Posts

Posted on

Showing the Way by Thought, Word and Deed

These brief examples represent  the ideals, principles, and qualities desired and admired by persons,  communities and nations.  The three persons apply these principles in their daily efforts.

In their individual areas, they rise, or rose, above self-interest and seek to bring out the best in others.

A 20’s something woman coach’s philosophy

Building the character of the rower is just as important as developing the skills of the athlete.   Diligent training on respect, resilience, and the outcomes of hard work is rewarded with improved teamwork and an overall love for the sport.

Every word spoken is intentional to create a positive learning environment and consistently progressing rowers. 

An author seeking appropriate use of words

Maybe we need to delete the word ownership from our vocabulary and certainly from our legal contracts and sales agreements and land deeds. Instead, let’s use the word stewardship — and introduce a raft of legislation that defines stewardship as “leaving something better than you found it.”

Steward it or lose it.

An Example of Selfless Generosity  (excerpts)

What made Aaron Feuerstein famous was not success but his attitude in the face of catastrophe. When a fire destroyed the textile mill he owned, he faced the decisions of whether to rebuild and whether to continue to pay his 1,400 workers, who were left destitute in the dead of winter. His decision became a model of how employers should treat their workers.

Standing By His Employees

Mr. Feuerstein won where it matters most. As a business leader, he captured the hearts of his employees and the imagination of Americans everywhere.

What made Aaron Feuerstein famous was not success but his attitude in the face of catastrophe. He became a model of how employers should treat their workers.

In December of 1995, a fire raged through the Malden Mills complex, destroying almost everything. He faced the decision of whether to rebuild. He also saw that the plant’s 1,400 workers were left destitute in the dead of winter. He could have collected the insurance proceeds and walked away from the disaster.

However, he decided to stand by his workers. He took a risk and retained all 1,400 employees on the full payroll for three months. He extended their health benefits and began rebuilding the plant so that they could return to work.

In a 1997 speech, he explained that if the worker felt he was “treated the way he should be treated,” he would go the extra mile and make quality products for the company. He was right.

Here is the link to his interview on 60 minutes (6 minutes):  https://youtu.be/ry7_FcSiQL8

Doing the Right Thing

How will your stewardship be remembered by your credit union’s members?  Who is showing the way for others on your leadership team?

 

 

 

 

 

 

 

 

 

 

Posted on

Are Credit Unions Democratic? Does it Matter?

On paper and as a long standing, unique cooperative value, the best answer is,  “Maybe.”  After all for federal and many state charters the member-owners have one person, one vote in elections, and no proxies allowed.

The required annual meeting is the recurring opportunity for members to decide who will represent them.  To approve their current leaders or to vote them out.

This is a crucial process in co-op governance.  However, the practice rarely lives up to the theory. One person sent me his summary of board elections with the title:  It’s a scam.

Here is my observation on the subject of Board elections:

1-The credit union board of directors appoint a nominating committee.  The committee are usually directors NOT up for re-election.

2- The nominating committee nominates the incumbent directors.

3-The nominating committee does not nominate any non-incumbents.

4-The ballot is “no contest” – the number of directors up for election is the same number of directors on the ballot.

5-There are no director term limits.

6-Directors arrange to “resign/retire” mid-year so the position can be filled by appointment – by the incumbent board of directors.

7-Once appointed the director will seek “re-election” by way of the nominating committee – composed of the board of directors

If a member seeks to run for the board they need to stand in front of the credit union and solicit signatures on a nominating petition & the number of signatures required is substantial.  

If it is not a scam, contested elections are certainly a rare occurrence.

While cynical, there is more than an element of truth in this former CEO’s observation.

Does the Absence of Director Elections Make any Difference?

Many very large federal credit unions have never had an, open contested board election in this century.   In seven states where proxies are used by state charters, the board itself controls all of the votes even were there to be a nomination by petition.  The result is that boards end up perpetually controlling who serves.

