How Can This Merger Be in the Members’ Best Interest?

Top 5 managers can gain $9.8 million additional compensation; 158,000 members will have one-time “special dividend” of $4.0 million if they approve merger

On October 23, 2019, the Chair of Schools Financial Credit Union sent a letter to all members saying the board and management had decided to merger the $2.1 billion Sacramento-based credit union with SchoolsFirst FCU($16.1 billion) in Orange County.

The seven-page summary can be found on the NCUA’s website.

CEO could benefit by over $8.0 million

Two full pages are used to describe potential additional compensation benefits for the five senior managers, the bulk of which would go to the CEO. His total of over $8.0 million includes potential severance pay and salary guarantees, a three-year bonus prospect of $1.2 million, accelerated vesting of the existing supplemental retirement plan and an amended split dollar life insurance retirement benefit. These additional payments are on top of existing salaries.

The 158,000 owners of the coop will receive an average of $25 from a $4.0 million “dividend”  paid from their common equity of over $260 million. Using the credit union’s average share balance of $11,453 and the pro-rata table showing payment by average account size, this would equate to a distribution rate of 15 basis points, or 0.15%.

This token “tip” to the members, as an incentive to vote for the merger, insults both their century-long loyalty and their trust in the cooperative.

In contrast to this $25 payment, each member’s actual share of the $260 million equity averages over $1,710. This “book value” does not recognize the real market worth of the credit union if goodwill, market presence and performance were priced in a true arm’s length transaction.

The true market value would be a 150-200% of book for a franchise with its 96-year history.

So why is this merger being proposed? Why should members be asked to give up their collective capital and the legacy of member contributions since 1933? What are they gaining in return, if anything? What other services and benefits will they surrender and what is the greater Sacramento community losing?

The front cover of the credit union’s 2018 Annual Report is headlined “Members First”. The cover has a picture of a couple who have been members since 1986 with the following quote:

ABC10 Teacher of the Month! “The personal attention and family atmosphere keep us banking at Schools Financial.”

This couple have been members longer than any of the five senior management beneficiaries of the merger have worked at the credit union. In fact, this proposed merger places members last!

I believe an objective review of the credit union’s public information describing its unique role and the sparse rationale in the member mailing clearly demonstrate that the only people gaining from this merger are the CEO and his four senior executives. They are receiving increased compensation while at the same time, giving up all the responsibilities of leadership.

What the members lose

The members lose control for how their $2.0 billion in collective resources and $260 million of equity are utilized for their own circumstances. They have no control for which unique products (e.g. a special 7% Banking for Everyone Savings, Senior Savers Club and business accounts) are retained, whether to continue participating in the 5,000 shared branching service centers or even which branches remain open.

Once the Sacramento-based charter is given up, the local community relations with realtors, car dealers, school districts, community organizations and media are now directed by managers located in Orange County overseeing $16 billion in their home market. There is no more local credit union elected leadership accountable for relationships with the Sacramento community.

Here is how the credit union currently describes this leadership in Sacramento:

Community & Education Outreach

https://www.schools.org/about-us/news-publications/news-special-offers#EducationOutreach

Schools Financial Credit Union strives to be an active partner in our community. We recognize that practicing good Corporate Citizenship supports the Credit Union Philosophy of “People Helping People.” Furthermore, we aspire to help raise the overall level of social and economic well-being of those in our community through direct financial support and participation in public service activities, in addition to championing the education sector. The Credit Union is always looking for ways to better position us to reach out and serve — as only credit unions can — those people in greatest need of affordable financial services.

Abdication by the Board

One has to question why, if this project was fully considered, it was not discussed with members in the March 17, 2019 annual meeting. The board has further abdicated its fiduciary responsibility to members providing just 49 days from the mailing of the announcement to the final vote and meeting on December 12. A 96-year-old, member-owned institution dissolved in a two-month process, with the only documented benefits going to the five senior managers.

The Board is charged with representing the member-owners’ interests. This is both a legal and moral role. Nowhere are the actual costs to members of the merger outlined, only the required listing of enhanced management compensation. What we do know is that the board has approved spending at least $13 million to induce members to give up their charter. That action alone seems to be a highly questionable decision and raises fundamental issues of fiduciary accountability.

