Einstein’s and Others’ Thoughts on the Advantages of Credit Unions

The “Home Court” Advantage

From Greylock Federal Credit Union:

We have officially welcomed over 100,000 Members! We are deeply proud to be the hometown financial institution of choice by so many in our community and we want to say THANK YOU!

From Springfield High School’s student newspaper on the school play:

. . .One of the important aspects of high school is the opportunity to be a part of something bigger than yourself. Being involved in the production process, like Hashmi stated, has allowed students to contribute to the creation of a captivating performance. It is a chance to collaborate with a team of talented individuals and learn new skills along the way. Plus, there’s a unique sense of camaraderie that comes with being part of a play. So, if you enjoy the idea of working behind the scenes and being a crucial part of bringing a story to life, the fall play is definitely worth considering! 

A Video: What Good Business Looks Like

This short video “story” from Thailand should be  required viewing for every credit union board that has ever contemplated the merging of their long- serving coop.  It is a stunning example you won’t forget. It disproves the capitalist adage, “Everybody has a price.”


Einstein on the critical credit union advantage in a Market Driven Economy

This week has seen another bank’s stock price fall by over half from $10 to $4 per share.

From Yahoo finance:  The Pressure on NYCB is Not Letting Up.  At yearend 2023 the bank reported $116 billion in assets and $10.8 billion in total equity.

Its history in brief: New York Community Bancorp, Inc. (NYCB), headquartered in Hicksville, New York, is a bank holding company for Flagstar Bank. In 2023, the bank operates 395 branches in New York, Michigan, New Jersey, Ohio, Florida, Arizona and Wisconsin under multiple local brands acquired via multiple acquisitions.

Einstein’s explanation of the credit union advantage, especially in times of crisis, is simple-Time: The only reason for time is so that everything doesn’t happen at once. 

The cooperative member-owner structure gives management and the owners time to straighten things out when problems occur.  Let markets cycle through their phases.  However, there is no respite in the winner-take-all world of competition when a market owned firm falls from grace.

The Justifications in Self-Serving Mergers in Which Members Get Nothing

In my recent look back on several mergers, I reached out to a participant from several years ago. Had the members seen any change for the better? The reply:   it’s just another bank without heart or soul or members, just customers…but then, we might just be American Idiots

If we’re honest, culture forms us as much as our statements of personal values.

Human beings can live without many things, but not with an absence of meaning. In our “free” market driven economy dominated by for-profit firms, cooperative CEO’s and boards will continue to cloth self-interested actions in moralisms and myths.

Fortunately, members are not idiots.





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.”


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.

Big Banks Adopting a Credit Union Tactic

Yesterday’s Marketplace program on NPR had a brief report on the investments two of America’s five largest banks are making to improve their competitive position.

Technology?  New Ventures? Greater staff skills? Social Marketing Influencers?  Third party-fintech-origination partners?  More acquisitions?  All are factors, but not the newest priority.

The New-Old Strategy

JPMorgan Chase announces brick-and-mortar bank expansion in a digital age

Several of the relevant paragraphs from the story:

In the year 2024, when you think banking, you think mobile apps, online deposits, digital future, right? Not so fast. JPMorgan Chase, the country’s largest bank, announced today it’s opening more than 500 new brick-and-mortar branches and renovating another 1,700.

This follows an expansion by Bank of America last summer. So, what’s the value of banking in person in the digital age?

You don’t usually think of a bank as having a living room. But Jason Patton of JPMorgan Chase says they’ll be a staple in a handful of the bank’s new branches, which are meant to be places where people chat. . . (in cu’s this is called serving members)

“Some of these branches, we’re opening up in places where we’re not as well known,” he said. “So, in many cases, people don’t know what we have to offer.”

And it’s important to see and be seen by those people if banks are going to drum up new business, said Jaime Peters, a finance professor at Maryville University in St. Louis.

“By going and building these new branches, and having that placard on the side of the road that people pass every day, that is brand awareness, that is trust building,” she said. . .

The Only Growth Option Is Organic

Big banks have another incentive to add branches: The ones that hold more than 10% of the nation’s deposits are generally prohibited from acquiring other banks, said Michael Rose, a managing director in equity research for Raymond James. 

“So because you’ve removed the ability for them to actually acquire other banks, they have to grow essentially organically,” he said.

The Credit Union Counter: Enhancing “Their” Local Environment

After posting the latest video from White Fish CU,  I received a link from Jason Lindstrom CEO of Evergreen CU in Maine.  This new video  has a similar community theme, but different subject matter. It is an homage to Maine’s forests and the people who maintain and enjoy them.

In addition to branches,  “local” means that  a credit union is authentically “home-grown,” not merely a local outpost of an out-of-state or national financial firm.    Bank of America or JP Morgan Chase branches are not being grown (drummed up) from the natural environment.  Rather they are an invasive species, trying to replace the local habitat.

This is Evergreen’s mission, “keeping Maine wild.”


Three Examples of Credit Union Success

Credit unions can be inventive when communicating their special nature.  Here are three different approaches.

A Few Great Numbers (KPI’s)

This traditional view of success is from the yearend numbers of an exceptional coop. This CEO’s team focuses on the 5 key performance indicators (KPI’s) in 2023 as shown below.

metrics goal actual
member growth 5.10% 4.10%
net earnings 1.00% 1.23%
service quality 82.25 83.3
P&S per member 4.64 4.61
deposit growth 10.00% 12.80%

These along with many others not shown (net worth, loan growth etc.) would be outstanding in any year.  However in this year of flat to down trends overall, they are extraordinary.   How was it accomplished?

This credit union implements the most traditional and important strategic advantage credit unions enjoy–“relationship banking.”  It provides stable deposits, long term members and intense focus on their community and its well being.

The organization does this by putting people first. The CEO tells employee and member care stories as a central part of his monthly updates.  Not words, but deeds, sometimes confessing honest shortcomings.

The credit union leadership has set boundaries, what to do well and what not to attempt.  No mergers, no bank buys.  They are in a market dominated by a super coop competitor ten times their size.

For those who believe scale is necessary for success, this credit union grew to over $700 million in 2023. It did so while recording the fifth consecutive year of lowering its operating expense to average assets ratio. In this five years the ratio has fallen every year going from 3.08% to 2.55%.

That result  is lower than the majority of credit unions over $5 billion.  It is because they know who they are as a credit union.

Celebrating a Community That Cares

For any credit union striving to communicate its role in the communities served, I would urge you to look at this latest video from Whitefish Credit Union in Montana.

It is from Josh Wilson, Senior Vice President for Marketing.  The video centers around people in all walks of life serving their community in local food banks.

It is a moving documentary.  So powerful it should be entered in the Sundance film festival. The stories honor those who serve and are being served.  It is a tribute to the small rural towns and the natural environment in which the credit union operates.

Watching it makes you feel good about this example of caring for others.  There is not a word about Whitefish’s financial services, which says everything you need to know about the credit union.  Enjoy.


The Special Opportunity for Credit Union Leaders- I Feel Like Makin’ Love

Yesterday I linked to a song by the rock group Green Day.  A fan, Bob Bianchini, sent me their latest video from two weeks ago.  It is a real picker-upper to start your day.

