The Cost of Not Learning from Our Brethren’s Mistakes

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

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

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


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

No Return for Casting Judgment

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

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

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

Discernment: A Powerful Form of Judgment

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

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

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

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

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

A Responsibility to and for the Community

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

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

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

New Credit Union Charter Germinates After Eight Years

From the new credit union’s announcement:

On Wednesday, August 14, the National Credit Union Administration (NCUA) approved charter number 24915 for Maine Harvest Federal Credit Union. This approval was announced publicly in an NCUA press release:

Maine Harvest FCU become the first regulated, deposit-taking financial institution with a mission to promote a local food system by lending to small farms and food producers. At Maine Harvest FCU, we hope to see the impact of our mission in stronger rural economy, a cleaner environment, increased soil fertility and improved public health.

Maine Harvest FCU becomes the first new credit union in Maine in 30 years and only the second credit union chartered nationally in 2019.

The process took eight years and required $2.5 million in donated, startup capital.

Since starting  the chartering process with NCUA’s required survey (seen below), there have been eight crop harvests. How many small farms and start up efforts were frustrated in the interim?

Which is harder: being a small farmer or a credit union organizer?

Potential Member Survey (2012)

The potential member survey was fielded at MOFGA’s Common Ground Fair in 2012. This two-page survey was based on a template from the National Credit Union Administration and is an important part of the credit union chartering process. The goal of the survey was to gauge the level of interest in the proposed credit union and to get an idea of potential deposits from prospective members. 258 responses were received and consistently indicated a high level of interest in joining the CU and with substantial potential deposits. (Source Maine Harvest web site)

The Real Capital Powering Credit Unions

In a recent podcast interview by Robert McGarvey, CEO Randy Karnes summarizes CU*Answers’ approach to strategy. On more than a dozen business issues from culture to market analysis, his concise insights are extraordinary.

At a time when supplemental capital for credit unions is a topic of regulatory review and wide industry interest, his comments on the CUSO’s approach to financial soundness, especially capital planning, are especially relevant.

As he explains, for his CUSO patronage by the owners is more valuable than dollars of capital. The reason is that patronage is “belief, persistence and cash flow.” Capital dollars have to be paid back. Patronage sustains and grows.

The Message for Credit Unions

All of the proposed approaches to supplemental capital will need to be paid back. The real “capital” that has been the source for all credit union’s soundness from day one is the member relationship. Member loyalty, use and trust are the patronage that sustains viability even if net worth ratios fall below well-capitalized.

The reason for 208 assistance in the FCU Act is to allow members to “recapitalize” their credit union over time through their patronage. When PCA or other supervisory actions prevent members and management from recovering from setbacks, the fundamental strength of the cooperative model is compromised.

Almost all credit unions active today, were founded without financial capital. Their financial success is created over years or even decades of member participation.

When the success or status of a credit union is measured by only financial yardsticks, sooner or later, that framework will be found wanting. It overlooks the fundamental difference between a member-owner cooperative and a for-profit financial alternative.

The message for credit unions from this CUSO’s 50-year history may be that all financial capital is supplemental. Longevity requires relationships. That is the cooperative difference and unmatchable advantage.

To listen to Randy’s 34 minute interview by Robert McGarvey’s CU 2.0 Podcast , Episode 47, visit:

A. Lincoln on Labor and Capital

A  Labor Day reflection:

In my present position I could scarcely be justified were I to omit raising a warning voice against this approach of returning despotism.

It is not needed nor fitting here that a general argument should be made in favor of popular institutions, but there is one point, with its connections, not so hackneyed as most others, to which I ask a brief attention. It is the effort to place capital on an equal footing with, if not above, labor in the structure of government. It is assumed that labor is available only in connection with capital; that nobody labors unless somebody else, owning capital, somehow by the use of it induces him to labor. This assumed, it is next considered whether it is best that capital shall hire laborers, and thus induce them to work by their own consent, or buy them and drive them to it without their consent. Having proceeded so far, it is naturally concluded that all laborers are either hired laborers or what we call slaves. And further, it is assumed that whoever is once a hired laborer is fixed in that condition for life.

Now there is no such relation between capital and labor as assumed, nor is there any such thing as a free man being fixed for life in the condition of a hired laborer. Both these assumptions are false, and all inferences from them are groundless.

Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. . .

Source:  State of the Union Address: Abraham Lincoln (December 3, 1861)

Strategy: How Important is Scale?

A common assumption by many working in credit unions is that scale, that is increasing a credit union’s balance sheet size, is critical to competitiveness, and therefore survival. As one CEO wrote:  “Given our market and community field of membership, we believe scale is more important than ever.”