Incumbent directors and CEO’s would defend the process by pointing to the industry’s financial results and member growth.  They would argue that is the real measure of the responsiveness of board leadership.

Others would point out that  credit unions regularly publicize  board nominations when announcing the annual meeting, but never receive any interest from members.

For many the idea that any member might collect sufficient signatures to stand for the board is unsettling.  After all it takes expertise and experience like that of current office holders, to be able to be a director.

If most credit unions succeed without democracy does it matter?

Can this co-op concept of “democracy” succeed if the member-owners never vote?

What kind of leadership culture and responsiveness will exist at the board level knowing that their tenures are never subject to member approval?

How will co-ops present themselves versus for-profit institutions where shareholder rights and activity are frequently used to bring issues to the fore at annual meetings?

Finally, how does one explain the voting manipulation that occurs with mergers of long serving, solvent credit unions where substantial benefits are paid to the merging CEO?

The  merger transaction promises members only rhetorical future benefits. But the person responsible for the merger, who gives up leadership responsibilities, receives significantly more compensation (a golden parachute) than by staying and retiring from the job.

One writer described the outcome when democratic practice is usurped by those in power:

“when you get rid of the democratic oversight of a sector of the economy, it becomes a black market free-for-all, a winner-take-all-loser-dies-in-poverty survival-of-the-fittest dog-eat-dog game.

The masses lose, the commons suffer, individual rights get trampled, and power amasses to CEO’s maximizing their personal outcomes. “

The Most Important Loss

While the erosion of democratic processes, may take time to manifest itself, the failure to cultivate co-op’s unique member-owner design may be the system’s biggest vulnerability.

Recently the Vanguard Group of mutual funds began a new television campaign.   The theme: “You’re not just an investor, You’re an Owner.”

This is only the second national TV campaign in the firm’s history.  As their initial product advantage of low cost, index-based mutual funds and ETF’s was matched by all their competitors, they are now singling out the one difference no other fund can match.

The message: “A rich life is about more than just money. That’s why at Vanguard, you’re more than just an investor — you’re an owner. So you can build a future for those you love.”

The agency which created the ads explained: the campaign was introduced “to celebrate the benefits of Vanguard’s unique corporate structure which makes clients, owners” and that the goal is “to underscore the value that investors can realize by investing through a firm with no outside owners other than its clients.”

More than a Design

Credit unions which fail to practice and celebrate their unique member-owner design, may be surrendering the most important advantage they have.

Democratic governance is not just another organizational option.  It is a critical aspect of an organization’s beliefs and practices for relating to the members who created and own the credit union.

When the advantage is not used, it goes away.   Co-ops become indistinguishable from banks.  Members are just another name for customers.  And leadership progressively presumes its judgments and choices are the primary basis for all decisions-even those ending the charter’s independent existence.  Even authoritarian leaders can survive, for a while.

When democratic practices are habitually circumvented, they are difficult to restore.   Without regular succession processes, the ability to find new leaders, or even generate interest in leadership is squelched. And at any moment, the sirens of self-interest can appear, cancelling the credit union’s future for all members.

Democracy matters, until it doesn’t.    The good news is that this is a fundamental flaw that every credit union has in its own power to fix.

 

Posted on

Leading with Competence, Not Position or Authority

On January 7, 1984, NCUA Chairman Ed Callahan spoke to the Hawaii Credit Union League’s Political Action Conference.  This was the predecessor to today’s governmental affairs conference.

He opened by discussing deregulation a term he described as “overused and misunderstood.”  “I was not the inventor, but I gave it a good push.”

He then addressed why credit unions had been so uneasy, even fearful with this radical change that would apply to entire financial industry.  The fear was whether cooperatives could compete.  For on December 14, 1982, in a first step, all rates for all institution’s  money market accounts were removed.

He then presented the evidence. Growth in savings showed credit unions, whose liabilities (shares) had been totally deregulated in May 1982, had increased by double digits for three consecutive years, far ahead of the banking industry’s outcome.

