Posts

Posted on

What Bubble?

Much professional and political debate is occurring as to whether the real economy’s outlook, measured by GDP, and stock market values are aligned.

One source of uncertainty is whether the increase of fiscal spending will lead to greater inflation (more money chasing fewer goods) or just a temporary adjustment before returning to some steady equilibrium.  That is, a “normal” of both GDP growth (3%) and of inflation, around 2-3%.

Some facts to throw into the confusion.

The current price earnings ratio of the S&P 500 index stands at 40 times or so.  This is up from a same index’s P/E ratio of 23X one year ago.  Historically the ratio hovers in the mid to high teens over an extended economic cycle.

Tesla is priced today at a P/E ratio of 204 times.   Over the past twelve months of trailing earnings, its P/E of 128X is eight times the domestic auto industry’s similar trailing P/E of 16.5X.

The business pages are full of daily stories of meme stocks such as AMC or GME where pricing bears no relationship to actual performance.  Irrational exuberance?  Retail investors with too much time and surplus cash on hand? Historically low interest rates pushing up the value of assets such as homes and used cars? Bit coin and other cyber currencies–the wave of the future for protecting wealth or just a giant Ponzi scheme where another buyer proves the greater fool theory of investing?  Until there are no fools left!

How Should Credit Unions Respond?

Some members, those with retirement, savings or other assets in stocks and real estate are probably feeling confident about their financial situation. Especially if they just refinanced at lower rates.

Those without these assets, or just holding savings accounts earning .10-.50 basis points are undoubtedly less sanguine about their situation.  Living on fixed incomes with prices rising on everything can raise anxiety about being left behind.

No one knows the future.  Most forecasts are based on past data and current assumptions about the environment.  But learning from these past forecasts might just help us navigate current uncertainties.

The 1978-1979 Inflation Takes Off

In 1978 the economy was experiencing dramatic rises in short term rates and inflation was a constant source of governmental attention.   In that year the money market mutual funds began to attract consumer deposits from all financial intermediaries whose rates were fixed by government regulation: generally 5% for banks and 51/4% for S&L’s on passbook accounts.  No interest was paid on checking–prohibited by regulation.   No depository money market accounts permitted. All CD rates and terms were similarly government controlled. Federal credit union rates were capped at 7%.  Share drafts were us just barely introduced although all Rhode Island state charters offered NOW accounts and paid interest on them.

Illinois chartered credit unions operated with a 12% loan usury ceiling in place since first the first act was passed in the 1920’s.   The Department issued updated guidelines for certificate accounts trying to help credit unions remain competitive if they had sufficient earnings.   I can remember, as Credit Union Supervisor, offering Ed Callahan, the Director of DFI, my considered opinion that rates would never rise about 12%.  They had never done so in the past. That loan ceiling reflected the collective judgments of generations of lawmakers and policy analysts that gave the number an aura of human observational certainty like the law of gravity.  What could be closer to a natural law than paying simple interest on loans at 1% per month?

Ed didn’t argue with my facts or logic.  He only replied: “Don’t ever say never.”  Meaning that when someone asserts something cannot change, be careful.  One year later his comment was proven true, and the economy and all financial institutions started responding to Treasury yields that would eventually soar to the mid-teens and 30-year mortgages became unavailable at any rate.

Consumers transferred billions from deposits to money market mutual funds which could pay these higher rates.  This disintermediation was the ultimate straw triggering complete deregulation of the depository institution industry.

Credit unions transitioned this financial earthquake by continuing one critical strategy-serve the member well and good results will follow.  A credit union advantage is being partially shielded from the everyday pressures of the market and the power of stock price on performance and management behavior.

Some data today suggests that certain parts of the economy are overpriced.  Others believe there are still bargains to be had and don’t want to miss out on the action.  It can be an entertaining game to watch, but not one credit unions are supposed to play.  Fortune tellers can only make a living if someone believes in their crystal ball.

Resist  the allure of future predictions and focus on getting ever better for members in the present.

 

 

 

Posted on

Gratitude

One of the most positive expressions of human interaction is gratitude.

G.K. Chesterson wrote, “gratitude is happiness doubled by wonder.”

