Category: NCUA

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TheDisruptive Costly Reach of CCULR/RBC: $30-$40 Billion For Initial Compliance & No longer Available for Members

The direct immediate impact of the new CCULR/RBC rule requires credit unions to hold between $30 to $40 billion more in reserves.  These funds cannot be used for daily operations such as expenses to increase member value or lower fee income or loan rates.

A major portion of these newly restricted funds is in credit unions that follow the 9% CCULR minimum required reserves versus the RBC option. The $24.3 billion CCULR “off ramp”  means these funds are unavailable for operations but required to stay in reserves.

This is from the December 16, 2021 Board Action Memo:

Of the total 680 complex credit unions as of June 30, 2021, 473 have a net worth ratio greater than nine percent and would be well capitalized under a nine percent CCULR standard. Of those 473 credit unions, the Board estimates that all of them meet the qualifying criteria, and are thus eligible to opt into the CCULR framework.

Under the CCULR, if all 473 credit unions opted into the CCULR and held the minimum nine percent net worth ratio required to be well capitalized, the total minimum net worth required is estimated at $111.8 billion, an increased capital requirement of $24.3 billion over the minimum required under the 2015 Final Rule. This additional capital would strengthen the system’s ability to absorb any future financial losses and economic shocks.

(Note: the 493 credit unions over $500 million and 9% net worth or greater, held $1.340 trillion in assets at yearend 2021. Therefore, when NCUA raised their net worth well capitalized requirement from 7 to 9%, the rule placed a total of $26.8 billion in restricted retained earnings. These extra funds are no longer available for credit unions to use as they choose-or else lose their CCULR option.)

The Disruptive Spread of the New Red Line

The new rule in theory applies only to the 83% of credit union assets with over $500 million. However, this 29% higher CCULR option will not be available to approximately 210 credit unions with $386 billion in assets. Before this rule they were considered “well capitalized.” And only three of the 210 would have been below the 7% well capitalized level.

All now fail the  revised “well capitalized” ratio.  The immediate regulatory sanction is to subject them to RBC, an entirely different  more complicated process under the never implemented rule.

All these,  24% by assets (30% by number), of this  $500 million class are in an RBC never-never land of capital measurement.  However the immediate impact is much broader than these 210 below the new 9% red line.

RBC’s  Shadow Extends Beyond 9%

Every credit union over the 9% threshold is now on notice that any short term run-up in assets  could result in their ratio falling below this new minimum.

As an example, there were 70 credit unions between 9 and 9.35% net worth at yearend.  Any time their asset growth exceeds the capital growth, the ratio will fall.

Historically, the highest amount of share growth occurs in the first two quarters.  If a credit union has 9.3% at the beginning of a month and grows 3% in assets, the net worth ratio falls to 9.0% by month end.

Since capital increases only through retained earnings, at an average of 1% of assets per year,  every credit union between 9 and 10% faces a dilemma: either  limit growth or increase ROA by amounts above traditional returns.

There are 173 credit unions in the 9-10% net worth range that will be in a state of unending compliance uncertainty as their ratio moves up and down in monthly variations.

 CCULR’s Shadow Hovers Over Those Below $500 Million

Many credit unions below $500 million must now closely monitor their growth and capital because when they cross this size threshold, the old 7% well capitalized rating no longer applies.

An example: At 2021 yearend there were 119 credit unions in the $400-500 million asset segment. They managed $52.7 billion in assets. Forty-five of these,  with $20 billion in assets, reported net worth below 9% and would not be CCULR eligible when passing $500 million.

Assuming this entire segment grows by the industry’s long-term average of 7%, then 13 credit unions with $465 million assets (or higher) at January 1 this year will be over the $500 million threshold by yearend.  They must monitor and calculate three capital measures simultaneously: the current 7%, the new 9% CCULR minimum, and failing that, the arcane rabbit hole of RBC.

An estimate of the total number of these three groups of credit unions that must immediately put net worth at the top of their business priorities is over 502, holding approximately 35 to40% of total industry assets.

This sudden new financial priority will turn upside down established business plans, pricing initiatives, and investments in new service capabilities.

Credit unions are being forced to turn away from serving their members to complying with NCUA’s  needs.

To this point in time, the industry’s average 2021 yearend capital ratio of 10.6% would be evidence of prudent capital management. That ratio is 360 basis points (3.6%) above the long standing well capitalized 7% benchmark. (see buffering discussion below) Financial uncertainty now permeates every business decision where there was none before.

The Tens of Billions Taken Away from Member Value

It is the members who will pay the cost.

To comply with this new capital standard, credit unions have two broad options.  First, closely limit all growth.  NCUA’s habitual approach to capital restoration plans is to require “downsizing” of assets to fit the available capital.

The second option is to ask members to pay more: no more over draft or other fee reductions, higher loan rates, or accept lower savings than would be the possible under the long standing 7% standard.

If the choice is downsizing, fewer members will be served with fewer loans and services.  If the choice is to require members to pay more, the direct additional costs are easy to calculate.

The 210 credit unions not in compliance with the 9% CCULR minimum, are collectively $2.7 billion short of capital under the new standard. That shortfall assumes no growth in assets.  Before the 7% benchmark was eliminated, these credit unions collectively maintained a margin of 1.31% above that old standard.

For these 210 with the $2.7 billion shortfall, setting a net worth goal just 1% above the 9%, would require another $3.9 billion.  This $6.6 billion total for more capital just repositions them relative to where they were under the old standard.

How easy is this to accomplish? In 2021 the entire movement grew total capital by 6.7% to $221 billion. The $6.6 billion more to exempt these 210 credit unions from  RBC requires an increase of 21% in their current net worth.  This is roughly three times the growth rate of capital in the industry.  And that assumes these 210 have no asset growth while they are building this new capital level.

Total Business and Financial Disruption Costing Members Tens of Billions

The other 292 credit unions above $500 million  in the 9-10% net worth range, and the 119 credit unions in the $400-$500 million below the new red line, will face similar challenges to their business model.  For example, in the $400 million plus segment, 45 are below 9% now by a total of amount of $195 million.

All these 502 credit unions face the same urgency of modifying previously approved business plans. Now they must either limit growth or charge members more.   Either choice is done at the members’ expense.

Before this apocalyptic rule took effect, at yearend 2021 only six credit unions in the $400 million and above category were below the 7% well capitalized standard. And five were considered “adequately capitalized.”

By changing the rules of the game overnight, NCUA has created a perception of financial weakness. At the same time the regulator has prevented credit unions from using literally tens of billions in existing reserves in the manner boards think best to compete in the market.  These funds were prudently set aside for the proverbial rainy day.  But now are restricted from use.

The cooperative system has been called to a financial halt by NCUA.  It reputation has been  turned upside down in member and public perception in a mistaken effort to make credit unions appear safer.

The outcome will be just the opposite.  The rule’s complexity and RBC uncertainty will just cause more sound, long serving credit unions to throw in the towel.

Capital is not and has never been the critical component of credit union success.  It is the resilience of leaders.  It was the founders’ passion that began these enterprises with no capital.

This newly imposed costly regulatory burden will lead current volunteers and professionals to feel they can no longer make the critical business decisions about how to best serve their members.

The government-NCUA-has now asserted by rule, that they know more than credit union’s leaders about how to manage  business decisions.

Appendix:  The Buffering Mentality Will Raise the Member Costs Further

The $30-40 billion cost estimate in new capital requirements does not include the credit unions “normal” buffering behavior.  Here is how Vice Chairman Hauptman raised the issue at the December board meeting.