You might ask who is Bob Bianchini?  He is the only League President who simultaneously served in the state legislature.  That was in an era when credit union leaders knew how to get things done.

This video reminded me of Rex Johnson’s exhortation to the credit union audiences who attended his many lending symposiums.   He would close by telling them, “your job is to treat your members so well that they become fans for your credit union.”

Here is what genuine fandom looks like-in a New York subway station from Bob and Green Day.


Are Credit Union Members “American Idiots’?

Do some credit union leaders, the general press and those charged with overseeing the public good believe the member-owners of cooperatives are idiots?  I believe those that think and act that way will soon be standing in front of a revolution if the behavior in mergers and other acquisitions continues as described below.

In the first decade of this century a punk rock group, Green Day, wrote a political protest song called American Idiot.   The song was a loud screed against the fear and xenophobia which they believed the public media promoted after the Bush administration’s invasion of Irag.

The chorus of this complaint is:

Welcome to a new kind of tension
All across the alienation
Where everything isn’t meant to be okay
In television dreams of tomorrow
We’re not the ones who’re meant to follow
For that’s enough to argue

Abraham Lincoln was gentler when he said,  ‘You can fool all people some of the time and some people all the time. But you can never fool all people all the time.”

Today a few hundred of the 4,700 credit unions are led by persons testing Lincoln’s assertion that you can’t fool all the people all the time.  Just insert the word member for people.

The ongoing spectacle of credit unions eating their own with the enablers stuffing their pockets to carry out this cooperative cannibalism continues.  The examples are piling up.  This continued mutual destruction could end up destroying the whole cooperative enterprise.  The latest example is the merger of 121 Financial CU with VyStar both headquartered in Jacksonville, FL.

The Setup

Some 90 years ago a group of telephone workers put their nickels, dimes, and quarters into a desk drawer to organize a credit union.  It was 1935, the middle of the Great Depression.  Over the years this telco-based group effort grew and grew.  As it became too large for self-management, the board hired full time professional staff to continue the purpose of building a “home-grown” cooperative serving the greater Jacksonville community.

At December 2023 this nickels and dimes startup had reached $710 million in assets, serving 50,000 members.  Its financial performance was strong, continuing to grow loans at 11% and achieving a net worth of 9.05% or well capitalized.   Delinquency had ticked up a bit to .64%, but the loss reserve was 140% of all past due loans.

However in November 2023, the current board and senior management decided to end this nine-decade record of member centered community service.

As reported by CU Today in November 2023, “the credit union told members the merger will provide enhanced services, meet the evolving needs of members and employees, and make a “profound positive impact on its communities.”

It did not identify what those enhanced services would be . . .

In addition, 121 Financial . . .said the merger will further its mission to “Do Good.”

The “doing good” that was disclosed were payouts to the five senior managers of over $900,000 for additional bonuses and salaries detailed at the end of this blog.

The 50,000 members who had built and owned the credit union received nothing.  Just vague promises in return for giving their $485 million in loans, $177 million in investments, all $25 million in fixed assets, and $63 million in equity for free.

Who wouldn’t want such a deal?  A successful nine decade long ongoing business with a local reputation and loyalty being given away, for free.  And the owners get a new set of leaders who have nothing to do with their history or success.

One can understand why senior management wants to ensure their future.  The recipient of this largesse, VyStar, has 925,000 members, 91 branches and 2,300 employees doesn’t need another CEO (whatever the new title-legacy ambassador?) COO, CFO, Sr Lending officer, let alone another Executive Assistant. The additional compensation was stated as over $900,000 and that does not include other benefits in written form from benefit plan terminations and new SERPS.

The leaders claimed that they had contacted a number of credit unions and this was the best deal.  Whether true or not (the shopping part) it does suggest that a number of credit unions passed on this freebee were not willing to pay the grift.

Or that VyStar thought it was worthwhile to eliminate a local competitor which was outperforming them with the traditional credit union strategic advantage of “relationship banking.”  Consider how VyStar would react if PenFed took the bait.

The  Members Saw Through the Scam Immediately

When the merger was announced the members immediately set up a website Stop the Merger.   The purpose was clear: We need you, The Members of 121 FCU, to help us save our Hometown Credit Union.

On the site are four articles describing their concerns and urging members to vote to stop this giveaway.  Their most pointed critique was on November 21, 2023, Outrageous Bonus for Top Merger Pushers.

Speaking of “Take-Over” in the merger package, it clearly states that all things 121FCU will go away….Name, Branding, etc. and more community engagement…..What that means is that Vystar will use more of the assets and value of 121FCU to buy naming rights for sports stadiums and silly promotions. I, for one, just need to be able to trust my financial institution…And I think the 2022 Vystar debacle shows we can’t do that, at least with them. 

The bottom line is that this leadership team by closing down this cooperative has broken trust with the owners.

The VyStar Connection-It Takes Two to Tango

CEO Brian Wolfburg has enunciated a clear growth strategy for his tenure.   The credit union at one point attempted to purchase the $1.6 billion Heritage Southeast Bancorporation (HSBI)with  its 22 branch locations across Southeast Georgia, through Savannah and into the Greater Atlanta Metro area.  The effort was called off after a 2022 very public failure of a home banking conversion caused a member uproar.

Even though not completed, this example is  relevant to see through this merger.  One can understand why Wolfburg wants to eliminate this very successful local competitor which is a burr under his saddle.

Mergers of strong independent firms are anti-competitive. In this case 121 Financial has stronger loan performance, long-established member loyalty and a niche nurtured over decades.  When offering to buy HSBI, VyStar offered the bank’s owners a price of 1.80 times book equity. It was also  a significant premium over the recent stock price, pre-merger announcement.

However the owners of 121 Financial were  offered $0.  Instead they were asked to give away their total capital to an entity that had nothing to do with its creation.

Treating credit union member-owners as idiots in an economy that promotes private property is a huge political and business mistake.   Members would be treated with more respect as bank shareholders.

CEO Wolfburg’s expansion efforts at VyStar depend on two growth hormones:  renting capital via subordinated debt (currently $200 million) and acquiring other firms’ assets versus organic growth.

Both of these efforts can work for a while, especially when the cost of funds for years as at or near zero.  Now the tide is going out, and as Warren Buffet famously quipped, “we can see who is swimming without any trunks.”  Organic growth is hard, but it also is more stable and builds a fortress foundation know as goodwill, not the intangible financial kind.

For a market indicator of VyStar’s performance this past five years, here are two benchmarks:

The credit union’s return on equity has gone from 7.9% in 2019 to 2.6% in 2023, a CAGR decline of -24% per year. In only 2021 did performance near the longterm  market average of 11.8%.

Return on assets in the same five years has gone from .68% to .18% or a negative CAGR of -28.%.  In none of the five has ROA reached 1%.

In a market traded firm, this five year record would have triggered calls for changes of leadership or strategy.

The $13.6 billion VyStar needs the financial strengths of 121 Financial to shore up its downtrends. This merger helps VyStar and offers nothing 121’s members cannot have from their credit union.

Where is NCUA?

