The Pied Piper of Group 209, or What Happened to the FCCU Members’ $10 Million? (Part I)

On January 26, 2022 I wrote a detailed analysis of the transfer of $10 million of members’ capital to a non profit organized by the CEO and Chair of the merging Finance Center Credit Union. My position was that this was an improper taking of funds owned by the members, but asked, “You be the judge.”

This is a followup analysis since the October 1, 2021 merger and funds transfer.

Synopsis: Part I summarizes previous events and questions raised about the money transfer. Articles provide principals’ various explanations in a CU Today story.

Part II presents the new Foundation’s data subsequent to the merger and former CEO Duffy’s activities as recently as January 2024.

Part III asks what happens now?

Looking Back at the Merger Issue

Stockton’s (area code 209) Need for Credit Union Services

In the words of the CEO of a local community food kitchen for the needy, “Stockton is not a destination city.” Its population of 322,000 residents is 42% Hispanic, 24% Asian, 19% non-Hispanic white and 13% black. It is one the most racially diverse large cities in America, according to a U.S. News analysis based on 2020 census data.

It is not a wealthy city. Median household income is $71,612 and per capita, $29,095. (2022) The poverty level is 15.6%. And only 18% of the population over 25 years has a college degree.

The Stockton record summarized the city’s variable reputation in a November 2023 article:

“Stockton has topped another list and this time it’s not a bad thing.

“While Stockton’s long had a reputation of being one of America’s most miserable cities (thanks, Forbes), U.S. News & World Report is shining a positive light on Mudville.

“In its most recent report, Stockton ranked among the best places to live in California. It ranked number thirteen, one spot below Visalia and one spot ahead of Bakersfield.”

Stockton was nationally recognized as one of the first cities in the country whose finances collapsed due, in large part, to unaffordable defined-benefit pension obligations. This threatened its ability to deliver basic services like police protection.

The city is the ideal opportunity for a locally focused credit union. The member needs are many. And until October 1, 2021, this was Financial Center Credit Union’s (FCCU) long time home market. On that date the CEO and board transferred via merger all the credit union’s savings, loans, members and operational direction to Valley Strong CU whose main office is in Bakersfield, a city approximately 250 miles and a four hour drive away.

Setting Up the Transfer

On June 25, 2021 Chair Lopez and CEO Duffy of FCCU registered a non profit in California named FCCU2. Forty two days later Chair Lopez signs the official Members’ Meeting Notice to merge FCCU into Valley Strong. The Notice includes the transfer of $10 million to this newly established corporation, one of several merger disbursements members were asked to approve in the merger vote.

To my knowledge this transfer of member capital to the sole control of the former CEO and Board chair had never occurred. It appeared to be a “taking spoils” from the event. The amount, the singular nature of the transfer and the credit union’s prior five year downtrends under CEO Duffy raised the question of whether this money grab was proper.

CEO Duffy and his Sister Nora Stroh had been the senior executives at the credit union since 1993. At the merger date, the credit union had served the Stockton community for 66 years with Duffy as CEO for the final 22. In the years prior to the merger, the $635 million credit union recorded these trends:

A decline in loans outstanding from $176 million in December 2016, to just $102 million at the merger date. This is an annual negative growth of 10.3%.
Total members declined by 2,900 from December 2016 to the merger, a fall of over 2% per year. These declines in loans and membership were the exact opposite of the growth gains reported by all other segments of the credit union system.
Even with this decline in risk assets, the credit union continued adding to reserves from earnings. The result was a net worth (capital) ratio of 20% at December 2018 and 17% in December 2020, nine months before the merger. During this five years, the credit union at times reported a net worth/asset ratio of more than 100% of the loan/asset ratio.
In the IRS 990 filing for 2018, the three highest reported salaries of Duffy, CEO; Nora Stroh, COO; and Steve Liega, Accounting and Finance were a combined $3.1 million or 46.5% of all compensation for a staff of over 90 employees.

During this period of decline in members and loans, CEO Duffy maintained a high profile public image. The credit union reported numerous local and statewide political donations and grants to area non profits in its annual 990 filings.

The Critique

In the years leading up to the 2021 merger, CEO Duffy operated with the form, but not the substance, of a cooperative charter. It was run as a family business promoting the public visibility of the CEO, versus the well-being of members.

My January 2022 post was called A Theft of $ 10 Million or Just Spreading Goodwill? I provided multiple data points about the credit union’s loan and member decline, million dollar executive salaries, and net worth sometimes greater than 100% of the loan to asset ratio.

An example of Duffy’s personal PR efforts is a video from the Stockton Mayor’s office of a $1.0 million donation to Stockton Strong in 2020. The speakers state the money is from the “employees of the credit union and the Michael P. Duffy Family Fund.”

The only credit union employee in the eleven minutes is Duffy. The video shows two mock checks of $100,000 each to charities feeding food insecure residents. In the same year as this employees’ gift, the credit union’s outstanding loans declined by $40 million.

I can find no public reference to the Michael P. Duffy Family Fund in either California’s registrations or IRS 990 tax exempt filings.

CEO Duffy’s May 1, 2021 press release announcement of the merger included the following rationale:

As the CEO of Financial Center Credit Union for the past 21 years, my perspective on mergers has evolved . . . I have marveled at what credit unions of today’s scale can accomplish when they join forces . . . this merger is a true embodiment of the credit union industry’s cooperative mind-set. . . 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.

There was no data or hard facts to support this sudden strategic insight. The only concrete future service promise in the Member Notice was access to Valley Strong’s 19 branch offices which were an average of 250 miles from the former Stockton headquarters.