Kyle S Hauptman: And we do know that . . .they keep a buffer of 3% right now, a little over 3%. Do you have any reason to believe they will not continue to keep a buffer of around 3% in the future? 

Tom Fay(staff): I don’t think I could estimate that, Vice Chair. 

Kyle S Hauptman: Okay, well, we can agree they do, now, have a ratio. All I’m trying to say is, when we say oh, no, this isn’t going to affect somebody because most of them, you know, if you already have 9.5%, you’re in the clear, but we already know that they like to have a buffer.

So, I think we just need to acknowledge that based on the way the credit unions operate, that being just above 9% does not mean you’re in the clear to meet our 9% CCULR because we know that they want to have a buffer for the reasons you just eloquently said. . .

. .  we shouldn’t be doing this without acknowledging that we are making credit unions hold substantially more capital because they’re going to have a buffer.

You think it’s good to have a buffer; so do I. We are raising the standards for credit unions. I just think we need to be clear about that. We shouldn’t be disingenuous to say, oh, no, look how many of them have over 9%. They should be fine with CCULR.

Well, we already know they have a buffer, so there’s no reason to think the operations of the credit unions will suddenly change; and we are raising capital for the vast majority of these because they will have — that number of 10.2%, at least for those subject to RBC and CCULR.  I’m happy to bet you that that number will go up because of what we are doing today.

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NCUA’s Apocalyptic New Year’s Surprise for Credit Unions

On December 23, 2021, NCUA filed a new rule, RBC/CCULR, in the federal register. It took full effect just 9 days later on January 1, 2022. This rule is the most consequential ever passed by NCUA, and the most damaging.

The change immediately affects 83% of 2021 yearend credit union assets.

Using a purported rationale of improving the safety of the system, the rule will result in the opposite outcome. It significantly handicaps the ability of credit unions to make decisions about how best to serve their members using their own experiences and judgments.

This catastrophic new burden will accelerate the merger of sound, well-run credit unions approaching the $500 million starting line for CCULR/RBC.  It will  energize this culling of hundreds of successful medium-sized local institutions now facing an overnight  fundamental change in compliance burden.

The New Year Shock

Credit Union 1, Rantoul, Illinois, wins the award for the first credit union to publish its full 2021 Annual Report including year-end financial data and ratios.

The President’s Report  by Todd Gunderson, CEO, contains the following upbeat assessment:

CU 1 loan portfolio growth was 15% as we extended $ 916 million in loans to our members throughout the year—an increase of 43%–and $276 million from the 2020 year.  The additional loan interest income helped CU 1 achieve a record net income amount for the 2021 year, bringing net capital rate or our rainy-day fund up to 8.71% of assets.  This keeps CU 1 well in excess of what regulators call a well-capitalized credit union, defined as 7% net capital.   

CU 1’s total assets had increased to $1.226 billion or by 4.8%.  At the same time, it raised its net worth ratio from 8.21% in 2020 to 8.71%.

Chair Bob Eberhert was equally proud of CU 1’s regulatory standing:   “. . . our future . . .is about having the trust of membership by being a sound member-oriented financial institution that propels CU 1 to be awarded the highest rating that can be bestowed upon a bank or credit union by  banking supervisory regulators.

These statements were accurate for exactly one day, December 31, 2021, when the books were closed.

CU 1 is the first of hundreds of credit unions that entered the New Year believing their past performance was at the highest standard.  They will now find they are in a literal regulatory net-worth “no-man’s land” where no coop has ever been.

Enter Three Capital standards

Every credit union over $500 million in assets saw their minimum ratio for “well capitalized” raised from 7% to 9%, a 29% increase, on January 1, 2022.

No phase in, no transitions, no analysis of the consequences, and imposed despite no demonstrated need at the individual credit union or system level by NCUA.

From one simple, easy to compare century-long standard, these institutions are now subject to three interlocking capital requirements.  These rules entail multiple options for calculating the numerator for “capital reserves” under the three standards.

The denominator, or “total assets,” now requires hundreds of specific math calculations as well as evaluating alternative methods. These factors include whether the asset is on and off the balance sheet, multiple time periods for determining “average” assets, and every asset’s relative risk calibrated precisely to a government mandated and calibrated formula.

The chart below presents this new tri-part capital era. The system has gone from the left column of clearly understood and applied net worth of 7% with five gradations, to the completely open-ended 500+ page-RBC/CCULR formulas and criteria.

Capital Options Table

A Direct Member Tax

The rule handicaps credit unions from spending money to lower fees (eg. overdraft charges), offer better savings or loan rates or even initiate critical programs such as cyber security or ESG initiatives.

Instead, this income must now be put into reserves where the amounts already set aside have proven more than sufficient through every previous financial crisis.

Every one of the 100 million plus members in a credit union subject to, or nearing this rule’s reach, will pay the direct costs of this regulatory tax in higher fees, lower savings or higher loan rates.

The members most affected will be those at the margin, with lower credit, just starting out after leaving school, or returning to the labor force; that is those traditionally perceived as higher risk.

Hundreds of Credit Unions Impacted

Hundreds of credit unions like CU 1 now find their “well-capitalized” regulatory standing downgraded overnight.  From understanding and complying with a capital standard proven over 100 years, they are immediately thrown into  a regulatory purgatory.

RBC/CCULR is a purgatory of changeable definitions and formulas in which every asset decision is now subject to a government-dictated risk rating.

Every credit union over $500 million in assets (83% % of total assets) can now be whipsawed between two different capital standards.  NCUA reserved the authority to impose the capital model they want,  regardless of the credit union’s choice.

No more respect for credit unions’ four-decade track record of demonstrated risk management honed in the marketplace since deregulation.

These two draconian rules of 500 pages are in effect now. No phase in, no transitions, no analysis of the consequences, and implemented with no reference to the actual capital soundness of the industry.

It is a regulator taking an action because it can. The traditional due processes and institutional checks and balances, at the board level, failed.

Uncertainty  About Cooperative Soundness Undermines Public Confidence

The agency gave itself the authority to micro-manage every asset decision made daily by 5,000 credit unions.  It is the most extreme example of an independent regulator asserting control over every aspect of a credit union’s operations.

This rule is  the worst kind of regulatory putsch possible. It is an assumed authority run amok.

It throws the credit union system into a public relations debacle.  For credit union leaders it creates a compliance wonderland of uncertainty about the rules of the game.

Will all CAMEL 1 rated credit unions below 9% now become CAMEL 2?

Will this incentivize the sale of subordinated debt with members paying the added cost of capital to be compliant?

How does anyone– the regulator, the members, the public– compare credit union performance with three very different ways of measuring “well capitalized”?

Will this intrusive regulatory grading of every asset decision override credit unions’ learned experience? And inhibit serving members and making investments required to stay competitive?

In upcoming posts I will show why RBC/CCULR is “the fruit of a poisonous tree.”

 

 

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NCUA’s Merger Supervision is Failing Members

In the June 2018 merger rule update, the board action memo (BAM) outlined the circumstances requiring an updated regulation.  The staff listed examples where self-dealing was rampant and decisions not made in the member’s interest.

This rule had been preceded by numerous press accounts of “credit unions for sale” and merger votes that were railroaded through with minimal notice to avoid any member opposition.

Any government intervention in the decisions made in a market economy should address  failings that market action alone will not correct.  The explanation that these mergers were just  the “free market” at work, is not true.