Every challenged CEO’s defense of this rapacious behavior is excused with two points:

  • NCUA approved it;
  • The Members Voted for it.

I won’t go into the faux-voting process required by NCUA.  Rather the failure to see reality is much deeper especially at the board level.  Recall that it was staff that presented multiple examples of self-dealing in proposing the merger reg in 2017.

Chairman Harper does not believe in member-owner rights.  He sees members as just consumers.  He will protect them with a veneer of enhanced compliance exams.  Cooperatives are nothing more than another financial option.

Vice Chairman Hauptman is vague on any philosophy, but sometimes will refer to the free market.  His inferred stance is that NCUA can’t run credit unions.  However in public pronouncements he makes constant reference to the importance of crypto/blockchain innovation and paying attention to fintechs.

This month will test new board member Otsuka’s ability to bring a fresh eye to both internal and external events. Will she fall back on broad policy statements independent of data.  That is the traditional pattern of board decisions. Or might she challenge the status quo?

CU Today reported the merger had been approved.   But neither credit union gave the details of the vote-which is unusual in a contested election.  A later story said a member wanted to continue to oppose the combination.  One has the feeling there is another shoe to drop here—or will this straw just be one more addition to the CAMELS load at VyStar.

The Payoffs to 121 Financial’s Four Senior Managers and an Executive Assistant

As first reported in November 2023 by CU Today the following are the disclosures of reported  benefits:

More Than $900,000 Being Paid in Bonuses, Plus Additional Funds in SERPs, Being Paid Out to 5 Executives

A credit union that is paying more than $900,000 in merger-related compensation to five top execs—plus undisclosed amounts in SERPS—is saying it was “very important to highlight that the board of directors conducted a thorough evaluation of multiple credit  unions lasting more than a year before selecting VyStar as the ideal merger partner,” 121 Financial told members.

The $709-million credit union told members the merger will provide enhanced services, meet the evolving needs of members and employees, and make a “profound positive impact on its communities.”

It did not identify what those enhanced services would be. . .

In addition, . . .said the merger will further its mission to “Do Good,” 121 Financial added.

Payout to Senior Executives

The merger related compensation each 121 Financial executive will receive is shown in part below:

  • CEO David Marovich, who will continue for five years as SVP-Northeast Community President, with a salary increase of $15,000, two retention bonuses of $122,500 each at six and 12 months after the merger; and who will receive a supplemental executive retirement plan that will pay him 40% of his annual salary of year five upon retirement in year six for a period of five years.
  • COO Paul Blackstone, who will continue on for five years and be named SVP-special projects with a salary increase of $95,000, two retention bonuses of $126,250 to be paid six and 12 months after the merger; and the establishment of a SERP that will pay him 35% of his annual salary of year five upon retirement in year six for a period of five years.
  • CFO Cyndi Koan, who will continue on for three years as SVP-financial special projects and who will be paid retention bonuses of $35,000 six and 12 months after the merger closes.
  • SVP-Lending Cathy Hufstetler, who will retire and receive a year’s severance of $273,000, and retention bonuses of $28,000 at six and 12 months after the merger closes.
  • Executive Assistant Nichole LeBlanc, who will continue on for five years as senior executive assistant with a salary increase of $5,000 and with retention bonuses of $9,500 at six and 12 months after the merger.

Credit Union Mergers: A Game without Rules


Part III

Previous parts I and II have provided a factual review how FCCU’s CEO and board chair diverted $12 million to their control via a new organization when merging the credit union.  While this example is discouraging, it is symptomatic of a much broader challenge for credit unions.

A Game Without Rules

The FCCU/Valley Strong merger is a current and common example of the private, insider deal making around mergers of successful, long serving institutions.   The CEO’s and boards arranging  these transactions put their self-interest and ambitions ahead of their member owners.  Their actions are covered with rhetorical reasons about scale, technology investments and competition threats.

CEO Duffy’s skill at deflecting any criticism is shown by how he positions those  whose official duty and/or fiduciary roles would be to protect and ensure the members’ best interests to support his action.

His board of five, on which he sits, had to approve the merger.  They are all given subsequent sinecures.  The senior staff who might have aspired to succeed in leadership is guaranteed bonuses and jobs in the continuing firm-at higher salaries and lesser responsibility (legacy ambassador vs COO).   The lawyers and accountants dutifully earn their fees for blessing the numbers and  transactions.  Like the trade associations, no one wants to lose a paying client.

And those in the community who lost their home- grown 66-year old cooperative, are not going to bite the hand that gave them an occasional handout (usually $1,000) or annual political  donation.

Two Members Said:  The Emperor Has No Clothes

To oppose someone in authority with literally millions in resources to fight back requires persons with more than insight, it takes unusual courage.

This merger confirms the modern day reality of Hans Christian Andersen’s most memorable fairy tale.   And the tale’s relevance is even more appropriate as shown by newspaper accounts of “banker” Duffy’s recent Stocksonian award. Both “leads” open by describing his  professional appearance, “looking dapper in a gray, tartan-style suit and stripped red bow tie.”

But just as in the fairy tale, the two members saw the CEO’s plan had no substance.  And they said so out loud, so all could see.  But no one wanted to note the obvious.  Here are their names, excerpts of some of their concerns, comments and questions as recorded in the CU Today story from NCUA’s website.

A  FCCU member,  Larry Matulich,  posted his objection on NCUA’s website in part as follows:

I am against the merger for several reasons.  I feel we must protect the financial stability of our local credit union. The loan to asset ratio of Valley Strong is 3 times the loans to total assets, while FCCU is only 20% of our loans to assets.  We do not need their loans, but they do need our assets.   Let’s protect  our money and keep it here in San Joaquin County.  Frankly the real strong credit union is not Valley Strong, but our FCCU. . .

A second member Frederick Butterworth posted in part:

Vote No on the proposed merger until the provision to transfer $10 million of member assets to a non-profit foundation for “community outreach” is eliminated from the proposal.  Member financial assets of any amount, especially of any amount, especially $10 million , should not be given away for any purpose.  If Financial Center Credit Union is so flush with cash that it wants to give  away $10 million, then that amount sould be distributed to the members.  I’ve written twice asking for the rationale for given away $10 million.  They have failed to answer me.  . . The so-called FCCU2 Foundation was created less than two months ago setting uup Duffy in his new give-away-our-asseets role. . .

Both saw that the rhetoric promoting the event was not supported by the facts.  Other employees and members knew these realities, but Duffy managed to outmaneuver any scrutiny, even by the regulators.

Regulatory Neglect Is Not Benign

This week NCUA announced the banning of a former president/CEO from forever participating in the affairs of a federally insured financial institution. This CEO’s misdeed was that between 2018 and 2020 she used the credit union’s credit card for personal purchases “totaling more than $12,000.”

In FCCU2’s foundation setup, the diversion for personal use was first announced as $10 million. But when the deed was finally reported to the IRS, an additional $2.0 million was added to total $12 million.

When asked, NCUA’s anonymous defense in the  CU Today story was this transfer is “a business decision left up to the credit union’s board of directors.” And further on, “ultimately in a voluntary merger (this action) is up to the members themselves.” When asked to explain its oversight, NCUA shows a regulatory middle finger to every FCCU member by stating “86% voted in favor of the merger.”

