and directors of NAFCU that we continue to give an unqualified endorsement and support to General  Nickerson.  . . 

(Source of letter excerpts:  NAFCU’s  Washington Line, October 1973,  pages 15-16) 

The Credit Union System’s Challenge Today

A current echo of this concern  of a single administrator is the ongoing political debate about the structure of the Consumer Financial Protection Bureau and its lone Director.

The above debate on NCUA’s single overseer was real. The situation was resolved in 1977 when legislation was passed creating NCUA as an independent agency with a three-person board.  No more than two members could be from the same party.  The board structure was intended as a check and balance on the chairman’s power and to facilitate different points of view on policy and oversight.

As mergers continue to reduce the number of independent voices in the cooperative system, how are different and sometimes opposing points of view getting voiced?   The credit union community values relationships.  Public disagreement is rare.  Internal board dissent is even more likely to go unaired.

One hope is that the competition of ideas will occur in the “free market” and different points will automatically arise.  Rarely happens.  Mergers are often of competing organizations as in CUNA and NAFCU’s recent combination.  The same occurs in many credit union tie-ups.

Another hope is an independent press, but the structure and resources of oversight of these organizations are limited.  The general press rarely follows credit union events, unless there is a crisis. There is no requirement that institutions respond to press queries.

Finally, some put their hope for dissenting views in  external oversight by Congress or state regulatory or legislative activities.  The current effort to amend the federal credit union act to accommodate Navy’s management of a military bank, has found sponsors and opponents submitting their views to Congressional committees-which are then reported publicly.

When any industry is marching to a single drummer, sooner or later that approach will be found wanting.  Ensuring there is open and full consideration of differing points is how change begins. Defending the status quo can lead to irrelevance or worse,  purely self-dealing decisions.

Mergers at their core, are anti-competitive.  Anyone doubt that motivation?

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Three Observations on Sound Credit Union Mergers

Members Vote Against Merger

From the May 24th CUToday story:   In a rare development, members of Hoosier Hills Credit Union have rejected a merger with Centra Credit Union. The two credit unions had announced in January  their plan to combine to create a CU with more than $3 billion in assets. 

The credit unions said in a joint statement that “despite extensive communication from Hoosier Hills outlining the factual details of the merger, the vote was impacted by the circulation of misinformation.”

The credit unions did not say what that misinformation consisted of. The vote tally was not released.  

Why did members reject this merger? Here is a post on LinkIn by Hoosier Hills CEO Travis Markley, based on a Forbes article dated June 20, 2023 about the credit union.  The merger was announced six months later.

“Amazed and humbled to be a part of this organization and everything we do for our members, and so proud of the dedicated staff that make it possible!

“Hoosier Hills Credit Union is honored to be recognized by Forbes as one of the three Best-In-State Credit Unions in Indiana for 2023, joined by our friends at Interra Credit Union and FORUM Credit Union.

“This award, the result of an independent survey conducted by Statista, was based eighty percent on feedback from 31,000 US consumers, who rated their credit unions on criteria such as trust, branch and digital services, customer service, fee transparency, and financial advice. Twenty percent of the scoring was attributed to publicly available Google Reviews from the past three years.

“We are honored to serve our members, and appreciate this special recognition, which we could not have achieved without the dedication and character of our team at all levels,” states Travis Markley, CEO at Hoosier Hills. “Our knowledgeable and caring staff is committed to carrying out our company’s mission and continues to put the needs of our members and communities at the center of every decision we make and every action we take.”

This Merger Process Seems Suspect

Very soon after this positive external recognition, the merger process started.  The CEO would become the Chief Experience Officer of the new combined entity.

What is even more curious is that the merger proposal posted on NCUA’s website for comment says that Centra is merging “with and into” Hoosier Hills Credit Union, not the other way round as implied in the CUToday article. The Centra Chairperson, Jim Bickel signed the merger plan sent to members (whose?) on November 1, 2023 or five months after the Forbes “best” ranking for Hoosier Hills.

In this Centra notice to members there is an effective date of the merger of July 1, 2024. However, the credit union being merged is North Park, not Hoosier Hills.

This entire episode needs a good hard look by state and federal regulators as the documentation and explanations appear questionable.  There is reference to a detailed merger plan by Centra, but it is not included in the required posting even though the letter states it is enclosed with the Notice to Members.

This example reminds me of a recent post by credit union consultant and former OCC examiner Ancin Cooley.

Mergers are Feeling “Icky”

By Ancin Cooley

Is anyone else beginning to feel a little “icky” about the current merger frenzy in the credit union industry? Something about these transactions just doesn’t sit well in my spirit. . . what do credit union members get for their capital and assets when they merge?

Here’s an excerpt from a recent merger disclosure:

“Members will have access to more branches, a 24/7 call center, industry-leading online and mobile banking services, and will still receive the personal service they enjoy from the same employees they rely on every day.” 

This feels “icky” to me. The credit union I mention below is giving the acquiring credit union 7 million dollars in exchange for no board seats.

Would you give me your house in exchange for my cutting your grass?

The Game

And let me be clear: I do not think the individuals involved are bad people. The game is the game. If the cooperative movement is ever going to survive, it needs to be “guarded” by individuals who believe in its purpose. If your credit union or any cooperative has “unguarded” capital, someone will come and take it.

A Case Study

I’m reviewing the financials of a credit union set to merge as of May 1, 2024. The CEO, who has been there for over 20 years, inherited a credit union with over 16% in capital. By 2015, they ventured into indirect lending, and by 2019, it represented 60% of their total loan volume.