The most important benefit of the change was that credit unions would make their own business decisions not government bureaucrats.  There was no more “follow the leader” putting all our “eggs in one basket.”  He also recognized “some will succeed more than others.”

The Rest of the Story

He then explained the additional changes necessary for this result to succeed.

The agency had approved a “more realistic common bond” which he believed would have the most lasting “real impact in the long run.”

He talked about the agency’s decentralization, putting resources into the field where they were most needed in order to conduct an annual exam program.   “We threw out the old cookbook and created a new exam process so we could be “problem solvers” if required.”

The agency needed to be “more efficient” using the resources provided by credit unions.  One example was “resource sharing” where the agency would compensate credit unions who would lend their personnel and knowhow to assist other credit unions experiencing difficulties.

Finishing the Job

He closed asking support for a new design for the NCUSIF.  The Fund was “not competitive” relying on double premiums to try to meet the 1% of shares objective set in the Act.

The new design would be “less costly, puts control of funds in your hands, and makes the fund all yours when you put up the money.”  This change would “complete the system.”

Leadership Change that Lasts

Ed took questions at the end of the talk replying to attendees’ concerns about “overlapping FOM’s, competition for members,” and the threat of taxation.

He closed with the thought that he did not want to be remembered for what he had done as NCUA chair but rather for “being part of the future.”

His ending rouser challenged credit unions: “You’ve been a model for your members; now become an even better one.”

What Sets a Leader Apart-“Feeling Safe”

Ed did not lead change by preaching fear.  Instead in this speech and many others he directly addressed the “fears” that credit union leaders shared.   Fear of the unknown future, competition from without and within the industry, or the lack of expertise and navigating an economic recovery with members.

Hearing him speak, credit unions “felt safe” with his proposals for the future.   They had confidence not just in current results, but in the way the agency presented the context for change-the transparency, the joint efforts, and the shared belief in the unique value of the cooperative system.

In 1984 credit unions supported Congress’ change of the NCUSIF to a 1% deposit-based system, bringing all the benefits described in the plan.   This was critical for credit unions to have a sound, unique and competitive future in the newly deregulated financial markets.

Ultimately the trust in any organization depends on those who interact with it, “feeling safe” with its leaders.   That belief is real; it is earned not granted by position; and it is the fundamental confidence required for any system’s success.

One of Ed’s gifts was instilling confidence in others and their ability to succeed.  Every coach knows this reality if there is to be a winning team.  An example that is  much needed today in DC.

 

 

Posted on

When Words Matter Most

On November 5th, Pomona Postal FCU, founded in 1964, became NCUA’s  fifth conservatorship of 2021.

The Credit Union Times story contained this standard explanation:

The NCUA issued a media release and other information, showing the agency took possession and control of the insured credit union to conserve its assets, protect the National Credit Union Share Insurance Fund, and resolve operational problems that could affect the credit union’s safety and soundness.

At September 30,  this $4.2 million credit union reported a net worth of 6.86%–down .01bps from a year earlier; an ROA of .48, delinquency of $33,184 covered by an allowance of $41,000.

The Critical Question

This action raises again the ultimate question, Why?  The $20 billion NCUSIF had to be “protected” from the deprecations of this $4.4 million monster disguised in tiny sheep’s clothing?

Or, as typical of other small credit union seizures, will we learn from court records (years from now) that there has been a long, on-going pattern of misdeeds in this two-employee firm, overlooked in multiple past annual NCUA exams?

Or, perhaps it is just examiner and regional office frustration that their supervision has been unable to stabilize a slowly declining financial picture?

Both options are troubling. The failure of NCUA to be transparent in the use of its most absolute authority is itself a symptom of the real issue.

If NCUA is unable to supervise this credit union speck in the $2.2 trillion system, how can anyone have confidence in their oversight of a $40 or $400 million, let alone a $4.0 billion entity.