Moreover this reference to  a supposedly democratic process demonstrates how disconnected from on the ground realities NCUA leadership is.

Duffy has been politically adroit placing the regulators between himself  and his self-dealing with the members’ money.  “Duffy said neither the NCUA nor the DFI raised any red flags over the transfer of the $10 million to the foundation.  There was nothing to question.” For NCUA to followup now, it would first have to investigate itself-what it already knew.  An internal review  few organization’s leaders are capable of doing.  Rather it may require a congressional hearing or a CNN story.

It was NCUA itself that described multiple situations of self dealing and failure of fiduciary responsibility by boards and CEO’s in approving its merger regulation.  If either NCUA or DFI had bothered to look under the covers, it would find this merger violated one of the oldest rule on the books: thou shalt not steal.

Consequences and a Solution

Credit unions compete in a capitalistic system described by the fictional character Gorden Gekko as fueled by self-interest: “Greed, for lack of a better word, is good. It captures the essence of the evolutionary spirit. Greed in all of its forms; greed for life, for money, for love, for knowledge has marked the upsurge of mankind.

The temptations are all around, even for member-owned coops.

At all levels of this process, the members’ trust and confidence have been violated.  In so doing, the cooperative reputation of thousands of credit unions that serve their members every day with commitment and purpose is stained.

Instead of stockpiling excess capital as done by FCCU, hundreds of credit unions pay special dividends explaining,” Our annual giveback bonus is what differentiates us from a typical bank.”

The system’s overall safety and soundness is lessened when more eggs are put into a single basket.

Everyone connected to this transaction loses something. The 29,000 members, their credit union; the city of Stockton a 66-year long relationship with a locally-owned financial cooperative.

Valley Strong’s senior management and Board, seduced by the prospect of adding $634 million in assets and free capital of $100 million, are now struggling when the tide of free money went away.  They thought the only cost would be several years FCCU executive salaries and $2.5 million in donations to the Duffy fund.  But nothing is free in life.  Valley Strong’s CEO,  will now have to knuckle down and run a credit union versus buying up others’ assets.

Credit unions’ public reputation as member-first organizations is contradicted by these facts. And the regulators’ conduct exposed as supervisors who “have no clothes.”

Duffy’s endgame benefitted him and some of his closest enablers.  But they will learn giving away other people’s money is a losing game when the funding drys up and the lights turned off.

Is There A Cure?

The only bright light in this case are the two members who spoke up with the truth about the event.  The solutions must empower the members with information and total transparency so that they are not just mere bystanders.

The single most important reform that would change the whole process, is to require that a minimum of 25% (or more) of members must vote in any election to end a sound credit union’s charter.

Today a minority, usually in the single digits, bother to vote.  And a smaller minority actually approve  charter surrender.  In a democratic process, presumably a majority should approve transferring their collective wealth to another party.  But in credit unions a minority of members, and and even smaller group can approve 100% or total transfer of value for everyone.

According the FCCU’s certification of the vote sent to NCUA, only 9% (2,680) of the 29,672 members voted.  Of this amount just 7.7% of all members supported giving up the charter.  Compare this with NCUA’s characterization of 86% of voters “in favor of the merger.”

Transparency and Options Create a Truly Free Market

First, much fuller disclosures should be mandatory.  All of the documents required by NCUA in their review should be part of the public record for every member to see.  All contracts for future service for any employee or board member should be public.  If an FCU is involved, they should be required to disclose the same information as a SCU files in the IRS 990.

Second, all credit union members should have a choice to take their pro-rata share of accumulated capital and close their account if the merger is approved.

Third, once the disclosures are public, members should have the opportunity to seek proposals from other credit unions who would be willing to make better offers.

Fourth,  merger agreements should include specific performance objectives so members can track whether the value promised has in fact been delivered.  For example lower operating expenses, increased loan or savings opportunities, enhanced delivery options and their usage.

Fifth, the board of the continuing credit union should be required to report to all members at the annual meeting the impact of the merger on the institution after the first 12 and 24 months.

Mergers today are the wild west of credit union activity.  They are marketed by intermediaries offering to facilitate the benefits for the selling institution and the niceties of the regulatory process–for a share of the action.

Duffy’s example is not an exception, albeit the foundation was a unique creation. Rather with no rules, everyone feels entitled to whatever they can get.

In a true market this insider dealing would not happen.  For example when credit unions buy banks, the deal is often very public and the benefits to the bank’s owners very clear.

Just this week Beacon Credit Union announced that it planned to acquire Mid-Southern Savings bank for $45.1 million in cash.  The bank’s total capital at third quarter 2023 was $28.9 million for a sale premium of 150% of book for all the bank’s owners.

In the official Member Notice Duffy and the FCCU board sent to members announcing the mrger, the headline under the credit union’s name reads: Better than a Bank.  Except when it comes to selling out the charter and all capital in return for nothing but promises and future charity.

The Pied Piper of Stockton (Part II)

This is a three-part look back of a January 26, 2022  article on the transfer of $10 million of members’ capital to a non profit  by the CEO and Chair as a result of merging Finance Center Credit Union.

Part I  summarized the previous events and articles offering principals’ explanations.

Part II below presents data subsequent to the merger from the Foundation and CEO Duffy’s activities through January 2024.

Part III will address what happens now?

Part II: Updating the FCCU2 Story To the Present

How is the newly expanded Valley Strong Credit Union doing?  After the first full year post-merger, (ending December 2022) the credit union was going gangbusters.   However as of September 2023, the same indicators suggest the credit union has hit a  brick wall.

Ratio/ Measure     December 22    Dec ’23

Loan growth %            49.1%                 -6.6%

Share growth                8.7%                      1.5%

Members                     16.4%                       6.8%

Total Assets                 21.3%                    -3.8%

Net Income                 (46.0%)                   8.6%

ROA                                 .44%                         .44%

Net Worth                       8.1%                       8.5%

Loan Originations         58.5%                (51.4%)

Delinquency                     1.1%                        1.2%

Net C-O loans              $25.4 M              $68.8 M

# employees-FTE            625                       570

Two notes from 4th Quarter numbers.  The credit union reported a non-operating gain of $15.2 million or 84% of total net income on which ROA is computed.

The compound four year CAGR annual ROA growth (2019-2023) is negative 18.9.  In the same period the annual CAGR for average salaries and benefits grew 12.2% per year.

The two years’ trends show a dramatic slowdown in key balance sheet accounts,  rising loan charge offs and a staff reduction of 50 employees.  Mergers can create an initial  “sugar-high” growth appearance, but sustainability depends on a firm’s ability to  develop relationships, that is grow organically.   How FCCU members view their new credit union is hard to discern from this macro data.

 The Data from IRS Filings

The 990 IRS non profit filings for FCCU2 and Valley Strong (both  for 2022) provide important data.

From Valley’s 990, we learn that all of the senior FCCU employees listed in the Member Notice, remain employees and qualified for their $800,000 in total 2021 merger bonuses. Their total  compensation for 2022 is listed as :

Michael Duffy, EVP Chief Advocacy Officer    $1,088.045.

