For example, a planned cooperative community park adjacent to the new head office of Los Alamos Schools Credit Union ($23.7M, Los Alamos, NM) sprung from seeds planted almost a decade ago.

In 2012, the Net Promoter Score derived from the member surveys of Del Norte Credit Union ($849.3M, Los Alamos, NM) showed they believed their credit union’s cooperative structure mattered. Promoters there valued service and believed the credit union was locally owned a cooperative not a bank. DNCU used that finding to differentiate itself. It joined forces with three local co-ops Little Forest Playschool, Los Alamos Cooperative Market, and Bathtub Row Brewery Co-op as well as two credit unions Zia ($176.3M, Los Alamos, NM) and LASCU to offer support, invest in their communities, serve their members, and educate the public about the cooperative difference.

The result? Keep It Co-Op New Mexico.

Building A Cooperative Commons

Matt Schmidt, CEO of LASCU, purchased land in the town’s center to build a new head office. The site includes adjacent space Schmidt believes should be converted into a cooperative park and community gathering place. The pandemic has only reinforced that belief.

Isolation had led to a craving for connection, the credit union CEO says.

The two-phase plan includes a community gathering space, outdoor concert stage, and room for a beer garden. It’s a bigger concept than LASCU alone can realize, though, so Matt approached Keep It Co-op. The group gave its immediate support.

Cooperative Education

Each contributing organization believes cooperation among cooperatives is vital. According to Schmidt, the group and projects like this are planting seeds.

We trust they will grow, he says. These projects show our belief in each other and the community.

Schmidt believes his credit union’s focus on educational employees and students makes its role in informing the community about cooperative design even more appropriate.

This shared space allows us to tell the story of why you should join a co-op; the value we bring together, he says. It is a concept that could be adapted to any community in America.

A Place To Gather After Being Apart

The six Los Alamos cooperatives that comprise Keep It Co-Op New Mexico have deep roots in the city’s history.

Little Forest Playschool: In 1951, moms in the American Association of University Women founded Little Forest, which initially included 15 children and cost 10 cents for juice and supplies. Today, it is a cooperatively managed preschool in which children learn through exploration and play.

Del Norte Credit Union: Founded in 1954 as Los Alamos Scientific Lab Credit Union, DNCU was the first financial institution in Los Alamos. The organization became a community charter in 1981 and expanded financial services and offerings to surrounding communities.

Los Alamos Schools Credit Union: Ruby Meaders founded LASCU out of her home in January 1955 just after the unveiling of the Secret City. She was more than glad to serve the needs of non-governmental businesses like grocery stores and financial institutions.

Zia Credit Union: In 1955, approximately 200 support contractors for the Los Alamos National Laboratory founded Zia Credit Union as a special interest group. In 1975, the credit union expanded its field of membership to serve the entire community.

Los Alamos Cooperative Market: The market opened in 2011 with a mission to serve Los Alamos County and surrounding communities by providing fairly priced, wholesome foods and other goods in an ecologically sustainable, socially responsible, and economically appropriate manner.

Bathtub Row Brewing Co-op: After three years of hard work and investment, Bathtub Row Brewery Co-op became Los Alamos first craft brewery and the fourth cooperatively run brewery in the United States in 2015.

This post appeared originally on Chip Filson’s blog, Just A Member, in January 2021.

The post A Cooperative Community Park appeared first on CreditUnions.com.

In fact, Ed was so fundamentally Irish that he waited to pass only until after all the bars had closed on St. Patrick’s Day in 2009 one final celebration to send him on. His Irish roots ran deep, and this could be seen in his personality and in how he interacted with friends and colleagues.

Ed has left us with a legacy and a lesson about leadership. Now, perhaps more than ever in recent years, we need to reflect on the importance of great leadership and how to build on what we’ve learned from those who have provided it to us along the way. Certainly, Ed Callahan was one of those.

It’s no accident that two Irishmen (Ronald Reagan and Don Regan) chose a third to be chairman of the NCUA in 1981. The Irish love camaraderie and prize loyalty. One answer Ed reportedly gave to Treasury Secretary Regan’s question of why he wanted to move to DC to be NCUA chair was because I want to have fun. Only another Irishman would understand that life perspective.

Ed embraced the credit union movement’s challenges and all life’s moments at full throttle. Jim Blaine best described his leadership in this way when he wrote:

Some said that Ed was a visionary, they were wrong. Ed Callahan was a revolutionary.

Visionaries talk about change, revolutionaries take you there. Ed led from the front a leader of conviction rather than convenience; principles above posture; courageous.

Revolutionaries, by definition, create problems; overturn apple carts; rebuke the status quo.

