Mergers – Page 3 – Just a Member

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.”

May 21, 2024May 21, 2024

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

May 16, 2024May 16, 2024

Credit Union Mergers: The Final Solution?

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

Credit unions are changing…

… and disappearing.

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

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

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

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

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

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

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

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

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

May 6, 2024May 6, 2024

The Ultimate Co-op Strategy to Overcome All Challenges

Worried about new fintech competitors? Liquidity tight and interest margins narrowing? Hard to find competent, affordable staff? Growth too slow? Delinquency rising? CFPB and NCUA about to cap fees-reducing ROA?

There is one surefire solution to all these ill winds every credit union faces. It is touted and practiced by CEO’s of all credit union sizes. Consultants are marketing their multiple processes for implementing this universal solution.

The magic formula is Merger. And incidentally, if you are not the surviving credit union, the payoff can be even greater than keeping your regular “day job.”

As this siren song travels across the cooperative waves, two skeptics have written critiques. One humorous and one listing what member-owners should know when asked to vote on this event. Here are their thoughts on this all encompassing panacea being touted by credit union saviors today.

An Elder Learning Fable

A story-metaphor by Ancin Cooley, Principal , Synergy Credit Union Consulting and former OCC examiner.

Grandson Hey, grandma. How are you doing?

Grandma: I’m good, baby. How are you doing?

Grandson: Grandma, I was wondering… I heard you did something with the house?

Grandma: Yeah, baby, I went ahead and let the next-door neighbor merge with my house. Now we are all together in one big house.

Grandson: When did you decide to make that decision?

Grandma: Oh, baby, we decided a couple of days ago.

Grandson: The house had $500,000 in equity, Grandma. You just gave that away?

Grandma: Yup, they didn’t give me any money.

Grandson: What!?!?

Grandma: I got better cable and better air conditioning.

Grandson: Services?!?! Grandmother, with your equity, you could’ve bought cable and air conditioning. You didn’t have to give it all away.

Grandma: I know, but this nice person came over and said we’d just be better together.

Grandma: I’m happy. I can watch Judge Judy as many times as I want now.

Grandson: Who presented you with this idea?

Grandma: It was our property manager. He said the cost of keeping the house maintained was going up.

Grandson: Let me see the contract…. Grandma, the manager got $50k of your equity when you merged. That’s why he brought up the idea.

Grandma: Baby, you are blocking the TV.

What Member-Owners Should Know before Voting in a Merger

CEO Daryl Empen of Gas and Electric Credit Union (GECU) in Rock Island, Illinois sent comments motived by multiple merger announcements in the state.

In addition to his CEO longevity, Daryl’s entire leadership team posts their pictures and direct phone numbers on the credit union’s home page under the heading: Meet Your Credit Union. His thoughts.

I cannot recall a merger in any industry that has led to better member service. That’s not to say that mergers can’t bring benefits. But more often than not, it means that consumers lose a voice and a say in things.

Credit Unions are one of the last 100% member-owned industries. As a member-owner, you should have a voice in your credit union, and certainly be fully informed about all of the areas below when asked to vote in a merger transaction.

The Minimum Disclosures Member-Owners Should Receive

Credit union mergers have been happening for decades. Some forced by regulators, some voluntary. There are a multitude of legitimate reasons. But as I celebrate 32 years in this industry, it is still sad to see the pace of mergers pick up every year.

When we lose our small credit unions, we are losing the heart and soul of our movement and the multiple earned legacies that make credit unions special. No matter the size, credit unions are still member-owned, not-for-profit financial institutions. But as we grow larger, whether organically or through mergers, members have less of a voice than at most smaller institution. I fear that we are becoming just another industry, instead of a movement.

Eleven Areas for Disclosure

If I was a member of a credit union being merged into a larger credit union, what questions should I be asking? Merger announcements tend to use generic statements like “economies of scale, synergies, shared philosophy of member service”. These all may be true, but are incredibly generic and tell you nothing about specific benefits.

Based on my experience, as both the President of a credit union, and a member-owner, here are some of those areas I would ask about.

1.Additional services. Some credit unions cannot afford today’s technology and electronic services. So this is a legitimate issue. What makes the surviving credit union’s version of your products better?

2.Operating expense ratio. If the larger CU has a higher expense to assets ratio, that’s not a sign of economies of scale. If the argument is the larger you are, the more efficient you are, then your operating expenses should be lower. This is not always the case – size doesn’t always equal efficiency.

3.Personnel. Will employees from the merging credit union be offered employment with the surviving credit union? What will their new positions and salary be after the merger is completed?

A list of all post-merger promotions with new position and salary should be provided.

Describe the details of any retirements or severance packages because of the merger.