Most credit union mergers are non-market transactions.  They are negotiated privately between two parties, there is no bidding or competitive offers sought, and the member meeting and voting requirement  is treated as a mere administrative formality.

Before the new rule, mergers of sound, long standing and successful credit unions were routinely benefitting senior employees, and members rarely presented with objective data of any superior benefits.

The Two Aspects of Due Process

The most fundamental step in a merger is the member-owners’ vote to approve or not the proposal of the board.  The one member, one vote democratic governance is an integral part of cooperative design.

The new rule was to insure members were protected by a process which would allow them to make an informed decision in giving up their unique relationship and future direction to another institution.

The final rule’s  requirements for this approval process had two different, but complimentary components:

  • Procedural due process prescribed the formal steps, timelines, documents and  other requirements to give the member-owners the chance to vote;
  • Substantiative due process describes the kinds of information and options that credit unions were to consider and present to NCUA and members.

NCUA’s rule gave it authority over both aspects of due process.  However in its oversight it has failed this second responsibility which was the primary reason for the rule’s update.

NCUA has  supervisory approval on many aspects of credit union operations from initial chartering, changes in fields of membership, use subordinated debt and derivatives and in multiple other operational actions. For these  the NCUA requires detailed plans, financial projections, and proof of the capacity to carry out the requested action in a manner that will keep the members’ interests safe.

In these many operations NCUA requires credit unions to thoroughly document their policies and goals.  Except for one action: giving up the charter.

In the vast majority of formal member merger notices there is little specific detail.  Instead, rhetoric about scale and competition, better service and sometimes a listing of added locations, is the norm.

The actual merger agreements submitted along with the certification of the vote are single paragraphs.  Just a statement of intent or transfer all assets and liabilities to the continuing credit union.  There are no plans.

NCUA posts all the Member Notices, along with approved member comments here.

Mergers have become an administrative rubber stamp with no effort to verify the reasons or assertions of inability to serve members in a competitive manner.

By rule NCUA must review the minutes of both parties for the prior 24 months to learn what work has been done by the boards to reach their conclusion to enter into merger. The applicants must send:

Board minutes for the merging and continuing credit union that reference the merger for the 24 months before the date the boards of directors of both credit unions approve the merger plan

Presumably a reviewing examiner would look at the discussions, forecasts, options to learn if the member owners interests were in fact considered.  And how. What outside expertise was consulted?

This is the same supervisory process established for the changes in power or activities  described above.   One presumes, for example, it is the same detailed review of requests to purchase whole banks.

Best Interests of the Member

The 62 page merger rule BAM provided multiple reasons for NCUA’s substantive, not just procedural review, of mergers:

“The Board acknowledges, however, that not all boards of directors are as conscientious about fulfilling their fiduciary duties . . .

The Board confirms that, for merging FCUs, the NCUA’s regional offices must ensure that boards and management have fulfilled their fiduciary duties under 12 C.F.R. § 701.4 to:

  • Carry out his or her duties as a director in good faith, in a manner such director reasonably believes to be in the best interests of the membership of the Federal credit union as a whole, and with the care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances;
  • The duty of good faith stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act with a conscious regard for their responsibilities as fiduciaries.

“Several commenters suggested . . .that the NCUA’s role is limited to safety and soundness concerns. These comments are inaccurate. . .

“the statutory factors the Board must consider in granting or withholding approval of a merger transaction include several factors related to safety and soundness, such as the financial condition of the credit union, the adequacy of the credit union’s reserves, the economic advisability of the transaction, and the general character and fitness of the credit union’s management. . .

The net worth of a credit union belongs to its members. Payments to insiders, especially in the context of a voluntary merger where a credit union could choose to liquidate and distribute its net worth among its members, are distributions of the credit union’s net worth. . .

“. . the fact that ownership of a portion of a credit union’s net worth is less negotiable than a share of stock in a public company is irrelevant at the time of a proposed merger transaction. A credit union in good condition has the option of voluntary liquidation instead of voluntary merger. . .

The Board agrees that mergers should not be the first resort when an otherwise healthy credit union faces succession issues or lack of growth. . .

The rule’s procedural requirements were to protect the members: The revised member notice will also clearly convey how the proposed merger will affect access to locations and services. These changes give members greater ability to assess whether the proposed merger is in their best interests.

NCUA stated that its authority in mergers was comparable to its authority over credit union conversions to banks, mergers with banks or with non-NCUSIF insured credit unions:  Applying all portions of the merger rule to all FICUs conforms to the approach the Board has taken in these other regulations promulgated under the same authority in the FCU Act. 

Member Best Interests

NCUA has outsourced its responsibility for the asserted future member benefits to the continuing credit union.  However it has no process for validating whether this has occurred.  It routinely accepts generalized assertions about “a wider range of products and services, benefits of scale, and improved technology” as if these  are merely routine operational upgrades.

One simple way would be to examine how many members remained active with the continuing credit union one year later. What happened to those relationships, along with the merged members’ equity?

Yet in  situations where credit unions have made multiple mergers, there is no evidence NCUA has assessed the member impact when the new merger requests are presented.

NCUA is not responsible for the respective judgments of the boards about whether to merge.  However it is responsible that when the requests are submitted that the plans, alternatives, financial projections and planned organizational changes were completed with professional thoroughness and thought.  That is, with substantive due process.

This is the same process for most NCUA  approvals. But that process appears missing in mergers.  NCUA takes years and hundreds of pages of documentation and projections to award a new charter whose benefits will be far into the future.

It requires no such effort for a credit union board and CEO to give up a charter and its accumulated member relationships and goodwill built over generations.  And the requests appear processed quickly, approved within weeks of submission of the required member notice.

The standard for a common sense review of any merger request and documentation should be: Are the transparency and plans sufficient to enable a member, with reasonable capacity and interest, to make an informed decision? 

If the review of minutes, plans and forecasts do not support the decision to give up the charter, then NCUA should ask the credit union to meet  its fiduciary responsibilities of loyalty and care and resubmit before sending Notice to the members.

Members are led to believe this supervisory due diligence has taken place when receiving the Notice of Members Special Meeting.  There is rarely any evidence of this supervisory due diligence did occur. Most member Notices wording suggest just the opposite.

Congress is Interested in Mergers

In a recent hearing Senator Warren attacked banking regulators for their routine approval of mergers.

“Community banks being gobbled up. The market is being dominated by big banks. There is more concentration, higher costs for consumers, and greater systemic risk, and it is happening in plain view of the federal agencies whose job it is to keep our communities safe.

 “The FDIC has a searchable database of all merger applications received since 2013, and there have been 1,124 such applications. Out of those, how many has the FDIC denied? The total number of denials for any reason whatsoever?”

 “It’s zero. This is not just a problem at FDIC. The FDIC, Federal Reserve and OCC combined have not formally denied a single bank merger in 15 years.

Merger review has become the definition of a rubber stamp and the banks know it, and it’s time for some changes. Just saying we’re going to get tougher on this is not likely to dissuade anyone, especially billion-dollar banks.

“This has turned into a check the box exercise where the outcome is predetermined.

“Our regulators have a job to do and it’s our job here in Congress to make sure they do it,”

Credit UnionMergers are Not Like Banks

There is a difference however between bank mergers and credit unions.  As one CEO observed:
Maybe the biggest difference and advantage, unfortunately, to the cooperative CU model these days is that the management can exploit the assets for its own self-interest without effective check…as opposed to the for-profit banks who are rigorously (often ruthlessly!) and transparently scrutinized by the marketplace. 

