Author: Chip Filson

Last week, Xceed’s CEO announced the final vote approving their merger with Kinecta FCU. Reviewing this combination in light of 2020’s full year results suggests that Xceed’s members are just being offloaded from a sinking ship to a severely listing one.

An obituary on Xceed’s passing can be written from three vantage points:

1. The tale of the data
2. The members’ reaction
3. The NCUA’s Regional Director cosigning bonus checks

The Data: Exceed’s Last Performance Report

Xceed’s 2020 headline result is a $2.7 million operating loss (-.29 ROA), representing a $4.6 million fall from the prior year. Loans outstanding declined by 20% ($142 million), reducing the loan to asset ratio to 59%. Total income was down 11%; the loss provision expense increased by 89%.

This full year outcome continues this management team’s track record of declining performance. The past five years show a compounded annual (CAGR) asset growth of negative (-0.67%) per year.

During the CEO’s 15-year tenure there have been five mergers that added $200 million in external assets and over 30% more members. Even after these combinations, Xceed’s annual asset growth of 1.39% was far behind the credit union average of 5.8%.

In this final act, the senior team doubled down on their failed merger growth strategy. They became the “mergee” turning over their leadership responsibilities to Kinecta, just down the road. They bailed out, but not before rewarding themselves for this timely exit. (see below)

Kinecta’s 2020 performance appears better with an ROA .48%, share growth of 13%. But the credit union also reported a decline in loans outstanding of over $300 million or 8%. Its net worth ratio of 7.9%, is almost 2% lower than Xceed’s 9.8%.

More important, Kinecta’s long term performance is similar to Xceed’s. That is, it has not been able to keep pace with its peers in the market.

In 1995 Hughes FCU (Kinecta’s earlier persona) ranked 9^th out of all 12,107 credit unions. Twenty-five years later at 2020 yearend, Kinecta’s asset ranking is 50^th out of 5,207 credit unions.

But didn’t the members approve this transaction?

The Members Vote by Ballot and with their Feet

Voluntary mergers require members vote to end their charter. No minimum participation is needed. A simple majority determines the outcome. Each member has one vote regardless of account size or length of membership.

Of Xceed’s 47,950 members at yearend, Credit Union Times reports that 1,536, or 3.2%, voted in favor of the merger. Some 323 members, or .7%, voted no. Just 3.9% (1,859) of members participated in the decision to give up this longstanding charter.

But a more meaningful member number is 3,768. That is the 7.9% of members who closed their credit union membership in 2020. They expressed their “no vote of confidence” with their feet. They took their relationships elsewhere.

To make a good choice, members must understand what the options are. This “voting” requirement was presented as an administrative event, devoid of any information with which members might make an informed choice. In a rebuke to the entire process, double the number of members who voted decided to get out now.

But Kinecta, five times larger, will fix this member run, right? Wrong. In the last full year Kinecta itself lost 13,079 members or 5.6%!

All credit union membership grew by 3.4% in 2020. This pending combination, by contrast, lost 16,847 members. Both institutions leadership teams are unable to attract followers.

One might surmise that since NCUA approved this transition– moving members from the frying pan to the fire– it must be OK!

NCUA’s Regional Director Cosigns Xceed’s Bonus Checks

NCUA’s Regional Director approved Xceed’s December 30 Member Notice including the details justifying the merger and calling for the member vote.

This regulator-approved Notice included the additional compensation that the five senior managers will be able to receive from this action. Following are the “possible maximum amounts” in the Notice:

Teresa Freeborn	President/CEO	$1,500,000
Michael Sacher	Executive VP/CFO	$622,127
Fabiana Burkett	Chief Risk Officer	$561,480
Bertha Gascon	Chief Lending Officer	$544,439
Kelly Ritchey-Davoran	People Officer	$269,268

In contrast, the members whose loyalty built the credit union receive nothing. Xceed’s 9.8% net worth is $27 million above the 7% well-capitalized level. These excess reserves are given, for free, to shore up Kinecta’s faltering net worth, which declined from 8.3% to 7.9% in 2020.These payments total $3,497,314 of enhanced financial benefits. What could possibly justify “additional compensation” for a management team leading to a credit union’s demise? They rewarded themselves the fruits of victory after losing the competitive race, year in and year out.