4.Average Salary Expense. This is directly tied to average operating expense, as salaries and benefits are usually the largest component of our expenses. What are the wages of the top management? Are they reasonable? All state-chartered credit unions file IRS Form 990 tax return which are public and contains the salaries of the CEO and highest paid employees. This information is should be included in the merger information, whether state or federal charter.

5.Net Worth. It is common that a smaller credit union will have a higher net worth or capital. If your net worth is significantly higher than the surviving credit union, will a bonus dividend occur before the merger? If not, why?

6.Cost of Funds/average dividend per member. A larger credit union should be able to pay better rates on savings products, especially if they are touting “economies of scale.” If the larger credit union’s rates are not better, what is the benefit to you as a member?

7.Average Loan Rates. Again, the surviving credit union should be able to charge lower rates on their loans with better economies of scale. If their average loan rates are higher, ask why.

8.Member Service. To some members, personal service is not important To others, it is THE most important item. Does the surviving credit union have a call center? Use ITMs not personal tellers? How easy is it to talk with a live person?

9.Costs of the merger. There are costs involved with any merger – paying out of the remaining terms of vendor contracts can be huge. Communications and advertising is another cost. Are there any bonuses or incentives being paid? How much will the merger cost?

10.Repesentation. Will you be represented on the new Board of Directors. Will your credit union have a seat ?

11.The Process. Who reached out to start the merger discussion? Did someone research other credit unions to make sure they were finding the best fit? If they didn’t, why not

We find it is often the larger credit union that makes an unsolicited proposal, or uses a third party to seek merger partners. In my 30+ years at GECU, we have never approached another credit union about merging. They have all approached us first. I always encouraged them to research other credit unions, as they have an obligation to their membership to find the best fit and best value.

Close

When asked to give up their long serving credit union charter with its multiple legacies of goodwill and accumulated collective wealth, members-owners should be provided specific details as to why they should approve ending their independence. This is not happening today. Transparency is critical for trust in a member-owned institution.

April 30, 2024April 30, 2024

“Climbing Ladders to Nowhere”

A reader sent the following after reading Ed Callahan’s last interview as Chairman of NCUA. In that conversation he focused on the relationships between the agency and credit unions.

Hey Chip – I am just reading this. My husband and I were camping in the wilds of Utah with very sketchy service. In the “old days” it truly was a partnership with the Agency.

Being a CEO my entire career, I was always highly engaged with the Examiners when they were in my credit union. It was always a very positive relationship where we learned from each other. Unfortunately, it devolved over the years into an “I GOTCHA” encounter. . .

Losing Our Heart and Soul

Greetings Chip! I continue to read your blog . . . After the latest news about more Illinois credit unions merging, I finally felt compelled to write down my thoughts on this issue.

I will publish his thoughts in the future. These are his opening paragraphs:

Credit union mergers have been happening for decades. Some are forced by the regulators, some are voluntary, and there are a multitude of legitimate reasons. But as I celebrate 32 years in this industry, it is still sad to see the number of credit unions that disappear every single year, and to see the pace of mergers pick up every year. When we lose our small credit unions, we are losing the heart and soul of our movement that makes credit unions special.

I know that no matter the size, credit unions are still member-owned, not-for-profit financial institutions. But it is difficult to argue with the fact that as we grow larger, whether organically or through mergers, that members have less of a voice. . . And I fear that we are becoming just another industry, instead of a movement.

No Longer a Movement?

There is no doubt credit unions are becoming more and more “mainstream.” They tout their promotions with professional sports franchises, stadium naming rights and multiple business partnerships.

Growth is the dominant success indicator. Credit union lobbyists argue in tandem with banks against the consumer protection initiatives of the CFP. NCUA’s Chair cites the FDIC as a financial model for the NCUSIF and positions his supervisory initiatives because that is how banking regulators act.

In becoming an important component in America’s financial sector, have credit unions also embraced the status quo? Are they more concerned with protecting their achievements than addressing the economic inequities members face in the economy?

An observer might give examples on both sides of the “movement” issue. However, I believe credit unions are not alone in their constant temptation to be seen as fully engaged participants in the so-called “free market.”

“The Only Game in Town”

Franciscan scholar Richard Rohr describes the ever-present allure of America’s economic system this way:

Most of us have grown up with a capitalist worldview which makes a virtue and goal out of accumulation, consumption, and collecting. It has taught us to assume, quite falsely, that more is better.

It’s hard for us to recognize this unsustainable and unhappy trap because it’s the only game in town. When parents perform multiple duties all day and into the night, that’s the story line their children surely absorb. “I produce therefore I am” and “I consume therefore I am” might be today’s answers to Descartes’ “I think therefore I am.” . . .