Press Followup of the $10 Million Question

CU Today published an extended story following up the $10 million transfer to Duffy’s control. The story, Leaders from Merged-Out Credit Union Head New Foundation, provides the participants’ explanations as follows:

The individuals involved in setting up the arrangement say it was approved by the regulators and is designed to fulfill the new merged-out credit union’s mission, while state and federal regulators issued vague statements saying no laws were violated and that the creation of the $10 million foundation was “a business decision” on the part of the credit union.

Duffy’s specific defense of the $10 million was, ”It’s not a diversion, but rather an investment in the communities it serves. This ensures that the funds will be used in the manner in which it was intended: to advance and support the needs of the members”

When asked why it was not paid to members: “The board viewed its strategic decision through three lenses: members, team and community. . .It’s a symbiosis between the three and we wanted to continue the continuation while improving opportunities through cooperation vs competition.”

After Duffy’s twenty-eight years earning a living and achieving personal standing in Stockton, he initiates the transfer of $634 million total assets, $102 million in loans, 29,500 members and their $540 million of savings to another credit union’s control and leadership. Prior to merger related adjustments, this “free” transfer also encompassed the members’ $107 million of capital.

Duffy kept control of $10 million in his words, “to advance and support the needs of members.” After transferring all his leadership responsibility for managing $634 million of member assets out of Stockton and away from local control (but keeping his CEO level compensation) he arranges to hold back $10 million for his personal use. In order to serve the “needs of the members” he had just sold out!

Part II tomorrow will look at data and events since the merger.

January 30, 2024January 30, 2024

NCUA’s Disdain for Credit Union Democracy

Let’s get right to the point. NCUA does not believe in member democracy, member rights or any aspect of owner-member control.

The cooperative model capitalizes on the character of its member-owners who join to help each other attain a better economic status. But that is not NCUA’s belief. For them, members are merely customers. NCUA’s primary duty is regulatory compliance, not enhancing the owner’s role. The democratic structure of one member one vote in elections is a theory rarely practiced. And its practice has nothing to do with the regulator’s oversight.

There are numerous examples of not just NCUA indifference, but outright rejection of requests to protect the property and process rights of member owners. The examples are rampant in three areas: the administration of mergers, the oversight of bylaw requirements/amendments framing director fiduciary conduct, and when asserting absolute, unaccountable and unexplained regulatory actions to close member owned institutions.

Unconstrained-Unexplained Closures

Following are two examples this month of NCUA forcing a merger without a member vote or any form of due process, and just vague wording: “The conditions of the merger met regulatory provisions that allowed for a waiver of the membership vote.” No facts to justify this cancellation of $32.1 million Gabriels Community CU charter.

A second example is cited again by CU Times: “An NCUA spokesperson said the $2.9 million Waconized Federal Credit Union in Waco, Texas was given the OK to merge with the $16.7 million 1st University Credit Union, also based in Waco. The consolidation was allowed in accordance with NCUA Rules and Regulations, Part 708(b), which gives the federal agency the authority to permit a merger without a member vote under certain circumstances.”

This arbitrary, unexplained use of NCUA authority is not new. In a February 26, 2022 post, the End of Kappa Alpha PSI (occurring in 2010), I provide the detail of NCUA’s liquidation while an appeal was pending of this black fraternity’s credit union.

This is not conduct limited to times of crisis. I list many other situations where NCUA arbitrarily removed management, forced mergers or performed instant liquidations without due process as recently as May 2020. In a single example from April 2016 the agency summarily liquidated six credit unions that reported collective net worth of 17.6% without any conservatorship or other steps required by its own rules.

At the time of most critical and consequential regulatory action, the agency rebuffs any explanations. All of the circumstances are kept behind closed doors: “we do not comment on our efforts or conditions related to conserved (or troubled) credit unions” is the standard defense.

At the moment the member-owners’ role is negated, the NCUA goes mum. Accountable to no one. As the two most recent examples occurred within a week of December yearend, it is easy to surmise why these silent closures were not revealed then. If done after yearend, a call report disclosing their financial condition would have to be filed. Such a final accounting, if available, would illuminate not a credit union collapse, but a failure of effective examination and supervisory oversight.

The continuing danger of these unopposed regulatory precedents is that they encourage further use of arbitrary power. Credit unions see this. Examiners will take their cues to assert their unchecked authority. Recommendations (DORs) wlll order credit unions to sell millions in underwater investments or borrow unneeded loans solely to reduce modeled interest rate risk will be issued. The threat of further action and CAMELS downgrades is all that is needed to force immediate, costly options that reduce member capital.

Lack of regulatory transparency at critical points in any credit union’s circumstances perpetuates unchecked and unaccountable regulatory power. Secret actions always hovering over credit unions in difficulty or who might otherwise oppose NCUA’s findings.

NCUA Suppression of Member Board Participation

On May 18, 2021, I filed 21-FOI-00083 “for the requests, communications, and NCUA’s approval or denial of all federal credit unions over $5 billion in assets that have requested to change their standard bylaw for nominations for directors by petition.”

Only two FCU’s have done this: Navy FCU and Penfed. Navy had filed two comment letters in 2004 and 2005 suggesting changes in the standard bylaw requirements. However, it was not until September 11, 2019, that the Director of CURE approved these requested changes which:

Raised the requirement for members to call a special meeting to 1,000 members or one fifth of one percent of total membership, whichever is greater.
Raised the requirement for nominations by petition to the greater of 1,000 members of one-fifth of one percent of the total membership.

The previous maximum bylaw signature requirement for both events was 500. Under the revised bylaw, one-fifth of 1% of members would be 26,000. The FOIA response denied much of the correspondence as to why this would be needed.

However, one can surmise the logic from the two comments from 2004/5. Navy is so large and important that it would be too uncertain to just let anyone run for the board by collecting 500 member signatures.