The word came to mind as I read the opening of one writer’s reflections on her experiences working with credit unions. Living gracefully and sharing are some of the benefits she highlights:

Coming up on my fifteenth year working for a cooperative CUSO, it seems right for me to reflect on my experience in the credit union industry. During my lengthy time here, I have found not only a home, but a lot to say about the things the credit union community does right.

Unlike other places I have worked, I’ve noticed the credit union industry has some unique attributes, many of which are the reason I’ve stayed for fifteen years. First and foremost, there is a genuine care about the consumer in our industry, where being a member still means something in today’s competitive world. Furthermore, credit union employees like to learn from each other and this knowledge is then freely shared with other people. There is also a fellowship among people in the credit union industry that I have not seen in other places I have worked. And finally, what is most impactful is that this care extends to an interest in all credit unions being successful.

Thank you Alycia for helping all of us be more aware of how special our credit union experiences can be.

Source: CUSO Magazine, What Makes Our Industry Unique, by Alycia Meyers

Posted on

A Member and a CEO React to Merger Events

A member of Xceed found my post from 2020 on that credit union’s merger with Kinecta.

Reading the analysis from Should a CEO’s Last Act Be Merger, he posted a comment:

Thank you for your article.  It is right on point.  As a member of XFCU since 1982, I have seen this organization decline at an alarming rate.  Now that that the merger has taken place, I am still waiting to see the additional value I am to receive from this merger.  XFCU began its fall when it closed the Texas operations.  Today, we have no personal service, personal bankers, investment opportunity, or competitive products.  Teresa Freeborn has been the only person who benefited from the merger.  I voted against the merger since I believe she participated in the merger with a conflict of interest.  

I submitted questions to her on service to members not on the East or West Coast.  This merger has so far shown me no benefit.  I moved my business account to BOA.  As other investments matured, I moved them to Fidelity and Merrill Edge.   As a 40-year customer, I expect to move all accounts by the end of the year to BOA.  Communication is terrible.  The XFCU Officers and Board have failed all members of this organization.

In October, prior to the merger vote, he sent Xceed an email asking for more information:

Subject: XFCU / Service to Members outside of California and New York

Good Morning:

Member since 1981.  Since closing the Texas Branch, service and communication has gone down to a level that I now question whether XFCU remains an option for me.  What services will be available to me in Texas through any CU affiliations that allows me to make deposits, withdrawals locally if needed. 

I was never advised of this merger and am a very disappointed longtime customer.

Thank you,

He told me: “I never got a response.”

When I asked what his credit union experience had been he wrote:

I am a retired Insurance Executive who worked for Crum & Forster Insurance acquired by Xerox in 1980’s.  I was recently a Senior Vice President at McGriff, a BB&T Company, now Truist.   

During my working career, XFCU was an important part of my personal financial success.  I bought several homes and cars.  Today, if I needed financial help, I wouldn’t know where to start at XFCU.  I don’t recommend CU to my kids any longer as I question their viability in today’s economic challenges.

Xceed’s First Quarter Financial Results

The combination with Kinecta had not been completed as of the March 31, 2021 call report.

In the first three months Xceed reported the following:  a loss of $2.1 million (ROA of  -.87), a 22% drop in loans ($146 million), 11% share growth, 112% operating expense/total income ratio, net worth of 11%, a 9.2% decline in members and 19% fewer employees (35 out of 185 have left) both compared with one year earlier. The writer is not alone in seeing difficulty.

Kinecta reports positive ROA of .70% and a net worth of 7.8% in the same first quarter.

One observer commented on the two credit union’s longer term track records: “it looks like two rocks  being tied together and tossed into a lake to see if they can float.”

But the members are already bailing out.   Unfortunately, it is they who will suffer the loss of value as the writer detailed in his experience above.

A Different Decision: A CEO Closes a Merger Conversation

In talking with a CEO of a $2.0 billion credit union, I asked if he had ever discussed a merger, especially with a much larger firm in his market area.  The two were intertwined and competed directly.

He said yes, the topic had come up.  Both had grown at the same rate, both had sound performance.   But he didn’t pursue the option.

