An Open Secret: NCUA, Oxymorons and Merger Truths

An oxymoron is a figure of speech in which two seemingly contradictory terms are used together.  Sometimes the intent is literary, as in “deafening silence.”  Sometimes the purpose is  ironic juxtaposition—“postal service” or “jumbo shrimp” –to highlight conflicting concepts.

I propose a new example Truth in Mergers.  This is a 25-page NCUA publication from May 2014. The subtitle: A guide for merging credit unions.

This document was prepared by NCUA’s Office of Small Credit Union Initiatives (OSCUI). The preface lists three purposes:

■ Understand trends in credit union mergers.

■ Determine when a merger is in (a credit union’s) best interest or, in the worst case, necessary to continue operations.

■ Negotiate a merger agreement that best serves the merging credit union’s interests.

OSCUI’s mission statement read: We support the success of small credit unions … (and) recognize the unique role small, low-income designated and new credit unions play in the lives of their members and communities. We are committed to helping these credit unions not only survive but thrive.

 The “truth” is that the brochure was to facilitate the demise of smaller credit unions.

 Oxymorons can assist the reader to clarify NCUA’s doublespeak. After each of the following verbatim excerpts, I have provided this figure of speech to aid in interpretation.

Statements from “Truth in Mergers”

  • Mergers between credit unions are commonplace in the industry today. (old news)
  • like all businesses and institutions, mergers can be successful or unsuccessful. (even odds)
  • NCUA does not endorse mergers. (seriously funny)
  • mergers undertaken proactively by credit unions in sound financial condition have better outcomes for the credit unions involved and their members. (alone together)
  • many credit unions wait until they are in a troubled financial position before exploring the option to merge. (definite possibility)
  • Weak Financial Condition Drives Most Credit Union Mergers (deliberate mistakes)
  • A merger can also provide direct benefits to credit union members, including lower cost of services, lower loan rates, and higher dividends. These benefits are significant, immediate, and persistent. (true lies)
  • Negotiating the terms of the merger contract is one way a merging credit union can realize the greatest benefits of the transaction. (bittersweet)
  • OSCUI’s study of merger packages also demonstrated a clear link between a merging credit union’s financial strength and its ability to negotiate advantageously with the continuing credit union. (strength in weakness)
  • Best Practices: Shop around for the best fit. Merging credit unions should seek out and evaluate multiple potential partners and critically evaluate major issues, such as: organizational culture, mission statements, and respective memberships. (act naturally)
  • Include a merger in the strategic planning process. Credit unions are encouraged to consider the impact of a merger as part of the strategic planning process. (definite possibility)
  • Develop a succession plan for executives and board members. Avoid letting the board and the CEO grow old together. (open secret)
  • Merger contracts can be negotiated to ensure that the merging credit union’s members, staff, and community continue to be served. (true myth)
  • Take measures to enforce the merger agreement. How can merger agreement provisions be enforced when one party to the agreement no longer exists?

NCUA’s Office of General Counsel suggests that a merging credit union name in the contract the third-party beneficiaries with standing to enforce the contract. For example, if the continuing credit union agrees to keep a branch open for at least one year, the agreement would note that the members of the discontinuing credit union are beneficiaries with standing. Because these matters would fall under state contract law, the wording should be state specific. (clearly confused)

The Almost Final Word

“This brochure has been prepared by NCUA’s Office of Small Credit Union Initiatives (OSCUI) as a resource to help credit unions.


The truth: this Office of Small Credit Union’s initiative was intended to phase out small credit unions.  Those with problems-for sure.  Those in sound financial condition-in due course.

And Consequences

This  “small credit union” endeavor gave the green light for all credit unions to seek merger opportunities.  No matter the size, circumstance, proximity or business logic.  It began an open season for self-dealing. CEO’s saw the opportunities to cash out at their retirement; long standing member loyalties were  squandered, and a binge of back room deals by leaders of sound local credit unions was officially sanctioned.

The challenge for Chairman Harper and the board: is there a CURE for this official document issued while he was senior policy advisor to Chairman Matz?

