Category: NCUA

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46 Credit Unions Close their Doors in Q 1 2025

Forty-six credit unions managing over $3.7 billion in assets cancelled their charters in the first quarter.   The credit union’s data is from December 2024 call reports.  Because they closed their doors, the credit unions filed no data for March 2025.

This total of closings is much higher than the 35 mergers NCUA reported in the first quarter.

The 256,000 members with with $2.4 billion in loans, have now lost their own institution some with  histories serving generations.  List with loan totals.

These credit unions ranged in size from the $560 million LA Financial to as small as $3,000  Asbury FCU in DC. This pdf with ROA and net worth is shown from largest to smallest by assets.

Not Financial Failures

On this listing, the weighted average net worth of the group was 10.7% at December.  Many had equity ratios much higher than this.  Two had net worth exceeding 30% including Gibbs Aluminum (KY) at 33% and Telco Roswell New Mexico at 34%.

Only 7 had a net worth ration below the 7% well- capitalized benchmark with the lowest two at 4.9% and 4.2% of assets. Six of these had negative ROA’s in 2024 but all were still solvent.

If these are not financial failures, why were the charters ended, largely by not entirely, via mergers?

Some would explaine that this is just the “creative destruction” that economists describe as an essential outcome from competition in a capitalist market system.  Underperformers are forced out of business and replaced with better options.  This is a necessary and healthy culling that makes capitalism strong, innovative  and prosperous for the greater community.

While there is an element of truth in this dynamic, cooperatives are supposed to be an alternative to the winner takes all mentality of market competition.  These coops are long standing with charters that go back over 100 years in some cases.

Two Internal System Weaknesses

I would suggest that these charter failures, and they are just that, of financially sound firms results more from cooperatives’ internal shortcomings, not external competition.

One critical deficiency is the lack of system support for some of these smaller credit unions who have decided to give up.  Surrendering charters versus adapting to new opportunities costs the industry between $100,000 to $500,000 each time a charter is lost.

Those amounts are the range of donated capital NCUA now requires for chartering a new credit union.  These 46 charters have a total “market” value as much as $23 million at the higher required capital level.  For example, Arise Community CU opened its doors on Juneteenth 2025 with over $1.0 million in capital donations.

New charters are extremely difficult to achieve with NCUA approving only 2-4 per year.  It would seem in everyone’s best interest, but especially leagues, CUSO’s, vendors and others supporting coop options  to find ways to preserve or transform existing charters to those willing to take the reins of leadership.  Press reports have said NCUA has over 90 new charter requests in various stages at this time. This suggests public interest in coops is still widespread.

Benign Neglect?

A tiny example of this system weakness, or neglect, is the smallest credit union on the list, Asbury at $3k and 100% capital.   The 100% net worth suggests that the credit union  has been self-liquidating for some time.  The credit union still has a web presence via a third party.  It was not invisible.

More tragically when one looks up Asbury’s history, the credit union was chartered in 1945–it is over 110 years old and insured by NCUA in 1972.  Virtually invisible and surviving, but  ignored by the system that created it.

The More Common Deficiency: Leadership Failings

The second largest credit union failure is NextMark FCU (VA) with $550 million in assets and 16.3% net worth.  The CEO and board requested members approve a merger with Apple FCU, which took place in the first quarter.

The failure of this long-time, financially well-off and large institution illustrates a second aspect of the industry’s self-inflicted errors.  There was no compelling financial, business or other shortcoming motivating this charter closure.  The CEO Joseph Thomas had served as President/CEO since October 1994 a period of 30years and 4 months before becoming Executive Vice President at Apple via the merger he orchestrated.

During his thirty years as CEO Thomas also served on many industry organizations. These positions include: a CUNA board member for 8 years; a board member of CUMA a DC mortgage CUSO for 22 years; Board member and immediate past chairman of the Virginia Credit Union League for 12 years; board member Worldwide Foundation for Credit Unions 7 years to the present; and board member for the World Council of Credit Unions, 5 years. also continuing.

NextMark gave Thomas a platform and standing to aspire to these positions  of wide spread credit union national and worldwide  responsibility. But now this opportunity and potential service paths are closed.  There is no successor CEO asThomas pulled up the ladder he climbed to participate in these other opportunities.  The independent charter ceased operations.

Mergers such as this destroy cooperative professional and volunteer leadership roles in communities, within the credit union system, across the country and, in this case, worldwide.  Fewer coop leader positions mean fewer voices and examples of professional excellence representing credit unions.