This non-merger had produced a very beneficial result.  In his assessment: “Our competition keeps the entire market for consumers honest because we price against each other.”

In this case two separate, strong, competing credit unions are helping all consumers “stay afloat.”

Posted on

Intergenerational Thinking and Co-op Design

The concept of paying forward is inherent in the credit union model.  Current leadership begins with a legacy of common wealth inherited from previous efforts.  The assumption is that the current generation will in turn pass an even greater legacy to their children’s children.

This is not the performance standard dictated for profit making firms in a market economy.   Rather the inexorable force of the invisible hand drives a firm’s stock price.   Success or shortfalls, are measured quarterly against explicit annual performance expectations.

What Will our Descendants Thank Us For?

Credit unions were founded with a different ethic of success.  The member ownership allows co-ops to play “the long game.” Performance encompasses obligations for the common good of members and their communities.

John Ruskin (1819-1900) was a leading English art critic of the Victorian era.  He was an art patron, draughtsman, watercolorist, philosopher, social thinker and philanthropist. He wrote on subjects as varied as architecture, myth, literature, education, botany and political economy.

His vision for human enterprise uses an architectural metaphor which I believe embraces this unique, intergenerational scope of cooperative design:

“When we build, let us think that we build forever. Let it not be for present delight nor for present use alone. Let it be such work as our descendants will thank us for; and let us think, as we lay stone on stone, that a time is to come when those stones will be held sacred because our hands have touched them, and that men will say, as they look upon the labor and wrought substance of them, ‘See! This our fathers did for us.”

 

Posted on

Do Small Credit Unions Matter?  Should They?  Will They?

In March 2014 before Jim Blaine laid down his sword, err pen, he wrote about the demise of small credit unions.  In the blog Clubbing Baby Seals, he used numbers to describe this decline concluding: “We’re in the midst of a “CU ecological” meltdown.” And the cooperative climate has only gotten hotter since.

The Less than $10 Million Segment Trends

The starting point in Jim’s analysis was ten years earlier in 2004 when there were 4,255 credit unions under $10 million.  At his writing, the total had fallen by half.  I updated his numbers for the most recent decade, 2010 through 2020, which show a continuing decline of the under $10 million segment from 2,908 (41% of cu’s) to 1,179 (23% of cu’s)—a 60% drop.

Many would react to these trends with a shrug: “They are what they are. This is just the marketplace at work.  These credit unions often underperform industry averages, do not provide a wide range of services, and members can find better deals elsewhere.  Besides larger credit unions continue to add members and grow. These organizations are not significant to carrying out the cooperative mission.”

Why Credit Unions Should Be Concerned With this Trend

This trend matters because of its impact on the system’s future  in two respects.

  1. All credit unions start small. Every credit union operating today was organized with assets in the hundreds or thousands of dollars.  From these small seeds large oaks can grow.  While all credit unions under $100 million show declines in charter numbers, segments above this amount have added 351 to their number in the same decade.  All emerged from the smaller asset segments. For the largest category, greater than $1 billion in assets, the count has gone from 167 in 2010, to more than 375 today.  Without seeds, the system will eventually run out of crops to harvest.
  2. The traditional interpretation of the decline is incomplete. Credit unions from the very beginning have started and then faltered.  Most that do not sustain operations are small.  Since FOM changes in the 1980’s, the vast majority of closed charters merge with other credit unions.

In 1978 when NCUA published the ratio for the FCU survival rate–number of active charters divided by number of charters issued–the percentage was 55%.   That was after 44 years of operations.

Today that ratio is 13%. (3,185 active/24,925 FCU’s chartered).  However, the reason for this dramatic decline in sustainability is not that small credit unions cannot survive.

The Federal Regulator’s About Face

In every year beginning in 1934 (except three war years) until 1971, the number of new FCU charters granted always exceeded the number cancelled.  In that year, FCU’s were required to qualify for NCUSIF insurance.  In 1978 NCUA became an independent agency.

In the same length of 44 years of NCUA’s oversight, the number of cancelled charters has exceeded new startups every year.  The loss of just federal charters during NCUA’s  tenure as an independent agency totals 9,865—from 13,050 (in 1978) to 3,185 (2020).