It is likely that Xceed’s members will continue to lose value from this leadership failure. The credit union’s eight branches, apart from the head office, are far removed from Kinecta’s southern California branch network. Two are hundreds of miles to the north in San Jose and Menlo park. Outside California, the six locations serve members in Rochester, NY, Parsippany, NJ, and Leesburg, VA.

To reverse the combined institution’s long term performance declines, Xceed’s members, employees and communities outside California will pay the cost. The legacy relationships and community goodwill created over the past 60 years will be forfeited. Members will quickly discover that phrases in the Member Notice such as “putting members’ needs first” and “lasting benefits” were nothing but shallow rhetoric.

Cherie Freed, NCUA’s regional director, approved the transaction including the $3.5 million in bonuses and vacuous descriptions of member benefit. Whatever conclusions can be drawn from the facts of this event, it would seem that the NCUA is either oblivious to its supervisory oversight, or complicit in approving payouts to a management team to move an underperforming Xceed off its watch list.

Timely supervisory action during a decade long economic expansion could have prevented this charter’s demise. But does NCUA recognize any cooperative values to stand up for?

The unique strength of cooperative design is the credit union’s relationships with its member-owners. These self-interested merger arrangements squander goodwill that credit unions have nurtured over decades, especially in crisis. Members of these two credit unions see this declining value clearly: 16,847 left in 2020.

What message will this and similar episodes convey when credit union CEO’s or NCUA board members are asked to explain merger events like this in congressional hearings or other public forums?

The trades may try to “open eyes” and extoll credit unions’ focus on member well-being. However, the tallest candle ain’t much good without a wick.

Examples multiply of the conflicts of interest embedded in these “voluntary” actions, the stripping of assets, the erosion of member value, and the regulator’s negligence. Can the cooperative model survive these self-inflicted wounds?

Preoccupied with the mantra “safety and soundness” of a single firm, industry leaders fail to understand cooperative history in a systemic way. The results have been disastrous. The isolated credit union is left fragile and defensive, adrift and alone, in a huge sea of others who are preoccupied for themselves—neither assisting nor relying on one another. The members who created the credit union are cast overboard.

Turning a blind eye will not make these issues go away. It will just encourage a feeding frenzy by others seeking to cash out on their tenure as well.

ALEXANDRIA, Va. (Jan. 4, 2021) – The National Credit Union Administration Board unanimously approved, by notation vote, a request for information(opens new window) seeking comments and information on the NCUA’s communication methods to promote efficiency and increase transparency.

“This request for information seeks public input on how the agency can streamline and improve its communications with our stakeholders. Outdated or duplicative regulatory and supervisory information adds to the overall regulatory burden of credit unions as they must devote time and resources to sorting through this information,” NCUA Chairman Rodney E. Hood said. “We recognize that the amount of information the NCUA provides to credit unions can create challenges and may impose unintended burdens.

Four pages, half of this  request, describes NCUA’s current communication efforts.  Reading through, I was not even sure where to send this response:  oeacmail@ncua.gov?

My Comment

Effective communication is not about publication design, content, frequency or media.  Nor is it determined by statutes and interpreting the law. It is about human intent.   My suggestions are:

1.  Require every NCUA employee who provides their email in their presentations to actually reply if contacted. Public servants responding to constituent’s inquiry is a professional courtesy as well as a responsibility, especially when they advertise their availability.

When I tested Rodney Hood’s offer of his personal email for contact  in last week’s GAC speech (BMHood@NCUA.gov) I was surprised to get a direct reply within 24 hours.

2. Fix the so-called “search” engines on NCUA’s web site. To have uploaded decades of information that cannot be accessed is offering nothing at all.  Neither the general search engine on NCUA’s home page nor  the one dedicated to finding documents from the general counsel’s office are effective.

One can type in a very precise request such as a credit union’s name or for a specifically identified NCUA supervisory letter or document and receive hundreds of unrelated responses, none correct.

Hint to readers:  Use the search engines at Credit Union Times, Credit Unions Today or CU Journal to find relevant information more easily.

3. Reorganize FOIA. Repurpose its mission to answer requests with full transparency and awareness of the agency’s responsibility to the public.  Quickly.  NCUA routinely denies requests for which information is public, has been routinely provided in the past, or to hide shortcomings in its own activities.