Greater Than Individual Achievement

Ed was much more than his personal accomplishments. Whether as a teacher, coach, high school principal, or chief executive, he understood his role was to help everyone around him to do and be better.

In my life I’ve been fortunate enough to have experienced firsthand this talent to help others achieve. My first such experience was one of the several times I had the chance to play on the same basketball team as Bill Bradley, the Princeton All-American, subsequent NBA champion with the NY Knicks, and then a U.S. senator from New Jersey.

The Oxford team was challenged to play a visiting semi-professional squad sponsored by Gulf Oil company. The team was composed of U.S. post-collegiate, paid players, not quite good enough for the NBA. Because of Bradley’s basketball reputation in Europe, the game was at the Royal Albert Hall, London, during the Christmas break from school. Even in soccer-loving England, the game was almost a sellout.

Some of our team members were gone, so I started, played the whole game and was second, only to Bill in total points. That was not my normal game performance. I had experienced what everyone knows instinctively, that a great performer succeeds by raising everyone else’s game, not merely by his or her individual efforts. Like Bill, Ed had that ability to lift up those around him to attain greater success.

Great Performance Outlasts The Player

The accomplishments of successful leaders last long after their tenure in office. For their contributions not only match the temper of the times but also rest on timeless insights.

CUNA President Dan Mica captured this impact in Ed’s New York Times obituary in April 2009: Ed Callahan largely shaped the credit union movement as we know it.

One of Ed’s insights from the August 1995 Callahan Report addressed the issue that if credit unions did things like banks, did that mean they were no different from other financial institutions?

Credit unions are different and always have been. We do not come together with the intention of making money. We come together with the intention of helping people.

Executives sitting around a table making decisions that answer to the question, Will it make money? will over time make fundamentally different decisions than executives making decisions that answer the question, Will it help people?

In the short run the answers may be the same. In the long run, they never are.

For Those Who Missed The Experience

Jim Blaine closed Ed’s tribute:

In the final analysis you can say many things about a great man’s life. Some men are admired, some are respected, some are envied, some are feared. But, in the final analysis, the most important thing you can say about a great man is, he will be missed.

And, Ed Callahan will be missed.

The post He Made Us All Better — Even Still Today appeared first on CreditUnions.com.

Except that’s not what happened. Here’s what it should have said: NCUA Failures Cost Credit Union Members $1.2 Billion.

That’s because the NCUA is blaming the victim for its self-serving cash outlays that cost the movement long-serving charters while stranding thousands of credit union borrowers.

The Largest Loss Ever For Natural Person Credit Unions

To understand the latest National Credit Union Share Insurance Fund debacle, it’s useful to look at the fund’s reported results from 2008 through 2018. Just last year, the NCUA spent almost $1.2 billion in cash outlays, an amount equal to 73% of the entire total spent during the prior 10 years, which includes the Great Recession.

This is the NCUSIF’s largest insurance loss expense ever. And it comes during the longest era of positive economic expansion in the country’s history.

Blaming The Victims

The NCUA has published no detailed explanations but has made no secret that it wants to pin much of the blame on two taxi medallion credit unions. The regulator conservedMelrose Credit Union and LOMTO Federal Credit Unionin early 2017 and liquidated them in the third quarter of 2018.

The NCUA recorded a $743 million reduction in the loss reserve account but otherwise gave no details of this largest-ever one-time expense beyond blaming credit unions the agency itself failed to help.

The trouble with blaming credit unions is that:

1. The NCUA’s conservators managing the two credit unions reported that as of June 30, 2018, the combined capital deficits for the two were only $155 million, not $743 million.
2. The NCUA’s own Mission and Values Statement says it’s the regulator’s responsibility to oversee problem institutions to provide … a sound credit union system which promotes confidence in the national system of cooperative credit (by) protecting the consumers who own them through effective supervision, regulation, and insurance.

The NCUA’s Dereliction Of Duty

Board member Rick Metsger documents his own agency’s failure. A press release from a Dec. 8, 2017, speech to the Oregon Credit Union League includes Metsger’s recognition that the agency issued a letter to credit unions in 2010 warning of concentration riskand issued a more specific letter on taxi medallion lending in 2014.

So, the NCUA recognizes it knew about the problem for three years before conserving and liquidating Melrose and LOMTO.

To resolve this longstanding potential risk first identified in 2010, the NCUA funded the largest cash liquidation ever. If this is effective supervision, regulation, and insurance, then why do credit unions have a regulator or insurer at all?

Deserting The Member-Borrowers

A $1.2 billion cash outlay and the only solution was to hold a fire sale and send taxi loans to a third-party servicer? Call Report data suggests there could be as many as 8,000 member loans secured by taxi medallions in cities throughout the United States.

