In the past month, the NCUA has approved two different mergers to take place. While this may seem like nothing new or exciting, both merger approvals noticeably took place without a vote from the credit unions’ membership, meaning that the credit unions’ member-owners had no say whatsoever in the mergers.
Given that I have only been in the industry for about five years, there are many aspects of credit unions—particularly regarding NCUA policy and rules—that I’m still discovering. Nonetheless, my reaction upon reading this news was something akin to King George III’s reaction to learning George Washington was stepping down in the musical Hamilton, when he said, “Is that true? I wasn’t aware that was something a person could do. I’m…perplexed.”
Perplexed or not, it turns out this very much is something a person (or, in this case, the NCUA) can do.
According to section 708b.105 “Approval of merger proposal by the NCUA” listed in the NCUA Rules and Regulations, “For mergers of federal credit unions into federally insured credit unions, if the NCUA determines that the merging credit union is in danger of insolvency and that the proposed merger would reduce the risk or avoid a threatened loss to the NCUSIF, the NCUA may permit the merger to become effective without an affirmative vote of the membership of the merging credit union otherwise required by 708b.106 of this part.”
While the excerpt leaves little room to deny the NCUA’s right to deny a merger vote, doing so twice in a one-month period certainly raises a few questions and concerns—ones the NCUA seems unwilling to answer.
The first of the voteless mergers is currently underway between two credit unions both located in Waco, Texas. The first, the $2.9 million Waconized Federal Credit Union will be merging into the $16.7 million 1st University Credit Union. The NCUA announced the approval on December 21, 2023, with an intent to complete the merger on January 31, 2024.
In this instance, the reasons behind the merger are easily apparent. Waconized FCU’s field of membership was mostly limited to the employees of the Owens-Illinois glass plant in Waco. However, the plant announced back in September 2023 that it would be closing its Waco location, leaving the remaining credit union in quite a bind.
Without the business from the plant, Waconized was almost surely going to become insolvent, as the credit union’s asset size had been steadily decreasing long beforehand—going from over $10 million in 2003 to $2.9 in 2023, and with only two employees to its name.
Given this, it seems a merger was a no-brainer for both parties and the NCUA. Therefore, one might assume that without any other options, it was logical for the NCUA to proceed without a vote from the member-owners. While I’ll admit this does seem like exactly the kind of situation the aforementioned clause was created for, it does create a scenario in which the owners of the credit union are completely removed from a topic that regards the life of the credit union.
From the initial concerns to the official merger of the credit union into another, every single discussion was held behind closed doors and every decision was made without the consultation or input of the member-owners. Extreme circumstances or not, it does not seem too much to ask that the credit union be transparent with the very people who own it about such large decisions—with or without a vote.
If the first was an example of good intentions gone wrong, or perhaps a credit union following the only path left for its members, the second of these two voteless mergers is certainly not.
Announced in November 2023, though still underway, is the merger between the $32.1 million Gabriels Community Credit Union in Lansing, Michigan, and the $7.6 billion Michigan State University Federal Credit Union in East Lansing, Michigan. In justification for the lack of a member vote, an NCUA spokesperson noted that “The conditions of the merger met regulatory provisions that allowed for a waiver of the membership vote.”
Notably, the NCUA outright refused to disclose what conditions the two credit unions supposedly met. MSUFCU President/CEO April Clobes gave a little more insight into the situation though, remarking that the merger was necessary due to “the extenuating circumstances of Gabriels.”
However, taking her cue from the NCUA, she would not expand upon what those circumstances were.
Despite the lack of willingness to provide a clear reason for the merger, if we refer back to the NCUA Rules and Regulations clause under which the NCUA is allowed to bypass a member vote, one can assume Gabriels was in danger of insolvency or posed a risk of loss to the National Credit Union Share Insurance Fund (NCUSIF). But do the financial reports filed by Gabriels back that assumption up?
According to NCUA financial performance reports, Gabriels Community had in fact been on a downturn financially in the last year. In the second quarter of 2022, the credit union saw a gain of $346,112 whereas in the same quarter of 2023, it reported a loss of $106,622. And between the third quarter of 2022 compared to the third quarter of 2023, Gabriels Community had gone from a gain of $487,612 to a loss of $288,692.
Clearly, the credit union’s financial situation had taken a downturn in 2023—drastically so compared to its 2022 financial reports, but neither the reports nor the statements on the merger offer any insight into how the credit union ended up in such an unrepairable situation, what steps were taken in an attempt to rectify it, or how the situation reached a point where there was no time or need for members to be allowed their right to vote. How did Gabriels Community’s status become so dire that the NCUA was willing to okay a non-member-approved merger?
Considering the silence from both credit unions and the NCUA and the topic, in contrast to Waconized somewhat obvious motivator, members and the industry as a whole are left scratching their heads and wondering, “Why the secrecy?”
While the lack of a vote may be permissible under NCUA regulations (though maybe still deserving of a little side eye) the true concern comes from a refusal of both the NCUA and the merging parties to provide information on the reasons behind the merger.
If Gabriels Community Credit Union was truly in a poor financial situation, so badly that it was in danger of insolvency, denying the credit unions’ owners of such information seems shady at best. At worst, it undermines their position as owners of the credit union. Not only do they have the right to know, but the credit union should be responsible for informing its owners of its financial situation and what issues, decisions, etc. led to this outcome.
How did the credit union go from a gain of $487,612 to a loss of $288,692 (a $776,304 difference) in the span of one year? How did one bad year of income vs previous years of success lead to the quick decision that the credit union could not be saved? Are members, as owners, not owed an explanation for the end result?
In a recent article, Chip Filson argued that credit unions and cooperatives should be providing their member-owners with more detailed information on the well-being of the credit union. “Credit unions are required in their bylaws to post a monthly financial report in a conspicuous place in the credit union and file the quarterly 5300, but few will provide a public description of these results. Credit unions have shareholders, as do all public companies. The members’ interest in the performance of their firm is the same as the owners of a bank or any other firm,” Filson wrote.
He went on to ask, “Is the interest of the member-owners any less deserving than those of public companies? Is the responsibility to coop shareholders by the credit union’s professional staff any less than to a publicly traded or even a private firm?”
To remove the opportunity to vote due to extreme circumstances is one thing, to close the door of information on them completely is another entirely. It draws a line in the sand between credit union owners and credit union management and signals that the rights of ownership do not extend to the inner workings of the credit union.
The situation feels quite secretive and somewhat deceptive, going to great lengths to keep member-owners out of—to quote Hamilton again—“The room where it happens.” Or, in other words, these credit unions and the NCUA are making decisions behind closed doors without the consultation, approval, or knowledge of the credit union’s member-owners, and intentionally working to keep it that way.
The merger between the Gabriel Community Credit Union and Michigan State University Federal Credit Union will be completed this month, but the series of choices, decisions, and results that led to the downfall of the credit union and the ultimate merger may forever be only known to those who were in the room where it happened.
Thanks so much for your response, Chip! The lack of transparency and commitment to keeping members in the dark defies what credit union ownership means. It’s important to continue calling out these situations. I’d definitely be interested in the examples you have!
chip+filson#1
Powerful article, well written. Even when members can vote, the whole merger activity is a “game without any rules.” So the more avarice and blatant self interest options to bad deals and closures of very strong, long serving credit unions.
At a minimum if this is just the “free market at work” as NCUA likes to claim, then members should be free to solicit other credit union offers for the merger–and all options be put on the table. But then the CEO’s might lose their sweetheart deals that negotiated. Can send examples if interested.