With no market discipline and regulatory neglect, credit union mergers have become enterprises for extracting personal benefit.

This story  is an example of how regulatory failure can result in the members’ interest compromised by self-dealing by the CEO’s of  the merging and continuing credit unions.

 

 

 

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Corporate Surpluses Top $5.7 billion-$1.5 Billion More to Distribute

In early January the latest AME financial updates were posted on NCUA’s website.  Shareholders of the four solvent corporates are projected to receive total payments from their respective liquidation estates of over $3.185 billion.

Of this total 54% had been distributed as of September 30, 2021.  The remaining $1.470 billion will be sent to shareholders later this year.

Southwest and Members United members will receive a liquidating dividend on top of the return of all their ownership shares.  Only WesCorp members will see no payment.   NCUA expects to have  a deficit on its insured savings liability of $2.1 billion.

That amount appears  to be final actual loss to the NCUSIF for the combined corporate resolution.

Adding these direct shareholder payments to the $2.563 billion TCCUSF net worth when merged   into the NCUSIF (September 2017) brings the total cash surplus to $5.7 billion.   All credit unions were paid two dividends totaling $895.8 million from these merged funds.  The result is that credit unions and the corporate members, will directly receive 72% of the AME’s growing surpluses.  The balance was kept in the NCUSIF.

A $12.9 Billion Total Turnaround

When the five corporates were liquidated in the fall of 2010 the auditor’s estimate of the combined deficit for the TCCUSF was reported by  KMPG as follows:

At the time of liquidation in 2010, the AMEs had an aggregate deficit of approximately $7.2 billion, which represented the difference between the value of the AMEs’ assets and the contractual or settlement amount of the claims and member shares recognized by the NCUA Board as the liquidating agent.

Adding the current $5.7 AME surpluses, the total variance from this initial loss estimate is $12.9 billion.

As recently as the September 30, 2017 final TCCUSF audit, the estimate in the footnotes was that the combined estates would still have a total deficit.

Total Fiduciary Net Assets/(Liabilities) $ (110,863) millions, at September 30,2017

The Schedule of Fiduciary Net Assets reflects the expected recovery value of the AMEs’ assets, including the Legacy Assets collateralizing the NGNs issued through the NGN Trusts, and the settlement value of valid claims against the AMEs outstanding at September 30, 2017

93% of Legal Recoveries Pay NCUA’s Liquidation Expenses

All of this $12.9 billion recovery is from the interest payments and principal pay downs on the legacy assets.  The longer the assets were held, the more valuable they became.  The initial estimates of the credit losses over the life of these securities have proved to be in error by over $12.9  billion.

Some assert that NCUA’s net legal recoveries of $3.85 billion were a critical part of this turnaround.  That is not the case. The net recoveries were important for another reason however.

NCUA’s liquidation expenses, not including payments to the lawyers, total $3.569 billion.  So 93% of  the net legal settlements went directly for NCUA’s operating expenses managing the AME’s and NGN trusts.

Moreover, NCUA’s costs were much greater than just those directly recorded.  In  one of its first actions in 2010 after seizing the five corporates, NCUA sold approximately $10 billion of sound performing corporate assets at a loss from book value of over $1.0 billion.   This  added an actual loss on these fully current securities whose value was temporarily impacted by “market dislocations.”

There were also additional charges paid from the AME’s assets including NCUA’s 35 basis point guarantee fee on the outstanding NGN monthly balances as reported in the audits:

The guarantee fee amount due to the NCUA, at each monthly payment date, is equal to 35 basis points per year on the outstanding NGN balance prior to the distribution of principal on the payment date,

Learning the Lessons of a Crisis

As credit unions receive these final payments, it will be tempting to close the books, move on and let bygones be gone.  The crisis was over 12 years ago.  But it is still referenced today by NCUA as a reason for challenging the adequacy of the NCUSIF’s design, setting the NOL, or even when imposing the new CCULR/RBC capital requirements.

Leaving these events open to these “urban myths” kinds of recall would be a critical error.  There is much to learn when both auditor and NCUA’s initial total projected losses  to credit unions were  $13.5 to $16.5 billion versus the actual outcome of a $6.0 billion in surplus.

Why were the accounting estimates so far in error?   Were the corporates more than adequately reserved even at these extreme loss estimates?  What options for resolution were considered?   What happened to the plan presented by the corporate network?

Why did NCUA refinance the assets via Wall Street at extremely high, above market rates, when credit unions had demonstrated the ability and willingness to continue funding all corporates at much lower costs?

What can be learned from a patient, long term view of problem resolution especially one caused by cyclical fluctuations in asset or collateral values?

The immediate public diagnosis and blame placed on corporate boards and management is a typical reaction when any firm is in difficulty.  However is that criticism still useful as the legal recoveries show that fraud played a role in the design of these investments  all of which were NCUA authorized?  Will the corporate system ever  play a leadership role again, or are they to remain permanently muzzled due to a crisis assessment that has proved wrong in so many ways?

Past problems may seem to offer little for current events.   But not learning from them means the mistakes  of panic judgments, placing blame, misplaced expertise and  failing to respect mutual efforts are easy to repeat.

One of the great strengths of the cooperative system has been its ability to fix things and make necessary changes.   Both at the credit union and the system’s institutional levels.

Cooperative design can check the ambition of  self-interest by the power of collaboration and common purpose.   A through public study of all the circumstances around the corporate events would restore credit union confidence in the ability of the regulator and industry to work together when future crisis occur.

An earlier  analysis of why this look back is so vital can be found here.

 

 

 

 

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We Did It All by Ourselves

In reviewing NCUA’s board agenda today, I was reminded of two different explanations about how one succeeds in our country.

Two paradigms influence most thoughts about a person’s role in American society and its economy.

One is the image of heroic individualism, the self-made person.

The second suggests  that life is lived and uplifted in community.

Credit unions embody both impulses.   Individuals combine to help each other succeed with their specific hopes and dreams.

“Captain of My Soul”

The poem “Invictus,” by William Ernest Henley ends with these words:  “I am the master of my fate,/I am the captain of my soul.”

Todd Harper’s first speech in February 2021 following his appointment  as NCUA Chair began with these words: “when I first became Chairman, I issued my Commander’s Call to the agency.”

One academic’s comment on Henley’s poem:

The advantage of being a great captain of one’s soul is that no one else need be consulted; those in our culture who are masters of their fates do not, in other words, do a great deal of “discerning.”

Author Kate Bowler writes about this same human impulse with irony:

I am self-made. Didn’t anyone tell you? I brought myself into the world when I decided to be born on a bright Monday morning. Then I figured out how cells replicate to grow my own arms and legs and head to a reasonable height and size. Then I filled my own mind from kindergarten to graduation with information I gleaned from the great works of literature. . . . 

I’m joking, but sometimes it feels like the pressure we are under. An entire self-help and wellness industry made sure that we got the memo: we are supposed to articulate our lives as a solitary story of realization and progress. Work. Learn. Fix. Change. Every exciting action sounds like it is designed for an individual who needs to learn how to conquer a world of their own making.

In contrast, her understanding of  achievement is:

It’s hard to remember a deeper, comforting truth: we are built on a foundation not our own. We were born because two other people created a combination of biological matter. We went to schools where dozens and dozens of people crafted ideas and activities to construct categories in our minds. We learned skills honed by generations of craftspeople.