To keep mergers in perspective we give the last word to capitalist Henry Ford:  “A business that makes nothing but money is a poor business.”




Readers Opine On Infinity FCU Merger with Deere Employees

Readers reacted to last week’s analysis of the Infinity combination with Deere.

A Maine resident: “Very strange indeed – for many reasons; it goes completely against the Maine community approach of being a state with their own mind and will.”

Two comments posted on blog site:

1. Why, why, why? I can’t make any sense of what Liz is saying. . .Wonder what NCUA CURE will have to say?

2. Size matters to Liz and not a single Maine CU wanted to merge with her.

A Financial Consultant to Banks and Credit Unions:

  1. At $341 million, there is enough “scale” to not just survive but thrive. It’s a matter of allocation of resources. I work with a lot of community banks that are doing just fine at that asset size; quietly going about their business producing a good ROA and accreting capital. Relationships drive their business model and that’s what the competitors don’t provide.
  2. The board needs to be committed to independence. The board needs just one member who understands this, is committed to it, and can influence the other board members.
  3. The CEO and leadership team need to be committed to independence. . . there needs to be something holding the team accountable. If there is a merger, capital should be returned to members, not given to acquiring institution for free.
  4. This is a horribly unproductive credit union. The leadership team needs a kick in the pants in terms how they are deploying the resources the members entrusted them with.
  5. The banker in me says this would be an ideal takeover target. They have a great balance sheet. I’d cut out a lot of expense, and turn this into a money-making machine for CU purposes. It would mean being a lot more productive, and use the capital for growth, member give-back and/or community impact.

The CEO is speaking out of both sides of her mouth. What is the board’s relationship with the CEO if unable to do the job to begin with? Are they competent to govern?

A Coincidence? Two Credit Unions Rethink: Maine Credit Unions Call off Merger- Consolidation discussions end amicably between Midcoast FCU and Maine State CU. March 26, 2021 CU Times.

From a Member Who Just Experienced a Merger:

Just touching base after reading this article about Infinity and Deere. Sounds so much like my member story with Xceed merging with Kinecta.

On March 17th Kinecta FCU sent me a similar packet with a Cover Letter highlighting 3 big changes, a joke. The number 1 bit of news is Reducing of the Insufficient/Uncollected Funds Fee from $27 to $25! Its borderline insulting to think longtime members of a well-run credit union would jump for joy on that news. 

Chase Bank is offering a $200 to new customers and free checking with direct deposit. My folks have used Chase since it was called Chase Manhattan Bank, I think since the 60’s. They have been happy with Chase for 50 some years. 

It seems like credit union mergers have become so common it might happen to a person more than once. It’s like opening a new bank account, changing direct deposits, automatic bill payments and so on. I keep my credit reports locked so unlocking them is an added step. 

Its kind of sad but I’ll miss banking with the same place for so long. I remember when working for USAA after leaving Xerox in the 1990s. Xerox FCU still had a small two-person branch in Clearwater, FL for a few thousand Xerox employees/families in the Tampa Bay area. How many financial institutions today would go the distance to have a two-person branch? I think with all the mergers the days of that kind of a credit union operation are coming to an end.

Rather than go kicking and screaming into the Continuing Credit Union Kinecta, I’ll quietly leave my employer created credit union of 30+ years for my family’s national bank. And $200. 

An Historical Perspective:

“All things are lawful, but not all things are beautiful. All things are lawful, but not all things build up. Do not seek your own advantage, but that of the other.”

How Another Agency Reviews Its Performance in Failures

A vital leadership skill for persons and organizations is the ability to learn from mistakes. Ignoring failures can lead to coverups and ultimately the loss of personal integrity and institutional purpose.

At the March NCUA board meeting, all three members, including Chairman Harper, publicly supported a “look back” to understand the Corporate crisis and lessons that might be gained. This could be an invaluable effort if truly open, independent and expert.

Last week NCUA conserved Edinburg Teachers CU with a net worth over 20%, without explanation. If the problems are not quantitative (financial) but qualitative (internal fraud, governance failures) is this a situation examiners should have discovered?