These liquidations prevent the members who borrowed from these two credit unions from restructuring to help them navigate the disruption in the industry.

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Cash-only fire sales also reduce the market value for all other medallion owners as well. One newspaper story reported this impact on values in November 2017: Hedge Fund Buys Taxi Mogul’s Foreclosed Medallions At 1990s Prices.

Instead of helping vulnerable members with options for working through the cycle of value changes, the NCUA just walked away.

That’s what banks do. Credit unions are supposed to walk toward their members in times of uncertainty. Especially so when that uncertaintyis imposed by external forces. The NCUA sold out members at the very time they needed their credit unions the most. This is the exact opposite of the agency’s mission and values statement.

And the NCUA stuck every other credit union member in the process. With 100 million members, the cost works out to more than $10 per member for the $1.2 billion cash outlay.

The NCUA’s Failures Cost Every Credit Union

The ineffectiveness of NCUA isn’t merely money. However, this measure most easily documents serious leadership and management shortcomings. The NCUA has long had the reputation of being at the shallow end of the regulatory pool in Washington, DC.

But even there, the NCUA appears out of its depth. The board and management have shown no grasp of cooperative design or cooperative options. The NCUA’s only solution for every situation is to spend more.

A common human tendency is to mourn the past and plan the future. But that’s not how credit unions succeed. They work best by focusing on the present. And there is a crisis of regulatory leadership that took root in 2008 and continues to this day in the NCUA’s stewardship of its responsibilities.

The agency has shown repeatedly that it cannot learn from itself. Transparency and accountability are just press release words. Here’s what every CEO and board member who care about the cooperative financial services movement need to grasp: The time is now to raise a collective voice and seek to transform a regulator that consistently fails those in its charge while feathering its own bed.

Chip Filson co-founded Callahan & Associates in 1985 after serving the NCUA as president of the Central Liquidity Fund and director of the Office of Programs, which included the NCUSIF and examination process. He is a Rhodes Scholar with degrees from Harvard, Oxford, and Northwestern universities.

The post The Return Of The Prodigal Fund appeared first on CreditUnions.com.

Although it certainly shined an unfavorable light on the regulator, the story’s focus on fine dining, expensive booze, and avoiding schlepping around in a Civic ignores core issues of transparency and accountability at the regulator.

Any focus on the NCUA needs to be on performance, not personalities.

In 2018, the NCUA reported two unprecedented expenditures from the National Credit Union Share Insurance Fund each exceeding half a billion dollars without any real explanation.

The regulator revealed the first expenditure on May 29, 2018, when it finally posted the December 2017 corporate Asset Managed Estates financial statements on the NCUA’s website.

These expenditures included a new AME expense category identified as Liquidation Expenses – NGN Maturity Related with a total of $767 million allocated among the five AMEs. The AMEs are the remains of the corporate credit unions the regulator liquidated in 2010 amid the financial crisis. NGNs are the NCUA Guaranteed Notes the NCUA issued as part of the corporate bailout. This new AME expense category reduced the potential recoverable value for credit union corporate members and/or all credit unions by this same amount.

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In the September 2018 NCUSIF financial statement, the regulator reported $744 million in charges for liquidation. The NCUA did not otherwise explain this expense against the allowance account other than in vague references to the closure of two taxi medallion credit unions it liquidated in the same quarter.

This is a failure of leadership. The absence of timely and transparent justification for expenditures totaling $1.5 billion undermines the confidence in the cooperative system of credit unions, their members, and the public.

Transparency, Accountability Are Fundamental For Regulatory Oversight

The issue at hand is more consequential than the NCUA’s fiduciary responsibility to be a proper steward of members’ funds. In fact, the entire system is at stake. Jelena McWilliams, the new chair of the FDIC, best describes the organizational responsibility required in these two events in an Oct. 3, 2018, speech describing her leadership priorities:

We, as Americans, entrust in our government the power to lead. In return, we expect the government to be fair and open, and to work to advance the public good.

When we trust the system, we feel a part of it. It is our government. On the other hand, distrust breaks down relationships, whether it is between a business entity and its customers, manager, and employee, or government and citizen. When taken to the extreme, it can lead to the breakdown of institutions.

Like any asset, trust must be earned and then preserved. In my view, the best way to maintain a trusting relationship is to be accessible, understandable, and responsive to provide your stakeholders with the information and means to hold you accountable.