Nora Stroh, Legacy Ambassador  $361,814

Steve  Leiga, VP Accounting   $354,748

David Rainwater, Sr. Project Mgr   $362,747

Amanda Verstl, HR manager   $353,542

The data is from Valley Strong’s 2022 Schedule J partially shown below.

Total compensation of the five senior FCCU executives on this schedule is $2, 521, 696.

The FCCU2 IRS Information-A $2.0 Million Bonus Contribution

The FCCU2 foundation’s 990 for 2022  provides information about the transfer and use of FCCU members’ funds from the merger.

  • The most stunning fact is that the Fund did not receive the $10 million listed in the official Member Notice. Rather the total sent to the foundation  in 2021 was for $11,959,462 or almost $2.0 million more than disclosed to and voted on by members.

No explanation is provided where these additional funds came from? Why were they taken from members or not transferred to Valley Strong as part of the equity transfer? Who approved this $2.0 million additional amount? What was NCUA’s role?

  • In the same 2022 IRS filing we learn:
    • The Foundation has changed its name to The 54 Fund.  No public explanation of the reason can be found in any media.
    • The address is no longer at the former credit union’s office but in the building below, that is 2616 Pacific Avenue #4081. It is the local post box not an office.

  • The new foundation lists no website address or other contact information.  When I emailed Foundation director Steve Liega on the IRS return, I received no reply.  When dialing the phone number, it is “not in service.”

  • We do see the $250,000 donation listed in Valley Strong’s contributions, its largest single grant.

We also learn all of the initial funds were invested in a firm called the Dana Group.  What does this have to do with credit unions or prudent investing?

After adding  $2.0 million more of members’ funds, all these registration/location changes further remove the Foundation from public scrutiny and accountability. The only  information available is from the IRS 990 filed in October 2023, ten months after year-end.

In  contrast credit union call reports are public and received quarterly.  Annual  state and federal exams validate reported data. The 990 provides additional information on donations, political contributions and executive salaries.  In contrast, the financial details of the new 54 Fund are available once per year and then ten months after year end.

The 54 Fund Spent $0.38 for Each $1.0 Donated

Even though limited, the Foundation’s first full year report gives insight how it manages its activities.

Total revenue was $368,658  including the $250,000 donation from Valley Strong.   Total operating expenses were $105,858. Charitable donations were $272,479.  For every $1 in donations, the Fund spent another $.38 on operating expenses.

The $272,479 donations were distributed in 86 grants ranging in size from $1,000 (45) to three at $25,000 each.  The recipients include churches/temples of all denominations, multiple private and public schools, private social agencies, and the United Way of San Joaquin. The 54 Fund at 2022 yearend had more assets than at the beginning ($11.974 vs $12.058 million)

The purpose stated for all  grants is “general support.” Other than seven over $10,000, the much smaller 79 amounts might be characterized by the term, “walking around money.”

Of the nine 54 Fund directors chosen by Duffy, four are former senior FCCU employees, now at Valley Strong.  In 2022, all five former senior FCCU executives listed in the Member Notice received much greater annual compensation from Valley Strong  than the Fund’s $272,492 in total donations to help its 29,000 former members.  Is it just proving the adage “charity starts at home?”  Were these five positions  and pay, or others,  “at will” or negotiated in contracts?  Did the executives guarantee their success and not member benefits?

Three other 54 Fund directors are former FCCU board members including the  Chair Manual Lopez. Another director is Ed Figeroa, listed as Executive Director, who received a salary  of $46,667.  Figeroa had recently retired as CEO of St. Mary’s Dining Room. In 2020 the charity received a $100,000 donation from FFCU as part of the credit union’s Stockton Strong donation (see video from Part I).

By comparison, Valley Strong CU made  total 501 C3 contributions in 2022 over $1.1 million including  $250K to the 54 Fund.  These grants were made without the need for a foundation.

As a tax exempt organization there is no purpose for a credit union to establish a separate foundation to  expense grants.   This raises the question of motivation.  Why was a new foundation needed “to advance and support the needs of the members”-Duffy’s characterization in Part I.

The “Tragedy of the Commons”

Why was the  FCCU2 foundation established just a month before the merger announcement when it was unnecessary for charitable grants in the credit union’s previous 65 years of operations? Or at Valley Strong now?

The separate foundation registered by CEO Duffy (along with  his former employees and board directors) keeps total control  of the  funds by Duffy.  If the money had been returned to  the members  or transferred to Valley Strong, the ability to continue to cultivate an image as a civic patron would not be under Duffy’s control.  This transfer of $12 million  “privatized” members’ common wealth.

The  54 Foundation was the vehicle used to promote the personal philanthropic reputation of the  FCCU CEO once he left his leadership role.  His previous political and public grants activity had been funded from his credit union’s resources.  He needed a new funding source.

Two examples of this reputation motivation are in recent articles. In January 2024 Michael Duffy was selected as Stockton’s 69th Stocktonian of the year.  The story begins:

Dressed in a gray plaid suit and a red striped bow tie, the former president and CEO of the Financial Center Credit Union became the 69th person to receive the award for service and positive impact on the city.”  The paper provided a series of pictures of the event. 

The article cited Duffy’s past as CEO of FCCU (a responsibility he had exited 28 months earlier) and his position at Valley Strong. There is no reference to Valley Strong’s recent charity or the Foundation as the source of Duffy’s donations.  But he gladly accepts the praise and publicity for giving away a tiny fraction of the $12.0 million set aside from the  former FCCU members’ collective savings.

A longer article reporting the same award was published by the Stocksonian on January 29, Banker Michael  Duffy Surprised by selection as Stocksonian of the Year.

He is now described as a “banker” a higher calling apparently than a former credit union CEO.

He is quoted in the article saying: “I love Stockton, and so I find every which way to be a part of Stockton,” Duffy said. “If it’s from the north, to the south, the east, the west, the tiny neighborhoods, the big events, the very small not-for-profits, the very big ones, if I can be there enjoying this city with everybody I’m there.”

Neither article notes that after gaining his living for 28 years from the credit union, he and his board failed to seek a successor to lead the city’s 66-year old and largest local cooperative financial firm. That would be  standard industry best practice when CEO’s decide to leave.  It is also a fiduciary duty of the Board of directors.

This is a recent case  of how CEO succession normally proceeds, especially for financially strong credit unions. FCCU’s capital ratio of 16% was twice the ratio of Valley Strong.

But that process would mean Duffy would be out of a job which had been paying  him over $1.0 million per year. And he would no longer have access to members’ funds to show his civic “love.”

A Financial Pied Piper Leads Members and Resources to Bakersfield

The term Pied Piper refers to a person who is able to charm or lure others through the use of their skills and ability to manipulate them for their own gain.

Instead of sustaining the credit union  to serve its founding community, Duffy engineered the transfer of 29,000 Stockton’s members’ $635 million locally owned assets and their $110 million accumulated capital.  A new board and executive team 250 miles away now controls how these resources will be used.

When initiating this change of control to a credit union with no local  roots,  Duffy set aside $12 million of his members’ surplus for his direct control in the 54 Fund.