Self-examination is difficult in the best of circumstances. In some respects, it is contrary to the ethos of a regulatory enterprise which itself is charged with ensuring proper conduct. To admit its own processes and judgments may be less than satisfactory, could harm the agency’s reputation. Better to stonewall and let bygones be gone.

Look Backs at An Agency

The FDIC’s success in assuring the public that insured deposits are indeed safe does not rest on its fund balance. The FDIC resources are far less than 1% of the banking assets it insures. Rather it depends on public confidence in the FDIC’s ability to resolve problems-whether caused by circumstances within insured banks or from its own supervisory shortcomings.

One key to this continuous improvement process is FDIC’s public analysis of failed banks.

The most recent was posted on Friday, March 26, the Failed Bank Review, Almena State Bank, Almena, Kansas.

The 5-page report on the October 2020 closure of Almena State bank shows a loss of $18 million or 27% of the bank’s $69 million total assets.

The IG’s review is to determine “whether the subject bank failure warrants an In-Depth Review.”

This initial assessment analyzes “key documents related to the bank’s failure, including the Division of Risk Management Supervision’s (RMS) Supervisory History, the Division of Resolutions and Receiverships’ (DRR) Failing Bank Case, and examination and visitation reports dated 2016, 2017, 2018, 2019 and 2020.4

The Analysis

Report sections include Causes of Failure and listings of all FDIC supervisory contacts. The review process includes multiple considerations:

“The OIG considers four factors to determine whether unusual circumstances warrant further review. These include: (1) the magnitude and significance of the loss to the DIF in relation to the total assets of the failed institution; (2) the extent to which the FDIC’s supervision identified and effectively addressed the issues that led to the bank’s failure or the loss to the DIF; (3) indicators of fraudulent activity that significantly contributed to the loss to the DIF; and (4) other relevant conditions or circumstances that significantly contributed to the bank’s failure or the loss to the DIF.”

The factor most relevant for credit unions is (2), cases where “the OIG identifies significant programmatic weaknesses in the FDIC’s supervision, to determine if there is a need for follow-up work and the appropriate course of action.”

In the Almena case “we found that the FDIC’s supervision identified and effectively addressed the issues that led to the bank’s failure and the loss to the DIF.

What NCUA Can Learn

As valuable as an analysis of the corporate resolution efforts will be, there are more immediate lessons NCUA might draw from FDIC’s ongoing “after-action reports.” Improvements include:

  1. Publish full details in all reports, including exam contacts. If critical facts are kept from the public, it is the same as if no assessment was done.
  2. Set up an independent process. NCUA’s OIG is dependent on the agency and personnel whose actions it is supposed to review.
  3. Include exam and supervision findings in the report (factor 2 above)- what went right and what mistakes occurred?  For example, NCUA’s IG review of Chairman McWatters’ travel expenses and his verbal explanations had more facts than the agency provided in its loss review of CBS Employees FCU. That loss exceeded $40 million, according to one newspaper article, and extended over decades of NCUA examinations.
  4. Evaluate how reviews and audits are done. NCUA OIG contracts much of its work to outside auditors. This process, while seemingly objective, is rarely expert and relies on the cooperation of those whose responsibilities are being assessed.
  5. Be timely in reporting. Late, after the fact analysis, may not change  current performance. Conservatorships often do not return control to members but are quietly ended in private sales. Meantime all members and the public are in the dark.

Maintaining public confidence requires leaders who acknowledge mistakes. Credit unions pay the bills for regulatory short comings. Today it is too easy to expense away failures and avoid public questions. In the end, this will only lead to further errors, misjudgments and greater losses.

Board leadership is required if  NCUA self-assessment is to be an agency priority. This can also be a chance to identify staff with the capability for this institutional self-examination.

Another Credit Union Incarcerated by NCUA

NCUA’s email announcement came at 6:30 PM Friday evening, 3/26/21, after the credit union press had gone home.  And weekend events might produce a different headline for Monday’s news cycle.

The Texas Credit Union Department had “taken possession of” the $106 million Edinburg Teachers Credit Union and appointed NCUA conservator.

