Chip Filson
The Seated Boxer, an iconic ancient Greek work of art, shows a grizzled veteran of the ring, equal parts resigned and ready to spring into action.
What I like is a sense of respite from competition, the powerful athletic physique and the tiredness that surrounds his humanity. Is he a winner this day? Are there more fights to go? How will his efforts be remembered?
These are questions that all of us encounter, in literal or figurative ways, in our daily efforts.
This is a true story. The lead characters are the CEO’s and boards of the two merging credit unions, NCUA’s Regional Office, CURE in DC and the California Department of Financial institutions.
The facts are from documents sent members, IRS 990 filings, FOIA data and public statements by those involved. I give my point of view. You can decide what your interpretation of the information would be.
The first step was for the actors to draw up their scheme, include a lot of financial “chaff” around the theft and then decorate the proposal with positive sounding future rhetoric about “empowering people and economies of scale.”
Next, submit this draft proposal to NCUA’s Regional office for their OK.
No surprise there. NCUA approved the plan, detailed below. Now it is full speed ahead.
With the regulator’s green light, the next step was to form a California based non-profit with initials mimicking the credit union’s name: FCCU2 Foundation. The stated purpose is to “support charitable and educational activities for the betterment of the Stockton area.” Despite the name, it is neither a foundation in traditional meaning nor tax exempt.
The two executives responsible for this new “charitable foundation” are the credit union’s CEO, Michael Duffy and the Board Chair Manual Lopez. The organization was registered on June 25, 2021 with Lopez the CEO and Duffy the agent. These two are also members of the five-person credit union board which approved these actions.
On August 6, or forty-two days after registering FCCU2, Board Chair Manual Lopez signs Financial Center Credit Union’s Notice of Special Meeting announcing the intent to merge with Valley Strong Credit Union. Voting will end on September 23.
The Notice contains required information about the transfer of credit union reserves to this just created organization including:
Other mandatory disclosures in the notice detail the additional financial benefits four of the five senior managers will gain from the merger. A special dividend will be paid to members if the combination is approved in their vote.
This special dividend is feasible because the merging credit union’s net worth, over 16%, is double the 8.7% at Valley Strong. The proposed dividend will be determined by a complicated proposal based on member tenure, most recent 12 month share balance with a maximum cap on the share balance. The estimated payout is “approximately $14,973,948.00” in the Notice-an unusually precise number, suggesting a very detailed plan.
Members were given 48 days to cast their vote. On September 23, 2021, the called special meeting took place. 38 members attended in person. Thirteen voted in favor and zero opposed. 2,667 members mailed ballots with 383 opposed and 2,284 in favor.
The final tally was 86% of members for and 14% opposed. Only 9% of the credit union’s 29,672 members voted on this request to give up their charter.
The merger was formally completed on October 1, 2021, seven days after the vote.
The financial results of the merger are reported in Financial Center’s last call report as of September 30, 2021. The loss for this final nine months of the credit union’s 66-year life span is $23.7 million. This is due to the $10 million “capital distribution” to FCCU2 and recording the special dividend of approximately $15 million.
This one quarter’s loss reduced the credit union’s net worth ratio, accumulated over seven generations, to 12.4% from 17.2% one year earlier. That ratio was still 4% points (50%) higher than Valley Strong’s net worth at the same date.
Recent events in California have highlighted the ethos of self-enrichment, especially in Silicon Valley startups. A phrase used describing these unproven business ideas is: “faking it till you make it.“
This is the practice of promising future bold success even though past results do not support the vision. When there is little or no objective evidence that a concept could succeed, a hyperbolic sales pitch is necessary to continue fund raising and keeping the effort going.
Michael Duffy has worked at Financial Center since 1993, the last 21 years as CEO. His sister, Nora Stroh, also joined in the 1990’s. She was Executive VP and COO, the number two position, all the time Michael was CEO. In the 990 IRS filing for 2018, each reported total compensation of over $1.0 million.
During the final five years of their leadership, the credit union’s loans declined every year, from a peak of $176.5 million at December 2016 to $102 million at the merger date. This is an annual growth of -10.3% (negative). Total members fell by 2,700 or almost 2% per year in the same time frame.
However, the credit union continued to increase its net worth ratio reaching a peak of 20% at December 2018, before falling to 17% one year prior to the merger. Until January 1, 2022, regulators considered credit unions well capitalized with 7% net worth.