For example, credit unions know more about former Chairman McWatters’ hundred-dollar travel reimbursements than how the agency managed and sold over $750 million dollars of 4,000 members’ taxi medallion loans to a hedge fund.  Many of those details were in a Wall Street Journal article. For the first 15 years of the CLF’s operations, NCUA routinely published its member subscribers, but now refuses to release the same information.

The list could go on.  One CEO described this FOIA  coverup of NCUA shortcomings and falsehoods in a series of posts  several years ago.  The oversight of this function was then by a General Counsel whose professional and personal decisions were revealed to be unprincipled, even corrupt, upon “retiring.” The FOIA’s office’s practices have not changed with a new General Counsel.

Communication versus PR

Today corporate and credit union “communications” are seen as a skill best managed by public relations professionals.  Never admit error or mistakes.  Do not show vulnerability.  Reframe questions to give your talking points.

No straight talk.  Select chosen facts or use phrases such as “our research shows” or resort to unprovable assertions about future events.

An organization’s communication challenge is not an issue of volume, mastering  the right digital media or even words. It is about leadership’s trustworthiness; a responsibility that cannot be outsourced, delegated or covered over with  a FOIA blanket.

This ends my comment.

 

 

 

 

In the previous article, I outlined the unprecedented action this young credit union took to oppose NCUA’s efforts at forced liquidation. The credit union’s legal challenge stated in part:

“NCUA knowingly, intentionally attempted to summarily liquidate and revoke the charter of KAPFCU with total and reckless disregard for the truth.”

“The publication of the order of liquidation and revocation is defamatory, casts KAPFCU in a false light, and has caused an erosion of public confidence. For these reasons, if the rushed liquidation is allowed to continue, KAPFCU will suffer irreparable harm.”

The Roots of Black Belief

Recently a friend shared reflections on Martin Luther King’s last sermon. It was given on April 3, 1968, to support the Memphis garbage workers (“I am a Man”) strike.

It is remembered as the “I have been to the Mountaintop” speech as King was killed the next day. Those final words were prophetic, but there were many other truths he spoke that are relevant to this day. I believe these are why Kappa Alpha Psi FCU stood up to the NCUA.

King said in part:

“. . .we’ve got to strengthen black institutions. (That’s right, Yeah) I call upon you to take your money out of the banks downtown and deposit your money in Tri-State Bank. (Yeah) [Applause] We want a “bank-in” movement in Memphis. (Yes) Go by the savings and loan association. I’m not asking you something that we don’t do ourselves in SCLC. Judge Hooks and others will tell you that we have an account here in the savings and loan association from the Southern Christian Leadership Conference. We are telling you to follow what we’re doing, put your money there. [Applause] You have six or seven black insurance companies here in the city of Memphis. Take out your insurance there. We want to have an “insurance-in.” [Applause] Now these are some practical things that we can do. We begin the process of building a greater economic base, and at the same time, we are putting pressure where it really hurts. (There you go) And I ask you to follow through here. [Applause]

“Now the other thing we’ll have to do is this: always anchor our external direct action with the power of economic withdrawal. Now we are poor people, individually we are poor when you compare us with white society in America. We are poor. Never stop and forget that collectively, that means all of us together, collectively we are richer than all the nations in the world, with the exception of nine. Did you ever think about that? After you leave the United States, Soviet Russia, Great Britain, West Germany, France, and I could name the others, the American Negro collectively is richer than most nations of the world. We have an annual income of more than thirty billion dollars a year, which is more than all of the exports of the United States and more than the national budget of Canada. Did you know that? That’s power right there, if we know how to pool it.

“Let us rise up tonight with a greater readiness. Let us stand with a greater determination. And let us move on in these powerful days, these days of challenge, to make America what it ought to be. We have an opportunity to make America a better nation. (Amen)”

NCUA Pre-empts the Court:

On Friday, August 13, 2010, NCUA filed a brief in the DC Federal Court of Judge Emmet Sullivan responding to the complaint by Kappa Alpha Psi FCU challenging NCUA’s liquidation order of August 3. Several hours later, NCUA carried out the liquidation, mailing checks to the savers and assigning loans to the agency’s asset management unit.

The credit union had until noon, Monday, August 16, 2010 to file its reply to NCUA’s brief. NCUA’s liquidation nullified further court review. Why liquidate the credit union before the court’s expedited legal process had even run its course?