The irony of NCUA’s explanation is stunning.  For if true that this $4.4 million was taken over to protect the insurance fund, the greatest danger to the system is not from credit union malfeasance or failures; rather it is NCUA’s incompetence.

It is time for the agency to drop the bureaucratic doublespeak and start giving straight talk about its actions. For the issue is not what happened at Pomona Postal but why the agency feels so compelled to cover up its most important responsibility.

 

 

Posted on

Veteran’s Day: Honoring the Responsibility of Public Service

A recent news story’s headline:  Sub’s Leaders Fired after Hitting Mountain.

The article described how the USS Connecticut, one of the fastest, most modern nuclear powered submarines had hit an underwater object  described as a “mountain”  in October.

The accident injured about a dozen sailors, but the sub navigated on its own back to Guam for a damage assessment.

One immediate result of the event is that the commander of the fast-attack sub, the executive officer and the senior enlisted Master Chief were all relieved of their duties.  Vice Adm. Karl Thomas, commander of US 7th Fleet, determined that “sound judgment, prudent decision-making and adherence to required procedures in navigation planning, watch team execution and risk management could have prevented the incident,”

The Military and Leadership

From the first day of active duty, every member of the military learns about responsibility and accountability.   From the ordinary tasks of getting up, wearing the uniform, or cleaning a work area, everything is subject to inspection.

All responsibilities come with accountability.   And when performance is above average there are awards and recognition beyond a positive fitness report.  But there is also the reprimand in the file when something goes wrong.   I received both in my four plus years of active duty.

I received the Navy Commendation Medal as Supply Officer during combat support operations:

“His outstanding managerial abilities combines with a ceaseless drive to accept and surmount challenges resulted in the establishment of many services for task group ONE SIXTEEN POINT ONE personal (the Navy Seal Team at Solid Anchor) that were not previously available.  Filson’s leadership and devotion to duty reflected great credit upon himself and were in keeping with the highest traditions of the United States Naval Service.”

Fitness reports recommended “accelerated promotion and augmentation to the regular Navy.”

But there was also the letter of reprimand in the file.   Upon being relieved as Supply Officer to transfer to shore duty, the audit of the ship’s store inventory found a shortage of $1,850.   After repeated recounts, there was no explanation, but the event occurred on my watch.

Many think of military duty as primarily combat.  I was a gunfire control officer.   Several times this meant telling everyone to clear the mount so a sailor can take a 3 inch 50 round that failed fire and throw the dud over the side.  Or the evening the siren’s sounded at Solid Anchor, the phosphorous flares suspended from tiny parachutes to light up the perimeter, the immediate scrambling of the two gunship helicopters, and running in night clothes to the bunkers built with sandbags.

These moments were the exceptions from much of the daily routine.   Nevertheless, the concepts of responsibility and accountability applied to all our activities.   Captain Mann personally signed off on every communication from the ship that I authored. He explained the only way his commanding officer knew how he was doing was from reading the ship’s traffic and whether the we arrived and departed port on time.

Respect for Service

The military gave me the chance to meet some of the most honorable, decent, and effective people I have ever known.    When I left banking to join Ed Callahan and Bucky Sebastian, it was not my thought to seek a government career.  Rather it was seeing in them the same qualities that make the military service special.   They believed that government employees are responsible to the public, that wise stewardship of resources is expected, and that everyone will be accountable for their duty.  Success was always a team effort.

Government service for them was not about political ideology or power.  Rather it was about serving the public.   When Ed announced the three of us were leaving NCUA in 1985 to form an undefined new company, he explained that we had accomplished what we came to do at NCUA, and it was time to move on.   Just like service in the military.

Dishonoring a Heritage of Service

Yesterday I received a member notice dated November 4, 2021 announcing the proposed merger of the $457 million Heritage Credit Union with the $3.7 billion Connexus, both in Wisconsin.  Each is very  strong financially.