The course we are on assures us of a predictable future of strained individualism, environmental destruction, severe competition as resources dwindle for a growing population, and perpetual war. Our culture ingrains in us the belief that there isn’t enough to go around, which determines most of our politics and spending. . .

F. Schumacher said years ago, “Small is beautiful,” and many other wise people have come to know that less stuff invariably leaves room for more soul. In fact, possessions and soul seem to operate in inverse proportion to one another. Only through simplicity can we find deep contentment instead of perpetually striving and living unsatisfied. . .

St. Francis knew that climbing ladders to nowhere would never make us happy nor create peace and justice on this earth. Too many have to stay at the bottom of the ladder so some can be at the top. . .

April 22, 2024April 22, 2024

Credit Union Mergers and the Myth of Free Markets

Two conclusions excerpted from a long article by Jared Brock Mega-Landlords Busted for Using AI Algorithms to Price-Fix the Rental Market, on April 10, 2024.

I believe his observations apply to aspects of the cooperative system especially mergers of sound credit unions* now being presented to member-owners.

“First: The free market is a myth.

“The idea that the world would somehow be better off if there were zero rules protecting the masses from predatory investors is not only deluded and insane, but it’s unfathomably dangerous. A rules-free-market is a black market where the worst actors win.

“Capitalism is all about incentives, and investors have twisted the economy to incentivize extraction and exploitation.

“Second: The modern rules-free-market isn’t what the father of capitalism Adam Smith meant when he said “the free market.”

“He meant a market free from parasites.”

* See Credit Union Times article of April 15, 2024, Five Illinois Credit Unions Announce Proposed Plans to Merge

March 20, 2024March 21, 2024

A Baseball Story about Character: An Example for Credit Unions?

Opening Day of the 2024 baseball season is eight days away. Players are being assigned to AAA from spring training or gaining limited roster spots on the major league varsity.

The sporting press is full of hope and enthusiasm. Every team’s ambitions are equal at this starting line. Accompanying these renewed expectations is the ever present realities of enormous player contracts, team moves to save money and whether multi-million dollar veterans will live up to their salaries and/or overcome temporary injury.

Baseball has become a game as much about money as competitive athletics. “Winners” are those with record contracts but not necessarily leading their teams to greater success.

However there is a counter story. It is about a player who stayed true to the game of baseball and his own values as told in the Imaginative Conservative:

The Baseball Hero Nobody Knows

By Stephen M. Klugewicz

His career stats indicate that he was a mediocre baseball pitcher—perhaps the epitome of mediocrity: 84 wins; 83 losses; a 4.49 Earned Run Average; a Walks-plus-Hits-to-Innings-Pitched ratio of 1.42.

Yet Gil Meche, who played for the Seattle Mariners and Kansas City Royals, was responsible for one of the most astounding, yet almost unnoticed, acts of virtue ever committed by a sports figure. In the winter of 2011, Mr. Meche, then with the Royals, voluntarily retired from the game, foregoing the final $12 million on his multi-year contract.

Mr. Meche was injured and would have sat out the 2012 season while receiving paychecks. “When I signed my contract, Mr. Meche explained, “my main goal was to earn it. Once I started to realize I wasn’t earning my money, I felt bad. I was making a crazy amount of money for not even pitching. Honestly, I didn’t feel like I deserved it.”

Mr. Meche’s decision is nearly unprecedented in professional sports; countless other injured players have gleefully accepted paychecks while they sat out entire seasons with injuries. “This isn’t about being a hero — that’s not even close to what it’s about,” Mr. Meche insisted. “Making that amount of money from a team that’s already given me over $40 million for my life and for my kids, it just wasn’t the right thing to do.”

Though a small event in the great arc of American history, Mr. Meche’s action would constitute an example of good character in any age, but it is especially noteworthy in the America of the early twenty-first century, an era of dishonesty, self-absorption, and greed. It should not go unnoticed, nor should it be forgotten.

Lost Virtues in Credit Unions

Today the opportunity to cash out one’s credit union tenure and leadership position is advertised in direct marketing appeals.

One headline reads:

1,200 Credit Union Mergers by 2030 –
How Are You Positioned?The YOU refers to the CEO ‘s who are being solicited. Either give up and join the merger-sales endgame and /or join in the bidding to secure another credit union’s resources. The need is urgent. Here’s why:

With regulations set to zap fee income, interest rates slowing mortgage action, compliance burden increasing costs and the need for scale driving strategic decisions. . . predictions say there may be as many as 1,200 credit union mergers by end of year 2030.

· Do your financials put your credit union in the position to be a merger or merge?

There is no pretense or subtlety here. Your future is full of threats, give up now and we’ll help you cash out. No mention of members’ best interests. No recognition that virtually every credit union operating today has a charter that has served at least three generations of members and created meaningful reserves of collective wealth and service legacy.