For generations members gave their financial resources to the board’s care What is most disappointing is that the board’s decision to put the credit union out of business in just 46 days draws upon the members’ longstanding trust and loyalty to follow their lead. This board’s action reeks of betrayal.

The merger rationale

The document used to justify the merger is the 7-page letter to members from the Chair. The key factors cited are the intent to “re-focus its efforts upon educators on a state-wide basis.” The reasons given include the historical loyalty of educators, the value of a market niche for growth and the need to differentiate itself and gain more economies of scale.

Even though School Financial’s state charter reports a potential FOM of over 4 million, it now claims to grow it must merge with SchoolsFirst FCU in Southern California with $16.1 billion assets and its historical roots in Orange Country.

Indeed, the explanation seems to merely adopt SchoolsFirst state-wide strategy not the implementation of an independent judgment by Schools Financial.

Nowhere are the details for how this justification will better serve the interests of the Sacramento-based membership. There are broad generalities about further commitment to member service, providing low cost accounts, long-term stability and expanding “rather than competing with our existing branch/ATM footprint.”

However, all the details are left open-ended about what these changes might be, as for example:

  • The existing branches will remain open for three years unless leases expire sooner.
  • The credit union’s participation in the shared branch will be evaluated later and the participation in the ATM network will be maintained.
  • The retention of federal share insurance reads like the logic of giving the sleeves off one’s vest since that is the case now.
  • All employees are “being offered retention bonuses to help ensure a smooth transition and successful integration”- an amount not disclosed. Of course there would be no retention bonus if the employees don’t support the change, another example of “tipping” interested parties to go along with proposal.

So the letter’s assurance seems to be nothing much is going to change, and if it does, it will be for some undefined future in which the only definite reality is the members will be part of an $18 billion credit union with its main headquarters almost 500 miles away.

There are no side by side comparisons of savings or loan rates, or fees ( one example only) or any other standard performance indicators that would suggest members might be better off transferring the management and leadership of their collective and personal interests to another organization with which they have no relationship.

Reviewing the latest facts

Savings: Different rates reflect different ALM strategies

Both of these credit unions are very successful using any financial performance measures. The differences that do exist reflect the different business models each has developed in their respective markets over the past decades.

For example, the letter says that SchoolsFirst pays its members higher rates on savings as measured by the average cost of funds. This is accurate: 1.05% for SchoolsFirst and 0.54% for Schools Financial through September 30, 2019.

However, the credit unions’ call reports show exactly the same rates on the core accounts, regular shares and share drafts. The difference in cost of funds is that SchoolsFirst has 28% of its savings in higher paying CDs, versus Schools Financial’s 12%. This funding difference reflects the contrasting loan strategies discussed below, in which SchoolsFirst is more concentrated on mortgage loans.

Moreover, Schools Financial provides options not available at SchoolsFirst including a special 7% Banking for Everyone savings, Senior Savers Club and business accounts.

The latest rates posted by Schools Financial for $1,000 minimum CDs ranging from 1.10% to 2.55%, appear to be more than competitive in almost any local or out of area market.

Two distinct lending portfolio priorities

The same analysis shows that Schools Financial’s 86% loan-to-share portfolio is very different from SchoolsFirst’s 70% ratio. Real estate loans are 54% of SchoolsFirst’s portfolio, versus 33% of Schools Financial’s. The yield on the member loans at Schools Financial is 3.98% versus 4.87% at SchoolsFirst. As reported in the September 30 call report Schools Financial’s rates are lower for credit cards and 1st liens, but higher for auto loans which are 59% of their portfolio, versus 31% for SchoolsFirst.

In both cases the credit unions offer excellent member value for their markets and their differing business strategies.