The required disclosures say that the Heritage President, a 40-year employee, will retire immediately after the merger.  The additional benefits she will receive for her final action includes a $487,546 payment due as employment contract runs through 3/2/2023; continuing health care benefits of $1,750 per month through age 65; a lump sum payment on her 457(f) in the amount of $425,282; and a merger clause payout  per her employment contract of $326,284.  The total of the additional compensation known amounts is $1.239 million plus the monthly health benefits.

The practice of a retiring CEO selling the credit union as a final effort to create a personal golden parachute is not new.  The most troubling aspect is the leadership failure by both the CEO and board ending all that Heritage had enabled–the shutting down of independent career opportunities for 124 employees, the ending of local relationships in 12 communities, and the betrayal  29,000 members’ loyalty first begun in 1934. This action is the antithesis of  the credit union’s founding story on  their web site-an event that enabled the professional leadership opportunities  the CEO and board have enjoyed for decades.

But it takes two parties to make a deal.   Connexus’ CEO and board agreed to these sale terms, issuing a joint press release.  Merger math is simple:  1 + 1 = 1.  The cupidity of the one side is matched by the morally comatose on the other.   Members are not dumb.   They see the self- dealing and loss of their Heritage.

Moreover employees of both organizations will look past the superficial statements of what’s in it for them.  They will ask is this the kind of organization, leadership and values to which I want to be a part of?

Why We Remember Honorable Service

This additional example of self-enrichment trumping fiduciary responsibility is even more troubling because the regulators-both state and NCUA-routinely sign off on these self-enrichment practices.

The concepts of responsibility and accountability have traditionally been the hallmark of effective public service—professionals in their conduct and expertise and conscientious in their duty.

The military’s example, combining honorable service with accountable conduct, is something we properly salute.   We celebrate the values inherent in this public duty. But these concepts should not be limited to military employees.

The credit union system could stand much taller and be more potent if the traditions of honorable service that created the $2 trillion system today, were followed by those responsible for overseeing its conduct today.

The logic of mergers like Heritage and Connexus is nothing more than simple monopoly capitalism.  Members become the means to growing ever larger, not the reason for the cooperative’s creation.  Management’s self-interest has usurped member’s best interest.

A good first step would be to learn from the Navy example.  There is an obvious regulatory shortcoming  of “sound judgment, prudent decision-making and adherence to required procedures.” There needs to be  “relief of duties.”

But that would take leadership at the top.  Leadership that can distinguish cooperative purpose from corporate capitalism.   And that remembers the values and commitments that created the credit union alternative in the first place.

Veterans Day tributes remind all of us what really matters in life, especially by those who aspire to public service.

 

 

 

 

Posted on

The Critical Difference in Bank Capital Versus Credit Union Net Worth

At September 30, the credit union system’s net worth was  10%, or 300 basis points above the 7% well capitalized level.

Bank’s simple core capital ratio at June 30 is 8.83%.  But comparing these two ratios is extremely misleading.   For $1 of credit union reserves is much more valuable than $1 of bank capital.

Here’s why.

Credit union reserves (equity) is from retained earnings which is free in two senses of the term.  Unlike banks, credit unions pay no taxes on their earnings.  Whereas banks are subject to whatever their marginal tax rate is on each $1 of earnings.

As of June 30 banks pretax ROA was 1.67 for the first six months, but actual ROA was 1.31 after tax.   It takes a $1.27 of net income, on average, for a bank to add $1 to retained earnings.

For credit unions, every $1 of net income adds in full to reserves.  The same $1 in bank net income will, on average, convert to .78 cents of additional equity.

Banks have multiple sources of capital options.  Of the second quarter’s $55.3 billion increase in bank capital, 40% came from additional stock and 60% from retained earnings.

But simple share capital comes with a price and longer term expectation.   The price is whatever the dividend paying practice is for the bank. That is, the bank pays rent to use their owner’s capital.

At June 30, banks paid 51.9% of their earnings in dividends.  Credit unions have no such “dividend” requirement, so it is “free” or no cost, in this second meaning as well.