It is at best ironic that those who seemed to have benefited significantly from their CEO leadership role, would close this path that was opened for them.  What kind of leadership perspective did he bring to these other system responsibilities?

But this tragedy goes further than the  opportunities for credit union volunteers and professionals in their communities and beyond.  The following public comment is one member’s response to the merger proposal. It clearly shows that members know this kind of ending is not why credit unions were founded.

Her description is one of betrayal, not just of the cooperative principles, but moral failings by those with fiduciary responsibility to the member-owners.  Here is her perceptive  description of why this merger is so tragic and wrong not only for these members, but also for America’s coop system (subheads added).

I recognize that the merger is likely a foregone conclusion, and the number of votes cast by members will be minimal.

My experience with the NextMark Federal Credit Union dates back to 1977 when it was known as the “Fairfax County Employees Credit Union.” Over the following 20 years of membership in the Credit Union and employment with the Fairfax County Government, I served several years as a member of the Credit Committee and the Supervisory Committee.

The general concept of a credit union, combined with a defined field of membership, the value of working toward the common good of the members, and loans based on character, were central to the success and satisfaction of the credit union members. The credit union grew, as did the Fairfax County employee base.

A Change of Focus

At some point in the late 90’s or early 2000’s, the field of membership expanded in scope, the name changed to the commercial generic “NextMark” and our credit union began to resemble a commercial bank, with limited on-line offerings and variable customer service. Nothing terrible, just a move far from the underlying values of the credit union movement.

The specific observations that I believe should merit regulatory review, are the substantial financial incentives offered to several key staff members, contingent on completion of the merger. The amounts seem very high, but of greater significance is that these payments are contingent on the merger, which these key staff members are urging members to approve. I am aware of nothing that casts any doubt on these key staff members’ sound character or integrity.

Gross Conflicts

The issue is a gross conflict of interest created through this incentive process. These senior staff and volunteer members have a fiduciary responsibility to the credit union members, including advising on significant business decisions and implementing structural changes, such as mergers. The existence of contingent incentive payments for completion of the merger would seem to conflict with the fiduciary responsibility to the members. It would seem that a more sound approach might be to delay the negotiation of pay and benefit incentives until after the membership vote.  

Old Fashioned Thinking

Maybe everything is fine just as it is, and such incentives are likely commonly accepted in the commercial banking and business arena. Credit Unions are supposed to be a little different – although that may just be old-fashioned thinking.  

End comment.

A final note on this merger:  Senior staff and the CEO received according to the Member Notice “pay adjustment distributions to meet the continuing credit union’s salary bands, long term retention bonus, incentives already established, deferred compensation benefits, or severance opportunities” totaling almost $900,000.

The members received a $12 million bonus dividend for approving this combination and free transfer of their $409 million in loans and remaining equity to another firm.  How might these resources been re-invested in the credit union for members’ future or even seeding a dozen or more new coops?

The credit union cancelled its future and distributed a token portion of its value that members created  to be paid forward to benefit future generations.

Can a coop system with such behaviors routinely approved at all levels, ever hope to survive in the future?  Should it?

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A Failure to Cooperate and a Turning Point in Credit Union Events

In the March 1985 issue of Credit Union Magazine, the writer of the monthly Capital Events column raised a critical industry issue following the successful recapitalization of the NCUSIF in January.

The concern was whether a stronger, more efficient, cost-effective NCUSIFcould put the private share insurance options out of business.

One CEO of of a private insurer said No.  The changes at the NCUSIF will just lead to healthy competition, and that will be good for everyone.

A Vital Industry Resource

NCUA  believed a strong group of private insurers was a vital industry resource.  They saw it as a check and a spur for Agency oversight.  “The NCUSIF is where it is today because the private insurers showed what could be done. Without them, the NCUSIF could stagnate and credit unions would be left without a viable alternative,” said Chip Filson, Director of the Office of Programs.

At March 1985 there were 15 state chartered guaranty corporations insuring $15.5 billion or about 17% of total credit union savings.  Several pre-date the NCUSIF, but most were chartered in the early 1970’s. They covered about 40% of state charters.

The writer lists events raising the issue of federal deposit insurance sufficiency.  These included large bank failures such as Penn Square and Continental Illinois banks, the scrutiny from the Bush Task Force on Financial Regulation and the FHLB’s request for a special $10 billion assessment for the S&L industry’s fund, FSLIC.