Trust And Transparency Lay At The Heart Of The FDIC’s Mission

During times of economic or financial stress, transparency becomes even more important as the FDIC undertakes stronger and more visible actions to deal with problem banks and resolve failed banks, McWilliams continued in her address. The stronger the actions, the greater the need to be transparent, not only with respect to what action is being undertaken, but who will benefit, who will pay for it, how will it affect banks and consumers, and why it is the best possible course. Communications that are absent, misunderstood, or nonresponsive, will only serve to heighten misperceptions that undermine trust and the recovery process.

To promote real trust, we cannot simply make data available, publish performance measures, and consider the job complete. That is not transparency or accountability. Trust through Transparency’ is my first public initiative as chairman of the FDIC. My ultimate hope is that the Trust through Transparency’ initiative will strengthen the bond of trust between consumers, banks, and the FDIC, while best positioning the FDIC to fulfill its mission of maintaining stability and confidence in the nation’s financial system.

The Taxi Medallion Resolution Works In Whose Interest?

With the emergency merger of Progressive Credit Union into Pentagon Federal Credit Union on Jan. 1, the NCUA completed the shutdown of credit unions whose business models focused on financing the sale of taxi medallions for owners and drivers.

The NCUA defended its decision by citing concentration risk in an industry in which the bubble burst. In most cities with regulated taxi or livery businesses, there’s no question the disruptive effect of ride-sharing alternatives has had serious economic consequences for traditional valuation models. Whether this disruption is cyclical or the end of the medallion business model remains to be seen.

The regulator’s war on concentration risk belies the reality that all credit unions have niches and concentrations, and it’s an excuse not to creatively seek workouts in the cooperative spirit. Learn more in The NCUA’s Taxi Medallion Vendetta Threatens All Credit Unions.

The critical question is not whether the value of the asset has dropped, but how does a credit union manage through a business transformation to sustain operations. The NCUA’s response was to eliminate the impacted credit unions through liquidation, purchase and assumption, and forced merger. And in the end, to charge credit unions $744 million for its oversight. For doing its job. A job for which it already has a generous budget and a well-reserved share insurance fund.

This resolution raises two questions: Did the NCUA act in members’ best interest? And is $744 million the best use of credit union money?

The NCUA’s response was to eliminate the impacted credit unions through liquidation, purchase and assumption, and forced merger. And in the end, to charge credit unions $744 million for doing its job.

Who Is The NCUA Really Helping?

The traditional approach of share insurance is to ensure the safety of member savings for all amounts less than $250,000. But in a credit union, the interests of the borrowers should also be considered and treated with the same or even greater respect as those of savers.

Credit unions were not designed primarily as savers clubs. Consumers have multiple options for safely saving money, insured and uninsured. Wholesale funding for credit unions is available through borrowings and non-member deposits. The cooperative system with the liquidity role of the Central Liquidity Fund and the capitalization capability of the NCUSIF, were specifically designed to help in a crisis. Especially crises imposed by external events.

Credit unions were formed to address borrowers’ needs. Taxi medallion financing was not only a community need but also an ideal example of cooperative finance. A lot of people many of them immigrants making their way in a new country financed their American dream through taxi driving and then medallion ownership.

When the security that underwrites a loan is devalued, both the borrower and the institution suffer. When the security is an income-producing asset, such as a taxi medallion, the impact on both is even greater. Both income and accumulated value are hurt.

Whatever the security for a loan, a lender’s successful transition through a crisis depends on its willingness to rewrite terms, lower payments, and recognize the borrowers’ efforts to find income and/or to persevere in current circumstances. This is what credit unions did repeatedly for home and auto borrowers during the recent Great Recession.

Credit unions that used creative extensions to lower payments preserved value in secured assets and, more importantly, helped the member work through the economic hardships faced by many.

If problem-solving becomes merely an exercise in disposing of problem loans, then the bond between the borrowing member and the credit union is broken.

Conservatorship is an important regulatory option for sustaining the institutional framework as a credit union works through problem assets (loans or investments) whose ultimate value is uncertain. But if problem-solving becomes merely an exercise in disposing of problem loans, then the bond between the borrowing member and the credit union is broken. The future for both becomes problematic and the options for a positive solution much reduced.

The NCUA conserved Melrose and LOMTO credit unions in February 2017 and later liquidated them. Unfortunately, these conservatorships did not preserve value. Rather, they undermined the relationship between the credit unions and borrowers so much that the president of the Committee for Taxi Safety wrote NCUA chair McWatters on May 12, 2017, about Melrose’s tactics:

For the most part medallion owners are not seeking to walk away from their loans. They are not seeking to walk away from personal liability. Recognizing this, lenders have stepped up to meet this challenge and work with medallion owners. The only lender that is refusing to work with medallion lenders is Melrose, under the control of NCUA. Regardless of each owner’s outstanding debt, the NCUA has taken a hard-line, one-size-fits-all approach that demands massive up-front principal pay downs of several hundred thousands of dollars and/or mortgages on residences to renew loans.