Facts versus Truth

This belief in “scale economies” is often supported by citing average financial performance by peer group size.   These averages do show that larger credit unions tend to grow both members and assets faster than smaller ones.   Also, they generally operate with lower expense ratios, larger dividend payouts, and generally higher ROA’s and loan to share ratios.

However even within the same peer group (over $1 billion in assets) there is a wide variation in these ratios.  Becoming larger does not automatically create these outcomes.

The logic that data confirms the necessity for scale, does not hold true across all situations.  Facts alone may not reveal underlying truths about successful cooperative performance.

Moreover, the facts used may rely on an assumption or mindset, that itself is debatable.

The Scarcity Mindset

Scale matters in a competitive market, some argue, because it can lead to larger market share and therefore greater economic power.

Scale is achieved by growth, that often means out running competitors.  This can be done organically or more recently, by some credit unions soliciting mergers or buying out bank competitors.

Growth thus becomes the primary objective, if not the mission of the credit union.  It is driven by an assumption of limited resources (or members) and that an institution must get their “share” before someone else takes it away.

I call this the “scarcity mindset” myth.   Credit unions think of strategy as a struggle to get more and more, and can never slow down, because ultimate scale is always unreachable.  The end point keeps growing from $100 million, to $1 billion to $10 billion in assets.  No asset size is ever enough.

The Cooperative Abundance Assumption

Credit union were founded on belief in the power and resources of community.  That by working together we can mobilize savers (those with more) to help borrowers (those with less).

By institutionalizing this process, members become empowered and the well-being of all is improved.  It is not the amount of resources that matter, but rather how they are managed for the common welfare.

This approach created by self-help and collaboration rests on the assumption of abundance. Credit unions are motivated by relationships and mission.  This focus creates trust that underwrites the inevitable cycles of economic fortune that will occur either individually or organizationally.

Instead of a scarcity mindset that focuses on getting whatever one can to grow an institution, credit union design rests on a belief in commerce organized around neighborliness and community.  In my individual capacity, I may not have what I need; but in my collective contributions, there is enough for all.

A Fork in the Strategic Road

The vast majority of credit unions have never had a major merger.  Most credit unions do not seek to buy out their financial competitors.

However, there is a commercial motivation promulgated by self-interested brokers, consultants and growth-oriented CEO’s and boards that assert survival depends on outmaneuvering the competition through size.  This market driven ideology of institutional success subverts the cooperative focus on purpose.

The cooperative model was created to give member-owners the opportunity to create and manage their own financial options in a market dominated by firms that make a profit from relationships.

The cooperative goal is to transform individual options and bring the resources of like-minded persons to build an institution using the resources available, that is a belief in an “economy of abundance.”

The credit union approach is sustained by a community of shared values, not just more plentiful resources.

Questions to Consider

As boards consider strategy, it may be helpful to ask the following:

  • How do we measure our scale, if that is an objective: institutional outcomes or member relationships?
  • Is our motivation for growth from fear or confidence? If it is fear from uncertainty, will we survive by doubling down on the familiar?
  • If scale is critical, what is the plateau we are aiming for? How is it determined?

As I look across the multiple examples of success among all credit union asset groups, I note that those who possess less are less possessed by motives for scale.   And instead of intending to be sustained by their savings from scale, they rely instead on the member’s trust and loyalty.

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

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

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

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

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


When Credit Unions Aligned with Communities of Faith for Social Progress

Catholic Energies is a non-profit, five-person organization that helps churches and schools convert to solar energy. Based in the District, the key capability they offer is collaboration with church owned properties, solar companies and investors seeking solar tax credits

In D.C. the group worked with the Catholic Charities of the Archdiocese of Washington to build a solar array on a church owned field that will light 260 homes by feeding into the local power grid. The energy credits will offset the costs of electricity across twelve of the charities’ properties in the district.

Catholic Energies is a subgroup of the non-profit Catholic Climate Covenant. This national initiative was launched to educate and engage US Catholics in caring for the environment. The sub group, Catholic Energies, was also responding to Pope Francis’ release in 2015 of Laudate Si, which argued for partnerships between religion and science to respond to climate change.

A Credit Union Social Action Precedent

The Catholic church’s involvement in issues of social progress embraced the credit union movement in the past. According to an article in the Grand Rapids Press from December 20, 1926, the National Catholic Welfare Conference intends to establish “a nationwide system of credit unions to lend money to wage earners. These short term loans will be extended to the 36 states with credit union laws.”