The bottom line in this strategic outlook is that prospective failure can become a CEO’s present success story. So get out while the getting is good!

Instead of character and values being triumphant, some coop leaders and their consultant allies are directing the industry into an America of the early twenty-first century, an era of dishonesty, self-absorption, and greed.

These actions dishonor the character of hundreds of Co-op “Gil Meches” who retire each year and loyally pass the credit union’s torch to their successors.

February 27, 2024March 1, 2024

Wisdom for Life from Children’s Stories

The Giving Tree by Shel Silverstein

Time to say ENOUGH!

This children’s book is overtly about the relationship between a tree and a young boy.

He first asks to pick the apples from the tree to sell. The tree says OK. He then requests to take branches to build a house. Again the tree agrees.

As the boy grows older the tree lets the boy take its trunk to build a boat.

For some this is a heartwarming tale that explores the selfless nature of unconditional love. It is a relationship of tree and a boy, a metaphor that teaches valuable lessons about the joy of giving and the importance of gratitude.

For others the morale is more straightforward and simple: it teaches the dangers of being selfish. When life has no boundaries, we just take and take until we end up destroying the source of our well-being.

Current day readers have generated interpretations far removed from what may have been the author’s initial intention. Some argue the boy’s behavior is narcissistic and the tree an enabler.

The power of a good story is to draw forth multiple reader reactions. So at the risk of some reader’s understanding of The Giving Tree, I want to apply its lessons for credit unions.

A Metaphor for Credit Union Behaviors

I believe one takeaway is that the current view of some credit leaders that theirs is an organization with no limits (internal or external), subverts and could destroy the integrity of the cooperative model.

There is no logic or reason between cross-country mergers or even those many states and miles away eg. Maine and Illinois. The continuing credit union’s home market and legacy has no relation to the newly acquired members or local community.

These deals corrupt the merger process making the executive sellers rich and the members poorer. The member-owners who are victims in these financial empire building combinations are asked to give away their accumulated value for nothing.

The justification for buying banks, sometimes completely out of the credit union’s market, is also suspect. These bank owners often reap above market returns. The credit unions readily pay premiums to bank owners, but acquire members’ accumulated wealth in mergers for free.

Both cases use members’ mutual savings accumulated over decades to enable corporate ambition, not improve member benefit. The intangible value and goodwill that created this common wealth becomes the means of transforming the coop’s purpose into a market-driven, tax exempt financial hybrid.

Instead of a more equitable and just financial system, the result is a greater concentration of wealth and power often outside all local connections–the antithesis of the cooperative model’s intent.

There is no virtue in being a tree and allowing someone to take away everything created until there is nothing left. The free market defense of these open-ended expansions, destroys the mutuality on which credit unions depend.

The irony of these takeovers is that they eliminate the critical source of credit union’s abundance-the trust and belief by member-owners that coops are different.

Boundaries are critical for knowing when to say yes and when to say no. It’s time for credit unions to say enough! Let’s remember who we are and how we earned our standing.

The Dish Ran Away

Silverstein was not the only author offering wisdom in a children’s idiom. If one looks at Mother Goose’s brief verses, they can be applied to many areas of our behavior.

Here’s one that is may also be relevant to the above concerns.

To See Such a Sport

The Cat and the Fiddle

Hey, diddle, diddle!

The cat and the fiddle,

The cow jumped over the moon;

The little dog laughed

To see such a sport

And the dish ran away with the spoon.

A nonsense poem to teach children rhyme and verse with familiar words?

Or, might one ask who is the Cat playing the fiddle? Who is the dish running away with the spoon?

Does this seeming blather suggest the pretense that buying and selling cooperatives is somehow benefitting members?

February 23, 2024February 27, 2024

How to Steal a Cooperative and Get Paid $60 million for Doing So

Preface:

This is a long blog, so I will summarize the main points for readers.

Four senior employees and one newcomer of 121 Financial Credit Union will receive a minimum of $9,416,600 in future guaranteed salaries and benefits for merging their credit union with VyStar. The required disclosures were less than a tenth of this number.
VyStar is a credit union in a financial stall. Peak shares occurred in the first quarter of 2022 at $11.2 billion; at yearend 2023 they were $10.1 billion. At that point, VyStar reports total borrowings over $2.6 billion including $200 million (corrected from earlier billon) in subordinated debt to boost its capital ratio. It bought a $280 million Florida bank in 2019 creating $28 million in goodwill, which suggests a price of approximately twice book value. It announced its intent to purchase HSBI in 2021 for approximately 1.8 times book. The transaction was cancelled in mid 2022 for failure to “receive timely regulatory approval.”
In this merger, Vystar eliminates its very effective local competitor that has managed to secure 38% of its members who also have VyStar accounts. And it gets paid $65 million in new capital versus giving cash to the credit union owners, as would be the case for bank owners, at multiple of their book value. At year end 2023, VyStar’s ROA was .18% and its ROE 2.6%-both in need of this instant boost from this free gift of $700 million in assets.
Other than the five employees listed, the remaining 130 are guaranteed nothing as they become a very small part of an organization which has 2,260 employees and whose locations will overlap some of 121’s existing branches.
The members no longer have a choice of credit unions. This matters. In 2023, 21% of VyStar’s funding was from borrowings and $10 billion (79%) in member shares. However when expensing the funding, the credit union paid 53% of its costs to the lenders and only 47% to the members whose savings are provided 80% of funding VyStar is in thrall to external funding.