Institutional performance

The September 2019 data also shows that scale seems to make little difference in overall performance

Some comparisons of note:

Ratio                                   Schools  Financial            Schools First

Efficiency                         60%                                        66%

Net Worth                        12.2%                                     11.6%

ROA (YTD)                        1.85%                                    1.16%

Delinquency                    0.22%                                   0.46%

Net C-O/ave loans        0.39%                                  0.49%

Allow/Del Loans            2.47X                                     1.58X

On many productivity measures the numbers are virtually the same even though the credit unions have contrasting business models. The average member relationship is $21.5K at Schools Financial versus $25K at SchoolsFirst, but the rate of growth in this comparison is faster at Schools Financial.

On critical productivity measures such as $ loan origination per full time employee, $ loan income per FTE or net revenue per FTE the credit unions are virtually the same.

The comparisons could continue. The point is that neither credit unions shows a significant performance advantage versus the other. Both are efficient, productive, and offer members excellent value.

Schools Financial further documents their value by referencing this citation on their website:

Schools Financial Named in Top 200 Healthiest Credit Unions List

DepositAccounts.com has released its list of the 2019 Top 200 Healthiest Credit Unions in America. In addition to being in the top 200, Schools Financial Credit Union has received an A+ rating for financial soundness.

The diminution of local employment and leadership

Schools Financial’s website is replete with examples of its involvement with the school districts it serves, offering special loan programs, supporting teacher recognition and local efforts at school support. Moreover, it advertises itself as a great place to work:

Top-5 Reasons to Work for Schools Financial Credit Union

      1. 100% Paid Insurance Coverage
      2. Up to 7% Employer Contribution to 401k Plan
      3. Babies in the Workplace Program
      4. Education Reimbursement
      5. Gain Sharing

In giving up their 1933 charter the members will lose control of not just their collective resources, but also of the election of local directors and governance which provides the oversight in the direction of policy and resource allocation. Business strategy and the numerous member education programs will be determined at head office and economic realities in Orange County. The priorities will then be passed down to local branches.

The relationships the credit union has created with the community–the auto dealers in its indirect program, the school district’s local support, the realtor networks which refer 1st mortgage home buyers, the media in which the credit union advertises, not to mention the civic organizations and involvement of the board and senior management—all lose their priority if not their significance once there is no longer local control.

Here is one of many examples of how Schools Financial describes its role in the community today on its website:

Community

“People Helping People” extends beyond our branches. Our members and our staff band together to extend that philosophy to those in need who reside in the communities we serve. Some of the organizations we lend a hand to are: (details omitted)

      • Children’s Miracle Network
      • Food Banks
      • Making Strides for Breast Cancer Walk®
      • Spirit of Giving

The fallacy of cooperative mergers

Credit unions rarely succeed by trying to become larger than their competitors. Rather their success is creating and cultivating member relationships. This grows loyalty and member trust. The cooperative design, uniquely among financial alternatives, encourages participation and connectedness among the member-owners.

SchoolsFirst could compete with Schools Financial, but they know how difficult that would be given the credit union’s Sacramento track record. Or, it could embrace cooperative collaboration where there are mutual benefits for members. But no, it instead is has bought out the CEO, a much easier way to expand and gain control of members’ equity without paying anything or committing to any future details.

The consequence is the member-owners will see their loyalty being sold as executives get windfalls for surrendering their leadership responsibilities. Their elected board abdicates any fiduciary role for either a democratic process or for providing genuine member value in the transaction.

The members not only lose in what is an insider-arranged “commercial sale,” but also, the credit union system loses credibility as stewards of cooperative design and member-ownership. Instead those agents charged with overseeing the model have engineered the system to serve their self-interests first, and members last, or not at all.

But the regulator approved this

The defense and one of the FAQ explanations is that the regulator approved this transaction including the statement sent to members.

Mergers of well run, independent sound institutions are seen by some as a necessary strategy. However, the inherent conflict of interest for a CEO arranging the merger of a credit union and specifically benefiting from it, has never been openly addressed.

NCUA has long abandoned its role as a steward of member interests. Cooperative leadership throughout the system has become increasingly hollowed out by the transactions of self-interested agents, including the regulator.

NCUA proclaims its basic mission is safety and soundness. However, it has turned a blind eye as one of the most basic principles of risk management is compromised by mergers of healthy credit unions. For putting more eggs into fewer and fewer baskets only creates larger risk concentrations for the next cyclical downturn.