Moreover, bank owners expect to see the value of their shares appreciate over time, a factor easily monitored by the daily stock price.  Or through comparisons with multiple bank stock indices.

If a bank’s stock price falls below these industry indicators over time, investors can sell, sometimes to owners who will seek better returns or new management.

False Comparisons

So when anyone starts to equate credit union reserve levels with bank capital ratios as an industry standard applicable to all, it is a false comparison.

The purpose of cooperative design is to provide financial services in the member’s best interest.   One of the advantages credit unions have meeting this goal is that there is no conflict between the returns to owners and the benefits offered consumers.  They are one and the same.   In banking this tradeoff occurs continuously.

Credit union’s capital advantages versus banks are real and measurable.  False comparisons not only mislead credit unions and the public; but it has the paradoxical consequence of causing some to lament the absence of capital options used by banks.

What these advocates miss is the costs of these alternatives and the tensions in allocating income between the returns required by capital providers and consumer benefit.

The Ultimate Advantage

Credit union’s simple leverage ratio has worked as an all-sufficient measure of capital adequacy for over 110 years.  But its most conclusive advantage noted by one observer is something more: “It’s the genius of simplicity. Any fool can get complicated.”

 

Posted on

Two CEO’s Experiences with  NCUA

From a retired 30-year CEO commenting on NCUA’s oversight of loans to credit union executives and directors- (2021).

“I hope NCUA has improved their guidance for loans to Management and the Board of Directors.  We merged with a credit union that had a policy that Board members, management and their families could borrow $100,000 each unsecured.  When we merged with them we found the Manager, his wife and two sons each borrowed $100,000 as well as the Asst Manager and two directors.

Each went bankrupt and the loans were never paid. When I challenged NCUA, CUMIS and our lawyers, they all said since they went bankrupt, we could not collect from them as long as the Board approved the policy allowing them to borrow up to $100,000 each unsecured.  NCUA should have a policy that officials cannot have special terms that the members do not have. “

Changing Role of the Regulator: A  Relationship That Should Be Based on Mutual Respect (1984)

“. . . it seemed as though we would never escape the attitude that the regulator knows best. . . A dramatic change has taken place in the last few years.  We now have a federal regulatory agency which openly concedes that credit union people know more about running credit unions than the agency does. . .

The relationship between credit unions and the regulatory agency is one founded on mutual self-respect, and on the realization that both sides share equally in the responsibility for the survival and future development of credit unions. . .

The nature of the federal bureaucracy being what it is. . .there will be a great amount of inertia to cause it to revert a less creative and less cooperative approach to regulating credit unions. 

I would not like to see that happen.”

Frank Wielga, CEO Pennsylvania State Employees credit Union. Source: NCUA 1984 Annual Report

 

Posted on

Missing Voices

 

          NCUA’s New Logo

“I wish I had kept the phone numbers and emails of CEOs that are now gone from view.  Ex-CEOs that could tell me what they had wished they had done when they faced downward curves on the way to the end.

I worry that lessons lost and archived outside our industry are what is needed now.

What did we miss when we justified the NCUA or regulators’ actions to end an organization?  What did we miss when no owners really dug into a vote to end a charter?  What did we miss when the life-cycles of leaders and volunteers were more important than CUs needing young blood?

What did we miss when we followed models based on scale that left local communities and individuals on the sidelines?  What did we miss that are the keys to turning a losing streak back towards winning?

Some might say we missed nothing, we witnessed progress and the natural march towards an industry’s maturation.  But that sounds to me like short term winners talking.” (Randy Karnes, 2018)

Tens of Thousands  Fewer Voices

NCUA was converted to an independent agency with a three-person board in 1977.

The results include 12,000 fewer charters and the elimination of  12,000 CEO’s and volunteer board’s leadership platforms.   Their employees  lost independent career opportunities as these organizations were shuttered. 

The movement’s human capital–enthusiasm, insights and entrepreneurial spirit–has been lessened.   