As net worth rose, falling loan balances resulted in the loan to asset ratio declining from 39% to 16% at the merger date. As these risk assets fell, the credit union continued adding unnecessary reserves, reaching almost three times (300%) the well capitalized standard. This resulted in shortchanging members on their savings returns and/or charging higher loan rates than necessary for a safe operation.
The credit union’s leadership failed year after year in its most critical member service: making loans. However, it piled up reserves relentlessly, until the leaders decided to bail out. And take some of the surplus reserves with them.
During this same period of decline, the credit unions maintained its public relations in high gear. According to the 990 filings for 2017 and 2019, the credit union made political donations from members’ funds for local political campaigns, such as Stockton city council and mayor, and for statewide office, Newsom for California Governor. Political donations in 2019 went to ten campaigns and $25,000 to the California Credit Union League Pac.
Maintaining the positive image was important for Duffy. On June 1, 2020, the credit union announced a $1.0 million donation by the Michael Duffy Family Fund and the employees of the credit union. An enlarged symbolic check to Stockton’s COVID-19 Response Fund was given by Duffy to the mayor, recorded for TV broadcast, and later published on social media.
The same press release also stated that the credit union had developed a Loan Holiday program to “alleviate financial burdens for its members.” Whatever the program’s intent, outstanding loans at the credit union fell by $40 million in 2020 from the prior year.
In the many years leading up to the merger, the credit union had been operating with the form but not the substance of a cooperative charter. It was run as a family business, promoting the public profile of the CEO, not the well-being of members.
In contrast with the nationwide member and loan growth in the industry, Financial Center’s data shows it had ceased serving members as its primary activity. Instead, it added to a bigger and bigger reserve nest egg to dip into down the road. In other words, faking it till you can take it.
Michael Duffy’s public announcement of the merger intention at the end of May, 2021, was accompanied by uplifting logic and his recent strategic insight:
“As the CEO of Financial Center Credit Union for the past 21 years, my perspective on mergers has evolved just as much as our industry has in that same time period. As credit unions built by select employee groups (SEGs) increasingly partner with community credit unions, I have marveled at what credit unions of today’s scale can accomplish when they join forces with their Member-owners and communities chiefly in mind.
In a financial services sector that is constantly evolving, this merger is a true embodiment of the credit union industry’s cooperative mind-set. At its core our partnership with Valley Strong represents us selecting the best credit union partner to help us achieve our goals faster than we could duplicate on our own.
The phrase ‘Growing Together,’ is a perfect adage, as 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.
After three decades of leadership of the credit union, Duffy has concluded that the institution he led can no longer serve its members because it is not big enough ( “scale” )or “fast” enough. His reward for this insight and merger endgame is a new position as Credit Union Advocate at Valley Strong. He gains control of $10 million funded by the credit union, a firm no longer able to keep up with the times under his leadership.
It is more than self-dealing hypocrisy. It is pilfering the members’ money.
One member who saw through this charade posted a comment on the NCUA’s member-to-member web sight, reviewed by NCUA’s CURE. He urged a No Vote stating in part;
If Financial Center Credit Union is so flush with cash that it wants to give away $10 million, then that amount should be distributed to members. I’ve written to FCCU twice asking for the rationale for giving away $10 million. They have failed to answer me, obviously because there is no rational reason for giving away $10 million from its member-owners.
However, this brazen appropriation of members’ funds was condoned by the regulators-at every step.
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 magnitude of the grab and the cover story of good intentions diverted multiple regulators from their public responsibility. Especially when accepting these future plans by leadership that had conned their members for years.
NCUA is fully aware of the self-dealing possible in mergers. It posted some of its concerns when explaining its new merger regulation approved in June 2018. The following are some of the reasons in the Board Action Memorandum supporting this updated rule:
“The Board acknowledges, however, that not all boards of directors are as conscientious about fulfilling their fiduciary duties (in a merger) . . .
The Board also confirms that, for merging FCUs, the NCUA’s regional offices must ensure that boards and management have fulfilled their fiduciary duties under 12 C.F.R. § 701.4.
Each Federal credit union director has the duty to:
“Several commenters questioned the NCUA’s authority to regulate credit union mergers, or suggested that the NCUA’s role is limited to safety and soundness concerns. These comments are inaccurate. . .
“In contrast to commenters’ assertions, the statutory factors the Board must consider in granting or withholding approval of a merger transaction include several factors related to safety and soundness, such as the financial condition of the credit union, the adequacy of the credit union’s reserves, the economic advisability of the transaction, and the general character and fitness of the credit union’s management. . .