Merger violates a sacred trust

The strength of credit unions is first and foremost the member-owners.

Cooperative design asserts that members’ well-being and what really matters to them will be kept close at hand. Credit unions can be locally sponsored and supported. To some this model seems contrary to the temper of the times and the siren attraction of size as a monument to success.

However, cooperatives are not merely financial firms, but a form of social capital based on a covenant to serve the common good.

This basic cooperative principle is compromised in this merger. For it privatizes and rewards the few from the common wealth created by generations of members. The members should vote against this merger.

Political Polarization and NCUA Chairman Hood’s White House Video

Recently the White House posted a video of NCUA Chairman Hood praising President Trump’s economic program for benefiting African-Americans.

The video link and some of the subsequent twitter comments were reported by CUToday.

Stepping Into a Politically Divided DC and Country

The decades long trend toward more political polarization in both voter’s views and in Congressional debate and actions (or inactions) is not new. This approach to politics is a key factor of President Trump’s leadership style.

So it was not surprising that democratic Senator Sherrod Brown should question Hood’s video message in a letter seeking more information about the event.

The letter raises the issue of the wisdom of the Chair of an independent regulatory agency making such an overt political statement. No banking regulators, the FDIC chair, the OCC or the Chair of the Federal Reserve have made such endorsements. In fact Fed Chairman Powell, has repeatedly stressed the Fed’s and his independence. President Trump has responded by attacking the Chair’s policy priorities.

Past Behavior and Current Context

In the book It’s Even Worse Than It Looks, the authors Mann and Ornstein provide the history of the collision of American Constitutional practice and what they call the NEW political extremism. In Chapter 2, titled “The Seeds of Dysfunction”, the authors chronicle the impact of Newt Gingrich’s role on the political culture of Congress.

The following is an example of Gingrich and his team’s use of CSpan media to communicate their view of the “fat and pork laden” House:

A group of Gingrich allies calling themselves the “Gang of Seven” seized on the (House) bank scandal to take Gingrich’s confrontational tactics to new levels. Its ring leaders were Rick Santorum of Pennsylvania; John Boehner of Ohio, then only in his second year as a member; and Jim Nussle of Iowa. Their most memorable moment came when Nussle put a brown paper bag over his head while on the house floor, proclaiming that he was ashamed to be a member of Congress. . .  Gingrich’s goal of causing voters to feel enough disgust at the entire Congress that they would throw out the majority was within reach; he attained it a little more than two years later.

Today Jim Nussle is President of CUNA. So partisan tactics can be effective, or do they generate a counterforce that defeats its practitioner’s goals?

Credit unions have tried to forge a bipartisan appeal in Washington, even as prior Chairs have been politicians or supporters from one party or the other. The issue is not one of party affiliation. Rather how does the leader of an independent agency best represent the interests of credit unions in Washington? Will becoming an overt partisan help or undermine support for the cooperative financial option in Congress and with credit unions throughout the country? Is Nussel’s past behavior and current responsibility a positive or a cautionary example for how credit unions should navigate the ever increasing turbulent political currents of our time?

What Deregulation Means

“Deregulation isn’t an issue of less regulation. When I talk about deregulation, I mean that decision-making is put back where it belongs-in the hands of the boards of directors and credit union managers. In other words, let credit unions be credit unions.”

(Ed Callahan Feb 1987)

Why Risk Based Capital Requirements Fail in Practice

We’ve already seen that the risk based approach does not work. It’s obvious that neither man nor model can adequately assess a given asset’s risk under all circumstances before the fact. It doesn’t make sense to spend a lot of time trying. It does make sense to have a minimum leverage ratio but it should be the same for banks of all sizes.”

(Thomas Brown, A Loss of liquidity, not inadequate capital, is what often dooms banks. Bankstocks.com, April 22, 2014)

The leverage, net worth ratio, is the current credit union model. Risk based capital formulae should be tools, not a rule. The real vulnerability for the credit union system at this time is the loss of the CLF-Corporate liquidity safety net.