An Option to Backstop the Funds

Because of the NCUSIF legislation, the credit union insurance options were not the primary concern in DC.  However, the NCUA had reached out to the private insurers with an option should there be a public crisis of confidence in deposit insurance.  Specifically, the CLF offered a low-cost liquidity line of credit to the 15 insurers collectively.  Draws supporting a credit unon  which would be collateralized by the credit union’s assets and a joint and several guarantee by all the funds.  It would give the private funds the same liquidity options that the CLF had for the NCUSIF.

The article closes with the note that the private fund’s trade group (ISD&GA) was considering the proposal.  The writer concludes: How the group responds may prove to be pivotal for credit unions and their insurers in the years ahead.

The insurance group did not take up the CLF’s offer primarily due to the joint and several support commitment for draws by an individual credit union or its insurance fund. The result was that political pressure at the state and federal level forced all but two of the funds to close their doors in subsequent years.  These were not financial failures per se, but rather the lack of political support at the state level.

This article some 40 years ago is a  case study of an inability to change or in the writer’s words, confident in the management and marketing skills to hold their own in the marketplace without altering the status quo.

Source:  Credit Union Magazine, March 1985, oages 17-18, by Brooke Shearer)

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Withdrawing from the Game

While the administration’s trade policy may have only an indirect impact on credit union fortunes, it is an example of how public policy can become sideways with America’s long term interests.  And our standing with the rest of the world.

What follows is a brief critique of the underlying assumptions about tariffs and how the rest of the world will react.  The analyst’s point is that poor policy assumptions lead to poor policy outcomes.

Policy is one aspect of the NCUA board’s role. The board no longer exists.  Future meetings have been cancelled and/or called tentative.

The board’s statutory role is to manage the agency.  That also is on hold.

The consequences of these absences of regulatory oversight will not be known for a while.  Meantime some credit unions will take the opportunity to push the envelope on corporate interests.

There will be fallout from this regulatory abdication on policy and agency leadership.  Like the trade example below, the market won’t wait to fill the current vacuum in supervision.

The Challenge of False Policy Assumptions

The following summary of US trade strategy is by William Reinsch at the Center for Strategic and International Studies *CSIS).
Even while uncertainty persists, not only about Trump’s intentions, but also about the half-life of his policies, his actions are being treated as the death knell for the global economy. Trump’s message to the world is that the United States is no longer a reliable partner. The obvious corollary is to find other partners, and that is just what others are doing—with the United States on the sidelines.

 

What is noteworthy is that it appears we are still making progress—in the same way and in the same direction as always. The difference is that the United States is not there; not under Biden and not under Trump. It is typical of Americans to think that we are leading —whatever we are doing is heading down the right path, with other countries running behind to catch up. In this case, however, it appears no one is following.
The new negotiations tell me that the announcement of the old order’s death was greatly exaggerated, and that the case for trade liberalization remains a strong one. Since the current administration is not going to change its worldview, the challenge for U.S. companies is to find ways to stay in the game even as our government has withdrawn from it.

 

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NOW. . . A Poetic Call to Decide

Had not seen our next door neighbors for a couple of weeks.  She updated me about events in their lives while working in the yard.  Her father who had been in hospice for almost a year died two weeks ago in Baltimore.  That took her away for much of the time.

in this same time frame, after 27 years in her career as a government employee, she agreed to take a voluntary early retirement, She is  in her early 50’s and would have preferred to stay in her job.  But given the uncertainty and possible legal changes to benefits, she decided to leave.

A Poet’s Insight

Poet James Russell Lowell wrote about these life altering decisions in his poem, The Present Crisis.  In its musical form as a hymn, it is titled, Once to Every Man and Nation.  The opening stanza:

Once to every man and nation comes the moment to decide,
In the strife of Truth with Falsehood, for the good or evil side;
Some great cause, God’s new Messiah, offering each the bloom or blight,
Parts the goats upon the left hand, and the sheep upon the right,
And the choice goes by for ever ‘twixt that darkness and that light.

Lowell wrote the poem as a protest against the Mexican-American war in 1848.

Life’s Choices In Credit Union Land

Life happens for all.  Sometimes the moral choices are chosen by us.  Other times they are thrust upon one by events.

These turning points can shape the rest of our lives.  My neighbor is now open to finding a new opportunity to help others, perhaps in non-profit work.

In credit union land, these pivotal events are unfolding daily.  NCUA’s leaders are in unchartered territory.  Will they step up or step back?

