Where Did Creighton FCU’s Members $13 Million Go?

On August 7 Credit Union Times reported the story of the merger, without a member vote, of the $66.9 million Creighton FCU with the $1.2 billion Cobalt FCU.   The source was not from NCUA, but rather a joint announcement by Cobalt of the NCUA approved combination.

In the twelve months ending June 2024, Creighton’s networth fell from a positive $6.3 million to a negative $7.3 million.  A total loss of $13.6 million, all of which was recorded in the June 2024 quarter’s call report.

What happened to cause this loss of over 20% of credit union members’ total assets in just 90 days?

Until this quarter, Creighton FCU had been doing business as usual.  Tom Kjar the President for 32 years had just announced his retirement. The credit union’s chair had posted a Credit Union President open position on LinkedIn with a salary range of $114-$152K.

On April 3, 2024 the credit union’s Vice President of Operations and Finance, Vorace Packer, died.  There was no public announcement of the circumstances in his obituary.  The credit union provided  no followup successor.

What the Data Shows

For a sudden financial loss this large that is not connected to asset write offs, all of the indicators point to an internal defalcation.

In the 5300 call report numbers NCUA posted at March ’24, Creighton’s shares total $61 million.  Just 90 days later that total is $74 million. The difference is almost equal to the the total loss of $13.6 million.  Of this sudden share increase, $12 million is in regular shares.

These numbers show shares were under reported a pattern often used to cover irregular transfers of funds.   Because the total amount is so large,  a single diversion of $500,000 or $1.0 million would cause attention or a cash flow problem.  It seems likely this diversion has probably taken place over many years.   For example at $1.0 million per year the cash outflow would be only $250,000 per quarter.

To accomplish this cash diversion and reducing reported member share balances, there would have to be two sets of books—the incorrect numbers for the auditors and examiners, and then the actual records so members would not see shortfalls in their account statements.  The fact that the under reported balances were totalled so quickly, suggests this second set was readily discovered.

There are other patterns in the data going back over ten years that should have raised questions.  For example the credit union would report positive net income for each quarter, but the total net worth did not change until the final call report filing for December.  The pattern of reporting “reserves” was changed in March of 2022,

Why Did the Members Lose their Credit Union?

NCUA has said nothing about its actions in this event.  Cobalt is the source of the merger announcement.  It is that credit union’s members who will cover the $7.6 million hole in Creighton’s balance sheet, subject to any valuation adjustments.

Cobalt reported, before this event, a $1.8 million loss for the first six months of 2024 along with negative loan and share growth.  NCUA said that there will be no impact on the NCUSIF from this event, so Cobalt members will be the rescuers.

Will there be bond recoveries for this loss?   What is the prospect of recoveries from where the funds were sent?  Who will pursue these and other recovery options?

The Most Important Questions Remain Unanswered

How did this apparent long-standing diversion occur?   Where did the $13 million of member funds go?

As a federal charter, when was the last NCUA exam prior to the finding of the defalcation? Was there an annual exam?  If so, were normal exam procedures followed?

The credit union reports employing the same auditor, Wipfli LLP, for at least the last five years.   Were their external CPA audits clean?  Did they or the supervisory committee do an annual  sample test verification of member share balances?   Were large disbursements of funds to third parties by the credit union reviewed?

Outside audits, supervisory committee verifications and NCUA exams are all intended to keep honest people honest.   How could these required processes have failed so hugely and over such an extended time period?

What was the CEO’s role—was there no division of duties, that is different persons authorizing transfers from those  initiating specific transactions?

NCUA’s Silence is Deafening

NCUA made no announcement of this event.   We have no idea if the board approved a conservatorship or the forced merger.   What options were presented, if any, to the board?  What was their role? Or, did they just delegate this action to staff elsewhere in the organization?

Why has there been no official explanation of NCUA’s role two months after the June 30 facts have been posted?

NCUA’s primary purpose is to prevent the loss of member funds. In this case there is a $13 million dollar shortfall between the $73 million in total shares and the purported net worth and assets to cover them.

What happened to the multiple supervisory oversight roles supposedly in place?   Until these apparent failures are understood and addressed, a much bigger problem remains.  Can the supervisory system charged with the responsibility and resources to oversee the industry’s soundness perform its basic functions?

Until there is transparency and full answers about this situation, the potential for greater difficulties is possible.  The NCUA’s silence about the members’ $13 million financial and charter loss at Creighton is a greater problem than this financial failure.

The critical question is whether the regulatory system’s processes are performing as intended?Who is willing to represent the NCUA in this episode to discuss what happened, why and any necessary changes from this event’s analysis?