Communities have fewer options.  As charters are pulled up by their roots, the movement becomes less diverse, less democratic, more concentrated and remote.

Credit unions are being depleted.   No movement can sustain itself built on subtraction rather than addition and multiplication.

In the end there will be no need for an NCUA or logo.

 

Posted on

NCUA’s Is Falling Down on its #1 Actvity

In Illinois, the initial state credit union act prohibited officers and directors from borrowing from their own credit union.   The act authorized chapter credit unions  to meet those official’s needs as well as serve members of any groups too small to form their own credit union.

When I became Illinois credit union supervisor in 1977, this restriction had been removed.  However the concept that persons managing money should be subject to special scrutiny remained.   As one colleague noted, one aspect of our job was to keep honest people honest.

Examiner Norman Glazer

Illinois conducted an annual exam of its 1,000 plus charters.   An important part of the onsite visit was reviewing all official family loans, their relatives and the travel and other expenses they charged the credit union.

Examiner Normal Glazer looked like a bookkeeper.  He wore wire rimmed glasses, was slight of stature, talked in subdued tones and was a long-time state employee.   He was  a very thorough examiner, who knew accounting and more importantly, the many ways that humans might conceal wrongdoing.

I asked him how he reviewed the loan and savings verifications looking for fictitious accounts.  It was simple-he selected a sample of each, and then looked up the names in the phone book.  If there was no name, he dug further.

Among Norman’s discoveries was a $1.0 million embezzlement from the Scott Foresman Credit Union where the manager kept a double set of books and accounting ledger cards.  When Norman’s tape of the individual ledger cards did not match the GL total, he sensed something was wrong. He refused to accept the “missing cards” explanation and found a completely separate set of ledgers with which he documented the full amount of the loss.  CUMIS paid the claim he substantiated.

Human Nature Has Not Changed

I cite this Illinois examination practice in support of Board member McWatters and others who have publicly observed that fraud is the most common cause of NCUSIF’s losses.

The historical concern about senior managers and directors engaging in self-dealing has a 5300 call report “echo.”   Account codes 995 and 996 show the number of loans and total dollar amount to this leadership group.   The table below lists the top 20 credit unions by highest average loan balance with total loan numbers and balances as one way of reviewing the data.

This table shows wide variations in this activity even among these 20.  The list by itself might prompt some obvious questions; however, the point is NCUA still believes this is an activity for ongoing monitoring—or is it?

Job # 1

NCUA’s largest budgeted amounts and the majority of its workforce are dedicated to  on-site exams. One assumes all loans, family related transactions and the expenditures charged by senior staff and directors to the credit union would be reviewed as normal exam protocol.

Reporter Peter Strozniak of the Credit Union Times regularly follows NCUA’s legal filings and court documents. From these records he describes the details of these internal thefts and other employee/director wrongdoing, unfortunately years after the credit unions’ failure.  These detailed accounts show that examiners have overlooked extended periods of self-dealing.

A recent example is from the Time’s report of NCUA’s suing CUMIS for recoveries from Melrose Credit Union’s CEO.  His October 15, 2021 story described one NCUA claim:

Prior to his 1998 retirement, Herb Kaufman, Kaufman’s father, was Melrose CEO and served as the board’s treasurer. In May of that year, Herb Kaufman became an independent consultant to Melrose under the terms of what the NCUA described as an unusual three-page agreement, which was signed by only one member of the board who turned out to be a life-long and close friend of Herb Kaufman.

The agreement contained a one-year renewable term that paid Herb Kaufman $5,600 a month for his services.

“Despite his obvious conflict of interest, Kaufman aggregated solely to himself the over site within the Melrose Consulting Agreement with his father,” the NCUA lawsuit reads. “Thereafter for more than 18 years, Kaufman covertly caused the renewal of his father’s Consulting Agreement without ever informing the Melrose board or otherwise bringing its continued existence to the attention of the Board.”