CEO’s are being tempted with buyouts, some sought and others dangled with incentives to transfer their legacy to another CEO’s command.  Do I do the right thing, or take the money is an ever-present temptation. And the classic rationale, everybody is doing it makes taking the payoffs seem defensible. 

As if the daily industry challenges were not sufficient, all Americans face a growing crisis in democratic governance at the national level.

It is easy to hunker down and just follow distant events on the news.  That is not my problem.  My attention must be on those things I directly control.  One point of Lowell’s poem is that we all have a choice in these moments:

Hast thou chosen, O my people, on whose party thou shalt stand,
Ere the Doom from its worn sandals shakes the dust against our land?
Though the cause of Evil prosper, yet ‘t is Truth alone is strong,
And, albeit she wander outcast now, I see around her throng
Troops of beautiful, tall angels, to enshield her from all wrong.

Importantly, Lowell   expresses  hope that once engaged, we will make the right choice in these critical moments. Because “amid the market’s din” our “souls” will tell us  what is required.  Are we up to the multiple challenges confronting us in our personal, professional and public choices?

We see dimly in the Present what is small and what is great,
Slow of faith how weak an arm may turn the iron helm of fate,
But the soul is still oracular; amid the market’s din,
List the ominous stern whisper from the Delphic cave within,—
“They enslave their children’s children who make compromise with sin.”

Our Moment

In our credit union lives and our duty as citizens, we are not living in an era of business as usual. Now is the moment to decide.

 

 

 

 

 

 

 

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Larry Connell, NCUA’s First Chairman, Dies

Larry Connell, appointed by President Carter as the first NCUA Board Chairman in 1977, died this past week in New Hampshire.

After graduating from Harvard in 1958 with a BA degree in economics, Connell worked for the Comptroller’s office(OCC) in ban k regulation. During this time he earned his JD degree from Georgetown University.

Connecticut Governor Ella Grasso appointed Connell as Bank Commissioner in 1975.   In that office he supervised commercial and savings banks, credit unions, and loan companies as well as acting as securities commissioner.

The Credit Union Years

President Jimmy Carter’s appointment of Connell as Chairman of the National Credit Union Administration (NCUA) came at a pivotal time for both credit unions and federal financial regulation.  Congressional legislation converted the NCUA from a single person administrator to an independent federal agency with a three person, Presidentially appointed board.

The same legislation established the Central Liquidity Facility (CLF) within the NCUA.  This was the cooperative system’s public-private partnership establishing lender of “unfailing reliability.”  At that time credit unions did not have access to the national clearing system or to the Federal Reserve

The first NCUA full board included PA Mack, a senior advisor for Senator Birch Bayh,  and Dr. Harold Black an associate professor of finance at the University of North Carolina’s School of Business Administration.

The First NCUA Board in 1979

As NCUA chair Connell was also a member of the Depository Institutions Deregulation Committee (DIDC) which was charged with the deregulation of rates and terms on the savings accounts of all federally insured deposits.  He was Chairman of the new congressionally chartered National Consumer Cooperative Bank (NCB) until his departure from NCUA in early 1982.

In March 1979 Congress established the Federal Financial Institutions Examination Council (FFIEC) to bring consistency to multiple regulators’ oversight of rules and call reports.  Connell was vice chair.  That same year he asked if I would serve as the state representative for credit unions.  The term was for two years and included periodic visits to Washington for state liaison meetings.  The primary discussions were about the wording for the new Truth in Lending and Truth in Savings rules.

A Career in Public – Private Banking Oversight

After leaving NCUA, Larry became President/CEO of the $2.5 billion Washington Mutual Savings Bank in Seattle.   This began a peripatetic 12-year career in bank crisis management as CEO or Director for banks and S&L’s across the country from Washington, Texas, New Hampshire, Maine, Illinois, Michigan and Washington DC.

After his work for domestic inistitutions Connell was deployed as Senior Advisor for the U.S. Treasury Department’s Office of Technical Assistance.  In this role he  advised governments on bank privatization policies and practices in eastern and central Europe, as well as in Russia, Turkey, Colombia, South East Asia and Africa.

At the Founding and the Transition

October 1981 welcome reception for Ed Callahan with P.A. Mack and Larry Connell

Larry was at the founding of the NCUA as the agency transformed to an independent board.  At his departure his successor, Ed Callahan, spoke of his vital contribution:

While Larry Connell’s departure will be a major loss to NCUA and to the credit union movement, his visionary ideas will continue to influence the financial community. Larry’s expertise in so many areas–economics, law and banking–helped to elevate the stature of NCUA during one of the watershed periods in American financial history.

