Credit Union Watcher Questions Transactions in Financial Center CU Merger

A longtime credit union observer and former NCUA staffer has called on the NCUA to claw back $10 million that a Stockton, Calif., credit union gave to a foundation controlled by two of the credit union’s board members, calling it “a pilfering of members’ money.”

The credit union responded to Chip Filson’s Jan. 26 blog by saying its recent merger, including related transactions questioned by Filson, was disclosed to members and approved by the NCUA and the California agency that regulates credit unions. It also said the foundation will not pay its officers or board members.

The $10 million payment occurred just before the credit union, Financial Center Credit Union, was acquired by Valley Strong Credit Union of Bakersfield, Calif., on Oct. 1, 2021. Financial Center ended its run with $634.4 million in assets and 29,604 members. Valley Strong went from $2.7 billion in assets and 192,523 members as of Sept. 30 to $3.5 billion in assets and 248,177 members as of Dec. 31. Michael Duffy was hired by Valley Strong as its chief advocacy officer.

The payment to the foundation, along with a $15 million special dividend paid to members, was previously reported by CU Times. With the combined $25 million payout, Financial Center was able to lower its net worth ratio from 17.21% in September 2020 to 12.40% on Sept. 30, 2021, the day before the merger went into effect. Valley Strong’s net worth ratio stood at 8.61% the day before the merger.

The merger was approved by members on Sept. 23, 2021 with 11% of members voting and 86% of them voting in favor.

Filson raised his objections on Jan. 26 on his “Just a Member” blog that he started after retiring in 2019 from Callahan & Co., the Washington, D.C., credit union company he co-founded in 1985 with two other former NCUA regulators.

Filson wrote in the Jan. 26 blog that the NCUA and California regulators failed to protect members by ensuring that the officers and board members carried out their duties as fiduciaries.

“This brazen appropriation of members’ funds was condoned by the regulators – at every step,” Filson wrote.

“(The) NCUA’s multiple levels of review as well as California’s Department of Financial Protection and Innovation must have been braindead when reviewing this diversion to the control of Duffy and his board Chair, the two founders of FCCU2.”

The NCUA declined to comment. The California Department of Financial Protection and Innovation (DFPI) emailed a response to CU Times on Monday.

“The merger agreement approved by the boards of each credit union provided for the payment of a special dividend of $15M to members on a pro rata basis and also for the payout prior to the merger of a $10M distribution to form the non-profit charitable foundation known as FCCU2 Foundation to provide community outreach and use in the San Joaquin Valley area. The application was reviewed per the Department’s procedures and was approved in accordance with California state law,” DFPI wrote.

Filson also wrote that the FCCU2 Foundation is not tax exempt and not “a foundation in the traditional meaning.” He also called for the NCUA to review Valley Strong’s agreement to pay a total of $2.5 million into the foundation over 10 years, saying that could be seen as an “inducement” for Financial Center to agree to the merger.

Jim Lawitz, a spokesman for Valley Strong, said the foundation is a 501(c)3.

“Any insinuation regarding a ‘quid pro quo’ is categorically false,” Lawitz said. “All documents relating to a merger of this size undergo a thorough review by the appropriate regulatory bodies.”

Filson cited California Secretary of State documents that show the FCCU2 Foundation was formed in June 2021 with Manuel Lopez, who was chair of Financial Center, as the foundation CEO, and Duffy, who was the credit union’s president, as the foundation’s agent. A filing in July showed Duffy also became CFO. Lopez and Duffy were also on the credit union’s five-person board that approved the merger.

The FCCU2 Foundation’s articles of incorporation filed June 25, 2021, said it will “provide support to other nonprofit charitable entities in the California communities historically served by Financial Center Credit Union, with an emphasis on San Juaquin County and adjacent communities, and engage in local community outreach and improvement activities through volunteer efforts and direct engagement with charitable projects or activities in those communities.”

The articles said the foundation’s board will consist of three to nine people, but did not list them. Valley Strong and Duffy were asked for a list of board members, but they did not provide one.