Penfed’s circumstances are slightly different. Prior to this change in their bylaws, a member had received the minimum 500 signatures to appear on the ballot in the just completed election. The candidate was a former board member, familiar with the process. He was informed he did not receive sufficient votes to be elected, but was not shown the election numbers.

Shortly after, Penfed applied for and was quickly approved for twofold bylaw changes approved June 24, 2020 by the director of CURE:

A special members’ meeting now requires 1,000 signatures or one-fifth of total members but a number not to exceed 2,000. There are additional requirements before the meeting can be called however. One includes the formation of a five-member committee to meet with the board. The committee will be bound by whatever agreement is reached on behalf of the petitioners; if no agreement, only then can the call for the meeting be sent.
Nominations for the board by petition now require total signatures of the greater of 1,000 or one-fifth of total members (no upper limit). No nominations will be accepted from the floor if there is only one candidate per vacancy. All board nominating committee candidates must be sent to members 75 days prior to the meeting. Nominations by petition must be filed with the secretary 40 days prior to the same meeting. This timing effectively provides members just 35 days to get signatures to add to the Board’s selected candidates after they are first disclosed.

With this bylaw, Penfed board nominations by member petition would require 5,800 signatures versus the original 500 maximum.

The effect of both bylaw changes is to virtually eliminate any chance of a board nomination by petition. Note these changes were done without any member input, no announcement by either credit union or NCUA of this fundamental change in the bylaw election process. And now that it is public . . .

Election Conduct Is Not NCUA’s Responsibility

NCUA avoids any involvement in board elections. Four members of Virginia Credit Union submitted nominations for the annual board election. Here is the background to their effort in a post, The Fix Is In. The members were not interviewed by the nominating committee They asked NCUA for assistance.

Regional Director John Kutchey ‘s reply summarized in a Credit Union Times report reads in part:

In his letter, Kutchey said the NCUA considers the right to participate in the director election process a fundamental, material right for members of a federally chartered credit union.

“The FCU Bylaws provisions that implement this right include, but are not limited to, a requirement that the FCU’s nominating committee interview each interested member that ‘meets any qualifications established by the nominating committee,’” Kutchey wrote. “Also, the FCU Bylaws provide alternative processes to run for a board seat for members interested in serving on the FCU’s board who are not selected by the FCU’s nominating committee.”

But that is just for FCU’s, not state charters. There has never been a reported instance of NCUA ever enforcing this interpretation for FCU’s.

Despite Kutchey’s high sounding phrases, NCUA has approved bylaw changes and board nomination outcomes that make a charade of democratic governance. Credit union boards and CEO’s see NCUA turning a blind eye to the repeated self-nomination and perpetual control closing any election choice. So, except for extremely rare events, boards turn into self-perpetuating, self selected directors. Member-owner governance via the annual meeting election does not exist. And with it a critical accountability check on the ambitions of the CEO and boards.

Mergers: A Game Without Rules

Knowing that they are insulated from any real member accountability or oversight, credit union CEO’s and boards feel unrestricted when they decide to seek mergers with other credit unions. The basic test is not what is in the members’ best interest, but where can management and board get the best deal for themselves—sometimes right before the CEO makes an exit.

Today credit union “voluntary” mergers are a game without any rules. Financially successful credit unions combine rhetorical generalizations referring to scale, common culture and shared vision. There is no pretense of fiduciary responsibility including the required duties of care for member-owner assets or of loyalty, to always act in the best interests of members.

NCUA blindly administers the process oblivious to the self-dealing and incoherent examples such as cross country mergers. When challenged the Agency has two responses, one before and one for after.

Their first defense is that it is the members’ choice. Note that this is most often the first time the members will be asked to vote on anything.

The Agency expects members who have put their confidence and money in the credit union, often for generations, to act contrary to the recommendations of the leaders to whom they have entrusted their resources and financial relationships. And if a member or group were to speak up, the credit union will either refuse to answer their concern or, use the full corporate resources against their opposing members. (multiple examples to follow)

The members are not even provided the same information credit unions are required to submit to NCUA on the merger package checklist. The owners are effectively removed from seeing the same data and information the regulator does.

But the worst part of NCUA’s studied neglect is its role if all the promises, undertakings and promised merger benefits fail to materialize. What happens afterwards? The answer is nothing happens, no matter how flagrant the violations promised in the Member Notice which NCUA approved.

NCUA has published a booklet called Truth in Mergers. It promotes merger as a strategic option, oblivious of any accountability to the owners.

When a merger turns out to be merely a planned sale to a third party with no background or interest other than asset acquisition, what are jilted members to do?

Here is NCUA’s reply from page 21 of the Merger Manual:

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. Likewise, if staff is promised a comparable position in the continuing credit union, the merger agreement should note their interest in the position, not to be terminated without cause for one year. Because these matters would fall under state contract law, the wording should be state specific.

Don’t come to NCUA if you have been duped or conned and stripped of your cooperative savings. Not NCUA’s problem. Go find an attorney and use your personal resources to fight the people who just screwed you.

I will present multiple examples of this kind of self-serving mentality and NCUA’s impotence even when confronted with the facts.

A Dangerous Myth

The bottom line is that NCUA does not believe in or support owner rights. A cooperative member is nothing more than a customer. Chairman Harper’s regulatory philosophy as presented in a GAC address is revealing. Note especially his ending words — the logic that credit unions do not discriminate because they are owned by their members is a dangerous myth and one that should end. While he might have intended otherwise, the real dangerous myth he evokes is “credit unions are owned by their members” His full comment:

Since joining the Board, I have focused on strengthening the NCUA’s consumer financial protection and fair lending resources. Given the consumer compliance examination program for comparably sized community banks, our program’s scope is insufficient, especially for those credit unions between $1 billion and $10 billion in assets. We should be doing more, and we can do more.