An ever expanding group of people—from government, industry and the media—now actively seek the Agency’s views on a variety of economic and financial matters, not  just credit union affairs.  I can’t pay him a higher compliment. (The NCUA Review February 1982, page 1)

However Larry did continue serving credit unions.  He was an original trustee of the TCU family of Mutual Funds launched in 1988 by Callahan & Associates.

Larry  laid the foundation for responsive, experienced, and professional NCUA leadership. He believed in credit unions as a vital alternative for individuals and communities left behind by the for-profit sector.  He was a friend, a colleague and always open for intelligent conversation.

The NCUA Board’s leadership and support of credit unions.

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NCUA Flying Solo

On May 22, the NCUA held its first public board meeting with its one and only member, Chairman Hauptman, overseeing staff reports.

This was the first public meeting since February, where the only agenda item then was the NCUSIF  update. Both March meetings were closed.  The March 27 and April 17 open meetings were  cancelled.  On April 16 President Trump fired the two democratic board members. That event is now being challenged in court with no specific timetable for resolution.

Observations from the May 22 Meeting

At the meeting’s conclusion Chairman Hauptman assured the public that NCUA was fully capable of meeting its statutory responsibilities.  He repeated the message from an earlier NCUA press release  on April 18:

Please be assured that the NCUA has precedent and standing delegations of authority in place to continue performing all operational and statutory requirements under the authority of a single Board Member. 

During the Bush Administration (2001–2002), Chairman Dennis Dollar acted as a sole Board Member. He held a Board meeting, voted, and took several actions, both administrative and operational. 

However the circumstances between these two situations is entirely different. In 2002, both nominees filling the expired terms were known and required only Senate confirmation. That happened very quickly in March.  This time, confirmed nominees have been fired creating two “vacancies.”  These two board members are challenging the President’s  removal in court.

Chairman Dollar held only one board meeting in which he received an NCUSIF  briefings and then tabled three other actions until a full board was in place.

Moreover, in a May 25, 2005 Delegation GEN 5 update by General Counsel Bob Fenner,  all delegations of Authority in the final paragraph is subject to the phrase “In a state of national emergency, all authorities retained by the board are delegated to . . .”  Are we-NCUA- in a state of national emergency? 

Hauptman’s situation is unique in how the vacancies occurred, the seemingly open-ended time period for single leadership, the dramatic internal staff and reorganizations underway, and the uncertain legal status of the fired members-especially if returned to their positions.

Board Item One: NCUSIF Update

The publc format of the March financial NCUSIF   update was changed. A  series of “dashboard” charts showing five-year trends for key balance sheet and performance ratops was unveiled.

These presentations provided interactive “eye-candy” but no increased transparency for how critical numbers such as the increase in loss reserves of $5.4 million were calculated. The loss reserves to insured shares ratio far exceeds the long term loss rate on insured savings.

Most importantly while reporting zero losses in the first quarter, there was complete silence on the recent liquidation of the $ 47 million Unilever FCU. This was finished in such haste that there was no conservatorship or apparent effort to find a willing merger partner.  The situation echoes the $13 million unexplained loss (20% of assets) at the $65 million  Creighton FCU in mid 2024.

The most important  issue, the underperformance of the NCUSIF portfolio, was documented in the new dashboard slide Portfolio Performance. It shows the NCUSIF’s return has trailed significantly the 90 -day T bill rate since mid 2022.  The year-to-date yield in the first quarter of 2.59% is significantly below the overnight return as well.

NCUA CFO Schied said staff’s policy was to continue the investment ladder out as long as ten years in order to ensure “a steady fund income.”  This ladder generates “steady income” that has trailed market returns by over 2.0% or more as shown in the bottom graph for over three years.

There was no reference to either interest rate risk (IRR)or ALM, the two basic factors in managing any portfolio. Especially one which cannot be adjusted once invested.  There is an obvious need for better policy and experienced investment management.

Chairman Hauptman likes to describe NCUA as an “insurance company.”  It would be helpful if there was much more transparency and thoughtful discussion about how this “company” manages its $23 billion  asset on behalf of credit unions.  This underperformance damanges both the fund’s finances and credit union’s returns.

Board Item Two: The Voluntary Separation Program

The staff stated that the voluntary layoff program had been agreed to in the March 21 closed full board meeting.  By  the May meeting the employee responses were  known.

