Last week Valor Credit Union announced that it is seeking to merge into PenFed Credit Union. In a letter to Valor members, the chairman of Valor’s board of directors summarized the reason for the proposed merger in one sentence:
After considering alternatives, we determined that a merger with PenFed is in the best interest of our members.
Before the merger can go forward, Valor must receive approval from its members. Valor appears to be rushing this through. The vote is scheduled to take place at a special meeting on February 7, 2017. Ballots that are mailed must be postmarked no later than February 3rd to be counted.
The Chairman’s letter and merger FAQs are available at this Valor webpage.
If members vote “yes” to merge, the FAQs state that on “March 1, 2017, your Valor Credit Union membership will officially become a PenFed membership.” Then, on April 1, the merger process will be completed with existing Valor accounts and products converted over to PenFed accounts and products that are most similar.
Last year, the former CEO of Valor pleaded guilty to bank fraud, and he’s now facing up to 60 years in prison. The credit union is also having some financial difficulty. It reported a net loss of $2.25 million in the third quarter of 2016. Both of these problems may have contributed to Valor’s decision to seek a merger.
It’s clear that both Valor and PenFed management are pushing for this merger. Valor mentioned the following perk for Valor members: “PenFed has agreed to pay all of Valor Credit Union's eligible voting members a 1% special dividend based on all regular share account balances as of December 31, 2016.” Note, the special dividend doesn’t appear to apply to CD balances.
Impact to Prime Rate Certificate Holders
Many DA readers are members of Valor Credit Union who have Valor’s 3% Prime Rate Certificates. Also, many of these same DA readers are PenFed members who have participated in many of PenFed’s past CD deals. Thus, this merger is impacting many DA readers, and several have contacted me with two primary questions:
- How will their existing 3% Prime Rate Certificates change after the merger?
- Will all of their Valor and PenFed deposits remain insured after the merger?
Regarding the first question, Valor’s FAQ #16 addresses it:
Will PenFed honor my Valor Credit Union loan and CD rates and terms?
Yes. All fixed-rate loans and CDs will transfer to PenFed at the existing Valor rate and term. Consumer lines of credit will transfer at either the Valor or PenFed rate, whichever is lower.
A reader also forwarded me information that he received from a conversation with Valor’s CEO. He was told that since this is a voluntary merger, all original terms and conditions of members’ certificates (including the Prime Rate Certificate) will be honored. However, the penalty-free withdrawal option that was offered to members on a temporary basis will not be honored by PenFed since it was not in the original terms and conditions.
The original terms of the Prime Rate Certificates should be a floor rate of 3.04% APY, a 7-year term, an early withdrawal penalty of two years of interest, and unlimited add-on deposits. Over the last two years, Valor has been trying to make detrimental changes to existing Prime Rate Certificates. The latest change was the termination of the add-on option. They also notified some Prime Rate Certificate holders and claimed that the floor rate was actually 0.25% instead of 3%, and that their certificate rate was going to be reduced to this floor.
The second question is important for those with large balances in both Valor’s Prime Rate Certificates and in PenFed CDs. After the merger, will your balance remain under the NCUA insurance coverage limits? The NCUA has the answer to this question in its Share Insurance FAQ:
What happens when federally insured credit unions merge?
If a member has accounts in credit union A and credit union B, and credit union A merges into credit union B, accounts of credit union A continue to be insured separately from the share deposits of credit union B for six months after the date of the merger or, in the case of a share certificate, the earliest maturity date after the six-month period. In the case of a share certificate that matures within the six-month grace period that is renewed at the same dollar amount, either with or without accrued dividends having been added to the principal amount, and for the same term as the original share certificate, the separate insurance applies to the renewed share certificate until the first maturity date after the six-month period. A share certificate that matures within the six-month grace period that is renewed on any other basis, or that is not renewed, is separately insured only until the end of the six-month grace period.
If the merger results in CDs that exceed the NCUA limits, the NCUA will continue to insure the CDs until they mature. When they mature, you’ll then have to worry about moving money or adding beneficiaries to ensure all of your deposits remain under the NCUA limit.
If the merger goes through, Valor members will no longer have to worry about the financial health of Valor Credit Union. PenFed is currently the third largest credit union the nation with a history of financial strength. We have it listed with an overall financial health grade of an “A” based on 2016 Q3 call reports. Also, I think PenFed management is more deserving of trust than Valor’s management based on Valor’s actions to members with Prime Rate Certificates.
Several DA readers have contacted Valor’s CEO and have received other information about the merger and the Prime Rate Certificates. Comments in this DA forum thread and in this one should be helpful to review. If you have any more information or questions, please leave a comment under this blog post.