I understand this is not a popular opinion in this room. Many within the industry maintain that the NCUA should primarily focus on its safety-and-soundness mission or that the agency has not demonstrated a significant rationale for a stronger consumer compliance program.

Some also contend that the cooperative nature of credit unions prevents their lending practices from being discriminatory because their primary purpose is to serve their members’ needs. However, the logic that credit unions do not discriminate because they are owned by their members is a dangerous myth and one that should end.

Boards and CEO’s have taken their cues from this amoral stance. When NCUA has no belief in owner-members, does nothing to support democratic participation and keeps members in the dark about their own activities, is it any wonder that CEO’s and boards believe they are completely free to decide their credit union’s future without any regulatory or member accountability.

Examples to follow.

January 29, 2024January 29, 2024

Threats to Coop Democracy

There is much public political rhetoric currently expressed under the theme of “threats to democracy.”

But America’s democratic experiment is not just in our national or state voting processes. Democracy is a civic practice that characterizes the governance of the vast majority of organizations, public and private, across the country.

These more local institutions, including credit unions, are where we learn and practice what responsible citizenship means. It can mean paying attention to leadership, organizational performance, voting when called upon, and supporting, when necessary, with our presence or money.

When money and power are at stake, especially in credit unions, those benefiting from positions of responsibility can be tempted to manipulate the democratic process for their advantage.

Lincoln’s Lyceum address before he had formally entered politics addressed the fragility of democratic design. Parts of his speech in the context of today’s events were quoted by Heather Cox Richardson in a recent column:

On January 27, 1838, Abraham Lincoln rose before the Young Men’s Lyceum in Springfield, Illinois, to make a speech. Just 28 years old, Lincoln had begun to practice law and had political ambitions. But he was worried that his generation might not preserve the republic that the founders had handed to it for transmission to yet another generation. He took as his topic for that January evening, “The Perpetuation of Our Political Institutions.”

Lincoln saw trouble coming, but not from a foreign power, as other countries feared. The destruction of the United States, he warned, could come only from within. “If destruction be our lot,” he said, “we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.”

Lincoln’s truth was that in democratic organizations, the greatest threat to sustainability is not external, but internal.

Lincoln’s last sentence above caught my attention. The same word, suicide, was used in the final part of a blog Mike Riley wrote last summer. He was expressing concerns with specific credit union practices. In a note of irony about his previous employer, NCUA’s role in these events, he closed with his inimitable sense of humor:

“If someone wants to commit suicide, it is a good thing if a doctor (i.e. NCUA) is present.”

Democratic institutions survive not due to their special design, but rather because leaders believe and follow the values and processes required to sustain.

This week I will review events that are shaping the evolution of credit unions that are contrary to the principles implied by democratic governance.

Ignoring or overlooking our cooperative falls from grace is easy. “It’s not my problem.” But soon the examples of bad behavior and poor decisions become precedents for others. These destructive events are not caused by outside competition; instead they reveal us becoming “authors” of our own finish.

January 26, 2024January 26, 2024

Bringing the Next Generation into Leadership

This is how one family introduces their children to credit unions, from a post earlier this week.

The parents take their role seriously. The baby is growing up. They are now helping her become familiar with credit union leadership responsibility.

She is looking to find the page on youth programs.

Here it is. One hopes more senior credit union volunteers spend this much time reviewing their board policies, especially on succession planning.

A High School’s Entrepreneurship Program

I graduated from Springfield High School. It never had a program like the one described in the SHS student newspaper from January 25.

The opening introduces a dedicated teacher helping students learn about the realities of small business.

For years, students have been restricted by the confines of the educational system, simply following the “status quo” and doing the bare minimum just to graduate. As time has passed, schools have developed their programs and have prepared students to genuinely pursue opportunities that never seemed possible for a regular high school student.

Springfield High School has developed a plethora of programs for students to grow their experience for potential careers, one of which is the entrepreneurship program.

Karri Devlin, a veteran teacher at SHS, runs this program with the intention of helping students reach their full potential as a business owner. “We try to emphasize the importance of leadership and creativity in regards to starting your own business. We talk about how to promote your business, and how to manage it financially. They also learn how to sell a product and collect the money. Students can pick their marketing team and sell their own product on what’s called Market Days at lunch. They’ll set up their products at lunch and we’ll try to sell them to the student body. We have some grant money that helps buy the supplies but the students pretty much have to come up with the money for the supplies I don’t provide. They also have to determine the markup and how much they’re going to sell it for to make sure that they can cover their costs.”

After describing one student’s efforts, the article closes with this observation:

From Mrs. Devlin’s entrepreneurship program, to creating their own businesses, student entrepreneurs have proven time and time again that they have an unstoppable drive. . .With their innovative young minds, they are the future of the business industry. And to those who do not possess the entrepreneurial spirit, support your classmates by buying local!

This high school in Springfield, Illinois would seem an ideal opportunity for credit union partners in this hands on, real world of “classroom” startups.

Update on the Federal Reserve’s Special Bank Term Lending Program (BTLP)

A week ago I reported that credit unions with only 9% of total financial assets, had taken down 27% of the emergency BTLP.

Also that financial firms were now arbitraging the special fund by borrowing and reinvesting the funds in overnight reserves, earning a spread. Borrowings had grown from $129 billion at yearend to $168 billion this week, in a period of quiet markets.

That opportunity is now over. The Fed announced the facility will close on March 11. The 307 credit union borrowers of $35 billion (as of September 2023) will have to pay off their loans or shift borrowings elsewhere.

January 25, 2024January 25, 2024

Credit Unions’ Origins versus Their Future Stories

As a state and federal regulator for eight years, credit union directors would sometimes come up during conferences to show me the original membership card in their wallet. The important part was the number on the card. Whether it was a single digit or other very low numeral, it validated the owner’s presence and belief at the cooperative’s founding.