Discerning Responses to Today’s Agenda

Effective credit union leaders, at their best, recognize this ego-centered temptation when becoming  ”commanders.” They understand that achievements are because of the foundation of other’s efforts-past and present.

Pay attention as you hear or later read about Board members’ comments on today’s topics.  A good example may be the discussion of the CLF’s future.   Listen for those who see themselves as Captains and those “who are  building on a foundation not their own.”

 

 

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A Theft of $10 million or Just Spreading Credit Union Goodwill: You be the Judge

This is a true story.  The lead characters are the CEO’s and boards of the two merging credit unions, NCUA’s Regional Office, CURE in DC and the California Department of Financial institutions.

The facts are from documents sent members, IRS 990 filings, FOIA data and public statements by those involved.  I give my point of view.  You can decide what your interpretation of the information would be.

The Story Begins

The first step was for the actors to draw up their scheme, include a lot of financial “chaff”  around the theft and then decorate the proposal with positive sounding future rhetoric  about “empowering people and economies of scale.”

Next, submit this draft proposal to NCUA’s Regional office for their OK.

No surprise there. NCUA approved the plan, detailed below.  Now it is full speed ahead.

With the regulator’s green light, the next step was to form a California based non-profit with initials mimicking the credit union’s name: FCCU2 Foundation.  The stated purpose is to “support charitable and educational activities for the betterment of the Stockton area.”  Despite the name, it is neither a foundation in traditional meaning nor tax exempt.

The two executives responsible for this new “charitable foundation” are the credit union’s CEO, Michael Duffy and the Board Chair Manual Lopez.   The organization was registered on June 25, 2021 with Lopez the CEO and Duffy the agent.  These two are also members of the five-person credit union board which approved these actions.

On August 6, or forty-two days after registering FCCU2, Board Chair Manual Lopez signs Financial Center Credit Union’s Notice of Special Meeting announcing the intent to merge with Valley Strong Credit Union.  Voting will end on September 23.

The Notice contains required information about the transfer of credit union reserves to this just created organization including:

  • the $10 million “capital distribution” to the newly formed non-profit FCCU2;
  • a new job for CEO Michael Duffy as Chief Advocacy Officer for the continuing credit union, Valley Strong;
  • Valley Strong Credit Union CEO Nicholas Ambrosini’s commitment to provide “an additional $2,500,000 to the FCCU2 Foundation over a term of ten years.” The wording is unclear whether this is $2.5 million in total or $2.5 million per year ($25 million) for ten years.

Other mandatory disclosures in the notice detail the additional financial benefits four of the five senior managers will gain from the merger.  A special  dividend will be paid to  members if the combination is approved in their vote.

This special dividend is feasible because the merging credit union’s net worth, over 16%, is double the 8.7% at Valley Strong.  The proposed dividend will be determined by a complicated proposal based on member tenure, most recent 12 month share balance with a maximum cap on the share balance.  The estimated payout is “approximately $14,973,948.00” in the Notice-an unusually precise number, suggesting a very detailed plan.

Members were given 48 days to cast their vote. On September 23, 2021, the called special meeting took place.  38 members attended in person.  Thirteen voted in favor and zero opposed. 2,667 members mailed ballots with 383 opposed and 2,284 in favor.

The final tally was 86% of members for and 14% opposed. Only 9% of the credit union’s 29,672 members voted on this request to give up their charter.

Financial Center’s Final Bottom Line

The merger was formally completed on October 1, 2021, seven days after the vote.

The financial results of the merger are reported in Financial Center’s last call report as of September 30, 2021. The loss for this final nine months  of the credit union’s 66-year life span is $23.7 million. This is due to the $10 million “capital distribution” to FCCU2 and recording the special dividend of approximately $15 million.

This one quarter’s loss reduced the credit union’s net worth ratio, accumulated over seven generations, to 12.4% from 17.2% one year earlier. That ratio was still 4% points (50%) higher than Valley Strong’s net worth at the same date.

Faking It Till You Make It

Recent events in California have highlighted the ethos of self-enrichment, especially in Silicon Valley startups.  A phrase used describing these unproven business ideas is: “faking it till you make it.“

This is the practice of promising future bold success even though past results do not support the vision.  When there is little or no objective evidence that a concept could succeed, a hyperbolic sales pitch is necessary to continue fund raising and keeping the effort going.

Michael Duffy has worked at Financial Center since 1993, the last 21 years as CEO.  His sister, Nora Stroh, also joined in the 1990’s.  She was Executive VP and COO, the number two position, all the time Michael was CEO.  In the 990 IRS filing for 2018, each reported total compensation of over $1.0 million.

During the final five years of their leadership, the credit union’s loans declined every year, from a peak of $176.5 million at December 2016 to $102 million at the merger date.  This is an annual growth of -10.3% (negative).  Total members fell by 2,700 or almost 2% per year in the same time frame.

However, the credit union continued to increase its net worth ratio reaching a peak of 20% at December 2018, before falling to 17% one year prior to the merger. Until January 1, 2022, regulators considered credit unions well capitalized with 7% net worth.

As net worth rose, falling loan balances resulted in the loan to asset ratio declining from 39% to 16% at the merger date. As these risk assets fell, the credit union continued adding unnecessary  reserves, reaching almost three times (300%) the well capitalized standard. This resulted in shortchanging members on their savings returns and/or charging higher loan rates than necessary for a safe operation.

The credit union’s leadership failed year after year in its most critical member service: making loans.  However, it piled up reserves relentlessly, until the leaders decided to bail out.  And take some of the surplus reserves with them.

Maintaining a Positive Public Profile

During this same period of decline, the credit unions maintained its public relations in high gear.  According to the 990 filings for 2017 and 2019, the credit union made political donations from members’ funds for local political campaigns, such as Stockton city council and mayor, and for statewide office, Newsom for California Governor.  Political donations in 2019 went to ten campaigns and $25,000 to the California Credit Union League Pac.

Maintaining the positive  image was important for Duffy. On June 1, 2020, the credit union announced a $1.0 million donation by the Michael Duffy Family Fund and the employees of the credit union.  An enlarged symbolic check to Stockton’s COVID-19 Response Fund was given by Duffy to the mayor, recorded for TV broadcast, and later published on social media.

The same press release also stated that the credit union had developed a Loan Holiday program to “alleviate financial burdens for its members.” Whatever the program’s intent, outstanding loans at the credit union fell by $40 million in 2020 from the prior year.

In the many years leading up to the merger, the credit union had been operating with the form but not the substance of a cooperative charter.  It was run as a family business, promoting the public profile of the CEO, not the well-being of members.

In contrast with the nationwide member and loan growth in the industry, Financial Center’s data shows it had ceased serving members as its primary activity. Instead, it added to a bigger and bigger reserve nest egg to dip into down the road. In other words, faking it till you can take it.

A Change of Perspective

Michael Duffy’s public  announcement of the merger intention at the end of May, 2021, was accompanied by uplifting logic and his recent strategic  insight:

“As the CEO of Financial Center Credit Union for the past 21 years, my perspective on mergers has evolved just as much as our industry has in that same time period. As credit unions built by select employee groups (SEGs) increasingly partner with community credit unions, I have marveled at what credit unions of today’s scale can accomplish when they join forces with their Member-owners and communities chiefly in mind.

In a financial services sector that is constantly evolving, this merger is a true embodiment of the credit union industry’s cooperative mind-set. At its core our partnership with Valley Strong represents us selecting the best credit union partner to help us achieve our goals faster than we could duplicate on our own.

The phrase ‘Growing Together,’ is a perfect adage, as 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.

