Songs Triumphant

Music has the power to capture, amplify and commemorate our highest emotions. Life’s most joyous moments are memorialized in song. Music uniquely expresses the feelings of jubilation after having won a victory or mastering a difficulty.

Many know this experience from the playing of school songs following a victorious sports contest. Marching band music honors parades of returning heroes. Even a song from a Broadway musical (Oh What a Beautiful Morning) can celebrate an important life event.

Celebrating a Political Exodus

When the British Empire was at its height, music was part of the national euphoria. One of my favorite examples of this victorious spirit is Handel’s oratorio, Israel In Egypt.

The oratorio is the story of the Hebrew’s flight from Egypt. The music paints multiple word pictures of the plagues and the drama of the fleeing slaves pursued by the Egyptian army.

The work is mostly for a double chorus with few solo arias. It is a joy to sing because of its musical exuberance embracing many emotional moods. And fast tempos.

The peak moment is the finale, “The Lord Shall Reign For Ever And Ever.” It reprises Miriam’s Song and the Song of the Sea. After the sea is parted and the Israelites are safe from the pursuing Egyptians, Moses and the children of Israel praise God for having saved them:

Then Moses and the children of Israel sang this song unto to the Lord, and they said: I will sing unto the Lord, for He has triumphed, O triumphed; horse and its rider He has hurled into the sea . . . 

For an expression of sheer exuberance, listen and watch this six-minute excerpt. Even the musicians are dancing! (https://www.youtube.com/watch?v=U0nMXunT3A4)

The Top 100 Coops at Year-end 2019

For 30 years, the National Cooperative Bank (NCB) has published the annual NCB Co-op 100, America’s top 100 Cooperatives by total revenue. In 2019, these member-owned and controlled businesses had total revenues of $228 billion.

https://impact.ncb.coop/hubfs/assets/resources/NCB-Co-op-100-2020-final.pdf

Who is on the list?

Five credit unions are in the top 100. Navy is #7; State Employees (NC) #22; PenFed #30; BECU #57; and SchoolsFirst #78.

There are several well known consumer brand names of firms such as SunKist Growers, Land O’Lakes, Ocean Spray, Welch Foods and ACE hardware. In addition to finance, larger co-ops also serve the farming, energy, health care, grocery and hardware sectors.

The total assets of these leaders are $733 billion.

The compiler of the list, NCB, was created to address the financial needs of an underserved market niche: people who join together cooperatively to meet personal, social or business needs especially in low income communities. Chartered by Congress in 1978, NCB was privatized in 1981. Owned by its more than 3,100 customer-owners, it has $7.9 billion in assets under management. As part of its enabling legislation, NCB was tasked with ensuring that 35% of the capital it deploys will benefit low income communities.

A Credit Union Opportunity?

The question for the $1.7 trillion cooperative credit union community’s 5,200 institutions: What are we doing to enhance cooperative solutions for the American economy beyond consumer finance?

Democracy and Voting in Credit Unions: Does it Mean Anything?

In an election late last year 157,655 members were asked whether they should merger their eight-decade old, successful, super performing community charter with over $2.1 billion in assets.

Here are the voting results certified to the NCUA:

  • 7,331 or 4.65% of members voted
  • 6,658 or 4.4% voted in favor
  • 473 or .3% voted against the merger

150,324 or 95.35% of members did not vote on the future of their credit union.

Of those voting only two did so in person, the rest by mailed ballot.

Is This What Cooperative Democracy Should Be?

Is this “democratic” when only 4.6% of the share owners vote?

Were members even aware of what was happening to their credit union?

How could such low participation occur on such a consequential issue?

Most important, is this perfunctory, minimalist process right for members? Their community? The credit union system? And cooperatives’ role in America’s economy?

Does Your Vote or Even Voting Matter?

We are all living in an election season where everyone is being urged to vote. Court battles are being waged over time limits on early voting, number of drop boxes, how long after November 3rd ballots can be counted, and numerous other election processes.

Every media outlet is tracking not just candidate debates and policy positions, but the voting activity itself. Will the outcome be seen as fair? Are votes being suppressed by changing rules?

Voting matters. We all get this. In a democracy public acceptance of the outcome depends on the perceived legitimacy of an election. For every level of government. Or any other election determined event.

While people will have different interpretations of the numbers from Schools Financial’s member vote to merge with SchoolsFirst, I think we would agree on one observation: This is not what a democratically labeled outcome should look like.

The Next Step: One Study on How the Pandemic is Changing Organizational Priorities

A colleague sent me this report from the IBM Institute of Business: “COVID-19 and Future Trending Insights”

It summaries five ‘epiphanies’ from multiple surveys of leading executives.

“Our research suggests five key discoveries for the post-pandemic business landscape offering new perspectives on digital transformation, the future of work, transparency, and sustainability. Together, they provide a playbook for proactive leaders who understand that old ways of working are gone.”

My take away for credit unions

The fourth epiphany is the one that could be most relevant to coops.

“Epiphany 4: Some will win. Some will lose. But few will do it alone.”