This credit union’s financial health started heavily declining two years ago. I’d be willing to bet that is right around when this CEO started looking for a merger partner. Indirect charge-offs were well over $600,000 last quarter. . . ending with a 7% capital ratio. This credit union was not lost due to technology, costs, or economies of scale. This was bad management and weak governance.

So, this person drives the credit union into the ground, receives a hefty retirement payout from the acquiring credit union, and retires happily. Ick… If you couldn’t earn a performance bonus payout while functioning as the CEO, getting one on the backend of a merger you brought to your Board doesn’t sit well with me.

Where are all the other voices? Where are all the credit union governance experts? Even if you disagree, please point out any errors in my logic or perspective. Don’t discuss this in small circles over dinner. Stop treating credit union capital like you invested in the organization with money out of your pocket.

What Are the Principles?

The evolving landscape of credit union mergers should invite deep personal introspection and discussion on the future of cooperative movements. Are these mergers truly beneficial for all stakeholders involved? Do they warrant a closer examination of the principles guiding such transactions?

Lastly, humans in general, often value relationships with people in close proximity to them vs. folks they don’t know. This manifests itself when directors, close to management, struggle to hold their executive teams accountable.

In the example of this post, if I named that CEO, I’d face more backlash than him or her for running the credit union into the ground.

Why is all this happening?

1) Because we value personal relationships over the member-owners of the cooperative movement. Some very smart and shrewd folks realized this years ago. Once the “old school” credit union folks passed away, it became a market free-for-all.

2) Where else are you gonna get 7 million dollars on a promise for better services? There’s too much money involved and not enough incentive to stop.

The only thing that could turn the tide is if some well-respected CEOs (and consultants) in the industry begin speaking up more. We may well continue to lose at least 15 credit unions per quarter for the next year or so. On my end, I’ll focus my energy on helping credit unions that want to grow, turn a profit, and keep their charters.    END

Another Interpretation of Credit Unions’ Personal Deal-making

The motivation for these so-called mergers of sound credit unions may have been best summarized by the well-known American entrepreneur, Al Capone who said: “This American system of ours, call it Americanism, call it capitalism, call it what you will (cooperative mergers), gives each and every one of us a great opportunity if we only seize it with both hands and make the most of it.”

 

 

 

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Deciding on a Merger Partner Shouldn’t Be Like a Blind Date

Edited excerpts from this Second Quarter 2017 column in The NCUA Report provide a perspective on current merger discussions.

Scientific brainteaser of the month: “This man-made creation is defying the normal rules of science by both expanding and contracting at the same time.”   The final Jeopardy answer is: The U.S. credit union system.

In a streak now extending for decades, the number of credit unions in American continues to shrink while credit union membership and assets continue to expand.  . . no other issue is as perennial as the discussion of consolidation within the credit union system.  Many bemoan the erosion of the small credit union fraternity, while others cite the ever- increasing tide of financial services competition for making the erosion inevitable.

Protecting Member Interests

Whatever your perspective, climate change in the credit unions system is real. . . our focus is on ensuring member interests are protected, through the regulatory process and that the merged entlty meets safety and sourndess requirements.

The value proposition of mergers is, as it properly should be, left to the members of those institutions to weigh and then decide. . .

Really Acquisitions

But, while the term “merger” has a distinctively collaborative ring to it, make no mistake many mergers are really acquisitions.  For some credit unions, their growth strategy is defined by pursing acquisitions.  On the surface there is nothing inherently wrong with such an approach by either the acquirer or the acquired as long as sunlight permeates the pathway from boardroom to membership. 

Transparency: a Cornerstone Principle

Throughout my tenure, transparency in governance has been a cornerstone principle my colleagues and I have committed to build upon.  As we are constantly reminded, “every dollar is ultimately a credit union member dollar.”  . . .it is equally valid and important to remember that the same responsibility falls upon boards to be open and forthright with their member-owners when it comes to the merger process.

While many mergers germinate from the ability of the acquired credit union, generally a smaller institution, to adequately serve its members, some voluntary mergers have involved medium to very larger credit unions with relatively strong balance sheets.  In such instances, boards of director should be comprehensive in their disclosures to their members.

If an acquiring institution is tapping the net worth of an acquired credit union to pay for the acquirer’s’ cost of the merger, that reduction in net worth should be transparently, completely and fully disclosed to the members of the acquired institution before they vote on the proposed merger.

Certain disclosures of executive compensation and boards of directors’ benefits are already required under some circumstances, but the threshold for disclosure many not be adequate to provide true transparency to members.

Many board directors initiate the marriage dance long before the merger nuptials are finalized.  Pay and benefit enhancements for the acquired credit union’s leadership are sometimes finalized prior to triggering the current window of disclosures. Members also may not be given adequate opportunity to digest the information before the final merger vote. . .

Merger Windows and Frosted Glass

In the final analysis, it will, and should be, the members who will rightly make the ultimate decision, not the NCUA.  But, as members peer through the merger window, it is imperative their view not be obscured by frosted glass. 

By Rick Metsger, NCUA Board Member

 

 

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Credit Union Mergers: The Final Solution?

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

      Credit unions are changing…

     … and disappearing.  

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

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

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://1.bp.blogspot.com/-K9Q1q_E1eFs/YDv8zTuCAtI/AAAAAAAASQw/nmm1E01Qrkc7SpsLMraBnCI_Ug_1RiicgCLcBGAsYHQ/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?