The primary reason for the decline of almost 10,000 active federal credit unions is that new charters have become virtually impossible to attain. They have averaged fewer than 10 per year in this century, and only 2.5 in the last decade.

The possibility for groups of citizens to form and control their own democratically governed financial entity has been effectively extinguished by the very organization charged with overseeing the cooperative system’s safety and soundness.

So What?

With new entrants effectively turned away, the industry’s structure will inevitably become more  consolidated in much larger credit unions. The diversity in credit union charter size is being eliminated.

Some would opine, “so what?”   Members continue to join, and the industry is financially strong and independent of sponsors. This is the natural outcome of any business in a competitive market economy.

Punching Above Their Weight

Blaine’s concern about the demise of smaller credit unions was summarized as:  Small credit unions “punch well above their weight” in terms of member impact and community importance.  Every credit union was created for a purpose, rarely did that original purpose have anything to do with ‘growth’”. 

He calls out the organizing motivations for a cooperative charter: persons with a common interest getting together to improve their local circumstances and opportunity.  Members then and today care most about the service they receive.

A credit union’s asset ranking, number of branches, surcharge free ATM’s or even its multiple channels do not create loyalty if an institution cannot respond to individual and local circumstances. That is the key factor in small credit union success.

The Democratization of Financial Opportunity

Credit unions’ democratic character was created from a fabric of relationships and community support.  These local origins were their source of political support.  Even though banks have opposed credit unions from the beginning, they have been unable to block their efforts to expand member services.

“Punching above their weight” is illustrated most recently by the quickness of Congress to overturn the Supreme Court’s interpretation of the Federal Credit Union act in 1998 limiting common bond to a single group.  In just months, the Credit Union Membership Access Act was passed approving the  field of membership interpretation NCUA authored in 1983.

But that success was over two decades ago.  Do credit unions conceived  in earlier eras still have the same political weight today?  Have the growth ambitions of some  via “voluntary” mergers and bank purchases raised issues of both member and public support for a less distinctive cooperative charter?

Can Small be Big Again?

I do not know what the future will bring.   Will ever-larger credit unions be increasingly viewed as just another impersonal financial option, like a bank?  Will the tax exemption survive the expansions of markets and scattering of local attention and knowledge?

Will the goodwill so critical in any industry’s ongoing success wither away as the seed corn for its future is no longer replenished? Or will credit union leaders see this declining trend as a priority and provide support comparable to the $100 million goal of CUNA’s Open Your Eyes marketing campaign?

Renewal efforts are underway. Can the initiatives to repurpose charters with new human capital be proven out?  Will the efforts to create more service center options via CUSO’s succeed?  Can the charter process be assigned to the regions so applicants are supported positively and quickly?

Two factors suggest this trend can be addressed.  The places of economic disparities and need are as numerous now as any time in our history.  The human spirit of solving problems and the values of cooperatives align with many seeking to bring change for a more equitable America.

 

 

 

Posted on

Two Reflections from Memorial Day

Opposition to the Vietnam war on many college campuses led to the cancellation of ROTC programs.  Subsequently the draft was ended with all branches of the military now relying on volunteers to fill their ranks.

One observer commented on the fewer ROTC programs and the elimination of the draft as incentives for college graduates to serve in an all-volunteer military.  He foresaw a possible outcome as follows:  Societies fall to folly when they draw distinct lines between their warriors and scholars. What this ultimately leads to is society’s thinking done by cowards and its fighting done by fools. 

What if we are called to serve and fail to answer?

The heydays of credit union charters began in the Great Depression with passage of the Federal Credit Union Act in 1934.   Post WWII saw another upsurge in new chartering activity.  From 1949-1970 between 500-700 new FCU charters were issued per year.

By yearend 1978, when NCUA became an independent agency, 23,278 federal charters had been granted of which 12,769 (55%) were still operating.

Many factors affected this chartering explosion.   One was the social ethic of the Greatest Generation.  The cooperative values of self-help, local leadership and community service were closely aligned with the ethos of the generation forged by depression and world war.