Edinburg thus joins the $6.6 million Indianapolis Newspaper FCU conserved on January 15, 2021 for “unsafe and unsound practices” and CO FCU, at $4.6 million, taken over on January 6, 2021, without further explanation.

These credit unions are “locked up” with fellow inmates confined in 2020 and 2019: the $46 million Southern Pine, taken in June 2020, and the $3.9 billion Municipal Credit Union in New York, seized in May 2019.

Members Behind NCUA Bars

There are now over 608,000 credit union members behind NCUA regulatory bars in these five conservatorships.  These member-owners have no say in their credit union and are given no plans for the future.

What makes Edinburg Teachers somewhat surprising is that the December 2020 call report shows net worth of 22%, ROA of .68% and share growth of 11.4%.  Two numbers are outliers, however. The loan-to-assets ratio was only 14.6%, or 3.5% lower than one year earlier.

Average salary and benefits for 9 FTE’s was $223,372, a figure that would place the credit union in the upper 1% of all salaries.

But neither of those facts is new. A 2016 article on ranked the average salary of Edinburg as the 4th highest of all credit unions as of December 2015.

NCUA Prison

Some imprisoned credit unions are accused of committing unsafe and unsound acts. No such accusation in Edinburg’s incarceration.

As regulatory prisoners, the credit unions are prohibited from speaking to the public. NCUA refuses to provide any updates on their condition or priorities while under their control.

The only information that filters out is the quarterly report of financial health signs. These reports are often spare.  Extraordinary increases are reported in provision expense or other miscellaneous category without explanation. For example, Southern Pine CU recorded an additional $10 million in operating expenses after being “saved” by NCUA in 2020.

Over 600,000 members now reside in this regulatory purgatory. They are told nothing about the institution they created with their loyalty. Their only solace is that the federal government promises to return up to $250,000 in shares, but not their credit union.

A Pattern of Silence Inconsistent with Public Duty

NCUA routinely covers its assumption of control using an “unsafe and unsound” blanket, or sometimes with no story at all.  The agency policy as stated by its office of external and public affairs: Please note that notwithstanding key personnel announcements, we do not comment on our efforts or conditions related to conserved credit unions.

The moment the regulator exercises its most extreme authority, seizing the members’ institution, is when their conduct should be the most accountable. Both to assure the public and so that all credit unions can learn from whatever caused such a severe situation in the first place.

But instead, silence.  One factor contributing to this regulatory “omerta” is that the problems that resulted in these takeovers are often long-standing and reflect deficiencies in the regulator’s examination and supervision process.

This is not a hypothesis. Four days before this latest conservatorship, an analysis gave examples in which NCUA’s examiners have been unable to see wrong doing happening before their eyes, for years, even decades.  NCUA’s Most Important Function Needs Transparent ReassessmentWill Texas Set a Responsible Model for Regulatory Candor?

One potentially important difference in the Edinburg event is that the Texas Credit Union Commissioner had primary jurisdiction for this state charter. Texas credit unions are overseen by an independent board described as follows:

The nine-member Credit Union Commission is responsible for overseeing the activities of the Credit Union Department and serves as the primary point of accountability for ensuring that state credit unions function as a system. 

The Commission is a board of private citizens appointed by and responsible to the Governor of Texas. Four members of the Commission must be individuals who serve as a director, officer or committee member of a Texas state credit union or a federal credit union with a principal office in Texas. The remaining five members of the Commission are representatives from the general public.

Commissioner John J. Kolhoff, an experienced state regulator and previously Michigan’s credit union supervisor, provided the following comment on Edinburg’s takeover:  The Texas Credit Union Department remains focused on continuing our efforts to provide appropriate regulatory oversight of state-chartered credit unions. We work to ensure that the businesses within these industries are safe, sound, and entitled to the public’s confidence.

As the primary regulator, Commissioner Kolhoff can earn the public’s confidence with a frank account of what went wrong in this apparently strong credit union’s failure. Were there supervisory mistakes? Was there no board or governance oversight?

NCUA’s practice is to bury its examination failures or to hand the problem over to someone else to resolve.  In contrast, the Texas Commission publishes on its website a Compact with Texans detailing is responsibilities and service standards.