Many credit unions summarize their beginning under the About section on their web sites. The theme is that from a few committed persons and minimal dollars, see how far we have come today.

Jim Blaine presented the SECU (NC) founding story in a recent post. A few excerpts provide you a flavor of his imitable style as he contrasts the official version with one member’s reality.

Creation stories are intended to provide us with an explanation and some reassurance that “stuff doesn’t just happen”. These stories are often called “creation myths”, or that fancy word “cosmogony”. . .

Folks at SECU for decades have gathered around the campfire to hear our creation story… “On June 4, 1937, 17 state employees and teachers in Raleigh pooled their meager resources of $437 to form State Employees’ Credit Union…” and the rest is history. Sounds almost like a religion or cult following doesn’t it? Well, for some of us it is…

But, as with most idealistic ventures, there is usually a back story. Way-back-when, I received an enlightening letter from long-time member Paul Wright. . .which begins:

“Back in 1932 I was a liquidating accountant for the State Banking Department. Mr. Gurney Hood was Commissioner of Banks and we had about 10 accountants and 12 or so bank examiners – all the banks were in trouble back then.”

You can read the specific impetus driving this unusual organizational effort in the full blog which concludes with Jim’s observation:

😎 Well, I did get a “kick” out of the letter and it did not in any way tarnish my belief in those “17 apostles”, with $437 who believed, with great purpose, that they could “capitalize on the character of their coworkers and help each other attain a better economic status.”

Wanted to share the “TRUE STORY” with you because today: 1) many credit unions – and one in particular – seem to have “forgotten” why they were created, 2) seem to have “forgotten” who they were created to serve, and 3) seem to have “forgotten” that most of their member-owners still often live in a “paycheck-to-paycheck”, “lend me $10 ’til payday” world of economic stress….… and of course, wanted to 4) remind the bankers that from its “creation” all SECU was ever trying to do was to save them from themselves… (still trying!)

Future Stories

History matters, whether factual or embellished by time and future events. It gives perspective on present circumstances and hope for how we might envision future opportunities.

But sometimes the always changing events in which we live cause some to say they have had enough. The forces driving the profession in which I labor are just too overwhelming. I’m no longer comfortable and need to get out.

An example is the resignation last week of Harvard’s football coach of 30 years. He had an extraordinary record as summarized in this article:

He ended his career with 200 wins, and, with a 17-9 victory over Dartmouth on Oct. 28, surpassed Yale’s Carm Cozza to set the record for Ivy League coaching wins. During his tenure, Harvard won 10 Ivy League titles and defeated the archival Yale Bulldogs 19 times, including nine straight from 2007-2015.

He also led the Crimson to three undefeated seasons — in 2001, 2004, and 2014 — leading Harvard to amass the sixth-best winning percentage in all of Division I football since 2000. Throughout his career, he won the New England Coach of the Year award eight times and was named a finalist for the Eddie Robinson Award — awarded to the top coach in the Football Championship Subdivision (FCS) — on five occasions.

So why did he retire, still young and in many ways at the top of his game? The driving motivation was changes in the college football model, specifically paying players through the “name, image, likeness” opportunity. Here is his blunt assessment:

“College football is changing dramatically and certainly not for the better,” Murphy said. “When people ask my opinion of what’s going on in college football, I give them a very simple explanation. It absolutely — positively — is professional football, only without any rules whatsoever.”

Some very successful credit union CEO’s and boards are voicing a similar lament about their industry. The challenges are just too numerous: technology, regulation, changing competition, lack of volunteers, little member loyalty and of course ever pressing competition.

As they look ahead, these CEO’s and boards give up and retire. Change has made it too hard to continue even after demonstrated successes of 40, 50 or 80 years—it is time for them AND the credit union to go, in their future outlook.

Tomorrow I will share an example of one credit union’s “future story” after 66 years of stable and focused growth. It determined it wouldn’t be able to continue and had to merge to continue to serve members.

The difference between the Harvard football coach’s retirement and these credit union leaders is the credit union leaders decided to withdraw from the game. Harvard will find a new coach who will want to tackle the challenges of competing in a time “of no rules.”

Also the credit union decided to give up and transfer all of their ample resources to another organization. It would be similar to the Harvard athletic department confirming Coach Murphy’s insight and declaring, “From now on Harvard is not going to field a football team. So just root for Yale or whatever school you prefer. And any young men who might want to play, don’t apply to Harvard.”

The instances of credit union leaders closing up shop is becoming more widely presented as an acceptable strategy. The decision is oblivious to whatever “creation story” the credit union told its generations of members who created the bountiful legacy that is given away to outsiders who had no role in its success. There is not even an effort to find a new coach.

The other disturbing aspect of these “future rationales” is that sometimes the leaders use the closure to enhance their own personal futures. It would be like Coach Murphy deciding to take all of Harvard’s footballs and memorabilia with him when he leaves saying, I deserve this because I made it all happen.

A college, or for that matter any football team’s future, does not depend on a single coach or even player. There is an institution, an organization, or even a league that supported the decades of every team’s individual efforts. I believe it is time for these supporting organizations and their alumni to speak up. The institutions they built to benefit future generations are being unilaterally shutdown.

January 23, 2024January 28, 2024

An NCUA Professional and Credit Union Believer Dies

Last Thursday, January 18, 2024 D. Michael Riley a career credit union professional died. He was 77 years old and is survived by his wife of 41 years, Lori.

After serving in the military, Mike graduated from the University of Alabama joining NCUA as a field examiner in 1972. A little more than 13 years later (May 1985) he succeeded me as Director of the Office of Programs. This responsibility included overseeing the newly capitalized NCUSIF, the CLF and the Agency’s Supervision and Examination programs.