“Another (commentator) suggested that members have no role in considering merger-related payments to employees. These comments are legally inaccurate and philosophically off-base. The net worth of a credit union belongs to its members. Payments to insiders, especially in the context of a voluntary merger where a credit union could choose to liquidate and distribute its net worth among its members, are distributions of the credit union’s net worth. . .
“Further, the fact that ownership of a portion of a credit union’s net worth is less negotiable than a share of stock in a public company is irrelevant at the time of a proposed merger transaction. A credit union in good condition has the option of voluntary liquidation instead of voluntary merger. . .
(Note: At June 30, 2021 the credit union reported $109.2 million in total capital. Cash on hand was $138.9 million. Net worth ratio was over 16%. If the credit union were liquidated this would have given the greater Stockton community this immediate cash benefit. The 29,000 Members could choose to join another credit union or use the funds for immediate needs. Instead the members received just 13.7% of their collective savings in a one time dividend. Even though this option is referred to in the rule, there is no indication this was ever considered.)
“The Board agrees that mergers should not be the first resort when an otherwise healthy credit union faces succession issues or lack of growth. . .
If these specific statements are insufficient for exercising regulatory judgment, the common law understanding of fiduciary responsibility is even more clear:
The duty of good faith is the principle that directors and officers of a company in making all decisions in their capacities as fiduciaries must act with a conscious regard for their responsibilities as fiduciaries. These include the duty of care, duty of loyalty and the duty to act lawfully.
Self-dealing is an illegal act that happens when a fiduciary acts in their own best interest in a transaction, rather than in the best interest of their clients.
This misappropriation of $10 million of member funds by the CEO and Chair of Financial Center should bring the following actions by NCUA:
Every person in the regulatory approval process of this merger should have their actions reviewed to determine if they should continue to be in positions of responsibility.
Every participant will have an excuse. The creator and enablers of this transaction will defend their role by saying NCUA approved it. Then they will point out that the members voted on it. NCUA staff will assert there was no safety and soundness basis to object-despite the many Board statements quoted above.
Citing deeply flawed processes to defend one’s conduct, does not make the actions proper.
In presenting these defenses, the parties involved merely demonstrate incomprehension of one of the oldest rules of society: Thou shalt not steal.
Were such excuses offered, it would confirm the absence of fiduciary awareness and protecting member interests by the parties to this transaction.
These failures are not due to a rule needing updating. Rather it is an example of persons who lack commonsense judgment about accountability.
If 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. However, this would not be the first time such blindness has occurred; only the latest example.
Ignoring this case will just create a new benchmark for the next merger personal enrichment effort. It’s time to halt these sham merger member deprecations.
Smart Children: If your plan is for one year, plant rice. If your plan is for ten years, plant trees. If your plan is for one hundred years, educate children.
Parents: If you nurture your children, you can spoil your grandchildren. But if you spoil your children, you’ll have to nurture your grandchildren.
National Parks: “There is considerable overlap between the intelligence of the smartest bears and the dumbest tourists.”
The best times of our lives are not about what we did, but who we were with.
Twenty three million American households acquired a pet during the COVID-19 crisis
Alix and Murphy
Will you hold my hand
will you guide me home
will you show me the way
when my light has gone?
When I can’t see where to go
when I don’t know what to do
when I’m lost and alone
will you stay with me?
When you can’t see where to go
when you don’t know what to do
when you’re lost and alone
I will stay with you.
MURPHY
A member comment on the Proposed Merger of WarCO FCU and First Financial:
The merger may appear to be a financially good move as First Financial of Maryland FCU has more assets. However, the documentation indicates the Pocomoke location “will remain open for a period of time.” There are no First Financial of Maryland FCU’s located on the Eastern Shore. Therefore, all work will need to be done electronically and one most likely will no longer be able to walk into an office anymore. Brian Cook, Member, WarCO FCU
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“You have to pick the places you don’t walk away from.” Joan Didion
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Jim Blaine: I think one of the ideas which used to ring true was the thought that trying to compare CUs to banks was like trying to compare Ralph Nader to GM because they were both in the car business….any attempt at comparison doesn’t really make sense…entirely different purposes. Credit Unions should never be “comparable” to banks; it seems a useless exercise…CUs should provide the “contrast” to banks. ( January 2022)
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Jeff Bezos: If you’re competitor focused, you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering.