Will the Texas Commission stand tall and fulfill its duty to the public and state credit union system?  Or hide inside NCUA’s credit union lockup?  This is not to assign blame but to improve professional leadership and accountability. And provide system awareness.

Most importantly, it is to show answerability to the members who have lost control of their cooperatively owned institution.

Tomorrow:  How another regulator publicly evaluates its regulatory and exam oversight when problems occur.

Credit Unions to the Rescue In Financial Desert

Today’s NPR morning news reported on “banking deserts.”   The full four minutes can be found here:

The message is that people still want local service even as the digital options continue to expand.  Credit unions are a key option for communities abandoned by banks.

Hope FCU “Waters” the Desert

Banks closed 3,300 branches last year.   The pandemic has accelerated the push to online services and the closure of in-person options.  NPR cited FDIC data that said  83% of customers visited a branch at least once in 2019.  In rural areas more than 40% of customers visited a branch ten times or more during the year.

A bank branch is part of the social fabric of these smaller and rural communities.  Hope FCU is the example in the story of a non-profit stepping in when the only bank left Morehead, MS.

“I can’t say how much that meant to us,” said the Mayor of Morehead.

Is there a comparable opportunity for your credit union?

Timeless Wisdom: Serious Disconnects

“There are some serious disconnects going on, ones that imperil the safety and soundness of credit unions. One is the disconnect between members and their credit unions. The other is between credit unions and their regulators. . . Regulatory systems are bureaucratic and not market driven. The regulators are not so cognizant of just how rapid the changes in the real world are. They are focused on a bookkeeper’s definition of safety and soundness.”

Ed Callahan, Callahan Report, May 1999

Infinity FCU: Merger Rhetoric Hides Critical Fact

Maine’s first credit union, Telephone Workers, founded in 1921, is now Infinity FCU with $341 million in assets. Since 2019, the credit union has been pursuing an out-of-state merger.  Its latest effort is to combine with the $1.2 billion Deere Employees CU in Moline, IL, over 1,300 miles away. The reasons for this unusual combination were explained by Elizabeth Hayes, CEO, in an interview reported by CUToday on January 31, 2021.

Among her comments in the article are the following:

Hayes said when local credit unions merge there is often “overlap” that can reduce the effectiveness of the combination.

“Merging with a credit union out-of-state gives you advantages,”  Hayes stated. “One is the increase in intellectual capital. I can’t stress that enough.”

Hayes said with the out-of-state combination there is going to be no reduction in offices, no reduction in staff, and the chance for her existing 90-person team to be part of a larger organization with greater opportunities to grow and remain with the credit union.

Infinity FCU will keep its name and local control. Hayes will stay on as Maine market president.

Hayes said keeping the credit union’s name was important to Infinity. “We can keep our brand, which is important. There are a lot of members who feel very vested in their credit union and they will continue to feel vested with Infinity.”

Infinity does not need a merger to be successful, said Hayes, “We are financially sound with 9.71% capital. We’re growing and we have a strong, young management team. It’s not like everybody’s retiring. The difference here for us has been it’s a strategic move to find a partner that allows us to compete.”

Increased local competition drove Infinity a few years ago to begin considering a merger as a growth strategy. “And as I said, one of the things we decided on is that we didn’t need to be necessarily the surviving credit union. But we wanted to have local control of our brand and over our products and services.”

Hayes said the fact that Infinity is proposing to merge with another CU in Moline has nothing to do with wanting to become part of the Illinois market.

The FAQ’s and Member Notice

The themes of independence and local control are repeated on Infinity’s website under merger FAQ’s:

Infinity walked away from the Vibrant 2019 proposed merger, “because it would not have allowed us to maintain local control.” And,  “Infinity is in the fortunate position of being independently strong. . .”

“There will be no reduction in the number of employees in Maine. . .Maine’s interest will continue to be represented by senior leadership and board members living in Maine. . .we recognize the importance of local control and maintaining Maine’s distinct character and flavor.  All five Infinity FCU branches will remain open.

The products and services you use today will remain unchanged.  You will have access to the same online banking and routing number.”