Some writers believe this capacity for social responsibility has been superseded in current generations by a more individualistic focus,  personal independence  and financial success.

A guest editorial by Margaret Renkl on this change of values was published Memorial Day, May 31, 2021 in the New York Times.

My question is whether this attitude might contribute to the virtual absence of new charters in this century.   There have been 193 FCU’s in first 20 years of this century, or fewer than 10 per year.  Here are several excerpts of the writer’s thinking:

“Young men of my father’s generation grew up during wartime and generally expected to serve when their turn came. No generation since has felt the same way. There are compelling reasons for that shift — the protracted catastrophe in Vietnam not least — but I’m less interested in why it happened than in what it tells us about our country now. What does it mean to live in a nation with no expectation for national service? With no close-hand experience of national sacrifice? . . .

 The need for some nonmartial way to nurture communitarian qualities is more urgent now than ever. We have lately been reminded of the absolute necessity for Americans to be motivated by warm fellow feeling across divides of region, race, class, politics, religion, age, gender, or ability; to cultivate a sense of common purpose; to make sacrifices for the sake of others. And that reminder came in the form of watching what happens when such qualities are absent, even anathema, in whole regions of the country. . .

If Vietnam exploded the unquestioned commitment to national service, the coronavirus pandemic should have been the very thing to bring it back.

That it did exactly the opposite tells us something about who we are as human beings, and who we are as a nation. There is more to mourn today than I ever understood before.” 

The Question for Credit Unions

To the extent that our society has lost capacity to “nurture its communitarian” responsibilities, how does this affect the cooperative model?  Credit unions rely on volunteers. Their greatest strength is the fabric of relationships they cultivate with members and their communities.   Has the model lost its way as a new generation of leaders takes control without a link or even knowledge of the qualities that created the institutions they inherit?

Have credit unions abandoned their capacity to cultivate a sense of common purpose; to make sacrifices for the sake of others now that they have achieved financial sufficiency and can stand apart from their roots?

Is credit union leadership today susceptible to the social folly described by the first writer?

Posted on

A Memorial Day Question

For two decades as a member of the National Men’s Chorus I participated in the final concert of the season on Memorial Day weekend.

The annual program might be modified to recognize an anniversary such as VE day or a Civil War commemoration.  However, most of the repertoire was arranged from popular melodies from the Revolutionary War era through the Vietnam conflict.

These songs, from Columbia Gem of the Ocean to The Ballad of the Green Berets, inspired and reminded listeners of the precious heritage that military conflicts have gained for all Americans.

This respect is especially evident during The Service Medley, as members of each military branch stand and honored as their song is sung.

One of the most uplifting moments in the program is  The Battle Hymn of the Republic.  Written by Julia Ward Howe in 1861, it is sometimes called America’s second national anthem.

One writer described it as “a warrior’s cry and a call to arms. Its vivid portrait of sacred violence captures how Americans fight wars, from the minié balls of the Civil War to the shock and awe of Iraq.  America’s song of itself-how the country feels about war.”

As a call to duty, it has inspired suffragists and labor organizers, civil rights leaders, and novelists—like John Steinbeck in The Grapes of Wrath.

A  New Meaning with Another Word

Her poem’s first verse certainly evokes the fury and righteousness of war: (original spelling)

Mine eyes have seen the glory of the coming of the Lord
He is trapling out the vintage where the grapes of wrath are stored
He haved loosed the faiteful lightening of his terrible swift sword
His truth is marching on

The final verse call all to sacrifice in this sacred duty:

In the beauty of the lilies Christ was born across the sea
With a glory in his bosom that transfigures you and me
As he died to make men holy let us die to make men free
His truth is marching on

But Is Sacrifice the Intent?

My first wife. Mary Ann, died in 1984.  In a Memorial Day church service earlier that decade, this Hymn was included.  Except the line in the final verse was changed to, As he died to make men holy, let us live to make men free. For her that was the meaning of Memorial Day. We honor those who die by how we serve the living.

 Which word best fits America today?  What is our call to duty?  Are we to remember just the increasingly small percentage of American families that serve and die in the military?  Or might there be a more all-encompassing obligation to “truth marching on?”