The conclusion on page 6 reads:

“Within sectors, expectations are growing that broader reach will help define winners. Our data also point to greater reliance on platform business models and partner networks, with 70 percent of executives planning significant partnering activity inside their industry and 57 percent looking outside. Either way, they expect such participation to grow more than 300 percent over the next two years compared to two years ago.”

The graph illustrating this executive intent is headed as follows:

Businesses are partnering up

Executives say they plan to participate in platforms, ecosystems and partner networks significantly more in the future than before or during COVID-19.”

The strategic question for credit unions: Who are the “partner networks” that are critical to your future?

One CEO phrases the challenge this way: “As we face the future, you cannot make the mistake of dreaming about going it alone as the next step. The next step is always best served by your faith to go at the edge through collaboration.”

The Power of Data

Our Covid pandemic has generated a number of comments about how serious this is versus the seasonal return of flu.

As America’s pandemic deaths exceed 225,000, hopefully the chart below puts our current challenge in the proper perspective;

Also, make sure you get this year’s flu shot! We already have a vaccine for this virus.

Is This Who We Are? Part III: Self-Dealing and Complicity

The analysis in the first two parts documented the extraordinary success of Sperry serving its Nassau County market. In public, the CEO extolls the credit union’s performance and long-term market positioning into the summer. In private, he and the board agreed over a half a year earlier to merge the charter into an institution 100 times Sperry’s size and leaving no local operations.

Conflicts of Interest and Self-Dealing

Kevin Healy originally joined the Sperry board as Vice Chair in March 2010 while employed as COO, General Counsel and Director of American Defense Systems, Inc. In December 2012, he became Sperry’s CEO, but still retained his Vice Chair position on the board.

As both CEO negotiating the terms of his employment contract and severance compensation with PenFed, and as a director approving the merger terms, he has a direct conflict of interest.

Publicly, he praises the credit union’s advantages and strengths. Privately, he negotiates a five-year contract and/or severance up to three times his annual salary (presently $336,000) if he leaves within the first 24 months after the merger.

This hypocrisy, or worse, is not confined to the CEO. The Chair who signed the letter recommending merger was honored by the New York Credit Union Association as the winner of the “Statewide Volunteer of the Year Award.” The Sperry press release dated June 11, 2020, describes the basis for this honor:

Garden City Park, NY, June 11, 2020 – Gary Barello, Sperry Associates Federal Credit Union’s Chairman of the Board, has been recognized by the New York Credit Union Association (NYCUA) as a 2020 “Volunteer of the Year.”

The award serves as recognition of Mr. Barello’s long record of service within the credit union industry. With Sperry, Mr. Barello was instrumental in helping to stabilize the institution’s finances as well as with bringing in a new executive management team to lead the credit union. These actions included the hiring of Kevin J. Healy, Sperry’s current CEO and Vice Chairman of the Board.

“Gary Barello’s philosophy of people helping people is highlighted by his conviction to the principles that credit unions stand for,” the NYCUA said in a statement announcing Mr. Barello’s Volunteer of the Year award.

“At Sperry, we couldn’t be prouder of Gary for getting well-deserved recognition from the NYCUA,” Mr. Healy, who nominated Mr. Barello for the award, said. “As a steadfast credit union volunteer, Gary continues to prove himself to be a critical factor in Sperry’s successes.”

Mr. Barello has served as Chairman of the Board at Sperry Associates FCU since December 2010 . . .”

CEO Healy, Vice Chair, nominated his Chair for this award. Barello, in turn was Chair when the board chose Healy, then on the board, to be CEO in 2012. Healy’s statement that his Chair “continues to prove himself to be a critical factor in Sperry’s successes” is made as the chair participated in and approved the merger to end Sperry’s independent charter half a year earlier, but still secret.

Within six weeks of this statewide public selection, Chair Barello wrote Sperry’s members asking them to vote to close the credit union he chairs. The chairman’s role is the primary basis for his Volunteer of the Year honor.

The New York Association’s award states that “Gary Barello’s philosophy of people helping people is highlighted by his conviction to the principles that credit unions stand for.”

Rather, Barello’s actions and “principles” betray every cooperative value that members and credit unions depend upon from volunteer leaders.

PenFed’s Complicity

PenFed is an experienced hand in these acquisitions.

But first it is important to note that these two credit unions created two very different business models. Sperry is a traditional member-community focused credit union. Member relationships are the foundation of their success. Their average member relationship (total loans and shares divided by members) at June 2020 is $26,017 or 37% greater than PenFed’s $19,016. Sperry’s average relationship grew 2.6% while Pentagon’s fell 10.3% for the 12 months ending June 2020. Even though it is the third largest credit union in the US, PenFed’s member relationship is lower than the average of all 5300 credit unions.

PenFed’s credit union business model is that of a commercial financial firm focusing on acquisitions, investing in ancillary businesses, and increasing use of wholesale financing. In 2019, for example, member shares fell by $1.6 billion while FHLB borrowings increased over $1.0 billion (PenFed 2019 Annual Report pg. 17) to total $3.7 billion, or 17% of total funding.