He turned the Robin Hood model of wealth distribution into a financial round robin game.  He first retains money, not using it for member benefits, to build reserves more than 100% higher than peers. From this extraordinary capital surplus, he directs $12 million into the new organization he controls.  To justify this diversion,  he says it to help those from whom he withheld the earnings benefit in the first place.

When CEO, Duffy short-changed members’ returns  by building capital ratios twice the industry average.  He turns to this same source for the 54 Foundation funds. Truly a double blow for those who entrusted their financial futures to his credit union leadership.

In Part III I will discuss what happens next.  And share the names and writings of two persons who saw through this whole financial flim flam from the start.

(Editor’s note:  Valley Strong data for December 2023 updated on February 3, 2024)

The Pied Piper of Group 209,  or What Happened to the FCCU Members’ $10 Million? (Part I)

On January 26, 2022 I wrote a detailed analysis of the transfer of $10 million of members’ capital to a non profit organized by the CEO and Chair of the merging Finance Center Credit Union.  My position was that this was an improper taking of funds owned by the members, but asked,  “You be the judge.”

This is a followup analysis since the October 1, 2021 merger and funds transfer.

Synopsis:  Part I  summarizes previous events and questions raised about the money transfer.  Articles provide principals’ various explanations in  a CU Today story.

Part II presents the new Foundation’s data subsequent to the merger and former CEO Duffy’s activities as recently as January 2024.

Part III asks what happens now?

 Looking Back at the Merger Issue

Stockton’s (area code 209) Need for Credit Union Services

In the words of the CEO of a local community food kitchen for the needy, “Stockton is not a destination city.”  Its population of 322,000  residents is 42% Hispanic, 24% Asian, 19% non-Hispanic white and 13% black.  It is one the most racially diverse large cities in America, according to a U.S. News analysis based on 2020 census data.

It is not a wealthy city. Median household income is $71,612 and per capita, $29,095. (2022)  The poverty level is 15.6%.   And only 18% of the population over 25 years has a college degree.

The Stockton record summarized the city’s variable reputation in a November 2023 article:

“Stockton has topped another list and this time it’s not a bad thing.

“While Stockton’s long had a reputation of being one of America’s most miserable cities (thanks, Forbes), U.S. News & World Report is shining a positive light on Mudville.

“In its most recent report,  Stockton ranked among the best places to live in California. It ranked number thirteen, one spot below Visalia and one spot ahead of Bakersfield.”

Stockton was nationally recognized as one of the first cities in the country whose finances collapsed due, in large part, to unaffordable defined-benefit pension obligations.  This threatened its ability to deliver basic services like police protection.

The city is the ideal opportunity for a locally focused credit union.  The member needs are many.  And until October 1, 2021, this was Financial Center Credit Union’s (FCCU) long time home market. On that date the CEO and board transferred via merger all the credit union’s savings, loans, members and operational direction to Valley Strong CU whose main office is in Bakersfield, a city approximately 250 miles and a four hour drive away.

Setting Up the Transfer

On June 25, 2021 Chair Lopez and CEO Duffy of FCCU registered a non profit in California named FCCU2.   Forty two days later Chair Lopez signs the official Members’ Meeting Notice to merge FCCU into Valley Strong.  The Notice includes the transfer of $10 million to this newly established corporation, one of several merger disbursements members were asked to approve in the merger vote.

To my knowledge this transfer of member capital to the sole control of the former CEO and Board chair had never occurred.  It appeared to be a “taking  spoils” from the event. The amount, the singular nature of the transfer and the credit union’s prior five year downtrends under CEO Duffy raised the question of whether this money grab was proper.

CEO Duffy and his Sister Nora Stroh  had been the senior executives at the credit union since 1993.  At the merger date, the credit union had served the Stockton community for 66 years with Duffy as CEO for the final 22.   In the  years prior to the merger, the $635 million credit union recorded these trends:

  • A decline in loans outstanding from $176 million in December 2016, to just $102 million at the merger date. This is an annual negative growth of 10.3%.
  • Total members declined by 2,900 from December 2016 to the merger, a fall of over 2% per year. These declines in loans and membership were the exact opposite of the growth gains reported by all other segments of the credit union system.
  • Even with this decline in risk assets, the credit union continued  adding to reserves from earnings. The result was a net worth (capital) ratio of 20% at December 2018 and 17% in December 2020, nine months before the merger.  During this five years, the credit union at times reported a net worth/asset ratio of more than 100% of the loan/asset ratio.
  • In the IRS 990 filing for 2018, the three highest reported salaries of Duffy, CEO; Nora Stroh, COO; and Steve Liega, Accounting and Finance were a combined $3.1 million or 46.5% of all compensation for a staff of over 90 employees.

During this period of decline in members and loans, CEO Duffy maintained a high profile public image.  The credit union reported numerous local and statewide political donations and grants to area non profits in its annual 990 filings.

The Critique

In the years leading up to the 2021 merger,  CEO Duffy operated with the form, but not the substance, of a cooperative charter.  It was run as a family business promoting the public visibility of the CEO, versus the well-being of members.

My January 2022 post was called A Theft of $ 10 Million or Just Spreading Goodwill?  I provided multiple data points about the credit union’s loan and member decline, million dollar executive salaries, and net worth sometimes greater than 100% of the loan to asset ratio.

An example of Duffy’s personal PR efforts is a video from the Stockton Mayor’s office of a $1.0 million donation to Stockton Strong in 2020. The speakers state the money  is from the “employees of the credit union and the Michael P. Duffy Family Fund.”

The only credit union employee in the eleven minutes is Duffy. The video shows two mock checks of $100,000 each to charities feeding food insecure residents.  In the same year as this employees’ gift, the credit union’s outstanding loans declined by $40 million.

I can find no public reference to the Michael P. Duffy Family Fund in either California’s registrations or IRS 990 tax exempt filings.

CEO Duffy’s May 1, 2021 press release announcement of the merger included the following rationale:

As the CEO of Financial Center Credit Union for the past 21 years, my perspective on mergers has evolved . . . I have marveled at what credit unions of today’s scale can accomplish when they join forces . . . this merger is a true embodiment of the credit union industry’s cooperative mind-set. . . this merger represents a strategic partnership between two financially healthy, future focused credit unions committed to providing unparalleled branch access, digital access, and amazing service for the Members and the communities they serve.

There was no data or hard facts to support this sudden strategic insight. The only concrete future service promise in the Member Notice was  access to Valley Strong’s 19 branch offices which were an average of 250 miles from the former Stockton headquarters.

Press Followup of the $10 Million Question

CU Today published an extended story following up  the $10 million transfer to Duffy’s control.  The story, Leaders from Merged-Out Credit Union Head New Foundation, provides the participants’ explanations as follows:

The individuals involved in setting up the arrangement say it was approved by the regulators and is designed to fulfill the new merged-out credit union’s mission, while state and federal regulators issued vague statements saying no laws were violated and that the creation of the $10 million foundation was “a business decision” on the part of the credit union. 

Duffy’s specific defense of the $10 million was,  ”It’s not a diversion, but rather an investment in the communities it serves. This ensures that the funds will be used in the manner in which it was intended: to advance and support the needs of the members” 

When asked why it was not paid to members: “The board viewed its strategic decision through three lenses: members, team and community. . .It’s a symbiosis between the three and we wanted to continue the continuation while improving opportunities through cooperation vs competition.”

