By Chip Filson
This is the second in a two-part look back of a Jan. 26, 2022 article on the transfer of $10 million of members’ capital to a nonprofit by the former CEO and chairman of what was then Finance Center Credit Union in Stockton, Calif., which has since merged into Valley Strong Credit Union in Bakersfield.
Part I summarized the previous events and articles offering principals’ explanations.
Below is a look at the data presented subsequent to the merger from the through January 2024.
The Financials
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. (September 23 data to be updated as soon as December 2023 call reports are in.)
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 nonprofit filings for FCCU2—which is the name of the foundation created as part of the merger--and Valley Strong (both for 2022) provide important data.
From Valley Strong’s 990 we learn that all of the senior FCCU employees listed in the Member Notice about the merger 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, senior project manager: $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-Million Bonus Contribution
The 2022 990 for the FCCU2 Foundation, which was formed just ahead of the merger announcement, 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 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-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 a building at 2616 Pacific Avenue #4081. It is a box at a local post office, 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, the message said 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-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, 10 months after year-end.
The Contrast
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. The financial details of the new 54 Fund, on the other hand, are only available once per year and then 10 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 million 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.”
The Directors
Of the nine 54 Fund directors, 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, Manuel 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, a charity that in 2020 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 $250,000 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, which is how Duffy characterized it (see 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. 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 the foundation’s control. This transfer of $12 million “privatized” members’ common wealth.
The 54 Foundation and Duffy were the subject of at least two media reports. 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. A longer article reporting the same award was published by the Stocksonian on Jan. 29 headlined, Banker Michael Duffy Surprised by selection as Stocksonian of the Year.
Duffy is quoted in the article saying, “I love Stockton, and so I find every which way to be a part of Stockton. 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.”
What Wasn’t Mentioned
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 CEOs decide to leave. It is also a fiduciary duty of the board of directors.
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 that had been paying him mor than $1 million per year.
A Financial Pied Piper
When initiating this change of control to a credit union with no local roots, FCCU set aside $12 million of his members’ surplus to be controlled by the 54 Fund.
The former FCCU then turned the Robin Hood model of wealth distribution into a financial round robin game by first retaining money, not using it for member benefits, to build reserves more than 100% higher than peers. From this extraordinary capital surplus, the credit union then directed $12 million into the new organization under the control of the former CEO and former chairman. To justify this diversion, the credit union says it to help those from whom it withheld the earnings benefit in the first place.
Members are Short-Changed
FCCU short-changed members’ returns by create capital twice the industry average. That has now become the same source for the 54 Foundation funds. Truly a double blow for those who entrusted their financial futures to his credit union leadership.
Chip Filson is a co-founder of Callahan & Associates and well known within credit unions as an author, frequent speaker, and consultant. Filson also previously served as president of the Central Liquidity Facility (CLF) and Director of the Office of Programs at NCUA. For more info: www.chipfilson.com.