The Continuing Credit Union

As presented in the merger FAQ’s: “Deere Employees Credit Union serves John Deere’s 60,000 world-wide employees.  Membership is an exclusive benefit for current and retired Deere employees, John Deere Dealers, contractors, employees of their wholly owned subsidiaries or joint ventures of John Deere , and the immediate family members.”

Under the credit union’s logo is the phrase:  Exclusively for the John Deere Family.  The credit union’s nine board members are all current employees of Deere and Company. Kurt Lewin has been President CEO of the credit union since October 1995, or over 25 years.

It is unclear what Deere achieves from this merger.  That should be a warning signal.

The Reality Behind the Rhetoric

Deere is a very successful employer-based credit union, still closely integrated in all respects with the sponsor.

Infinity FCU’s official Special Meeting notice calling members to vote on the proposal clearly states that “all assets and liabilities will be merged with and into the Continuing Credit Union”(Deere).

The Notice contains not a single factual example of a better rate, product or service.  How Deere’s branch network near the company’s facilities in Illinois, Iowa, Florida and North Carolina benefits Maine’s members is not explained.  All of Infinity FCU’s net worth $34.2 million at Dec. 2020 “will be transferred to the continuing credit union” upon merging.

Members are told nothing about what Infinity CEO Hayes means by “a true collaboration.” In fact , just the opposite; the credit union provides repeated assurances that everything about Infinity will remain the same–the employees, branches, leadership, products and services, and Maine “character and flavor” are all unchanged.

Why would a long-standing sponsor-based credit union want to be a “sugar daddy” for a community credit union over 1,000 miles away?   Infinity adds no meaningful size to Deere; what does Deere gain by sending dollars to an “affiliate” that states it will remain independent, under local leadership? With a community based FOM?

What areas of “true collaboration” have been explored?  Has the Deere team even conducted on site due diligence, and if so, why are none of those supposed opportunities mentioned?

Once Infinity FCU broke off its announced engagement with Vibrant CU in 2019, why did this Deere Employees focused credit union step up so readily to volunteer as the new spouse?  What about Illinois is so attractive to Maine credit union folk?

One Unstated Truth About this Merger

If the documentation Infinity provided its members in the FAQ’s and Meeting Notice were presented as a sound business concept in any college course, it would be graded an F.  All rhetoric, no substance, no facts.  Ideas without any evidence of reality or relevance to either credit union.

Did the two boards receive more details about this proposal?  If not, how can they exercise their fiduciary responsibility of due care? What did the CEO’s tell them?  If the directors had more details, why were the member-owners kept in the dark?

However one thing is certain:  if Infinity’s members vote to merge with this Illinois credit union, they will no longer have any role in governance, voting, or say in the leadership of the credit union they are being forced to join.

Illinois state charters allow proxy voting in all actions normally voted upon by members.  All proxies are signed over to the board of directors who control their use. The board then votes these proxies to fill vacancies or even to approve mergers.  Proxy votes are weighted by shares.  No more democratic one-member, one-vote as in a FCU charter.

It is clear then why all of the stress on independence, local control.  Maine “flavor” and continuity of services.  This empty rhetoric is a charade to disguise this loss of member control.  Proxies are not allowed in FCU’s.

If this fundamental change in member voting had been explained, might members then ask why they should give up control of their credit union and its $34 million in collective wealth for no specific benefit and no say in the future?

This essential fact has been completely ignored, and that absence raises a more fundamental question of integrity–what else has been left out of the story?

Finally, why would any credit union leader spend three years seeking a merger, while claiming in the same CUToday interview, that one is unnecessary to be successful?

After 100 years of Maine members’ loyalty creating over $34 million of cooperative wealth “paid forward” to benefit future residents, this proposal lacks both coherence and honesty.  The 18,200 Infinity members should vote NO on the merger and retain real independence and local control.

Two Observations: Positive Mood and the Opportunity of “Local” Scale 

A CEO’s March 2021 Comment to the Board:

“Almost daily the mood all around us is improving – not from the messages that the media and our government push on us, but from the fact that teammates announce with beaming faces that they got vaccinated, that they recognize more and more people have gotten vaccinated, and that the momentum for things to improve is local and real (not national, not a mirage of bias).”