After Duffy’s twenty-eight years earning a living and achieving personal standing in Stockton,  he initiates the transfer of  $634 million total assets, $102 million in loans, 29,500 members and their $540 million of savings to another credit union’s control and leadership.  Prior to merger related adjustments, this “free” transfer also encompassed the members’ $107 million of capital.

Duffy kept control of $10 million in his words, “to advance and support the needs of members.”  After transferring all his leadership responsibility for managing  $634 million of member assets out of Stockton and away from local control (but keeping his CEO level compensation) he arranges to hold back $10 million for his personal use.  In order to serve the “needs of the members” he had just sold out!

Part II tomorrow will look at data and events since the merger.


NCUA’s Disdain for Credit Union Democracy

Let’s get right to the point.  NCUA does not believe in member democracy, member rights or any aspect of owner-member control.

The cooperative model capitalizes on the character of its member-owners who join to help each other attain a better economic status. But that is not NCUA’s belief.  For them, members are merely customers. NCUA’s primary duty is regulatory compliance, not enhancing the owner’s role. The democratic structure of one member one vote in elections is a theory rarely practiced. And its practice has nothing to do with the regulator’s oversight.

There are numerous examples of not just NCUA indifference, but outright rejection of requests to protect the property and process rights of member owners.  The examples are rampant in three areas:  the administration of mergers, the oversight of bylaw requirements/amendments framing director fiduciary conduct, and when asserting absolute, unaccountable and unexplained regulatory actions to close member owned institutions.

Unconstrained-Unexplained Closures

Following are two examples this month of NCUA forcing a merger without a member vote or any form of due process, and just vague wording: “The conditions of the merger met regulatory provisions that allowed for a waiver of the membership vote.” No facts to justify this cancellation of $32.1 million Gabriels Community CU charter.

A second example is cited again by CU Times:  “An NCUA spokesperson said the $2.9 million Waconized Federal Credit Union in Waco, Texas was given the OK to merge with the $16.7 million 1st University Credit Union, also based in Waco. The consolidation was allowed in accordance with NCUA Rules and Regulations, Part 708(b), which gives the federal agency the authority to permit a merger without a member vote under certain circumstances.”

This arbitrary, unexplained use of NCUA authority is not new.   In a February 26, 2022 post, the End of Kappa Alpha PSI  (occurring in 2010), I provide the detail of NCUA’s liquidation while an appeal was pending of this black fraternity’s credit union.

This is not conduct limited to times of crisis. I list many other situations where NCUA arbitrarily removed management, forced mergers or performed instant liquidations without due process as recently as May 2020. In a single example from April 2016 the agency summarily liquidated six credit unions that reported collective net worth of 17.6% without any conservatorship or other steps required by its own rules.

At the time of most critical and consequential regulatory action, the agency rebuffs any explanations. All of the circumstances are kept behind closed doors: “we do not comment on our efforts or conditions related to conserved (or troubled) credit unions” is the standard defense.

At the moment the member-owners’ role is negated, the NCUA goes mum. Accountable to no one.  As the two most recent examples occurred within a week of December yearend, it is easy to surmise why these silent closures were not revealed then.  If done after yearend, a call report disclosing their financial condition would have to be filed.  Such a final accounting, if available, would illuminate not a credit union collapse, but  a failure of effective examination and supervisory oversight.

The continuing danger of these unopposed regulatory precedents is that they encourage further use of arbitrary power.  Credit unions see this.  Examiners will take their cues to assert their unchecked authority.  Recommendations (DORs)  wlll order credit unions to sell millions in underwater investments or borrow unneeded loans solely to reduce modeled interest rate risk will be issued.  The threat of further action and CAMELS downgrades is all that is needed to force immediate, costly options that reduce member capital.

Lack of regulatory transparency at  critical points in any credit union’s circumstances perpetuates unchecked and unaccountable regulatory power.  Secret actions always hovering over credit unions in difficulty or who might otherwise oppose NCUA’s findings.

NCUA Suppression of Member Board Participation


On May 18, 2021, I filed 21-FOI-00083 “for the requests, communications, and NCUA’s approval or denial of all federal credit unions over $5 billion in assets that have requested to change their  standard bylaw for nominations for directors by petition.”

Only two FCU’s have done this: Navy FCU and Penfed.   Navy had filed two comment letters in 2004 and 2005 suggesting changes in the standard bylaw requirements.  However, it was not until September 11, 2019, that the Director of CURE approved these requested changes which:

  • Raised the requirement for members to call a special meeting to 1,000 members or one fifth of one percent of total membership, whichever is greater.
  • Raised the requirement for nominations by petition to the greater of 1,000 members of one-fifth of one percent of the total membership.

The previous maximum bylaw signature requirement for both events was 500.  Under the revised bylaw, one-fifth of 1% of members would be 26,000.  The FOIA response denied much of the correspondence as to why this would be needed.

However, one can surmise the logic from the two comments from 2004/5.  Navy is so large and important that it would be too uncertain to just let anyone run for the board by collecting 500 member signatures.

Penfed’s circumstances are slightly different. Prior to this change in their bylaws,  a member had received the minimum 500 signatures to appear on the ballot in the just completed election.  The candidate was a former board member, familiar with the process. He was informed he did not receive sufficient votes to be elected, but was not shown the election numbers.

Shortly after, Penfed applied for and was quickly approved for twofold bylaw changes approved June 24, 2020 by the director of CURE:

  • A special members’ meeting now requires 1,000 signatures or one-fifth of total members but a number not to exceed 2,000. There are additional requirements before the meeting can be called however.  One includes the formation of a five-member committee to meet with the board.  The committee will be bound by whatever agreement is reached on behalf of the petitioners; if no agreement, only then can the call for the meeting be sent.
  • Nominations for the board by petition now require total signatures of the greater of 1,000 or one-fifth of total members (no upper limit). No nominations will be accepted from the floor if there is only one candidate per vacancy.  All board nominating committee candidates must be sent to members 75 days prior to the meeting.  Nominations by petition must be filed with the secretary 40 days prior to the same meeting.  This timing effectively provides members just 35 days to get signatures to add to the Board’s selected candidates after they are first disclosed.

With this bylaw, Penfed board nominations by member petition would require 5,800 signatures versus the original 500 maximum.

The effect of both bylaw changes is to virtually eliminate any chance of a board nomination by petition.   Note these changes were done without any member input, no announcement by either credit union or NCUA of this fundamental change in the bylaw election process.  And now that it is public . . .

Election Conduct Is Not NCUA’s Responsibility

NCUA avoids any involvement in board elections.   Four members of Virginia Credit Union submitted nominations for the annual board election. Here is the background to their effort in a post, The Fix Is In.  The members were not interviewed by the nominating committee They asked NCUA for assistance.

Regional Director John Kutchey ‘s reply summarized in  a Credit Union Times report  reads in part:

In his letter, Kutchey said the NCUA considers the right to participate in the director election process a fundamental, material right for members of a federally chartered credit union.