The credit union was serving the mission of the largest black professional fraternity using a virtual business model. No checking accounts, no ATMs, and no debit card withdrawals. Just regular savings to fund loans to students and black professionals to support “achievement”–a fraternity goal.

The risk of any NCUSIF loss was de minimus. The credit union’s lawyers were pro bono. Their goal was to merge the credit union, if NCUA wanted to cancel the charter. They sought an impartial hearing for this request.  Their motive was to preserve  the pride and dignity of their fraternal colleagues who began the effort and to continue a credit union offering for members.

NCUA held all the resources and power and used it to destroy this new charter.

A Legal Precedent

Their efforts to appeal NCUA’s unilateral actions may however have lasting value. For the credit union’s lawyers were not credit union attorneys. They had no prior experience to know how unprecedented their challenge would be. But their effort may have shown a legal path that could benefit members in the years to come.

Credit unions are member-owned, one-person, one-vote. The lawyers argued that NCUA’s actions violated two individual constitutional rights: due process and equal protection. Could this black-sponsored credit union have identified a legal standard that could benefit every credit union member which is subject to arbitrary NCUA dictates? Could NCUA have erred on both the facts of the case as well as the law?

Or was this just a little regulatory nuisance that NCUA wanted to dispose of quickly?

When creditunions.com reported these events in August 2010, more than 9,000 views were recorded. Almost 100 comments were filed. Many similar experiences of regulatory arrogance were recounted in these posts.

The Continued Use of Summary Authority to the Present Day

Kappa Alpha Psi FCU was not the only credit union to find its charter abruptly ended.

In September 2010, NCUA without warning liquidated five corporate credit unions with total assets of over $67 Bn. The agency stated any appeal efforts would risk personal liability—the credit unions were marched straight to NCUA’s chopping block.

Other credit unions were subjected to this authoritarian power mode even though the economic crisis was almost a year into recovery. The $846 million Arrowhead CU in June 2010, was conserved to remove a management team that challenged examiners’ exaggerated estimates of loan losses. Others were forced to merge, including the $600 million USA FCU into Navy FCU in September 2010.

But these were not just crisis incidents. NCUA continued to use this unchecked authority to end credit union charters without due process. On April 5, 2016, NCUA simultaneously liquidated six Philadelphia credit unions ending 308 total years of operations. These six were given no appeal rights.

These credit unions had been through economic thick and thin for decades, and their total size — $4.8 million — could not pose a serious threat to the share insurance fund. They reported an average net worth of 17.0%.

NCUA performed another instant liquidation on May 29, 2020 of IBEW Local Union 712 Federal Credit Union in Beaver, Pennsylvania. According to CUToday, “Chartered in 1964, IBEW Local Union 712 served 2,935 members and had assets of approximately $14.8 million according to the credit union’s most recent Call Report. NCUA did not provide a reason for the liquidation.”

This regulatory silence and lack of accountability continues to this day, for example in all conservatorships in which NCUA takes total control of the credit union from the board and members. When recently asked about the status of Municipal CU in New York, NCUA’s Office of External affairs stated: “we do not comment on our efforts or conditions related to conserved credit unions.”

The Journey to the Promised Land

Is Kappa Alpha Psi FCU’s fate just another instance of a decade’s long ongoing abuse of NCUA authority?

Does this credit union’s unmatched courage taking a stand have any meaning today?

Why did these credit union novices fight when others did not dare?

I believe their actions were living out the charge that King gave that final day in Memphis:

“We just need to go around to these massive industries in our country (Amen), and say, “God sent us by here (All right) to say to you that you’re not treating His children right. (That’s right) And we’ve come by here to ask you to make the first item on your agenda fair treatment where God’s children are concerned.”

Members’ Rights

NCUA does not respect members’ rights. Be they black, brown, or white; young, old or in between; male or female. When member-owned institutions, created through volunteer labor, are summarily closed or merged, the systemic failure that allows this will either be changed or there will be no more cooperative movement.

Injustice, whether by public or private organizations, always targets the vulnerable first. Be they the economically fragile, or the uninformed and unempowered. When violation of rights is left unchallenged, the inequities will extend across the entire population.

Will Kappa Alpha Psi’s stand make a difference today? I think hearing again this promise should inspire everyone to realize change is possible-even in those exercising unchallenged power.

Yes, I believe Kappa’s example will be remembered.