In contrast, 121 Financial has borrowings equal to 14% of its funding liabilities. However, it paid 60% of its funding costs to members and 40% to lenders. Members no longer get to choose the better deal which is why these combinations are accurately described as anti-competitive.

NCUA is mentioned twice in the merger document. First as a place to post comments “to share with other members”– a digital and street address is given. And again when “NCUA regulations require merging credit unions to disclose certain material changes in total compensation or benefits” the implication is that the regulator has reviewed the disclosures and announcement and that everything is being done according to Hoyle.

That is not the public rhetoric of Chairman Harper, who sees himself as an exemplar of consumer protection. Just last month in a credit union conference in Hawaii he talked forcefully about the need for credit unions to reexamine their overdraft fees (over which the agency has no authority) and reduce them when they unfairly charge members for the service.

The new board member Otsuka is a lawyer and has worked at the FDIC. She should understand what the “slow walking” by regulators of an application, for example to buy a bank, means. Also the fiduciary standards of directors for the “duty of care” and “duty of loyalty.”

An Election with No Vote Tally

Both may hide behind NCUA’s standard position, “well, the members voted for it.” However when members who opposed the merger asked to watch the votes as they were counted, the answer was no. When they requested the final tally, the answer from staff was the vote would not be released and the ballots had been destroyed.

Once again democracy, in this case, credit union cooperative democracy goes to Florida to die. Abetted by those appointees who champion the rights of consumers.

Why I am Writing about This

After the vote was announced I received two calls in early February from 121 members who were very, very angry. They had put up spirited opposition including a website Stop the Merge and spent their own money on advertising. They claimed to have been threatened in their employment if they continue to speak out after the vote. All of their results from a mock online poll showed members opposed.

They had spoken to NCUA before the vote and had calls returned, but not any longer. Their anger was palpable; they trusted no one; they did not have the ability to make their own case rationally.

They saw this event as a breach of trust by the credit union officials and the governmental oversight system that was supposed to protect them. Neither caller had first hand knowledge of the credit union system or its press. All they wanted from me was a lawyer’s name because they said a local firm wanted $25,000 to investigate and perhaps take up their case.

Was I a lawyer? No, a blogger. “Oh, so you just want to make money off our story.” I had to shout back to get them to start a dialogue, but said I would look into it. The result was my blog Are Credit Union Members “American Idiots’?

These two members believe, and I think rightly so, the democratic system that they tried and supported has let them down. They played by the rules. No one will listen to their cause, and it is hard, because they are very exasperated; perhaps a little paranoid. They certainly feel alienated from the powers that be. And they are right to feel this way.

Information about the two credit unions continues to come in, but here is what we know so far.

The Rest of the Story

What follows is details to support the summaries above.

Who would not be attracted to a credit union whose mission statement is:

Growing together, prospering together.

To empower our team to deliver innovative solutions through one-to-one service by focusing on he unique value of every member.

To ensue organizational stability and financial wellness in our community since 1935.

Their home page video promises members they will be “a credit union for life.”

https://121fcu.org/about-121/

But its 89 year-long role as “Jacksonville’s hometown credit union, dedicated to delivering highly personalized financial services that benefit our members and community” is about to end on March 1 when the merger would be consummated.

In April 2023 the executive team of 121 Financial Credit Union first announced the credit union would merge with VyStar Credit Union, also headquartered in Jacksonville.

Rarely do members join a credit union based on size, which is the prime difference between these two organizations. Members choose based on convenience, price and service. When they see and experience a local institution that expresses their hopes, as in the mission statements above, they become believers. In this case for 89 years.

Many 121 members who were especially loyal strongly opposed the plan to end the charter. They took action and talked to NCUA about the process. A number put up a website, Stop the Merge, complete with local advertising and publicity urging members to turn down the plan finally disclosed in the formal Member Notice Mailed dated November 30, 2023.

Why Did Management Choose to Give Up their Charter?