Regional Director Riley speaking at NCUA’s December 1984 National Examiners and Credit Union Conference.

Rising to the Top

His meteoric rise to the highest responsibility in agency reflected his ability to get things done. In 1982 he was reassigned from NCUA’s Central Office to become Director in Region Six-the Western part of the United States.

California was the epicenter of problem credit unions exacerbated by double digit inflation and unemployment and the number and size of credit unions. I believe Mike, at 35, was the youngest examiner ever promoted to RD at NCUA.

Chairman Callahan believed that effective supervision required the leadership of the six RD’s, not rule-making in Washington. They were the critical managers of the agency’s most important responsibility—the examination program. Success was achieved not by cashing out problems with insurance money; but by developing resolution plans unique to each situation and underwritten by cooperative patience.

Regional Directors Allen Carver, Mike Riley, Lyn Skyles and Executive Director Bucky Sebastian at the December 1984 NCUA Conference.

A Passion for the Movement

Mike’s progress from new examiner to RD in a decade is a testament to his grasp of credit union operations. Most importantly he bought into the changes Ed Callahan was seeking. He knew how to get things done, an uncommon trait in a bureaucracy. He had the ability to work with everyone, but was not a “yes” person.

Last July I wrote a brief article about Ed’s time as a football coach and how that influenced his approach to leadership: The Roots and Legacy of a Credit Union Leader.

Mike responded: Great article, I know he taught me a lot.

When Ed left after three years and eight months as NCUA Chair, the small team of five whom he brought from Illinois also left. Senator Roger Jepsen, the next NCUA Chair, did not have a background in either administration or credit unions.

This is when Mike made his most critical contribution. Significant change in a governmental bureaucracy will not last if successors do not believe in the new directions.

It is a bureaucratic reflex that when a Chair leaves, staff reasserts their priorities. This is especially the case when incoming Board members have little or no prior credit union experience. Instead Mike insured the fundamental tenets from the Callahan era of deregulation were sustained.

Hitting the Ground Running

When returning to DC in 1985 as Director of the Office of Programs, he testified with Chairman Callahan on the CLF’s annual budget appropriation within his first 30 days. In September 11 and 12, 1985 he was NCUA’s spokesperson to the House Banking Committee on credit unions’ condition as the new NCUA Chair had yet to take over.

As reported in NCUA News September 1985, he said “federal credit unions had strong gains and a remarkable track record in an increasingly competitive, deregulated environment.” He called the capitalization of the NCUIF, “the most significant development since its founding in 1971. It had quadrupled in size solely through the financial support of insured credit unions.”

In the wake of the Ohio and Maryland S&L crises, he stated NCUA supports the dual chartering system and the option of private insurance for state charters. “This arraignment has served the credit union movement well, providing strength and innovation out of competition.”

For the next ten years (1985-1995) as Director of Programs Mike continued the critical administrative and policy priorities that Callahan had implemented. These included an annual exam cycle, total transparency of performance, expense control. the CLF’s expansion to every credit union and promoting the uniqueness of the credit union system.

In the years he led the Office, failures caused the downfall of the FSLIC and the separate S&L industry, the initial bankruptcy and refunding of the FDIC and ongoing economic cycles. However credit unions and the funds NCUA managed continued their steady progress. Growth in credit union service and members expanded across the country.

Continued Interest in the Movement

In May 2023 post I wrote about the dangerous goal of NCUA’s goal of seeking parity with other regulators. He commented: Outstanding article. Thanks for laying out so clearly. It’s hard to get into the nuts and bolts but somehow NCUA’s operating costs needs to be reduced, fewer administrators and more hands on folks.

He also had a dry sense of humor with an affable southern temperament.

I recall his moderating a GAC panel of two former NCUA Chairs, Ed Callahan and Senator Jepsen. He led a revealing conversation with charm and wit. If someone has a cassette tape of this session, it would be illuminating to hear how Mike navigated the discussion of these two leaders.

People liked Mike. His colleagues were family. Lori and he would hold an open house every Christmas inviting both NCUA and credit union friends.

After leaving NCUA in the mid 1990’s, Mike worked with Callahan and Associates and then on his own as a consultant. He was a Trustee of the TCU mutual funds family.

His Views on Today’s Trends

Mike wrote about current credit union events in this complete post in April 2023. He was concerned about worrisome trends in credit unions leading to their “creative destruction.” He draws from his early years as an examiner overseeing 30-40 credit unions. He closes with this observation on mergers:

This ongoing march continues. The merger of two sound credit unions without some legitimate reason doesn’t seem to be member oriented. I still think of the members of those small credit unions who received services such as buying a washer that no one else would do.

Bigger is not better if the member does not benefit. How many of these mergers produce lower loan rates , higher dividends, or distinctly better products at a lower price? Carried to the extreme we will be left with 20 credit unions that are no different than large banks.

(and on NCUA’s role)

Schumpeter opined “If someone wants to commit suicide, it is a good thing if a doctor is present.”

Memorial Service Details

A service of celebration and resurrection will be held on Saturday, February 10, 2024, at St. Luke’s United Methodist Church (UMC) at 304 South Talbot Street, St. Michaels, MD.

The family will welcome friends and relatives at St. Luke’s UMC from 11:00 AM to 12:00 PM, which will be one hour prior to the service at 12:00 PM.In lieu of flowers, memorial contributions may be made to Habitat for Humanity Choptank, Salvation Army, St. Luke’s UMC, or Talbot Humane.

January 22, 2024January 22, 2024

Will There Be a Credit Union in This Person’s Future?

Photo from a third generation credit union family.

However, will there be an option of a member-owned cooperative in her future? Her mom and dad and grandparents have worked in credit unions for most of their professional lives.