After three decades of leadership of the credit union, Duffy has concluded that the institution he led can no longer serve its members because it is not big enough ( “scale” )or “fast” enough.   His reward for this insight and merger endgame is a new position as Credit Union Advocate at Valley Strong. He gains control of  $10 million  funded by the credit union, a firm  no longer able to keep up with the times under his leadership.

It is more than self-dealing hypocrisy.  It is pilfering the members’ money.

Brain Dead Regulatory Oversight

One member who saw through this charade posted a comment on the NCUA’s member-to-member web sight, reviewed by NCUA’s CURE.  He urged a No Vote stating in part;

If Financial Center Credit Union is so flush with cash that it wants to give away $10 million, then that amount should be distributed to members. I’ve written to FCCU twice asking for the rationale for giving away $10 million. They have failed to answer me, obviously because there is no rational reason for giving away $10 million from its member-owners.

However, this brazen appropriation of members’ funds was condoned by the regulators-at every step.

NCUA’s multiple levels of review as well as California’s Department of Financial Protection and Innovation must have been braindead when reviewing this diversion to the control of Duffy and his board Chair, the two founders of FCCU2.

The magnitude of the grab and the cover story of good intentions diverted multiple regulators from their public responsibility.  Especially when accepting these future plans by leadership that had conned their members for years.

NCUA is fully aware of the self-dealing possible in mergers. It posted some of its  concerns when explaining its new merger regulation approved in June 2018.  The following are some of the reasons in the Board Action Memorandum supporting this updated rule:

“The Board acknowledges, however, that not all boards of directors are as conscientious about fulfilling their fiduciary duties (in a merger) . . .

The Board also confirms that, for merging FCUs, the NCUA’s regional offices must ensure that boards and management have fulfilled their fiduciary duties under 12 C.F.R. § 701.4.

Each Federal credit union director has the duty to:

  • Carry out his or her duties as a director in good faith, in a manner such director reasonably believes to be in the best interests of the membership of the Federal credit union as a whole, and with the care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances;
  • The duty of good faith stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act with a conscious regard for their responsibilities as fiduciaries.

“Several commenters questioned the NCUA’s authority to regulate credit union mergers, or suggested that the NCUA’s role is limited to safety and soundness concerns. These comments are inaccurate. . .

“In contrast to commenters’ assertions, the statutory factors the Board must consider in granting or withholding approval of a merger transaction include several factors related to safety and soundness, such as the financial condition of the credit union, the adequacy of the credit union’s reserves, the economic advisability of the transaction, and the general character and fitness of the credit union’s management. . .

“Another (commentator) suggested that members have no role in considering merger-related payments to employees. These comments are legally inaccurate and philosophically off-base. The net worth of a credit union belongs to its members. Payments to insiders, especially in the context of a voluntary merger where a credit union could choose to liquidate and distribute its net worth among its members, are distributions of the credit union’s net worth. . .

“Further, the fact that ownership of a portion of a credit union’s net worth is less negotiable than a share of stock in a public company is irrelevant at the time of a proposed merger transaction. A credit union in good condition has the option of voluntary liquidation instead of voluntary merger. . .

(Note:  At June 30, 2021 the credit union reported $109.2 million in total capital.  Cash on hand was $138.9 million.  Net worth ratio was over 16%.  If the credit union were liquidated this would have given the greater Stockton community this immediate cash benefit. The 29,000 Members could choose to join another credit union or use the funds for immediate needs.   Instead the members received just 13.7% of their collective savings in a one time dividend.  Even though this option is referred to in the rule, there is no indication this was ever considered.)

“The Board agrees that mergers should not be the first resort when an otherwise healthy credit union faces succession issues or lack of growth. . .

If these specific statements are insufficient for exercising regulatory judgment, the common law understanding of fiduciary responsibility is even more clear:

The duty of good faith is the principle that directors and officers of a company in making all decisions in their capacities as fiduciaries must act with a conscious regard for their responsibilities as fiduciaries.  These include the duty of care, duty of loyalty and the duty to act lawfully.

Self-dealing is an illegal act that happens when a fiduciary acts in their own best interest in a transaction, rather than in the best interest of their clients.

“General Character and Fitness”

This misappropriation of $10 million of member funds by the CEO and Chair of Financial Center should bring the following actions by NCUA:

  • the full amount of the $10 million diversion should be clawed back from FCCU2 and distributed to the members;
  • the instigators at the board and in management who developed and implemented this scheme should be permanently barred from participating in credit union affairs;
  • the minutes and all other documentation relating to the additional required contribution(s) of $2.5 million by Valley Strong to FCCU2 for ten years should be reviewed. If this commitment was a quid pro quo (inducement) in return for the merger, then all parties approving this payment(s) should also be barred from engaging in the affairs of a credit union-board and management.

Every person in the regulatory approval process of this merger should have their actions reviewed to determine if they should continue to be in positions of responsibility.

Every participant will have an excuse. The creator and enablers of this transaction will defend their role by saying NCUA approved it.  Then they will point out that the members voted on it. NCUA staff will assert there was no safety and soundness basis to object-despite the many Board  statements quoted above.

Citing deeply flawed processes to defend one’s conduct, does not make the actions proper.

In presenting these defenses, the parties involved merely demonstrate incomprehension of one of the oldest rules of society: Thou shalt not steal.

Were such excuses offered, it would  confirm the absence  of fiduciary awareness and protecting member interests by the parties to this transaction.

These failures are not due to a rule needing updating. Rather it is an example of persons who lack commonsense judgment about accountability.

If NCUA fails to claw back the funds and do nothing it will demonstrate that it has neither foresight nor hindsight when it comes to protecting members. However, this would not be the first time such blindness has occurred; only the latest example.

Ignoring this case will just create a new benchmark for the next merger personal enrichment effort. It’s time to halt these sham merger member deprecations.

 

 

 

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BON MOTS II for Friday

A member comment on the Proposed Merger of WarCO FCU and First Financial:

The merger may appear to be a financially good move as First Financial of Maryland FCU has more assets. However, the documentation indicates the Pocomoke location “will remain open for a period of time.” There are no First Financial of Maryland FCU’s located on the Eastern Shore. Therefore, all work will need to be done electronically and one most likely will no longer be able to walk into an office anymore.  Brian Cook, Member, WarCO FCU

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“You have to pick the places you don’t walk away from.”  Joan Didion

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Jim Blaine: I think one of the ideas which used to ring true was the thought that trying to compare CUs to banks was like trying to compare Ralph Nader to GM because they were both in the car business….any attempt at comparison doesn’t really make sense…entirely different purposes. Credit Unions should never be “comparable” to banks; it seems a useless exercise…CUs should provide the “contrast” to banks. ( January 2022)

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 Jeff Bezos: If you’re competitor focused, you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering.

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Ed Callahan: “The only threat to credit unions is the bureaucratic tendency 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.“  (Chairman, National Credit Union Administration, April 1985)

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Samuel Johnson  observed that “what is written without effort is generally read without pleasure.”

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Weekend reading recommendation: The Fed’s Doomsday Prophet Has a Dire Warning for Where We Are Headed.   The article illuminates the distinction between traditional consumer price inflation and asset inflation (S&P index up 47% the last two years) and the consequences for our political economy.

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NCUA and the Supreme Court

There is a case before the Supreme Court this term that could influence credit unions’ options when they disagree with an NCUA action or ruling.

In the 1984 Chevron case, the Court’s decision gave deference to a federal agency’s interpretation, as well as enforcement, of the law.