The Notice has not a single example of a better rate (savings or loan), fee or product that would benefit 121 Financial members. There is lots of rhetoric about a bigger organization with a list of VyStar branches.

121 Financial is capable of offering the same system benefits VyStar promises. In examples of community support, the much smaller credit union features its alliance with the local Jumbo Shrimp, a Triple-A minor league affiliate of the Miami Marlins.

Why This Merger is Occurring

I believe that when the full amounts of payments guaranteed to the five senior leaders in the form of salaries, bonuses, severance, and retirement are added together, the answer is simple: personal greed. These five give up all their current credit union leadership positions, which they had held for less than five years, in return for “special project” roles. The remaining employees are guaranteed nothing.

The members lose everything they spent 89 years building.

$9.5 Million in Guaranteed Payments

But wait—doesn’t NCUA require that “certain material changes in total compensation and benefits of 15% or more of the five most highly compensated employees have received or will receive in connection” to be disclosed? That is the literal requirement but obscures the full payoffs management has negotiated for itself when leaving their positions of responsibility.

David Marovich, CEO, appointed full time CEO in March of 2020. In a press interview (below) said he began merger discussions with the board in the fall of 2021. The disclosures list a five year contract with a $16,000 salary increase, 2 first year bonuses totaling $245,00 and a supplemental retirement plan (SERP) for five more years at 40% of his final year’s salary.

Using the credit union’s IRS 990 filing for 2022 for these senior salaries, the minimum total payments for this work and SERP is a minimum of $3,209, 600.

Paul Blackstone, COO since January 2020. Receives a five-year contract with a $95,000 salary increase and two first year retention bonuses totaling $252,500, and a SERP that pays 35% of his final year’s salary for five years. The minimum of these payments is $3,867,908.

Cyndi Koan, CFO since December 2019. Receives a three-year contract with two first year retention bonuses totaling $70,000. Total minimum payments $1,168,102.

Cathy Hufstetler, Senior VP Lending since September 2019. Will continue through conversion then retire and receive a one year severance of $273,000 and two first year bonuses totaling $56,000. Total minimum payments $602,000. She began at 121 Financial (Telco) in June 1991 and is the longest serving of the five employees listed.

Nichole Le Blanc, Executive Assistant to the C suite. No start date given but her previous experience listed in the Notice, leads one to believe it to be very recent. Receives a five-year contract with a $5,000 salary increase and two first year retention bonuses totaling $18,000. Estimated minimum payments $569,000.

The total (salary data is from 2022) of these five guaranteed positions is a minimum $9,416,600.

In addition It should be noted that in 2022 the credit union began a SERP plan for the four senior positions that will fully vest all earned benefits upon merging. In addition they will also receive all other retirement benefits that all employees of 121 Financial will vest upon the charter closing. This is why Hufstetler, above, has no retirement benefits from the merger. because of her 121 benefits package.

The Remaining 121’s Staff

The 121 website lists 17 employees (out of 140) in leadership positions. Only the five most highly compensated are required to be disclosed according to NCUA’s rules. So the others may have received a temporary incentive other than vesting 121 benefits. It is not clear why Le Blanc, the apparent newcomer, was included in the guaranteed benefits given her relatively brief time at the credit union.

The average salary and benefit for VyStar and 121 Financial employees is the same for both credit unions at $97,000. According to the notice VyStar committed to retain all 121 employees but for how long and under what work responsibilities will be determined. For all seven 121 Financial locations, the only promise is that all “will remain open for a period of time” which does not sound very permanent.

Given the logic of acquisitions and the need for VyStar to turnaround its deteriorating performance, often the quickest savings is from employee attrition. The 121 employees may have other job opportunities, but they will lose their earned and established professional agency in joining an organization of 2,260 employees.

Will Members Get A better Deal?

A review the financing and business strategy of the two credit unions shows one is hellbent on geographic expansion in FL and GA with more branches-or acquisitions. The other is Jacksonville’s home grown institution.

One relies on outside borrowings, the other on member funding. With 38% of 121’s members also with VyStar, they have elected to have a choice. Now that is ended.

Moreover there is a question as to how this data was obtained. Consumer privacy regulations would normally prohibit either credit union from accessing this information from public sources no matter which credit union ran this comparison.

What Kind of Credit Union is VyStar?

VyStar’s business model is the antithesis of 121 Financial. It is the country’s 13^th largest with $13.6 billion in assets or twenty times the size of 121. Both credit unions report very similar financial performance ratios at yearend 2023 with 121’s net worth and ROA running slightly above the larger credit union.

With 926,588 members and 91 branches compared to 49,000 and 7, VyStar’s strategic priority is growth. Bank acquisitions and credit union mergers are one aspect of this effort.