This week I will write about some of the internal challenges facing the movement.

Coincidentally, Jim Blaine is beginning a series-Consider This– of forceful posts on what makes the credit unions unique. It is a good primer for those who cannot attend a DEI week.

His first “chapter” in the series is called The Difference. The next is The Difference is Real. The third discusses “genericide” or The Kleenex Dilemma. A brief excerpt:

What is “The Kleenex Dilemma” for SECU as a credit union? Like it or not, try as you might, when an SECU member is asked: “Where do you “bank”?, the member will invariably say “At the credit union!” See the problem? The word “bank” owns the financial institution category in the mind of the public – and that probably is not going to change any time soon.

So, what has SECU done about the kleenex problem?. . .

His target audience is the entire SECU family, especially the board. These posts would be a helpful resource and live case study for any credit union volunteer-paid or unpaid, every industry regulator (especially NCUA) and of course the public.

If we want our children and grand children to become “member-owners” I hope Jim’s logic and some examples this week of wayward activity may “steady” the movement on its course.

January 19, 2024January 19, 2024

Taking a Snow Day

First real snowfall in over two years onTuesday. Continuing this morning. Silent and cold.

Suppose we did our work
like the snow, quietly, quietly.
Leaving nothing out.
— Wendell Berry, from his collection, Leavings, 2010

My reindeer topiary enjoying winter.

The Christmas wreath with all of its seasonal coloring.

Our black dragon evergreen stands tall in the snow.

An indoors chrysanthemum looks out on the new wintery scene.

A picture to remember next summer.

A Japanese snow lantern fully realized.

Happy sledding or just sitting quietly by the fireplace.

January 18, 2024January 18, 2024

Credit Unions Top Users of Bank Term Funding Program (BTFP)

At the end of the September quarter, credit union total assets of $2.25 trillion were just 9.7% of total banking assets. However their participation in the special emergency Federal Reserve lending program equaled 27% of the BEFP’s loans at yearend or three times their share of total assets.

The September 2023 call reports show 307 credit unions with Federal Reserve borrowings of $34.9 billion, an average of $114 million. For these credit unions, the Federal Reserve represents 66% of their total borrowings. For 112 of this group, the Federal Reserve is their only source. The largest reported loan is $2.0 billion and two credit unions report draws of just $500,000 each.

In an ironical coincidence with the BTFP participation, this total was also 27% of all credit union borrowings at the quarter end of $130.3 billion. Moreover this $35 billion was only a small portion of the reported $173.4 billion in total lines these credit unions had established with the Federal Reserve.

Most of these loans were drawn following the banking liquidity crisis in March. The Fed created the emergency Bank Term Funding Program (BTFP) after the Silicon Valley Bank failure to prevent a system wide run by uninsured depositors on other depository institutions.

This facility was different from traditional Federal Reserve programs. Eligible collateral security was expanded, all collateral was valued at par, not market , and draws could go up to one year. The rate for term advances under the Program is the one-year overnight index swap rate plus 10 basis points. The rate is fixed for the term of the advance on the day the line is drawn down.

What Happens Next?

In a January 9, 2024 speech to Women in Housing the Federal Reserve’s Vice Chairman for Supervision, Michael Barr, was asked about the program’s future when the initial one year life is over. Here are portions of his reply:

Moderator: I wanted to ask you about the future of the BTFP. We are rapidly approaching the one-year mark, is this something where the Fed is planning on extensions, or any information to be released to the public on usage?

Vice Chair for Supervision Barr: So when the funding stress happened in March 2023, over the weekend the Federal Reserve, FDIC and Treasury agreed to a systemic risk exception to least cost resolution for the FDIC. And the Federal Reserve and the Treasury worked together to create an emergency lending program for banks and credit unions, the Bank Term Funding Program that you are referencing. And the Bank Term Funding Program enables banks to use collateral that was in place as of that time – as of March of 2023 – that is, essentially Treasuries and agency mortgage-backed securities, to pledge those, and to be able to get borrowing against that up to a year at the par value of those securities.

That program was really designed in that emergency situation. It was designed to address what in the statute is called unusual and exigent circumstances – you can think of it as an emergency. . .we want to make sure that banks and creditors of banks and depositors of banks understand that banks have the liquidity they need. And that program worked as intended. It dramatically reduced stress in the banking system very, very quickly. And deposit outflows which had been very rapid in that short period of time normalized to what had been going on before and in fact maybe flattened out to some extent a little bit.

So that program was highly effective, banks and credit unions are borrowing under that program today, but it was really set up as an emergency program. It was set up with a one-year timeframe, so banks can continue to borrow now all the way through March 11 of this year. . .a bank could continue to borrow or refinance under the program and in March of this year have a loan that then extends to March 2025.

I expect continued usage until that end date of March 11, but it really was established as an emergency program for that moment in time.

Arbitrage Opportunity Grows Outstandings

Two days after Barr spoke, the Wall Street Journal published an update on the program: Banks Game Fed Rescue Program.

The article reported that the BTFP pricing, based on the benchmark interest rates average plus 10 basis points, was less than the 5.4% the Fed was paying on overnight excess reserves. This arbitrage opportunity has resulted in an increase of $12 billion in more drawdowns since yearend even though no liquidity strains were apparent in either system.

Credit unions can request extensions up to one year until March 11, 2024. After that date, the statement above and the most recent activity suggest the program will end. Credit unions should plan to either repay or tap other sources of liquidity.

And the CLF?

It should be noted that the Central Liquidity Facility reports no loans this year as of its November financial statements. In fact it has initiated no new loans since 2009. The BTFP participation suggests credit unions certainly have liquidity needs. However the CLF, designed to serve and funded totally by credit unions, is not as responsive as the Federal Reserve Banks.