A Contemporary Interpretation

After the Civil War, Juliet Ward Howe became active in the women’s suffrage movement. In 1868, she founded the New England Women’s Club and was one of the founders of the New England Women’s Suffrage Association. Her sense of duty was not limited to sacrifices in war.  She was motivated by a broader view of “civic virtue.”

Would she approve replacing the word die with live?   And what would that communicate to today’s listeners and singers?

The Battle Hymn of the Republic reminds us of the sacred (hymn) call (battle) that sustains our country (the republic).   Its spirit, I believe, calls forth the responsibility of every citizen to sustain the country’s evolving experience of freedom, which we call democracy.

Relevance for Credit Unions

But what does this have to do with how we carry out our roles in the credit union system?

The Friday before this Memorial Day weekend I received an email from a colleague which said simply:  “This is wild” and included a link to an article in CUToday:

The story summarized the intent of fifteen credit unions operating for generations to merge.  In some cases, the arrangers of these transactions would receive increased compensation from the event.

What did the sender mean by This is Wild?  While I do not know what the words intended, I suspect they reflect a deep concern with this wholesale abandonment of legacies of efforts and resources created by previous members and their leaders.

Those credit union ancestors paid forward the fruits of their labor so the current generation might prosper and build on their efforts.  Instead, these leaders chose to hand over their members and inheritance to another, unrelated organization.

Howe’s third verse describes judgment:

He has sounded forth the trumpet
That shall never call retreat;
He is sifting out the hearts of men
Before His judgement seat;
Oh, be swift, my soul, to answer Him;
Be jubilant, my feet                                                                 His truth is marching on

I believe the writer’s email reaction is raising this ultimate question of values: Can a democratic credit union financial system survive when leaders so easily lose the will and inspiration to continue?  In the future, will any cooperative “truth be marching on”?

Version 2.0

Here is Mary Ann’s preferred wording of The Battle Hymn of the Republic.

Posted on

Memorial Day Poem

By Jim Blaine

1. “You have the freedom to argue about America…

…because they thought you should. Don’t ever forget that.”

2. “The American Experiment…

…we’re all living on borrowed time.”

3. “Some monuments…

…will always stand the test of time.”

4.”They didn’t think it was perfect either…

…but that wasn’t the point.”

Posted on

Should Credit Unions Buy Banks?

Two major credit union purchase and assumptions of commercial banks have been announced recently.   The $7.5 billion GreenState Credit Union in North Liberty, IA is buying two banks outside Its home state with total assets of $1.1 billion.

In April the $10 billion Vystar Credit Union in Jacksonville, Fla., agreed to buy the $1.5 billion Heritage Southeast Bank of Jonesboro, Ga., for $189 million, becoming the credit union industry’s largest bank acquisition.

Excess Cash on Hand?

With the average annual asset growth over 20% for the largest credit unions, the explanation that buying size to get to the future faster  would seem questionable.  Organic growth has taken off.

Is it possible that all the excess cash on hand is burning holes in credit union pockets?   If that is a factor than it is well to remember the age-old wisdom about money and value: asset values of banks tend to benefit from excess liquidity and suffer from a dearth of it, like most other asset classes.

Three Ways of Approaching the Issue

In upcoming blogs I will look at several examples, some pending and others completed, around three topics.

  1. Is the purchase of whole banks consistent with the public policy role of credit unions, a role that  justifies their exemption from income tax?  In the political arena, local and nationally, do these transactions help or harm credit union’s reputation?
  2. How do purchases benefit existing member owners? Are the disclosures and information credit union CEOs provide about these transactions adequate for existing members whose loyalty created the capacity to do these cash purchases?
  3. Looking at several examples, albeit with incomplete details, do these investments appear to be financially sound, especially in instances where the announced price is substantially above recent market value?

No Easy Answers and No System Dialogue

At each level of analysis there will be differing viewpoints.  NCUA has taken a hands-off approach signaling that these are merely “market-based transactions.”   I believe this is a misuse of the term.  At one point Chairman Harper, as a board member, indicated concern that “former consumers of the acquired banks will not have the same level of consumer financial protection oversight in their new credit union.”