In August 2019 the credit union announced:

VyStar received approval from the Florida Office of Financial Regulation (FLOFR) to significantly expand its field of membership by 27 counties – more than doubling the original 22 counties – to include all 49 counties of Central to North Florida. . .. In addition, VyStar received approval from the Georgia Department of Banking and Finance and the FLOFR to expand into four Southeast Georgia counties: Camden, Charlton, Glynn and Ware.

That same month VyStar announced the purchase and assumption of the $280 million Citizens State Bank in Perry, Florida. Terms were not announced. However, the credit union carries a $28 million goodwill intangible asset which occurs when an asset is acquired in excess of its book value.

In March 2021 VyStar agreed to purchase the $1.6 billion Heritage Southeast Bank (HSBI)in Jonesboro, GA, for an estimated $196 million or 1.8 times tangible book capital. This effort was cancelled a year later due to the inability to receive timely regulatory approval.

In 2022 the credit union announced the addition of 15 more counties in FL and GA to its FOM. In January 2023 it announced the merger with First Coast FCU, an $11.3 million firm.

Why This is a Great Deal for VyStar: The Art of the Steal

In April 2023 when VyStar and 121 Financial announced their merger intention, the American Banker used the headline VyStar Credit Union to Merge with Local Competitor.

In addition to eliminating this local “home grown” competition, VyStar needed this $700 million to keep its growth ambitions going. For the three years ending 2023 VyStar has had zero share growth, marked by a decline of 5% in 2023. It has to do something so it turns to another acquisition to juice its growth.

In this way VyStar can instantly add $163 million in investments, $485 million in loans, $24 million in fixed assets (7 locations) and 50,000 member accounts. And the best part is it will get paid $63 million in member capital for taking this long time operating entity off the hands of its existing leadership.

If this had been a bank purchase, the amount that would have to be paid to the owners would have been at least 1.5 times book or over $90 million in cash payments. Why would a credit union ever buy a bank when you can steal a credit union? Just arrange a couple of new senior positions for the senior team. Can you imagine a bank’s owners giving their shares away free to another bank?

VyStar receives a free capital infusion and a $700 million operating entity. The credit union’s owners whose loyalty and financial relationships built this very successful organization, receive nothing. What’s worse, any member could have joined VyStar at any time they thought it was a better deal. Instead the evidence suggests VyStar members go to 121 Financial because they prefer its local focus.

Should Credit Unions Care?

The easy answer is to keep one’s opinion silent. This does not involve my members. But this and similar precedents will end up destroying the reputation of thousands of credit union leaders who try to do the right thing, in the right way. Because something is legal, does not mean it is right.

Note from two CEO’s joint press interview.

From an April 20,2023 article in the Jacksonville Daily Record by reporter David Crumpler: (Wolfburg is VyStar’s CEO)

Wolfburg said the merger “developed organically.”

He said the credit unions have long had a good relationship that existed when he joined VyStar in 2018 and was “started by our predecessors.”

Marovich said he and 121 Financial board members “have been working on this for about 18 months.

“I think our board felt that this was a good time (to think about a merger) and tried to determine who would be the best partners for this.”

The release said all 121 Financial members and its 140 employees will be invited to join VyStar.

“We do not want to disrupt the employees,” Wolfburg said.

“Those are employees who built that institution and who make the brand what is it, and have relationships with businesses and clients.”

There are no plans to make any decisions about keeping or closing branches over the coming year, Marovich said.

“VyStar has a good presence of branch locations, and expanded access was one of the things we’ve talked about,” he said.

February 8, 2024February 8, 2024

A Winner’s Inside Account of a Very Close Merger

On November 9, 2021 the results of one of the most contested credit union merger elections were announced. The members of Vermont State Employees (VSE) had approved a merger with New England FCU. The final tally was 7,622 for and 7,304 against, a margin of 318 votes. Approximately 21% of the members voted, an unusually high participation.

I wrote a number of blogs about the contest. The opposition put up a website Calling All Members led by the former CEO and previous board directors. It presented powerful arguments against ending VSE’s independence. For these longtime VSE supporters, the outcome was a surprise and disappointment. However, they chose not to challenge the results. Since the merger date of January 1, 2023, VSE has operated as a division of New England FCU. A new name/brand is promised for the future.

“In the Room Where It Happened”

John Kennedy once said, “Victory has a thousand fathers; defeat is an orphan.” In this case victory has a mother.

I recount this story from a much longer article about her efforts. This insider’s account raises the question what the outcome might have been had this approach been revealed during, not 8 months after the vote.

In July 2023 this VSE senior executive who directed the merger campaign was the subject of a long account by Joel Berg. It is posted in full on the Financial Brand website, Tactics from a Nail-Biter Merger That Every Bank Marketer Can Use.