A Thought about Future Living Environments (from: Building Back Better, You Say? It’s All About Scale) By James Howard Kunstler

“The good news is there is another way (than big city or suburban life), and it’s a better way: the traditional town, where all kinds of businesses can be integrated healthily and happily with houses and apartments; where most of the things you need from day-to-day are within a five-minute walk; and where everything is at a much more humane scale. There are thousands of towns across the USA that once formed the basis of what we considered most valuable about American life: places worth caring about, places that you could confidently call your home. Most of them are in terrible shape these days, because for most of the past century, Americans have been settling in the big cities and the suburbs. Dis-investment has been savage in small-town America.

But that is the next frontier for redevelopment and should be of special interest to New Urbanists.(and credit unions) Get in early and avoid the rush. These small towns, and even small cities, are sitting there waiting to be reactivated with much of their infrastructure intact and already properly scaled to the more austere conditions we face going forward. The renovations can be accomplished at the small scale, building lot by building lot, without requiring absurd amounts of capital.”


NCUA’s Most Important Function Needs Transparent Reassessment

NCUA has developed a bad habit as a public agency.  It fails to report any details of its most vital activities when engaged with problem credit unions. This covers conservatorships, liquidations and other important supervisory activities. Total silence on these critical functions raises the question of what is NCUA trying to hide?

The Latest Example

Last week the credit union press reported the details from court hearings of IBEW Local 712 FCU, a 56-year old charter with $7.6 million in assets when closed in May 2020. Key facts from the Credit Union Times account:

  • The CEO’s embezzlement began May 2017, five months into the position, and lasted until March 2020.
  • The fraud was primarily from cash advances on credit cards (presumably from the credit union) of $589,222 in 2018 and $1,085,549 in 2019.
  • Total theft $2,099,437.
  • Credit union was $7.6 million with 3,000 members when “merged-assumed” in May 2020.
  • Court documents did not reveal how the embezzlement was uncovered, how it was concealed or what was done with the money.
  • IBEW Local 712 FCU’s March 2020 Call report shows a loss of $2,099,437 presumably from the NCUA examiner’s review of the situation.

Under current practice, NCUA had no comment last May when assigning the credit union’s remnants to West Penn P&P FCU just down the road.  In offloading  the responsibility for this failure to West Penn, the transaction increased West Penn’s assets from $14.2 to $23.4 million and immediately reduced its net worth ratio from 16.1% to 10.2%.

Not the First Time  

From a July 10,2014, NCUA press release on another IBEW FCU liquidation: “The National Credit Union Administration today liquidated IBEW Local 816 Federal Credit Union of Paducah, Kentucky. . .

“NCUA made the decision to liquidate IBEW Local 816 Federal Credit Union and discontinue its operations after determining the credit union was insolvent and had no prospect for restoring viable operations. . .

“IBEW Local 816 Federal Credit Union served 929 members and had assets of approximately $6.3 million. Chartered in 1954, IBEW Local 816 Federal Credit Union served members, employees and their families of the International Brotherhood of Electrical Workers, AFL-CIO, in Paducah.

In September 2015, a year later, the facts are reported in a CUToday story, again from court documents and not NCUA, the regulator:

  • Debra C. Pyfrom, the former manager of the IBEW Local 816 Federal Credit Union, pleaded guilty in a to a single charge of bank fraud.
  • Restitution promised by Pyfrom: $600,520.
  • Pyfrom admitted to issuing loans to herself and to her daughter and posting false payments to conceal the fraud and make payments appear current on IBEW’s books.

What Is the Real Problem?

NCUA’s most important function is examinations. This responsibility consumes the majority of the agency’s employees and budget. Its effectiveness is augmented by quarterly call reports and numerous other supervisory and administrative interactions.  When examinations are only fill-in-the-blank financial analysis or completing check lists of required activities, the entire basis for the exam is compromised.

The most critical aspect of any well-done exam is judgment: what to look at beyond numbers and how far to follow up areas of uncertainty. Then the skill in presenting reasoned judgments to the credit union’s leadership team, if changes are necessary, even when no apparent issue of safety and soundness is evident.