January 17, 2024January 17, 2024

A Lesson from the Latest FDIC Premium Assessments on Banks

Last Friday the four largest banks in American announced their 4^th quarter and full year financial results.

All had one new, significant expense in the 4^th quarter. Here are the numbers from the New York Times article: Biggest Banks Earn Billions, Even after Payments to the FDIC Fund-(January 13, 2024)

Bank $ FDIC Payment

JP-Morgan $2.9 billion

Bank of America $2.1 billion

Wells Fargo $1.9 billion

Citigroup $1.7 billion

These premiums are necessary to cover the costs for the FCIC’s losses on bank failures earlier in 2023. FDIC’s reported loss expense through the first three quarters of 2023 was $19.7 billion.

The FDIC is collecting approximately $16.3 billion in this fourth quarter assessment. The four largest banks will pay the $8.6 billion shown above or 53% of the total.

Premiums comprised more than 81% of the FDIC ‘s total revenue through the first three quarters of 2023. Interest income from the FDIC’s investments, the other revenue source, would cover FDIC ‘s operating expenses. But the $600 million excess would not even begin to cover the almost $20 billion in estimated insurance losses. (all data is through September 30, 2023).

FDIC Premiums and Insured Deposits Not Connected

There is no relationship between premiums and FDIC’s insurance coverage of $250,00 per account. Instead premiums are calculated on a bank’s net assets which is called its “assessment base.” At September 2023 this was $20.7 trillion versus just $10.7 trillion of insured shares.

FDIC’s revenue is no longer based on its stated goal to protect depositors’ savings but rather the FDIC’s role in stabilizing the entire industry’s balance sheet. When banks succeed, shareholders win. When banks fail, everybody pays.

FDIC’s Complex Pricing Structure

The FDIC may set the premium at whatever level it deems necessary to achieve its minimum ratio goal of 1.35%. The fund recorded an approximately $10 billion operating loss through the September quarter putting the ratio at just 1.13%. The $17 billion new assessment is needed cover this shortfall and grow the fund’s ratio target.

Moreover premium rates can vary from 2.5 to 42 basis points depending on bank size, that is whether an institution is more or less than $10 billion in assets. The final rate is based on each bank’s CAMELS rating plus, for larger firms, a scorecard which measures “complexity.”

The assessment rates are so complicated that the FDIC posts three different calculators for banks to determine what amount they must pay.

This premium system provides virtually no check and balance on pricing, except the rule making process. It is frequently “updated” and always open- ended in amount. There is no incentive or check and balance on FDIC effectiveness in its oversight or problem solving roles. Banks must bear the costs not only from institutional failures but also from FDIC’s supervisory effectiveness, good and bad.

The Cooperative Alternative in the NCUSIF

By comparison the NCUSIF is simple to understand, administer and monitor. Statements are posted monthly. Public board updates on investment returns and overall financial trends are presented at least quarterly so credit unions can track their cooperatively designed fund.

The 1% deposit underwriting means premiums are extremely rare, assessed only four times in 40 years since the 1984 redesign went in effect. Dividends have been paid out over a dozen times.

When the 1% deposits totals are added to the retained earnings, the investment portfolio remains relative in size to the insured risk at all times. Investment income has proven adequate to meet all of the fund’s operating expenses and sustain a stable operating level between 1.2 and 1.3% of insured savings. Based on the latest November NCUSIF financial report the fund’s equity should be at or above the long-time upper cap of 1.3% at yearend 2023.

With NCUSIF equity at the high end of the .2-.3 range, it means there is over $1.7 billion in additional reserve for any contingency. In the October NCUSIF update the CFO reported the five-year loss average since 2017 was only .1 of 1 basis point. The net actual cash loss so far in 2023 was just $1.0 million in the same update.

With over 40 years of data from all economic cycles, financial crisis and evolving credit union business models, there are decades of real data to validate the NCUSIF’s financial design. This record shows that to maintain a stable NOL a yield on investments of 2.5-3.0% would sustain the fund through virtually any growth or economic cycle and any operating contingency.

This historical 1.3 % cap is due for Board review in February based on 2023 yearend earnings. This decision is an important commitment of NCUA to the credit unions who underwrite the fund. Unlike the FDIC’s premium dependency, the NCUSIF’s investment portfolio return has proven to be a reliable, predictable and sufficient model-in all environments.

Therefore, when net income exceeds the NOL cap, the credit unions are paid a dividend on the excess income recognizing their overall sound performance. This return is a critical element of the cooperative design.

The FDIC’s premium model is unpredictable, subjective and arbitrary, and most importantly unrelated to the actual insurance coverage per account.

Why the NCUSIF Design Works

The credit union model is based on the historical operational and cooperative values on which credit unions are founded. All participants are treated equally. Risk and expenses are shared alike for all. It is democratic and accountable in its structure.

The redesign was accomplished with industry-wide collaboration and participation. It required congressional approval. It was based on the oldest of cooperative concepts: self-help. No government assistance or funding was sought or necessary.

Instead the credit unions put themselves in the law as the underwriters of the fund’s resilience, no matter the circumstance. This is how they intend to maintain their independence as a separate financial system. For example the S&L’s were merged with the banks and the FDIC when their system collapsed. Unlike the for-profit, stockholder owned banking system, the moral hazard examples of excessive risk taking by management are extremely rare in the cooperative model.

Understanding NCUSIF’s unique history and design and why it fits credit unions so well is especially important whenever a new board member comes to NCUA. It will be especially critical Tanya Otsuka be informed of NCUSIF’s special character and long term performance, as much of her professional background is within the FDIC.

The February NOL setting will be the first of many opportunities she will have to show her understanding of the differences between bank and credit union regulation. Credit unions should be communicating that distinction now.