A total of 250 employees elected to leave voluntarily. There were no forced departures.  Almost all will be placed immediately on administrative leave with full pay and benefits but doing no work.  This paid leave status extends until December 31, 2025.  This means most of these departing employees will be paid in full while not contributing for at least six months orlonger.

To incentivize the two options, there was a $50,000 bonus provided to each participant.  In addition, all will receive their 2025 merit bonus which will average $15K for junior staff and from $29K-$42K for senior staff.

In addition Hauptman announced there would be no restrictions on these employees’ future employment so they might find another job while on leave. He commented, “They might even be paid more than what they earned at NCUA.”

As explained by Executive Director Larry Fazio, the program was designed by the staff for the staff. There will be no budget savings for 2025.  The special severamce benefits will fully utilize the  NCUA’s operating funds for this year. The estimated total  of $75 million in potential “savings” means the average cost for the 250 departures was $300,000 each.

Staff was ambivalent about whether there will actually be anything close to these savings in 2026.  The gross cost of $75 million paid departing employees will be offset by new contracts, salary increases, new hires, technology investments and other expenditures setting up a new future state for the Agency.  In other words any savings are yet to be determined.  And  the generous terms of the 2025 voluntary departures will leave no surplus from the current year.

There were no specifics provided for how NCUA’s future organzarion  will be structured.  No departments closed or consolidated, no programs (eg. consumer exams, DEI conferences, etc) to be reduced. No reference to any DOGE recommendations for eliminating unnecessary expenses.

There ws  one specific example of change however.  Thiswas to extend the time between on-site exams based on a credit union’s net worth.  For credit unions $1-15 billion in assets, the exam interval would be from 12 to 18 months.  For less than $1 billion, the period between field contacts would be 14 to 24 months.

This one concrete step will reduce the agency’s in person safety and soundness exams as long as the net worth seems sufficient-above 10%.  This first line of defense for the NCUSIF is being weakened at a time when the sudden falures of Unilever and Creighton FCUs are still unexplained.

 Flying Solo & Landing Safely

Thia is not a business as usual moment  in this era of single board leadership. This circumstance  is exacerbated by the fact that Chairman Hauptman’s term expires in August of this year.  What happens then?  An acting Chair?  Who designs and follows through on NCUA’s future state?  Staff whose 25% voluntary separations outcome used up this enire year’s budget?

In a March 3, 2025 CUSO Magazine article,  Hauptman’s agnostic approach to the future of credit unions was presented:

On the topic of the NCUA’s future, Hauptman declined to speculate or advocate for one outcome or another, noting that while he does not shy away from controversial topics, he keeps himself from getting into debates when he has no authority over the outcome. The fate of the NCUA, he argues, is outside his control and lies in the hands of Congress and the White House.

Congress created the NCUA in 1970, and there were 27,000 credit unions operating before then…my only view on it is that it is important for people to understand that credit unions are different. So whoever in the future is going to be regulating needs to be aware of this.” 

In an April 23, 2025 memo to All NCUA Staff, Hauptman wrote in part: NCUA will be returning to the headcount that it had a few years back—but be assured we know it takes teamwork and creativity to “land the plane safely.” And NCUA is doing that quite well thus far.” 

The outcome from the first solo board meeting since 2002 suggests that there is still a great deal of turbulence.  It is not clear who is piloting the plane or where it is trying to land.

This first flyby of the pubic landing zone with credit unions leaves more questions than answers.  The future of NCUA with its implications for credit unions and their 100 million members seems at best cloudy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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A Member’s Question

If credit unions are a special idea about individuals’ collaborative financial efforts, we should care about human values and human rights when implementing this design.

I received the following from a member who had read several previous blog posts about mergers and just lived through the experience:

Recently, I was reading some of your articles, such as from 2017 regarding the issue of unjust enrichment by insiders in mergers. (Credit Unions for Sale) I didn’t realize what a longstanding problem this has been.   It seems like the whole structure is designed to enable those in power, in charge, to take advantage of those with less power, authority, resources, knowledge, and education.  

I don’t know who are the worst actors – the regulators who give the illusion of regulating to protect consumers, the BOD’s who are supposed to be looking out for members’ best interests, or the executive management who selfishly negotiate these deals at the expense of members, and try to convince members to give up their rights, their credit union, their net worth.   It’s a sickening rigged game. 

I see the motivation for the insiders who have millions of reasons for this, but how does the BOD benefit? Or regulators overseeing an industry decline in numbers and reputation?

A Rigged Game

Welcome to what democracy looks like with one- party government.  No loyal opposition.  In fact, no opposition, just obedience. Be a loyal consumer.  A satisfied customer, but not an owner.