Because an activity is legal does not mean it is wise.  Either as policy or in a specific instance.

Another difficulty is assessing the financial impact of these larger events on the purchasing credit union.  It may not be possible for years to know the benefits or costs on the acquiring credit union or the communities and customers  whose accounts were transferred.  For example what is the retention rate of depositors?  It is one thing to acquire assets, it is another skillset to manage them effectively.

As a general maxim, the purchase or merger of commercial entities tends to reduce shareholder value.  Before its recent disposal of its media assets, AT&T (T) spun off its DirecTV and other pay-tv services into a separate company, with private-equity firm TPG Capital as a 30% owner of the new entity. The deal valued the pay-tv services at a combined $16.25 billion, compared to the $66 billion that AT&T paid for DirecTV alone in 2015. (CNBC)

My goal in following articles will be to ask questions and to confront the seemingly nonchalant acceptance of this activity within the credit union community.   Through dialogue I hope credit unions can become more aware of what is at stake and what future actions might be, if different from the vacuum that now surrounds these activities.

Posted on

Just a Coincidence?

Two news reports in one day on credit union failures suggest these events are merely different sides of the same coin.

First Story: 

ALEXANDRIA, Va. (May 24, 2021) – “The National Credit Union Administration today placed Empire Financial Federal Credit Union in Jackson, New Jersey, into conservatorship.

Empire Financial Federal Credit Union is a federally insured credit union with 343 members and assets of more than $3.04 million, according to the credit union’s most recent Call Report. Empire Financial Federal Credit Union serves multiple faith, occupational, and associational groups, and communities primarily located in New York, New York, and New Jersey.”

Second Story:

Former CU Service Center Co-founder Sentenced for $1M Embezzlement   By Peter Strozniak, Credit Union Times

“Joan Brown stole funds to keep her business and the six CUs it served afloat, prosecutors and defense lawyer say. . .

Starting in 2010 and through 2016, Brown embezzled more than $1 million, which was drawn on accounts of Cardozo Lodge FCU; O.P.S. Employees FCU; Chester Upland School Employees FCU; Triangle Interests FCU; Electrical Inspectors FCU and Servco FCU.”

NCUA liquidated all six credit unions in April 2016.

The Same Coin

These two events, I believe, are related.   The failure of six credit unions resulted from an embezzlement conducted over six years.   Six times six means that examiners had 36 chances to discover wrongdoing.

By moving Empire Financial FCU’s office 77 miles away to the main office of Municipal Credit Union, still in conservatorship, means a forced merger is underway.  Any doubt there might have been fraud in this case as well?

These repeated  credit union failures due to embezzlements that occurring  over years or for decades in the case of CBS Employees FCU, suggest that examiners  are either inadequately trained or just not up to the job of conducting routine reviews of general ledger activity and the accounts of key personnel.

In small credit unions with only one or two employees these reviews are straight forward and critical because there is little or no separation of duties.

The coin involved is the same: the members’ money in direct losses or via NCUSIF liquidations.

Hiding Shortcomings

The lack of transparency around these events enables NCUA to hide internal shortcomings until the facts are revealed in court cases years later-five  in the Times example above.  Post examination reviews are either not done because of the small amounts involved or the problem has been “resolved,” that is merged or liquidated.

The temptation for money handlers to commit fraud is endemic with the role.  That is why field exam contacts are necessary.   Simple audit steps and verifications help keep honest people honest.

These coincidental events suggest something is lacking in NCUA’s oversight of its smallest institutions. If shortcomings exist in this segment, one must wonder about examinations of larger, more complex credit unions whose activities include buying banks and purchasing other credit unions.

Is NCUA’s exam program up to the job whether the credit union be small or large?   Whether the review is simply balancing clearing accounts or complicated, such as using derivatives to mitigate risk?

Someone at the agency needs to own this challenge.  The first step would be to bring light to these failures as they occur, not in legal proceedings years later.  That public comment would put the agency’s examiners, credit unions and dishonest employees on notice that NCUA is alert for bad actors.