Acquisitions and PenFed Financial Performance

For over five years “$0 cost acquisitions” have been a critical contributor to PenFed’s bottom line and balance sheet size. In 2019, it booked a total equity increase of $92.4 from mergers. “Bargain gains from mergers”(negative good will) totaled $74.2 million and $18.2 million was added equity value. Of the credit union’s $151 million 2019 net income, over half is from transferring the accumulated surplus from other well-capitalized, merged credit unions to PenFed where it is recorded as “other operating income.”

This 2019 one-time income boost came from three mergers: Progressive with total assets of $382 million; McGraw Hill with $383 million; and Magnify at $78.6 million for a total of $843 million. PenFed’s reported asset growth was only $300 million. Without these three mergers it would show a balance sheet decline of $500 million.

PenFed’s financial “stability” depends on “acquisitions.” These three transactions are described as follows in the 2019 Annual Report: “The fair value of the identifiable assets acquired, and liabilities assumed of $ xxx exceed the fair value of the consideration transferred $0 . . Accordingly, the acquisition has been accounted for as a bargain purchase and as a result the Credit Union recognized a gain of $ xxx associated with the acquisition. The gain is recorded in Other Non-Interest Income. . .” (page 37)

PenFed negotiates with credit union boards and senior managers offering financial incentives so they will transfer their accumulated reserves for “$0 consideration” to prop up its own balance sheet and net income.

Sperry’s “acquisition” continues this Ponzi-like pattern of cooperative takeovers. They provide PenFed the appearance of financial performance by acquiring the accumulated reserves of other well-capitalized credit unions at $0 cost-contrary to all normal market transactions.

Sperry’s “acquisition” contributes at least $15 million more to this scheme plus another $270 million in assets.

PenFed’s strategic focus is on corporate initiatives. Members are not the credit union’s mission. Rather, members are the means PenFed’s management uses to implement its commercial business model. Member relationships and community participation are simply tactical marketing promotions to its nationwide field of membership of 330 million Americans as shown in its 5300-call report.

NCUA’s Regulatory Abdication

Recently NCUA sent a letter to a person helping to organize a new credit union. It stated the following requirements:

“Before NCUA can approve the Certificate to organize. . .the Federal Credit Union Act requires NCUA to investigate your general character and fitness to serve as a prospective officer. . .NCUA has made a preliminary determination that you are competent, experienced, honest and of good character in accordance with the FOM manual. . .NCUA will continue to monitor your background and credit worthiness. . . at any time . . . should NCUA discover anything that adversely affects your character or fitness to serve as a prospective officer. . . we will notify you about this additional information and request a response. . .as an officer of a newly chartered credit union you must still maintain your character and fitness to continue your service as such. . .”

However, NCUA’s review of character and fitness appears to matter only when seeking a charter. Once in business, anything goes.

NCUA’s ONES Director and the three regional directors routinely approve these insider self-dealings devoid of any objective justification, documented member benefit or pretense of informed choice.

The so-called member vote bears no semblance to a valid decision between two market options. The effort is designed in secret, the members marketed only one point of view, no alternatives are offered, and the “campaign” period strictly limited to discourage alternative voices from being raised. The process pre-ordains the majority of outcomes.

Often this decision is the first-time members have ever been asked to vote on anything. Why should they be skeptical of their board and management’s advice? The members’ vote is a pantomime orchestrated by leaders cashing in on the outcome. All with NCUA’s blessing.

This regulatory dereliction undermines the system’s safety and soundness. NCUA overlooks the operational deficiencies of PenFed’s commercial model. These acquisitions increase concentration risk in a fallible institution disguising its weakness by booking gains with further takeovers.

System-wide, similarly inclined CEOs are emboldened as they watch for their chance for personal windfalls like the PenFed offers. Members’ future well-being is sacrificed. The uniqueness of credit unions is corrupted.

What Can Be Done?

There are several possibilities to stop this cooperative self-harm.

  1. One would hope the Chair and CEO of Sperry would reconsider and reverse course, bring on new board members and enhance Sperry’s unquestioned valuable role for their local community.
  2. NCUA might call the game off. There is a direct conflict of interest by the principals and their public duplicity with information provided members. PenFed is just adding to its financial house of cards.
  3. The press reports the situation for readers whose concerns cause political leaders to bring to account the enablers of this sham process.

This example and others like it, show the urgency for radical reform to protect members’ interests. One approach would be to require transparency through public auction where fully developed merger offers are openly solicited from interested credit unions, or even third parties. That would truly create a “free market” process where members meaningfully select their destiny.

The most critical factor for maintaining confidence in a financial system is trust. These secretly arranged acquisitions mock this fundamental value. Character and integrity are replaced by greed. Cooperatives’ unique focus on the common good is sacrificed on the altar of personal ambition.

Today it is Sperry’s members who are the victims of this dishonesty. Tomorrow it will be the credit union system that pays the price.