The End of Risk Based Capital for America’s Community Banks

On September 17, the FDIC board eliminated risk based capital (RBC) requirements for community banks with assets of less than $10 billion.

It replaced the international banking BASEL-inspired approach with a simple leverage ratio. A community bank will be considered well-capitalized under required prompt corrective action (PCA) regulations if the tier 1 leverage ratio is 9%.

Banks will not be required to report or to calculate a risk-based capital according to the FDIC’s press release.

The FDIC Chairman Jelena Williams said the new rule ensures that the regulatory framework is commensurate with the operational reality of these institutions.

“The final rule. . .supports the goals of reducing regulatory burden for as many community banks as possible. . .and will allow community banks to significantly reduce the regulatory reporting associated with capital adequacy on the call report.”

The rule was also supported by all the other banking regulators,  the comptroller of the currency and the Federal Reserve.

An Example for the NCUA Board

The final RBC rule passed by the NCUA board was over 400 pages and requires all of the regulatory and reporting burdens cited by the FDIC as the reason for eliminating this requirement.

Surely the NCUA can learn from this experience! There is no better time or precedent to cancel this ineffectual, burdensome and deeply flawed approach to capital measurement. For if such a rule had been effective, it would have stayed. The FDIC’s experience shows RBC doesn’t work in practice.

The simple to understand leverage ratio, now in effect, has served credit unions well since deregulation and the imposition of PCA in 2008.

Don’t be misled by the 9% well-capitalized FDIC level versus the credit union’s 7% well-capitalized PCA standards into thinking cooperatives need to raise their capital. All of the capital reserves in credit unions are “free.” More than half of bank capital is in equity shares, whose owners are expecting a return on their investment.  Free cooperative reserves do not have this performance burden..

There is no better time for NCUA board to withdraw this misguided rule. Will the board show the leadership demonstrated by the FDIC?

All credit unions would give a great sigh of relief to have this burden removed from the horizon.

The Only Threat to Credit Unions

At a time when many credit union leaders see NCUA board members announcing new regulatory agendas in virtually every speech, it is helpful to remember this counsel from a former NCUA Chairman:

“The only threat to credit unions is the bureaucratic threat to treat them for convenience sake, the same as banks and savings and loans.  This is a mistake, for they are made of a different fabric.  It is a fabric woven tightly by thousands of volunteers, sponsoring companies, credit union organizations and NCUA-all working together.”

 Source:  Chairman’s letter: NCUA 1984 Annual Report

A Credit Union Member Takes a Stand After a $40 Million Loss

In an 18-page complaint filed August 7, Victor Webb filed suit against the board and supervisory committee of the failed CBS Employees FCU seeking over $40 million in recoveries for members.

According to press reports the loss was first discovered on March 6, by an employee who raised questions about a $35,000 check the CEO, Rostohar, had made out to himself.

NCUA’s audit as of February 28, 2019 said the loss could be as high as $40.5 million for an embezzlement scheme that Rostohar admitted carrying out over two decades. In the credit union’s last call report as of December 31, 2018, it reported $21 million in assets, $2.6 million in capital and 2,798 members.

A Member Acts

The federal credit union was chartered in 1961 to serve CBS employees and related companies. In the complaint Webb stated he joined the credit union in 1970 while a CBS employee. He remained a member until the credit union was liquidated in March, although he retired from CBS in 2014.

His suit names the board and supervisory committee members at the time of liquidation and prior members who served in similar capacities during the two decades of defalcations.

As a class action, Webb seeks damages of $40 million on behalf of all members, by stating that the benefits of membership were devalued by this amount which should have been available so members could benefit from lower fees and loan rates or higher dividends—that is the lost benefits of credit union ownership.