As described below this precedent and the authority it gave federal agencies is now the subject of an appeal that might curtail the scope of that decision. The case is described below.

How Might this Affect Credit Unions

If the Court’s decision were to limit the agency “deference” practice  from Chevron, it would create better opportunities for credit unions to challenge NCUA actions.

A recurring example of the agency’s unilateral interpretations are its determinations of the adequacy of a credit union’s loss allowance and hence its net worth/PCA ratio.

A classic example is NCUA’s conservatorship of Arrowhead Central Credit Union in 2010.  The agency said the credit union was severely undercapitalized with a net worth ratio of only 3%.  However that ratio was because the agency disputed the adequacy of the credit union’s allowance account.  Examiners required significantly more allowance expense.  Subsequent events showed management’s original estimate was exactly on target.

NCUA celebrated the credit union’s miraculous turnaround in May 2013 pointing to a net worth of 10.5% up from the 3% estimate when conserved 36 months earlier. The situation was another example of regulatory misjudgments from which there has been no external appeal.

Ironically the legacy of this account’s over-funding continues today. Arrowhead’s coverage ratio (allowance account/delinquent loans) is 940% or roughly 800% higher than the industry average.

Even NCUA board members who interpret the law as they read it have no standing.   Board member Mark McWatters,  a lawyer, presented his legal analysis opposing  the agency’s risk based capital proposals as not authorized by statue. His reasoning was “overruled” twice by a simple board vote, 2 to 1.

Rebalancing Unilateral Decision Making

The Chevron precedent has inhibited credit unions from challenging NCUA’s judgments and actions in court.   For example the so-called merger of the TCCUSF with the NCUSIF to use the funds for natural person loses was specifically prohibited in Congress’s  legislative language with the bill.  This was pointed out to the board, the IG and  NCUA’s auditor in letters and formal comments, but to no avail.

Should the Chevron precedent be modified, it could result in a better balance between the judgments of the regulator  and the rights of credit union’s to challenge those determinations.

Agency deference

by Jonathan Turley, Shapiro Professor of Public Interest Law, George Washington University. (Jan 1, 2022)

While not often discussed with the “matinee” cases of the term, one case on the docket could bring sweeping impacts across various areas — from the environment to financial regulations to public health. American Hospital Association (AHA) v. Becerra raises a highly technical question of a U.S. Department of Health and Human Services rule that cut outpatient drug reimbursements to hospitals. The rule is based on an agency interpretation of vague statutory provisions — an interpretation that was defended under the deference afforded to agency decisions.

 The case is technically about outpatient care for Medicare Part B recipients; however, for some justices, particularly Samuel Alito and Neil Gorsuch, it is all about Chevron and agency deference.

 Chevron USA Inc. v. Natural Resources Defense Council Inc. is a 1984 administrative law case that has come to embody the role of federal agencies in not just enforcing but creating law. The “Chevron Doctrine” has insulated agency decisions for decades from substantive review, giving federal agencies an overwhelming degree of authority in our system of government.

 For some of us, the dominance of federal agencies has become equivalent to a fourth branch of government. The question is whether a critical mass has formed on the court to substantially curtail that decision. If so, AHA v. Becerra could be a torpedo in the water for the Chevron Doctrine.

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Member Voices After Being Merged

In June 2018, the NCUA board approved a new merger rule.  The rule was extended to all FISCU’s because the agency believed there were safety and soundness risks if a merger was not done in the members’ interest:

For example, members of a merging credit union who discover, after the fact, that they were inadequately informed about the details of the merger may become disgruntled. The dissatisfied members could create bad publicity, creating a reputation risk for the continuing credit union. Unhappy members could also choose to stop doing business with the continuing credit union, affecting earnings projections.

In contrast to commenters’ assertions, the statutory factors the Board must consider in granting or withholding approval of a merger transaction include. . . the general character and fitness of the credit union’s management.

Members Reacting Post Merger

There is no “after the fact” process for NCUA to learn members’ reactions to the merger of their credit unions.  The following  comment posted on January 14, 2022 to Just a Member is an example of one reaction:

Comment:

Recently, Teresa Freeborn has left Kinecta to manage her Daughter’s Business interests.  The merger of Xceed FCU and Kinecta was a disaster.  After months of wait, the transition was a bust.  Poor customer service.  Problems with online access and mismanagement of credit cards from XFCU visa to Kinecta Mastercard.  I paid off my Visa and the balance rolled to the unactivated Kinecta Mastercard.  I had to file a complaint with NCUA to get it resolved.  I have now closed my accounts and ended an over 40-year relationship with XFCU.  I have found better banking deals at BOA and Citibank.  I think you have made a smart decision, Teresa Freeborn, to exit credit unions after protecting your interests and abandoning the Credit Union members!

George E. Skelton

Today’s social media options provide multiple sources for members’ post-merger experiences.

When PenFed merged with Postal Employees in Madison Wi, in April 2021 the following comments were provided about the subsequent service:

NameWithheld
August 30, 2021

Lousy place. Abusive. Fails to do what’s requested. Online phone help just as bad. Says being done but not. Waited 65 days for free personal checks that never showed. Still waiting for refunds and account closures. Worse place ever in my 45 years of banking. Local Person at Madison Wi extremely abusive. Place needs to be shut down. Don’t waste your time here. Consider a class action lawsuit.

PETER SCHNEIDER
August 24, 2021

POOR customer service…..so impersonal….hate being treated like a number and not an individual.

PenFed’s Merger with Miramar FCU

Years after the May 1, 2017 merger between PenFed and Miramar FCU, members continue to compare their post-merger service to that received prior to the event:

February 8, 2021

The employees here are nice but the service is not efficient – employees do not know procedures for certain requests or processes. When it was Miramar FCU the staff were more equipped to answer questions and work through solutions with members.
Also, the hours are incorrect. Penfed office of Miramar is closed and there was no update on the website nor any message to inform members. Penfed, please update your information on your website and your employees on procedures. 

Joanne
July 31, 2020

It is 1245 on a Friday afternoon and the hours are stated that you are open until 1pm. so why is no one picking up the phone? have been on a continuous ring and redialing for the 15 minutes, until 1 pm. a business is supposed to answer it’s phone. this never happened to me in the the days of mfcu.

Brad Hines
April 9, 2020

This was a topnotch organization when it was Miramar FCU. Since PenFed took over there’s been a complete overhaul of the staff – and not for the better! I’ve had numerous times where tellers have made mistakes, or they just didn’t know what to do and had to ask for help. Most recent situation was transferring a large amount of funds out of a CD that had matured. The teller didn’t know the procedure, so had the manager come over to help. She explained that my best course of action was to put the funds into a “premium” savings account which yielded decent interest. I authorized this, and the teller made the transaction (after the manager had left). Several days later I just happened to check my account online only to see that that large amount of $ had been put into a “regular” savings account that had very poor yield. Fortunately when I called the national help desk they were able to fix this – but what a gigantic error and problem this would have cost me if I hadn’t discovered it!

A member’s report of service at a former branch of Ft. Belvoir FCU, now merged with PenFed, and the credit union’s response:

Chandra G a month ago

I would like to say that I was so hurt when I left the PenFed on Davis Road. A teller was helping me with an issue. I needed a letter to send to my other bank so she had to refer me to a manager. Before I went into the office, I told the teller that I needed that document back when they were done with it.
By this time I was walking in the office with a manager and a member service representative. The teller is so kind so she wanted to tell the manager that I needed the document back. Before she could say anything, Regina Lawton told her, “you don’t need to be in here. Go back out there.”
She then repeated it two more times, “You don’t need to be in here. Go back out there and help them. You don’t need to be standing in here.”