According to the NCUA, Herb Kaufman was paid $1,239,795 over 18 years and failed to generate any business for Melrose or provide any meaningful consulting services to the credit union. What’s more, Melrose also paid Herb Kaufman’s travel expenses of more than $26,000 even though his consulting agreement stipulated the travel expenses were to be paid by Herb Kaufman.

The facts offered by NCUA say the Melrose President paid his father (the retired CEO) for 18 years without a fully approved contract.

Assuming an annual NCUA and state exam, this arrangement went un-noted for almost two decades.  How could this be?  Same last name, monthly checks, a written agreement-it raises the question of what do examiners look at?   And NCUA is asking CUMIS to pay up because the bond company should have detected this?

This is not the first time NCUA has sued CUMIS for credit union failures.

On April 23, 2010 NCUA placed the East Lake, Ohio-based St. Paul Croatian FCU in conservatorship  with an estimated loss of $170 million, or almost the entire amount of insured shares balance. Loan fraud was among the primary reason for the CU’s collapse.

The IG significant loss report stated:

At St. Paul Croatian FCU, examiners didn’t assess the weakness of the credit union’s internal controls and failed to ensure that the credit union took corrective action on document of resolution issues.

How does NCUA atone for its exam failures?  The CU Times report:  The NCUA filed a proof of loss claim with CUMIS for nearly $72.5 million (St Paul Croatian FCU). However, because CUMIS’ fidelity bond has a $5 million coverage limit, the amount of money in dispute would be less than 7% of that figure, said Phil Tschudy, a CUNA Mutual Group spokesman.

Between this 2010 St. Paul failure and the October 2021 CUMIS suit for Melrose recovery, there have been repeated cases of significant examination failures over multiple exam cycles.   Three of these are described in this post.    The information, all from court proceedings, documents CEO embezzlements lasting years.  In the CBS Employees FCU case, the CEO fraud extended for two decades resulting in an estimated $40 million loss to the members.

NCUA’s Two-foldProblem

These recurring, costly examples, suggest that NCUA is not doing well its number one job of examination.  Examiners should be given a whole new process  and trained on reviewing self-dealing activity.

But it is hard for NCUA to fix a problem that is hidden from public scrutiny until years after the fact.

A second challenge is NCUA’s lack of transparency.  It provides no information on its supervisory actions.  The agency has said nothing about its current conservatorships, one of which is over $4billion in assets. But then years later court proceedings show how extensive and elongated the pattern of misconduct and coincident examination shortcomings were.

Generalized IG critiques of exam failures provide no details of the examiner oversights or  any mention of accountability.   The response to IG findings is by the same people responsible for the entire process in the first place.

Accomplishing Job # 1

With all the recent public remarks by NCUA leadership about cyber ransomware, cryptocurrency, DEI, climate change and other current “risk” topics, the agency seems unable to perform its most important, historically necessary, oversight function effectively.

Examinations produce pages of financial statements, ratios and trends, and checked boxes for policy adequacy.  Almost 97% of credit union assets are held by Code 1 and 2 rated credit unions.  The biggest risks are internal, not on the balance sheet.

Examiners should be training for conversations about all forms of self-dealing to see who approved what, when and why.  These discussions should be part of the exam record.  The topics should be raised and documented in the board exit conference.  Without putting these activities in the light of day during exams, everyone presumes it’s OK to keep questionable activities in the dark, and out of the record.

Where is Norman Glazer when credit unions need his sixth sense, or rather common sense?  For example he might look at the table above and ponder why are real estate loans to senior credit union personnel so much larger in the lower priced Midwestern states than in any of the more expensive big city coastal markets?

I know he would have challenged a $35 million dollar sinecure committed to a newly organized non-profit by two merging credit unions to support the “advocacy” activities of the CEO who arranged the merger.

The fiduciary concepts of care and loyalty would appear to have been erased from NCUA’s examination and supervision process a long time ago.

Credit union members pay the costs of these failures. However in the long run its is the public reputation of NCUA and the system that is at risk when examinations miss the obvious.