“A Fiduciary Relationship”

The core argument for suing the Board and supervisory committee members is summarized as follows:

“By reason of Individual Defendants’ positions with CBS Employees (FCU) as members of the Board of Directors, they are or were, at all times herein relevant, in a fiduciary relationship with Plaintiff and other CBS Employees (FCU) members and owe them a duty of highest good faith, fair dealing, loyalty, as well as a duty to maximize member value.” (Page 3)

The fiduciary responsibility of directors and committee members is well documented in NCUA regulations and letters, but rarely is their conduct formally challenged by a member. But this is a case of extraordinary loss equal to almost 10% of the last reported assets, or $2 million per year, for over two decades. Both the amount and length suggest a complete breakdown in both internal and external, regulatory oversight.

How Could This Happen?

This suit focusing on the fiduciary duties of the Board and Supervisory committee could be a very important milestone in cooperative governance and oversight.

How NCUA’s reported audited shortfall of $40.5 million in a $21.3 million asset size credit union could occur is hard to fathom.

The credit union’s December 2018 call report shows $18.4 million in shares for 2,798 members, resulting in an average share balance of $6,576. The credit union’s assets consisted of $14.7 million of investments and $6.1 million in loans with a reported delinquency of only 0.33%.

The credit union’s $18.4 million in member shares would seem to be more than adequately covered by the $21.2 million (with $2.6 million net worth) in easily verifiable assets if a liquidation were ever necessary.

Internal processes to monitor the credit union’s management are mandated in both bylaws and by rule and reg.

Every federal credit union is required to complete an annual audit under the auspices of its Supervisory Committee. Such an audit, whether internally conducted or outsourced, would entail a verification of member accounts, selected confirmations of investments and loans, and a review of internal controls. The results are reported to the Board.

The Regulatory Review

Additionally, NCUA has conducted annual audits of every FCU since the 2008-09 financial crisis. This review would review the credit union’s own supervisory committee’s audits, including member confirmations, plus a complete examination of investments and loans. In addition, the examiner would review all settlement accounts against the latest bank statements to ensure up to date postings and that the credit union’s general ledger is in agreement with external financial confirmations.

If the assets reported by the credit union are correctly reported, then that would mean the total loss caused by the CEO’s fraudulent activities would be the $40.5 million shortfall plus the $2.6 million in net worth for a total of $43.1 million.

NCUA’s obligation to member shareholders is to pay up to the $250,000 per account insured limit. A $43.1 million payment on top of the $18 million in reported shares would mean that over 6,500 more accounts (using the average share balance from reported members) would have been kept in a second set of off-the-book records.

There are only two explanations for NCUA’s reporting a $40.5 million loss after its February 28,2019 audit:

  1. The reported asset values were widely inaccurate, which raises the question, what kind of annual regulatory examination was done; or
  2. The assets are properly recorded, which means that from $40.5-$43.1 in off balance sheet shares were being managed by the corrupt CEO.

If the second option is the explanation, this suggests the CEO was running a shadow credit union with almost three times the number of members and shares as the reporting credit union. How could this activity be hidden from employees, the directors or supervisory committee, since these members must have received statements and conducted business transactions regularly with the credit union?

If the reported assets are phony, which would account for half of the loss, the only question is what type of annual exam had NCUA conducted over the two decades that this theft occurred?

Time for a Real Accounting

I salute member Webb for standing up and asking that responsible parties be held to account. This is more than sending the former CEO to jail and then covering the tens of millions shortfall out of NCUA’s “rainy day insurance fund.”

All the public evidence suggests that the problems are much more extensive than a corrupt CEO and a hoodwinked and a deleterious board and supervisory committee. The regulatory oversight that is supposed to assure the industry’s safety and soundness through onsite examinations would appear to have been negligent as well.

When a member takes a stand against ineptness, self-serving conduct and dereliction of duty, the whole democratic movement will benefit. Cooperative governance requires that fiduciary duty have real meaning, not just good intentions. Hopefully this suit will bring out the full story and create a much-needed precedent along with a correction of examination shortfalls.

I salute Victor Webb and say with him, “Enough is Enough.” Stop paying out losses, let’s correct the problems letting these occur.

The Cost of Not Learning from Our Brethren’s Mistakes

Over the past twelve months the credit union community is on the hook or paid the bills for the following situations:

  1. A $1 billion cash payout for the Melrose CU and LOMTO FCU liquidations;
  2. An estimated $40.5 million shortfall for a two decade embezzlement by the CEO at CBS Employees FCU;
  3. A $125 Million write off at Municipal Credit Union at June 30, while under NCUA conservatorship.