The article described the “parish credit union as a cooperative savings and loan society. Depositors buy shares at the par value, usually $5, and get a 6% a year interest. The capital thus obtained is loaned out at 8%.”

To understand the importance of this organizational effort, one need scan an alphabetical listing in any state in the following 50 years to see all the credit unions starting with “St.” followed by the parish name. In Massachusetts today there are still nine credit unions listed by parish names.

And like solar energy today, this effort had formal church support. Fr. Otto Thiel wrote an article in the December 1941 issue of Franciscan Studies explaining the church’s involvement.

It begins: “The religious and economic are the two predominant influences which have moulded man’s character and the world’s history. Religious motives are more intense than economic, but their direct actions seldom extends over so large a part of life (as do the economic ones).” After surveying the history of pawnbrokers or usurers to meet the economic needs of people of small means, he continues, “a way was discovered by which honest and responsible working people could supply themselves credit from within their own ranks. That discovery properly marked the origins of the movement which has produced the credit union of our day. . . It is neither a purely charitable nor a mere business organization, but one of self-help or co-operation. Its origins might be traced back to the Mons Pietatis of the later Middle ages, an organization to provide credit facilities for poor borrowers.”

More Than Catholics

Even prior to this national effort, other faiths promoted the credit union solution. In the January 1920 Annals of the American Academy of Political and Social Science, an article described multiple efforts to create new thrift organizations to serve the needs of both rural and urban borrowers.

As reported in the article The New American Thrift Loan: “According to the latest report of the Jewish Agricultural and Industrial Aid Society, several of the rural credit unions in New York have been obliged to wind up their affairs. In place of the eight credit unions among farmers reported in 1916, only three now exist. . . and no mention is made regarding the present status of credit unions among Jewish farmers in the states of Connecticut and Massachusetts. “

A Current Day Example

In June I met Greg Truex, the manager of the two year old, $16 million ELCA FCU. It is remarkably successful as a new startup relying on a largely virtual operating model. The credit union is sponsored by Evangelical Lutheran Church in America. The mission statement : God’s Work. Our Hands.

To succeed credit unions need more than capital. The hundreds if not thousands of credit unions sponsored by religious organizations, show the importance of both purpose and collaboration. And that heritage is still an invaluable coop advantage in today’s ever more crowded financial arena.

What is IBM Doing to Stay Relevant?

In an era when the longevity of an S&P 500 company is about two decades, the fact that IBM is still around from its 1911 initial combination of three businesses, raises the question of how it has survived. This is an especially challenging issue in an era of unending technology change in which the Internet has replaced the in-house main frame as the core of back office processing.

IBM began as the Computing, Tabulating & Recording Company (C-T-R). Their first large contract was to provide tabulating equipment for the tabulation and analysis of the 1890 US census.

Thomas Watson Sr. became CEO in 1914 and in the early 1920s the name was changed to International Business Machines (IBM). When he renamed the company, he put a plaque on his New York head office building in the 1930s reading, World Peace through World Trade.

From Machines to Intangibles

Following WWII, IBM became the world leader in providing computer systems for both business and scientific applications. The company continued to excel at inventing and making things (machines). In 1964, IBM revolutionized the industry by bringing out the first comprehensive family of computers (the System/360). This caused many of their competitors to either merge or go bankrupt, leaving IBM in an even more dominant position.

IBM’s historical role as a manufacturer of computer mainframes now makes up only 10% of the company’s revenue, even after 55 years of market dominance. 85% of the company’s revenue is from software and information management.

Its primary service is helping companies manage and transfer data. It is placing itself at the center of the “data economy” an intangible (compared with manufactured goods) network of information and transaction processing vital to every business. Its software and managed services are involved in 87% of the world’s credit card processing and service 90% of top 10 retail firms.

An Exploding Market

Today over 70% of the firm’s revenue is from outside the US. While global trade in goods and services is declining, the “trade” in data transmission and digital information is exploding.

The digital economy is a world economy, not limited by traditional physical boundaries and barriers. One estimate is that over 80 terabytes of information flow into and out of the US every minute of every day, a volume of information equal to eight Libraries of Congress.

The digital revolution is part of the service economy that today dwarfs the manufacturing sector in the US. Operating the “back office” of this growing information and processing activity is how IBM intends to build ongoing success.

The company, over 100 yeas old, was formed at the same the time as the first credit unions were chartered. Are there parallels in IBM’s evolution serving businesses, for what credit unions do for members? What might be vital information management needs in the digital economy that credit unions can provide members? Answering that question and designing services providing relevant data could be the key to the next 100 years of cooperative success with members.