Using Fraud as an Excuse

The most devastating example to date of this “fraud” cover for examination shortcomings is the case of the $40 million CBS Employees FCU in 2018.  The fraud began in 2000 and according to the LA Times account: “was first exposed on March 6, (2019) when a credit union employee discovered a $35,000 check made payable to the manager. The employee then conducted an audit and discovered $3.775 million in checks made payable to CEO Rostohar between January 2018 and March (2019). Those checks included the forged signature of another employee, who did not give consent.”

The $40 million figure in the story is the $25 million taken plus interest lost on the stolen funds.    The CEO had been managing insured share accounts and paying interest for members that were 150% greater, over time, than the amounts on the books examiners reviewed for decades.  Common sense should have alerted a casual reviewer that the transaction activity did not square with the reported balances.

IBEW Local 712 FCU’s demise in last week’s CU Times is just the most recent example suggesting the examinations basics are not sufficient.  In this case, 2017, 2018, 2019, 2020: four exams.  CEO takings amounted to over 25% of the credit unions assets in this period.

Reviewing the accounts of the CEO, senior managers and Board members is a standard, essential examiner responsibility.  So obvious is self-dealing in money management that for the first half century of credit union charters, many state laws prohibited officers and directors from borrowing from their own institution-they had to borrow from Central credit unions established just for this purpose.

Were these reviews not done?  How were the cash advances on credit cards hidden? Was the examiner properly trained? Where was the supervisory examiner’s review? How often has this occurred in the Region?

Instead of confronting these examples of agency shortcomings, NCUA conceals its mistakes by perfunctorily assuring all accounts are insured up to $250,000.  The agency charges off the losses from their institutional failures to the NCUSIF-that is all other credit unions.  Only later, sometimes years afterwards, are the myriad details released demonstrating the scope and length of the misdeeds and multiple examination misses.

Why An Annual Exam Contact is Essential

Some trade groups, credit unions and even NCUA board members have suggested extending exam frequency up to as much as 18 months,  as a cost savings measure or as a reward for a prior top exam rating.

I believe an annual exam contact is essential for two reasons.  A “contact” proportionate to the circumstances of each credit union reminds all concerned that the regulator is watching.  As one CEO commented, it keeps honest people honest.

But more importantly, when over 95% of credit unions are rated camel codes 1 and 2, this is an opportunity for both sides to learn what is going on in real time, not 30-90 days later from call reports. This learning can be as mundane as following a credit union’s PPP loan activity, its assimilation of a merger or future plans to change a major technology provider or engage a new partner venture.

The key skill of judgment is developed from the experience of seeing multiple examples of how institutions respond to both universal and individual circumstances. Observing proactive examples, or passive responses, to common challenges makes the examiner more competent when providing an informed external point of view.

The board must reverse the agency practice of hiding or covering up problem resolutions. Let the light in. If NCUA continues to bury problem credit unions out of sight, sooner or later it will run out of space to place the remains, or out of bodies to bury.

Quick Thoughts for a Monday


A leader without followers is a person out for a walk.

The Federal Government and Money

Spending is the most bipartisan activity.   Only in Washington is every question of competence reduced to a budget line item.

Members and Cooperative Democracy

The alternative to active members is  passive subjects.

Pandemics and Unmooring

Economic calamity can lead to the search for easy solutions. When unchecked by democratic norms, those in power can  default to the illusions of false prophets promising a future without uncertainty.

Revolution versus Democratic Change

Destruction is easy, persuasion is hard.

Regulatory Decisions

Choices made without options are actions lacking accountability.

Crises Are Twice Lived Through

The first time as experienced firsthand be all participants. The second time when the losses are clear, people endeavor to ask what have we learned?


The reconciliation of order and freedom; the union of individual enterprise within a community, pragmatism with idealism, creating multiples paths to a better society.

Covid-The Great Pause

When to “fast” means to go slow, recenter our purpose and continue on the journey to something better.

The Medical Community’s Wisdom

When all else fails, ask the patient.