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Ed Callahan: “The only threat to credit unions is the bureaucratic tendency to treat them, for convenience sake, the same as banks and savings and loans. This is a mistake, for they are made of a different fabric. It is a fabric woven tightly by thousands of volunteers, sponsoring companies, credit union organizations and NCUA-all working together.“ (Chairman, National Credit Union Administration, April 1985)
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Samuel Johnson observed that “what is written without effort is generally read without pleasure.”
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Weekend reading recommendation: The Fed’s Doomsday Prophet Has a Dire Warning for Where We Are Headed. The article illuminates the distinction between traditional consumer price inflation and asset inflation (S&P index up 47% the last two years) and the consequences for our political economy.
There is a case before the Supreme Court this term that could influence credit unions’ options when they disagree with an NCUA action or ruling.
In the 1984 Chevron case, the Court’s decision gave deference to a federal agency’s interpretation, as well as enforcement, of the law.
As described below this precedent and the authority it gave federal agencies is now the subject of an appeal that might curtail the scope of that decision. The case is described below.
If the Court’s decision were to limit the agency “deference” practice from Chevron, it would create better opportunities for credit unions to challenge NCUA actions.
A recurring example of the agency’s unilateral interpretations are its determinations of the adequacy of a credit union’s loss allowance and hence its net worth/PCA ratio.
A classic example is NCUA’s conservatorship of Arrowhead Central Credit Union in 2010. The agency said the credit union was severely undercapitalized with a net worth ratio of only 3%. However that ratio was because the agency disputed the adequacy of the credit union’s allowance account. Examiners required significantly more allowance expense. Subsequent events showed management’s original estimate was exactly on target.
NCUA celebrated the credit union’s miraculous turnaround in May 2013 pointing to a net worth of 10.5% up from the 3% estimate when conserved 36 months earlier. The situation was another example of regulatory misjudgments from which there has been no external appeal.
Ironically the legacy of this account’s over-funding continues today. Arrowhead’s coverage ratio (allowance account/delinquent loans) is 940% or roughly 800% higher than the industry average.
Even NCUA board members who interpret the law as they read it have no standing. Board member Mark McWatters, a lawyer, presented his legal analysis opposing the agency’s risk based capital proposals as not authorized by statue. His reasoning was “overruled” twice by a simple board vote, 2 to 1.
The Chevron precedent has inhibited credit unions from challenging NCUA’s judgments and actions in court. For example the so-called merger of the TCCUSF with the NCUSIF to use the funds for natural person loses was specifically prohibited in Congress’s legislative language with the bill. This was pointed out to the board, the IG and NCUA’s auditor in letters and formal comments, but to no avail.
Should the Chevron precedent be modified, it could result in a better balance between the judgments of the regulator and the rights of credit union’s to challenge those determinations.
by Jonathan Turley, Shapiro Professor of Public Interest Law, George Washington University. (Jan 1, 2022)
While not often discussed with the “matinee” cases of the term, one case on the docket could bring sweeping impacts across various areas — from the environment to financial regulations to public health. American Hospital Association (AHA) v. Becerra raises a highly technical question of a U.S. Department of Health and Human Services rule that cut outpatient drug reimbursements to hospitals. The rule is based on an agency interpretation of vague statutory provisions — an interpretation that was defended under the deference afforded to agency decisions.
The case is technically about outpatient care for Medicare Part B recipients; however, for some justices, particularly Samuel Alito and Neil Gorsuch, it is all about Chevron and agency deference.
Chevron USA Inc. v. Natural Resources Defense Council Inc. is a 1984 administrative law case that has come to embody the role of federal agencies in not just enforcing but creating law. The “Chevron Doctrine” has insulated agency decisions for decades from substantive review, giving federal agencies an overwhelming degree of authority in our system of government.
For some of us, the dominance of federal agencies has become equivalent to a fourth branch of government. The question is whether a critical mass has formed on the court to substantially curtail that decision. If so, AHA v. Becerra could be a torpedo in the water for the Chevron Doctrine.
In June 2018, the NCUA board approved a new merger rule. The rule was extended to all FISCU’s because the agency believed there were safety and soundness risks if a merger was not done in the members’ interest:
For example, members of a merging credit union who discover, after the fact, that they were inadequately informed about the details of the merger may become disgruntled. The dissatisfied members could create bad publicity, creating a reputation risk for the continuing credit union. Unhappy members could also choose to stop doing business with the continuing credit union, affecting earnings projections.