“The FCU Bylaws provisions that implement this right include, but are not limited to, a requirement that the FCU’s nominating committee interview each interested member that ‘meets any qualifications established by the nominating committee,’” Kutchey wrote. “Also, the FCU Bylaws provide alternative processes to run for a board seat for members interested in serving on the FCU’s board who are not selected by the FCU’s nominating committee.”

But that is just for FCU’s, not state charters.  There has never been a reported instance of NCUA ever enforcing this interpretation for FCU’s.

Despite Kutchey’s high sounding phrases, NCUA has approved bylaw changes and board nomination outcomes that make a charade of democratic governance.  Credit union boards and CEO’s see NCUA turning a blind eye to the repeated self-nomination and perpetual control closing any election choice.  So, except for extremely rare events, boards turn into self-perpetuating, self selected directors.  Member-owner governance via the annual meeting election does not exist.  And with it a critical accountability check on the ambitions of the CEO and boards.

Mergers: A Game Without Rules

Knowing that they are insulated from any real member accountability or oversight, credit union CEO’s and boards feel unrestricted when they decide to seek mergers with other credit unions.  The basic test is not what is in the members’ best interest, but where can management and board get the best deal for themselves—sometimes right before the CEO makes an exit.

Today credit union “voluntary” mergers are a game without any rules. Financially successful credit unions combine  rhetorical generalizations referring to scale, common culture and shared vision. There is no pretense of fiduciary responsibility including the required duties of care for member-owner assets or of loyalty, to always act in the best interests of members.

NCUA blindly administers the process oblivious to the self-dealing and incoherent examples such as cross country mergers.  When challenged the Agency has two responses, one before and one for after.

Their first defense is that it is the members’ choice.  Note that this is most often the first time the members will be asked to vote on anything.

The Agency expects members who have put their confidence and money in the credit union, often for generations, to act contrary to the recommendations of the leaders to whom they have entrusted their resources and financial relationships.  And if a member or group were to speak up, the credit union will either refuse to answer their concern or, use the full corporate resources against their opposing members. (multiple examples to follow)

The members are not even provided the same information credit unions are required to submit to NCUA on the merger package checklist. The owners are effectively removed from seeing the same data and information the regulator does.

But the worst part of NCUA’s studied neglect is its role if all the promises, undertakings and promised merger benefits fail to materialize.  What happens afterwards? The answer is nothing happens, no matter how flagrant the violations promised in the Member Notice which NCUA approved.

NCUA has published a booklet called Truth in Mergers.  It promotes merger as a strategic option, oblivious of any accountability to the owners.

When a merger turns out to be merely a planned sale to a third party with no background or interest other than asset acquisition, what are  jilted members to do?

Here is NCUA’s reply from page 21 of the Merger Manual:

Take measures to enforce the merger agreement. How can merger agreement provisions be enforced when one party to the agreement no longer exists? NCUA’s Office of General Counsel suggests that a merging credit union name in the contract the third-party beneficiaries with standing to enforce the contract. For example, if the continuing credit union agrees to keep a branch open for at least one year, the agreement would note that the members of the discontinuing credit union are beneficiaries with standing. Likewise, if staff is promised a comparable position in the continuing credit union, the merger agreement should note their interest in the position, not to be terminated without cause for one year. Because these matters would fall under state contract law, the wording should be state specific.

Don’t come to NCUA if you have been duped or conned and stripped of your cooperative savings.  Not NCUA’s problem.  Go find an attorney and use your personal resources to fight the people who just screwed you.

I will present multiple examples of this kind of self-serving mentality and NCUA’s impotence even when confronted with the facts.

A Dangerous Myth

The bottom line is that NCUA does not believe in or support owner rights.  A cooperative member is nothing more than a customer.   Chairman Harper’s regulatory philosophy as presented in a GAC address is revealing.  Note especially his ending words — the logic that credit unions do not discriminate because they are owned by their members is a dangerous myth and one that should end. While he might have intended otherwise, the real dangerous myth he evokes is “credit unions are owned by their members” His full comment:

Since joining the Board, I have focused on strengthening the NCUA’s consumer financial protection and fair lending resources. Given the consumer compliance examination program for comparably sized community banks, our program’s scope is insufficient, especially for those credit unions between $1 billion and $10 billion in assets. We should be doing more, and we can do more.

I understand this is not a popular opinion in this room. Many within the industry maintain that the NCUA should primarily focus on its safety-and-soundness mission or that the agency has not demonstrated a significant rationale for a stronger consumer compliance program.

Some also contend that the cooperative nature of credit unions prevents their lending practices from being discriminatory because their primary purpose is to serve their members’ needs. However, the logic that credit unions do not discriminate because they are owned by their members is a dangerous myth and one that should end.

Boards and CEO’s have taken their cues from this amoral stance.   When NCUA has no belief in owner-members, does nothing to support democratic participation and keeps members in the dark about their own activities, is it any wonder that CEO’s and boards believe they are completely free to decide their credit union’s future without any regulatory or member accountability.

Examples to follow.

Threats to Coop Democracy

There is much public political rhetoric currently  expressed under the theme of “threats to democracy.”

But America’s democratic experiment is not just in our national or state voting processes.   Democracy is a civic practice that characterizes the governance  of the vast majority of organizations, public and private, across the country.

These more local institutions, including credit unions, are where we learn and practice what responsible citizenship means.   It can mean paying attention to leadership, organizational performance, voting when called upon, and supporting, when necessary, with our presence or money.

When money and power are at stake, especially in credit unions, those benefiting from positions of responsibility can be tempted to manipulate the democratic process for their advantage.

Lincoln’s Lyceum address before he had formally entered politics addressed the fragility of democratic design.   Parts of his speech  in the context of today’s events were quoted by Heather Cox Richardson in a recent column:

On January 27, 1838, Abraham Lincoln rose before the Young Men’s Lyceum in Springfield, Illinois, to make a speech. Just 28 years old, Lincoln had begun to practice law and had political ambitions. But he was worried that his generation might not preserve the republic that the founders had handed to it for transmission to yet another generation. He took as his topic for that January evening, “The Perpetuation of Our Political Institutions.”

Lincoln saw trouble coming, but not from a foreign power, as other countries feared. The destruction of the United States, he warned, could come only from within. “If destruction be our lot,” he said, “we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.”

Lincoln’s truth was that in democratic organizations, the greatest threat to sustainability is not external, but internal.

Lincoln’s last sentence above caught my attention.  The same word, suicide, was used in the final part of a blog Mike Riley wrote last summer. He was expressing concerns with specific credit union practices.  In a note of irony about his previous employer, NCUA’s role in these events, he closed with his inimitable sense of humor:

“If someone wants to commit suicide, it is a good thing if a doctor (i.e. NCUA)  is present.”

Democratic institutions survive not due to their special design, but rather because  leaders  believe and follow the values and processes required to sustain.

This week I will review events that are shaping the evolution of credit unions that are contrary to the principles implied by democratic governance.

Ignoring or overlooking our cooperative falls from grace is easy.  “It’s not my problem.”  But soon the examples of bad behavior and poor decisions become precedents for others.  These destructive events are not caused by outside competition; instead they reveal us becoming “authors” of our own finish.