The theory of cooperative design is that the one vote per member in election of their board members will act as a democratic check and balance to ensure the owners’ interest always come first.

It is an extremely rare event for those in power to fulfill this voting practice.  Boards become self-perpetuating; members are rarely encouraged to attend let along participate in the annual election.  And there is no voting, just acclimation for the board’s nominees.

The result is that boards and CEO’s believe they alone are responsible for determining the priorities and future of the members’ organization.  Even if this means transferring a long-standing, sound communal charter’s legacy  to another credit union where owners receive nothing and those last in charge cash out, often big time.

Democracy in a One-Party State

The defense offered by the regulator and the credit unions involved in these private deals is the members voted for it, often by overwhelming margins.

But what kind of a “vote” is taking place when those in charge control all the financial resources of the institution, the means for direct member and public communications, the timing and presentation of the election process, and the representation of regulatory oversight and approval?

The situation is the authoritarian’s dream of one-party governance. This is pretend democracy.  The people are told to vote for what the Board and executives will proclaim is a better future; albeit no longer under your control.

The results show the effectiveness of one-party rule.  Over 99 percent of mergers are approved.  An incumbent’s sure-fire strategy for self-enrichment.

To assert, as NCUA and state regulators routinely do, that the members’ voted for this is an  abdication of responsibility for member-owner rights. It destroys the core of credit union character. It demonstrates regulators as powerless or clueless in the face of this predatory  cooperative plundering of members’ equity. There is no governance by members, just subservience.

There Are No Limits

Ambitious CEO’s and boards see these free takeovers being negotiated daily.  There is no limit to the combinations being planned.  Just payout the initiators and receive the billions now up for grabs-for free.  The stakes will only get bigger, the payouts more creative and humongous, and the capitalistic model of acquisition dominate cooperative strategy.

But the history of one-party rule is not encouraging for the  long run.  The consolidation of power and resources grows, the lack of any meaningful role for owners is blatant,  and the sameness of all the “better products and services” becomes apparent to all.

Ultimately, the people will see what the member above observed.  The media will highlight the gaps between purpose and practice.  And the disruptions will start, small isolated at first, but real and threatening to those in authority.  Examples are already underway.

Most importantly, credit union leaders and members will learn what one-party rule means when this occurs with the federal regulator, not just in their individual institutions.  Then maybe the virtues of democracy will be embraced once again.

 

 

 

 

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The Art of the Steal

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

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

The Merger Problem Becomes Public

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

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

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

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

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

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

What the Final Rule Required

 

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

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

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

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

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

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

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

Concerns with Financial Disclosures

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

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

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

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

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

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

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

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

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

Houston, We Have a Problem

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

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

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

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

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

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

The Manipulated Voting Process

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

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

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

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

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

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

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

The System’s Problem

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

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

The Absence of Regulatory Oversight

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

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

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

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

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

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

The Combinations Undercut Cooperative Advantage

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

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

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

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

Transparency Does not Erase Wrong Doing

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

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

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

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

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

How Healthy Mergers Damage the System’s Soundness

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

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

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

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

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

One Voice

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

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

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

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

 

 

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Whose Voice Do You Follow?

in the late 1970’s Norman Gazer was a relatively new examiner in the Credit Union Division of the Department of Financial institutions (DFI) in Illinois. He had a bookkeeping background, understood accounting, and had a very quiet, reticent almost shy demeanor.

One of the DFI’s goals was that every one of the over 1,000 state charters must have an annual exam.  This must be by the DFI examiners  or completed by an independent CPA firm using our format.

An essential part of the annual exam was the verification of lndividual loan and share account balances.  This was the primary function of the supervisory committee. In larger credit unions this would be done by an outside firm.  When there was no record in smaller credit unions, the examiners would attempt to test the accounts.

Norman did this in two ways.  He would run his own adding machine tape of the individual ledger balances to see if they equalled the general ledger total.  Were their suspense accounts?  Late entries etc?  This was before computers.  In some cases the cards were still hand posted.

I knew we verified  external investments by sending out confirmation requests to firms holding these balances. But how did he verify members?  He said it was simple.  He just looked up the names in the telephone book and called.

It was this effort to verify accounts that led Norman to discover the credit union defalcation at Scott, Forseman and Company, the publisher of the children’s first reading books: “See Spot Run.”  After repeated attempts to balance the share accounts, Norman determined the credit union manager of this $1 million single sponsor, was keeping two sets of books.