In contrast to commenters’ assertions, the statutory factors the Board must consider in granting or withholding approval of a merger transaction include. . . the general character and fitness of the credit union’s management.
There is no “after the fact” process for NCUA to learn members’ reactions to the merger of their credit unions. The following comment posted on January 14, 2022 to Just a Member is an example of one reaction:
Comment:
Recently, Teresa Freeborn has left Kinecta to manage her Daughter’s Business interests. The merger of Xceed FCU and Kinecta was a disaster. After months of wait, the transition was a bust. Poor customer service. Problems with online access and mismanagement of credit cards from XFCU visa to Kinecta Mastercard. I paid off my Visa and the balance rolled to the unactivated Kinecta Mastercard. I had to file a complaint with NCUA to get it resolved. I have now closed my accounts and ended an over 40-year relationship with XFCU. I have found better banking deals at BOA and Citibank. I think you have made a smart decision, Teresa Freeborn, to exit credit unions after protecting your interests and abandoning the Credit Union members!
George E. Skelton
Today’s social media options provide multiple sources for members’ post-merger experiences.
When PenFed merged with Postal Employees in Madison Wi, in April 2021 the following comments were provided about the subsequent service:
NameWithheld
August 30, 2021
Lousy place. Abusive. Fails to do what’s requested. Online phone help just as bad. Says being done but not. Waited 65 days for free personal checks that never showed. Still waiting for refunds and account closures. Worse place ever in my 45 years of banking. Local Person at Madison Wi extremely abusive. Place needs to be shut down. Don’t waste your time here. Consider a class action lawsuit.
PETER SCHNEIDER
August 24, 2021
POOR customer service…..so impersonal….hate being treated like a number and not an individual.
Years after the May 1, 2017 merger between PenFed and Miramar FCU, members continue to compare their post-merger service to that received prior to the event:
February 8, 2021
The employees here are nice but the service is not efficient – employees do not know procedures for certain requests or processes. When it was Miramar FCU the staff were more equipped to answer questions and work through solutions with members.
Also, the hours are incorrect. Penfed office of Miramar is closed and there was no update on the website nor any message to inform members. Penfed, please update your information on your website and your employees on procedures.
Joanne
July 31, 2020
It is 1245 on a Friday afternoon and the hours are stated that you are open until 1pm. so why is no one picking up the phone? have been on a continuous ring and redialing for the 15 minutes, until 1 pm. a business is supposed to answer it’s phone. this never happened to me in the the days of mfcu.
Brad Hines
April 9, 2020
This was a topnotch organization when it was Miramar FCU. Since PenFed took over there’s been a complete overhaul of the staff – and not for the better! I’ve had numerous times where tellers have made mistakes, or they just didn’t know what to do and had to ask for help. Most recent situation was transferring a large amount of funds out of a CD that had matured. The teller didn’t know the procedure, so had the manager come over to help. She explained that my best course of action was to put the funds into a “premium” savings account which yielded decent interest. I authorized this, and the teller made the transaction (after the manager had left). Several days later I just happened to check my account online only to see that that large amount of $ had been put into a “regular” savings account that had very poor yield. Fortunately when I called the national help desk they were able to fix this – but what a gigantic error and problem this would have cost me if I hadn’t discovered it!
A member’s report of service at a former branch of Ft. Belvoir FCU, now merged with PenFed, and the credit union’s response:
Chandra G a month ago
I would like to say that I was so hurt when I left the PenFed on Davis Road. A teller was helping me with an issue. I needed a letter to send to my other bank so she had to refer me to a manager. Before I went into the office, I told the teller that I needed that document back when they were done with it.
By this time I was walking in the office with a manager and a member service representative. The teller is so kind so she wanted to tell the manager that I needed the document back. Before she could say anything, Regina Lawton told her, “you don’t need to be in here. Go back out there.”
She then repeated it two more times, “You don’t need to be in here. Go back out there and help them. You don’t need to be standing in here.”
The teller was just attempting to tell her that I needed the document. She was providing excellent customer service!
I couldn’t imagine working for Regina Lawton. If you speak to your employees like that in front of customers, I can only imagine how you speak to them privately. TERRIBLE
Also, the teller DOES NOT know
I’m reporting Regina Lawton. I went to my car, after the incident, and my conscience wouldn’t allow me to leave knowing someone is being treated like this.