The teller was just attempting to tell her that I needed the document. She was providing excellent customer service!
I couldn’t imagine working for Regina Lawton. If you speak to your employees like that in front of customers, I can only imagine how you speak to them privately. TERRIBLE
Also, the teller DOES NOT know
I’m reporting Regina Lawton. I went to my car, after the incident, and my conscience wouldn’t allow me to leave knowing someone is being treated like this.

Response from the owner a month ago

Hi Chandra, thank you for bringing this to our attention. We will share this with our branch leadership team. We appreciate your membership and feedback.

Google reviews of PenFed’s merger with a Georgia Credit Union

Yasmin 4 days ago NEW

No customer service whatsoever. I’m a patient person so I waited 30 minutes to eventually walk away and take my business somewhere else. But what I don’t tolerate is when you have 2 customer service reps just staring at the group of people waiting for membership services. No, we will be with you. No, thank you folks for your patience. Just no acknowledgement whatsoever or managing expectations. Then for some reason, they were done with the prior members, it had been about 10 minutes, and they didn’t come for the next group. Not efficient at all. So rude.

Jason Boyd 3 weeks ago NEW

This is a federal credit union that is united but you can’t do business with your other credit union accounts (such as safe federal credit union) unless you have an account with them directly. Not only is that greedy but a poor business model. I will never bank with you and I will make sure no one I know does either. Oh, and thanks for the 15 minute wait for nothing too btw.

Where’s the Problem?

NCUA’s statement that poorly done mergers create bad publicity and soundness risks affects more than a merging credit union’s members.   The reputation of the credit union system is stained.

But the problem is not just badly executed mergers.  When mergers are pursued as an acquisition strategy, institutional ambitions easily become more important than the members’ best interests.

There are fundamental gaps  in NCUA’s oversight  of its merger rule.   Board member Metsger stated at the time of the revised rule:

“Our focus is on ensuring member interests are protected through the regulatory process.”   

However efforts to protect member interests are not evident in NCUA’s supervisory oversight. Egregious self-dealing and hollow future benefit promises are routinely approved.

The member comments above are indications that something is amiss in regulatory oversight.  A later blog will provide some examples of self-dealing, at the members’ expense, routinely approved by the agency.

 

 

 

 

 

 

 

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Managing the NCUSIF-Is It too Late to Act?

What should credit unions do when the regulator who makes the rules, does not follow its own rules?

Yesterday the consumer price increase for calendar 2021 was reported as 7%, the highest in 40 years.  This was not a surprise.   Concern about increasing inflation and the Fed’s response had been growing since the summer of 2021.

Interest rate risk is not a new topic. NCUA first proposed adding an S for sensitivity  to the CAMEL rating in 2016.  In October 2021, the board approved a rule adding this “S”  with Chairman Harper saying:

The NCUA’s adoption of the CAMELS system is good public policy and long overdue.  Separating the liquidity and market sensitivity components will allow the NCUA to better monitor these risks within the credit union system, better communicate specific concerns to individual credit unions, and better allocate resources.

The agency’s description of interest rate risk was straight forward:

The sensitivity to market risk reflects the exposure of a credit union’s current and prospective earnings level and economic capital position arising from changes in market prices and the general level of interest rates. Effective risk management programs include comprehensive interest rate risk policies, appropriate and identifiable risk limits, clearly defined risk mitigation strategies, and a suitable governance framework.

Ignoring its Own Rules

However Just six days prior to this, those responsible for managing the NCUSIF’s portfolio invested $1.0 billion (5% of the portfolio) at an average weighted life of 5.95 years and yield of 1.19%.

These investments actually extended the portfolio’s overall maturity from the month before.

This was a continuation of the robotic process  the NCUSIF investment committee had followed since market rates had fallen to near zero in 2020.

In December 2020 question were raised about these investment decisions: What Is NCUSIF’s IRR Investment Policy? Is this a Gap in NCUA Board Oversight?  The article pointed out NCUSIF’s most recent investments included a 7-year fixed rate yielding only .45%.  Would any reasonable person make this investment at this point in the cycle of historically low rates?

In August 2021, the NCUSIF continued its market tone-deaf investing by placing $1.2 billion at an average weighted yield of .943% and life of 5.7 years.   The analysis pointed out that these decisions were hurting credit unions.  One immediate decision that month cost credit unions $4.2 million in foregone revenue over the next 7 years before it matures.

At the same time, credit unions in contrast, reported keeping 53% of their record level of investments in overnight funds.

Who Makes These Decisions?

The NCUSIF has an investment committee of four people including the Chief Financial Officer, the Director of E &I, the chief economist and the head of the Capital and Credit Markets division.

NCUA preaches interest rate management,  but does not practice it.  One doesn’t have to run a stress test to see the devastating results  of these recent decisions. The  NCUSIF’s monthly data documents the decline in portfolio value as rates began  rising over the past 12 months.

In September 2020, the $17 billion NCUSIF reported a market gain of $586 million. In October 2021, the latest report available, this had fallen  by 97%, to just $16.2 million on a portfolio $20.3 billion.  Large portions of the most recent investments are now worth less than their purchase price.  These low yields will hurt the NCUSIF’s performance for years to come.

Who Is Responsible for this Performance Failure?

The NCUA board receives a monthly report on the NCUSIF and a quarterly in-person update.

In questions about investments as recently as December’s meeting, staff’s response is they are just following Board policy.   In the September’s 2021 board meeting the CFO agreed to make public this investment policy.  It didn’t happen.  Several meetings later, he explained the policy was under review and would not be released until that was completed-at some indefinite time in the future.

The Board unanimously approved the new interest rate sensitivity rule in October 2021, which was first published in March.   It receives the monthly report showing the robotic investment activity and steadily falling portfolio values.  The board’s  words and deeds are far apart when it comes to IRR.

The Costs to Credit Unions and NCUA

When the agency’s highest professionals show an inability to manage the agency’s largest asset, the $20 billion NCUSIF, in accordance with its own rules on interest rate sensitivity, fundamental questions are raised.

Are senior staff competent for this task?  Are these investments what the Board really intends with policy?   Is no one in the agency,  staff or board, able to see the damage this causes to the fund’s revenue and its financial soundness?

Good judgement comes from experience.  And experience?  That comes from bad judgement. How many more bad judgements does the board need?

More than the NCUSIF’s future is at stake, as important as that is.   This year-long example of failure to respond to the changing economic conditions in managing the funds, begs the question: Is the agency capable of overseeing this issue in credit unions?   The IRR monitoring of the NCUSIF is simple.  In most credit unions the issues are much more complex.

Both the NCUA board and senior staff are letting credit unions down.  Sooner or later the bill for this failure will come due.   A simple portfolio yield of just 2% on $21 billion is sufficient to cover the normal financial expenses in the fund.  When these investment decisions lock in rates of 1% or less for 5 or 6 years, a premium may be required to pay for the damage caused by poor management.

If this failure is the outcome for the simple management of the NCUSIF’s IRR, the bigger issue is whether the agency has the grasp to properly monitor the industry through the coming rise in the interest rate cycle.

The first test will be what the leadership does about their responsibility for the NCUSIF.  Will the board and senior staff continue to kick the can down the road, blind to the consequences of inaction, or make a difference now?