In each situation there has been no objective, public discussion of what happened. No lessons have been taken away from these extraordinary losses and how they might be eliminated or mitigated in the future.

Specifically:

  • NCUA has said nothing about its Municipal Credit Union conservatorship as the credit union reported the largest loss ever at June 30.
  • In Melrose’s case the primary publicity has been about suing the former CEO for accepting vendor’s trips and other self-interested actions.
  • For CBS Employees FCU’s extraordinary embezzlement, the throw away characterization has been that the CEO was a former NCUA examiner and therefore knew how to hide his two decade defalcation based on his examiner experience.

No Return for Casting Judgment

When a loss occurs, there is a rush to judgment. What went wrong? Who screwed up? Why did this happen, again?

The natural response is to point fingers, blame someone for the problem. Then punish or banish wrongdoers from ever working at a credit union. And resolve the loss by paying for the shortfall out of the NCUSIF—and move on.

While indicting possible malfeasance may be necessary, it can miss entirely the lessons to be learned. The result is that there is no return on the money expended. Credit union monies are swallowed up in a regulatory “black hole.”

Discernment: A Powerful Form of Judgment

For informed judgement is about discernment, understanding the circumstances of what happened and identifying the possibly numerous opportunities to have done something about the situation much earlier.

Judgement is much more than holding people accountable. In the cooperative community, all members pay for the individual losses via the NCUSIF. Therefore the most important benefit should be corrective actions or processes that can prevent similar circumstances from getting “out of hand” in the future.

For example, NCUA says correctly that it sent a letter about potential problems in the taxi medallion industry to all examiners in 2014. The letter did not identify the possible disruption of the entire industry by Uber and Lyft, but it did reinforce proper underwriting including the ability of borrowers to service the debt.

But somehow the problem grew and grew and no one knew how to manage through a cyclical decline in asset values. This is not a new situation for credit unions. Loans secured by real estate, autos and leases, and/or commercial properties and farm land will all have changes in the value of security during the term of the loan.

But somehow these inevitable fluctuations in value cause reactions as if the problem has never occurred. Before. This panic often exacerbates the situation, freezing new responses and resulting in irreversible financial decisions at the lowest point of value for the security.

A Responsibility to and for the Community

Cooperatives are interdependent on each other for market success. The most consequential connection is via the shared capital pool created in the NCUSIF. While the temptation may be to approach difficult situations with an eye to eliminating the problem, that not only may be the least desirable outcome for members of the credit union, but more importantly, it may not be the positive example needed by the whole cooperative community.

Credit unions were created to solve problems especially for members and in circumstances when normal market options were unavailable or too expensive. When problems are just done away with and all circumstances swept under the rug because of sufficient resources to do so, everyone loses. Other credit unions facing similar loan challenges as the taxi medallion example, those with concerns about the adequacy of their internal and external audits; or credit unions with underfunded pension or other liabilities could all benefit from a thorough knowledge of the above cases.

Every credit union board and CEO any CPA or auditing firm and every DP, bonding and any vendor connected to the credit unions above, has an interest in knowing what happened. That knowledge is necessary if there is to be a common commitment to do better in the future. NCUA has to lead by example. The three circumstances above would be excellent places to start with full public reviews. Credit unions have received nothing for the $1.25 billion spent so far. The buck has to stop somewhere before credit unions run out of bucks.

Why the Appeals Court Ruling on NCUA’s FOM Rule Is Irrelevant

According to the US Census Bureau’s population clock, the estimated 2018 United States population (February 2018) is 327.16 million.

This is a bit lower than the 329.06 million estimated by the United Nations.

As reported in Pentagon FCU’s June 30, 2019 quarterly call report, every one in the US is eligible to become a member. The data submitted by  the credit union is as follows:

MISCELLANEOUS INFORMATION NUMBER ACCT
2. Number of current members (not number of accounts) 1,788,610 083
3. Number of potential members 329,152,485 084