Response from the owner a month ago
Hi Chandra, thank you for bringing this to our attention. We will share this with our branch leadership team. We appreciate your membership and feedback.
Google reviews of PenFed’s merger with a Georgia Credit Union
Yasmin 4 days ago NEW
No customer service whatsoever. I’m a patient person so I waited 30 minutes to eventually walk away and take my business somewhere else. But what I don’t tolerate is when you have 2 customer service reps just staring at the group of people waiting for membership services. No, we will be with you. No, thank you folks for your patience. Just no acknowledgement whatsoever or managing expectations. Then for some reason, they were done with the prior members, it had been about 10 minutes, and they didn’t come for the next group. Not efficient at all. So rude.
Jason Boyd 3 weeks ago NEW
This is a federal credit union that is united but you can’t do business with your other credit union accounts (such as safe federal credit union) unless you have an account with them directly. Not only is that greedy but a poor business model. I will never bank with you and I will make sure no one I know does either. Oh, and thanks for the 15 minute wait for nothing too btw.
NCUA’s statement that poorly done mergers create bad publicity and soundness risks affects more than a merging credit union’s members. The reputation of the credit union system is stained.
But the problem is not just badly executed mergers. When mergers are pursued as an acquisition strategy, institutional ambitions easily become more important than the members’ best interests.
There are fundamental gaps in NCUA’s oversight of its merger rule. Board member Metsger stated at the time of the revised rule:
“Our focus is on ensuring member interests are protected through the regulatory process.”
However efforts to protect member interests are not evident in NCUA’s supervisory oversight. Egregious self-dealing and hollow future benefit promises are routinely approved.
The member comments above are indications that something is amiss in regulatory oversight. A later blog will provide some examples of self-dealing, at the members’ expense, routinely approved by the agency.
The $10.6 billion Alaska USA FCU operates branches in four states to serve its 712,000 members (September Call Report).
The distribution of operations includes 27 locations in Alaska, 12 in the greater Phoenix area, six in California and 22 in Washington state. Total employment (FTE’s) is 1900.
Currently its web site lists 240 openings for credit union jobs. Twelve pages with 20 positions each. That is a vacancy rate of 12%.
The number of openings poses questions such as: What is the impact on member service? How do these vacancies affect its current capabilities? Are the open positions in one area or throughout its network? Is this just another example of labor shortages across the broader economy?
In the credit union’s web site “About” section, their origin story begins:
In 1948, fifteen civil service personnel gathered in Anchorage’s Alaska Air Depot, pooled their savings and their conviction in one another, and formed a member-owned credit union.
At the heart of that decision was a simple truth—local financial institutions simply could not or would not support the credit needs of the personnel who had been recently transferred to Alaska.
This “truth” raises another possibility: As Alaska USA’s operations expand beyond Anchorage throughout the Western United States, has this lessened their “local” advantage for attracting employees? What will be the impact of going Global?
We do not learn from experience. We learn from reflecting on experience. John Dewey
I often tell people that many of the things we do don’t always make sense to business students– but I believe that’s part of our secret sauce. While data is important, people are more important, and our formula has always been based on taking care of people. Doug Fecher, Retired CEO, Wright-Patt Credit union
An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today. Laurence J. Peter, Canadian writer
We tell ourselves stories in order to live. Joan Didion
Didion also asks, sometimes implicitly, sometimes explicitly, what happens when you can’t trust the narrator? How do you know whose story to believe? What happens when all stories are both believable by some and unbelievable by others? What happens to that community storytelling creates when the members no longer agree about their story? Dr. Andrew Roth
There’s a difference between a procedure update and a process improvement. A procedure update might edit step nine in a 10-step sequence. A process improvement reconsiders why there are 10 steps at all. Jimmy Lovelace, Senior Vice President, Community First Credit Union of Florida
A writer annoys his readers by writing too much.
For weekend reading: It’s Time to Remind Members They are Owners, by Henry Wirz, Retired CEO, Safe Credit Union
What should credit unions do when the regulator who makes the rules, does not follow its own rules?
Yesterday the consumer price increase for calendar 2021 was reported as 7%, the highest in 40 years. This was not a surprise. Concern about increasing inflation and the Fed’s response had been growing since the summer of 2021.