In keeping with the requirements of a 501(c)3, the document said FCCU2 would not be involved with influencing legislation or promoting political campaigns.

Lopez sent a notice to members signed Aug. 6 of the special meeting to decide the merger. In it he listed the creation of the “nonprofit, charitable foundation” as one of the benefits of approving the merger and disclosed the contributions of $10 million from Financial Center and $2.5 million from Valley Strong to support “charitable and educational activities for the betterment of the Stockton area.”

“Both Financial Center Credit Union and Valley Strong Credit Union are committed to community outreach in the San Joaquin Valley,” Lopez wrote.

The NCUA website only posted two comments about the merger, both against it. One received Aug. 18, 2021 based his objection on the $10 million transfer to the foundation, saying he had asked for but failed to receive an explanation for the transfer. “Member financial assets of any amount, especially $10 million, should not be given away for any purpose,” he wrote.

CU Times asked Duffy via email why he participated in the formation of the foundation and what his goal was.

“The foundation was formed to provide support to other nonprofit charitable entities in the communities historically served by Financial Center Credit Union. It allows for continued local giving and support in the communities that FCCU has served since its inception,” he wrote.

CU Times also asked him how much the foundation will pay the CEO.

“The foundation offers no benefits or compensation to board members,” he wrote. “Additionally, there are no paid employees of the foundation including former CEO Michael Duffy. The Secretary of State’s Statement of Information (SI-100) form requires all officers to be listed.”

The latest statement of information, filed July 20, 2021, showed Lopez and Duffy as officers, but listed no one else as officers or board members.

CU Times asked him how members and the public can monitor how the foundation spends its funds.

“Monitoring and reporting are through state and federal authorities as is required of all 501(c)3 nonprofit foundations chartered in California. These include reporting to the Internal Revenue Service, the California Franchise Tax Board and the California Secretary of State’s office. Are all public record,” Duffy wrote.

IRS Form 990s can show spending and compensation by nonprofits but are usually at least two years old. For example, among the foundations of the four largest credit unions, the IRS Form 990 search tool showed reports for fiscal years ending from June 2018 to December 2019. The latest Navy Federal Credit Union Foundation report was for the fiscal year ending Dec. 31, 2018.

Diana Dykstra, President/CEO California & Nevada Credit Union Leagues, said she has known Duffy for many years, and has admired his work in San Joaquin County. The blog, she said, is “Chip throwing an honorable man under the bus.”

“Michael is being vilified, when he is a man of such integrity and care for this community,” she said.

Dykstra said the foundation will benefit Stockton, which she said is heavily agricultural and has many low-income residents.

“That money could have gone into the net worth of Valley Strong. This stays in this community,” she said. “I think it’s honorable what Michael did.”

Filson, who received a Rhodes Scholarship in 1966, worked from 1977 to 1981 for the Illinois regulator of credit unions and from 1981 to 1985 with the NCUA, where he was director of the Office of Programs in Washington, D.C.

Since his retirement from Callahan, Filson’s blog has often criticized the NCUA and some credit unions with articles heavy on numbers and thick with specificity on process. In the Jan. 26 blog, Filson called on the NCUA to:

• Claw back “the full amount of the $10 million diversion” and distribute it to members.”
• Permanently bar from credit union affairs “the instigators at the board and in management who developed and implemented this scheme.”
• Review the minutes and all other documents related to the additional required contribution of $2.5 million by Valley Strong to FCCU2. “If this commitment was a quid pro quo (inducement) in return for the merger, then all parties approving this payment(s) should also be barred from engaging in the affairs of a credit union board and management,” Filson wrote.
• Review the actions of every regulator involved with the merger “to determine if they should continue to be in positions of responsibility.”

“These failures are not due to a rule needing updating. Rather it is an example of persons who lack common sense judgment about accountability,” he wrote. “If (the) NCUA fails to claw back the funds and do nothing it will demonstrate that it has neither foresight nor hindsight when it comes to protecting members.”