This lengthy, first-person story of the voting campaign centers on Yvonne Garand, VSE’s chief marketing manager. The article includes examples of the mailings and other promotions from the campaign which are not included here.

Writer Berg describes Garand’s communications strategy as the “make-or-break factor.” These included messaging to target segments at critical points in what ended up being conducted like a “political campaign” including hiring a consultant expert in political elections.

The author believes this case “offers lessons for other institutions concerned about how customers will react to a change in ownership.” Also an example of tactics necessary to win. He says the fundamental challenge in any merger or purchase-even if members vote: “the customers or members coming on board didn’t choose to bank with the acquirer on their own.”

The Critical Tactic for “Getting out the Votes”

The critical communication tactic was segmentation. Identify key groups and prepare different messages, tone and style for each subsector.

The two credit unions had different histories and business priorities. Both were community charters but VSE’s (1947) legacy was its state employee origins. New England’s roots were as an IBM chartered credit union (1961) with members outside the state from the beginning. These two Vermont based credit unions had created different business models, cultures, and brands.

Garand called her communications strategy a “human-centric approach” that ensured the “messages were empathetic.” In this short video link in the article she summarizes her approach with this point–the campaign couldn’t be a typical merger story about greater scale and efficiency.

“All of those things are important. But that’s our inside jargon. And we knew that if we came out with messaging and communications that sounded like that, people might not understand it, and it might even feel a little intimidating.”

(https://www.youtube.com/watch?v=Xtc2GWunoZY&t=55s)

Several key segments included “digital natives,” environmentally minded members, and those located around New England’s branch structure in Burlington.

But the most group was VSE members who lived near the state capital of Montpelier. As the longest tenured members, “We knew that this was probably the segment that would feel the greatest sense of loss because they grew up with VSECU. We really wanted this group to know that they were still going to have the same experiences that they have today.”

As Berg notes in the article, “knowing many “no” votes would come from the state capital area, the credit union focused on reaching potential voters in other areas of Vermont who might be more receptive to the merger plan.” He quotes Garand: “We strategically focused on the Burlington market — Chittenden County — as well as other smaller regions in Vermont, to encourage those members to vote. And it worked.”

Changing Tactics as the Opposition Organized

Garand’s reaction to the opposition, “It did take us off guard just a little bit, how effective this opposition was in the central Vermont area.”

The independence effort was led by Steven Post the former CEO of 26 years and other directors and senior executives. Their website offered multiple, thoughtful reasons for sustaining VSE’s unique values based, Vermont-centric model. I wrote several blogs presenting their position that VSE’s continuation was in the members’ best interest.

The Vermont State Employees’ Association and the Vermont Retired State Employees’ Association, opposed the merger. Given this backing, “we thought we were going to win,” says Post the previous long term CEO.

What made the difference? The opponents say it was VSE’s resources used to promote the merger. If one looks at the increase in marketing and professional services spending in 2022 versus the prior year, it would seem to confirm one critic’s estimate that over $1.0 million was used to convince members to support management’s decision.

From Berg’s article, “If we had had money to put ads on TV, I don’t have any doubt that the outcome would have been different,” says Jerome W. Diamond, the state AG from 1975 to 1981 and a former chair of the credit union’s board.”

The Vital Tactical Change

As the opposition organized Garand changed tactics from a traditional company marketing-messaging effort to a political campaign. Even bringing in outside consultant with election expertise.

Berg’s article includes more details with marketing collateral. This is an insider’s account of her role to persuade members to support VSE’s termination. She avoids debates about member benefits, rather the member communications focus on “feel good” concepts: “Better Together,” “Leading from the Future,” and “Enriching the Quality of Life.”

Garand rejects traditional business logic for mergers-scale, efficiency, innovation- to solicit votes. Recognize the opposition, but don’t engage with the critics.

The credit union controls the communication channels to reach the members including branch signage and multiple message marketings. Focus on advertising a potential bright future not on whether members should give up control over all the resources, relationships and community focus they have created and own.

Learning from the Past

Once eliminated via merger, there is no going back to resuscitate a vital legacy over 75 years in the making. When reporting on the outcome I described the losses that occurred not only for VSE members, but the state credit union system and its citizens.

New England FCU’s acquisition not only eliminated its principal competitor, it also created one credit union controlling 47% of the state’s credit union assets and 40% of members at the merger date. A big egg for one basket.

Tomorrow I will look at the results of the merger one year out. How are members responding? What are the financial trends? It is especially important for a look back while the events and points of view are still remembered.

We can change the future if we are willing to learn from the past. And then take seriously the differing judgments about the event’s consequences. One group lost an election about a credit union’s future role.

However everyone loses when the event is merely another successful example of the power of propaganda, or marketing, whichever interpretation best fits this recounting.