Interest rate risk is not a new topic. NCUA first proposed adding an S for sensitivity to the CAMEL rating in 2016. In October 2021, the board approved a rule adding this “S” with Chairman Harper saying:
The NCUA’s adoption of the CAMELS system is good public policy and long overdue. Separating the liquidity and market sensitivity components will allow the NCUA to better monitor these risks within the credit union system, better communicate specific concerns to individual credit unions, and better allocate resources.
The agency’s description of interest rate risk was straight forward:
The sensitivity to market risk reflects the exposure of a credit union’s current and prospective earnings level and economic capital position arising from changes in market prices and the general level of interest rates. Effective risk management programs include comprehensive interest rate risk policies, appropriate and identifiable risk limits, clearly defined risk mitigation strategies, and a suitable governance framework.
However Just six days prior to this, those responsible for managing the NCUSIF’s portfolio invested $1.0 billion (5% of the portfolio) at an average weighted life of 5.95 years and yield of 1.19%.
These investments actually extended the portfolio’s overall maturity from the month before.
This was a continuation of the robotic investing the NCUSIF investment committee had followed since market rates had fallen to near zero in 2020.
In December 2020 question were raised about these investment decisions: What Is NCUSIF’s IRR Investment Policy? Is this a Gap in NCUA Board Oversight? The article pointed out NCUSIF’s most recent investments included a 7-year fixed rate yielding only .45%. Would any reasonable person make this investment at this point in the cycle of historically low rates?
In August 2021, the NCUSIF continued its market-tone deaf investing by placing $1.2 billion at an average weighted yield of .943% and life of 5.7 years. The analysis pointed out that these decisions were hurting credit unions. One immediate decision that month cost credit unions $42 million in foregone revenue over the next 7 years of that investment’s life.
At the same time, credit unions in contrast, reported keeping 53% of their record level of investments in overnight funds.
The NCUSIF has an investment committee of four people including the Chief Financial Officer, the Director of E &I, the chief economist and the head of the Capital and Credit Markets division.
NCUA preaches interest rate management, but does not practice it. One doesn’t have to run a stress test to see the devasting results of these recent decisions. The NCUSIF’s monthly data documents the decline in portfolio value as rates began rising over the past 12 months.
In September 2020, the $17 billion NCUSIF reported a market gain of $586 million. In October 2021, the latest report available, this had fallen by 97%, to just $16.2 million on a portfolio $20.3 billion. Large portions of the most recent investments are now worth less than their purchase price. These low yields will hurt the NCUSIF’s performance for years to come.
The NCUA board receives a monthly report on the NCUSIF and a quarterly in-person update.
In questions about investments as recently as December’s meeting, staff’s response is they are just following Board policy. In the September’s 2021 board meeting the CFO agreed to make public this investment policy. It didn’t happen. Several meetings later, he explained the policy was under review and would not be released until that was completed-at some indefinite time in the future.
The Board unanimously approved the new interest rate sensitivity rule in October 2021, which was first published in March. It receives the monthly report showing the robotic investment activity and steadily falling portfolio values. The board’s words and deeds are far apart when it comes to IRR.
When the agency’s highest professionals show an inability to manage the agency’s largest asset, the $20 billion NCUSIF, in accordance with its own rules on interest rate sensitivity, fundamental questions are raised.
Are senior staff competent for this task? Are these investments what the Board really intends with policy? Is no one in the agency, staff or board, able to see the damage this causes to the fund’s revenue and its financial soundness?
Good judgement comes from experience. And experience? That comes from bad judgement. How many more bad judgements does the board need?
More than the NCUSIF’s future is at stake, as important as that is. This year-long example of failure to respond to the changing economic conditions in managing the funds, begs the question: Is the agency capable of overseeing this issue in credit unions? The IRR monitoring of the NCUSIF is simple. In most credit unions the issues are much more complex.
Both the NCUA board and senior staff are letting credit unions down. Sooner or later the bill for this failure will come due. A simple portfolio yield of just 2% on $21 billion is sufficient to cover the normal financial expenses in the fund. When these investment decisions lock in rates of 1% or less for 5 or 6 years, a premium may be required to pay for the damage caused by poor management.
If this failure is the outcome for the simple management of the NCUSIF’s IRR, the bigger issue is whether the agency has the grasp to properly monitor the industry through the coming rise in the interest rate cycle.
The first test will be what the leadership does about their responsibility for the NCUSIF. Will the board and senior staff continue to kick the can down the road, blind to the consequences of inaction, or make a difference now?