When confronted, the manager handed over the second set. The defalcation was almost $1.0 million.Norman’s documentation persuaded CUNA Mutual to cover most of the shortfall under the credit union’s fidelity bond.

Whose Voice Do You Listen to?

In America today almost anyone can set up a platform to share their views about any issue.  Politicians routinely present themselves as the voice of the neglected, unheard or angry.

We often choose the voices to follow by two criteria.   Do we generally agree with the person’s point of view whether the topic is professional, personal or political.  Secondly, we tend to believe those in leadership, or individuals whose opinions are based on their professional experiences and credentials (professors, doctors, lawyers, or regulators)

One of the commentators i respect is Ancin Cooley.  His  succinct postings are well reasoned and from extensive on the ground interactions. His comment on the recommendations of America’s Credit Union lobbiests to reduce NCUA rules caught my attention.  And reminded me of Norman’s story of why we have supervisory committees in the first place.

This is Cooley’s response to  ACU’s proposal to  eliminate supervisory committee and succession planning requirements by NCUA.

What are we doing?

“Now its eliminate succession planning and Supervisory Committee audits?

We’re literally watching member money be used to advocate against the very guardrails designed to protect them and the institutions they trust.

At some point, someone has to throw a flag on the play. Come on y’all….

Succession planning shouldn’t even be up for debate. It’s basic governance. It’s only an issue because if there is a succession plan in place, it makes it difficult to merge the credit union when a CEO retires.

And now, Supervisory Committees? Yes, they can be a pain, but the function must remain intact and unweakened.

This one’s been locked-and-loaded for a while, especially given the quiet, strategic push to weaken audit committees through legislative efforts over the last twenty years.

If we let this trend continue, the very banks we claim not to be will end up with stronger governance and audit protections for their shareholders than we offer our members.

I’ve been asking this question repeatedly: Who do our associations and leagues actually represent?

The members? The credit unions?

Or the CEOs who sign the check for the membership dues?

Because if you said members—if you truly represent the membership—let me be clear: this proposal is not in the interest of any member-owner.

No bank shareholder would vote to eliminate their audit committee. Why? Because they have their actual money at stake.

Our members deserve the same level of protection. Their collective capital deserves the same level of seriousness and protection.”

This is plain spoken common sense by a person who knows what he is talking about.  But there is still a worse outcome than bad counsel.

What could  be more disastrous? Complete silence. Especially by those in positions of responsibility for credit unions.  Tomorrow I will show how voicelessness communicates approval of bad behavior in The Art of the Steal.

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Harper’s Brookings Interview

I attended former NCUA board member Todd Harper’s interview with Aaron Kline of Brookings yesterday.  Thes session lasted an hour, was recorded and can be accessed here.

Notes from the Conversation

When asked why the administration removed the two members, Harper thought the firings were part of a broader strategy to eventually change the Federal Reserve Board before those terms expire.

In the February closed board meetings, he had voted for the staff downsizings that were  agenda items on the public April board meeting–which was cancelled.

He had not met with he DOGE people and was not aware of their role in the agency.  NCUA legal staff had not provided any advice versus the board removals.   Only Inclusiv had backed his suit so far. He expressed disappointment that America’s Credit Unions had taken a “wait and see” approach.

Data Referenced in Questions

In responding to two questions Harper used prepared data. One topic was the initial findings from NCUA’s call report collection of OD/NSF fees from credit unions over $1 billion.  The second was the number of CAMELS code 3, 4, and 5 ratings.  In both cases the data was used to support his previous positions.  He was critical of fees and asserted staff cuts could increase risk to the NCUSIF.  Therefore the need for a higher NOL cap.

In terms of future policy he listed three areas:  disclosure of executive pay for FCU’s, paying volunteer board members for dependent care, and revisiting the NCUSIF’s NOL cap.

When asked about taxation of credit unions he said it could impact safety and soundness by slowing the growth of retained earnings/capital.  But that Congress wlll decide the issue while noting the Washington state legislature’s proposal to tax state charters which buy banks.

My reaction.  The Harper one saw at NCUA, his priorities, selective use of data, and policy justifications were the focus.  This may have been due to the interviewer’s questions on areas such as naming rights for stadiums, bank purchases and OD fees.

Harper’s attention was his NCUA policy preferences, not the future of credit unions. There was no rallying cry to fight back on the firings. He is not turning the page either.  As he said in response to a question from a reporter, he is not  “going off Broadway.”