Even if the borrower complies, the NCUA then seeks to substantially increase the interest rate on the loans. Melrose has taken borrowers who want to pay and placed them in a position in which they know they will be put in default, thereby forcing them to face financial ruin.

The NCUA’s position is so extreme that it has told borrowers who are current on their loans and still making all payments, that if a medallion is in storage for any reason, temporarily or long term, that it will immediately commence foreclosure proceedings.

All we are asking is for the NCUA to act reasonably and allow struggling medallion owners some flexibility in paying off loans. The NCUA’s behavior has been that of a bully. It is time for the NCUA to end this assault on our industry and show leadership and human decency.

When LOMTO and Melrose reported their June 30, 2018, financial condition under NCUA management, their combined deficit capital position was $155 million. When liquidated within months of that filing, NCUA recorded a $744 million expense. This almost $500 million difference shows the cost of ineffective conservatorship and resolution competency. From another perspective, if the NCUA had used $744 million to capitalize a credit union at a 7% well-capitalized level, it could support more than $10 billion of cooperative assets.

This almost $500 million difference shows the cost of ineffective conservatorship and resolution competency.

The Problem With Secrecy And Silence

A lack of regulatory transparency creates a culture of impunity where no one is accountable and no explanations are necessary. The NCUA described its writing down $767 million in AME values as making required accounting entries. The NCUA’s focus is no longer about the members it’s about institutional self-interest. And this bureaucratic self-interest versus members’ welfare does not go unnoted by credit union leaders.

The best estimates implied by call report data are that credit unions now hold more than 8,000 member loans secured by taxi medallions. The average outstanding loan is between $250,000 and $350,000. Many of these borrowers will be financially challenged either as self-employed drivers and/or debtors. Like others working in the so-called gig economy, their future is not certain. Will credit unions work with these borrowers as members, or will credit unions try to rid themselves of problem credit?

The NCUA transferred Melrose’s medallion loans to an outside servicer after liquidation. The borrowers now have three options: pay, go delinquent, or walk away via bankruptcy. Without an interested lending partner holding the loan, rewrites or other refinancing accommodations are lost. There is no prospect of a future relationship. The credit union promise to member-owners is non-existent. Selling problem loans is how banks, not coops, routinely solve their problem credits.

The NCUA transferred Melrose’s medallion loans to an outside servicer after liquidation. The borrowers now have three options: pay, go delinquent, or walk away via bankruptcy.

These two, $1.5 billion expense transactions continue an NCUA pattern of converting the recoveries from fiduciary assets acquired in liquidations to its own use. These recoveries are outside the budget and expense oversight processes. They are, in the auditor’s words, non-governmental assets, beyond the scope of their opinion audit. By constantly overestimating future losses, the NCUA has set up a system to shield its balance sheet from current events through allowance write-offs and/or expense reversals. Hence no accountability.

The NCUA assessed credit unions for the corporate workout at its initial estimated cost of $13 billion to $16 billion. Recoveries currently exceed $5.6 billion. In merging the Temporary Corporate Credit Union Stability Fund, the NCUA positioned the NCUSIF to take this ongoing income from TCCUSF assets and all past and future recoveries before returning these surpluses to the credit unions that pre-funded these exaggerated resolution estimates.

The regulator kept the corporate crisis bailout money for itself, further undermining the pillars of the cooperative system. Does anybody care? Read How The NCUA Cheated 100 Million Credit Union Members Out Of $3.1 Billion.

Asking The Right Questions

Should borrowers expect the same protection as savers in troubled co-ops?

Should the NCUA rehabilitate versus liquidate problem institutions?

Are credit union fiduciary funds being properly monitored and used?

Is the NCUA conflicted between minimizing problem resolution costs versus explaining its supervisory effectiveness?

Without transparency and contemporary financial reporting, it is difficult to ask the right questions about the NCUA’s effectiveness. The agency reverts to the rationale of safety and soundness as a mantra that disguises its decade-long habit of paying its way out of problems that it’s supposed to minimize.

Transparency and accountability are not simply institutional virtues they are critical operational processes. They are at the heart of any organization’s effectiveness. This is especially the case with a government regulator that has significant, unilateral authority over credit unions and their resources.

An advantage of cooperative design is that it is meant to focus on members’ needs, not insiders’ ease or comfort. When an institution focuses on its internal agenda rather than on the principals it is supposed to serve, that is a warning sign of potential failure.

Paying off crisis events is not the same as sustaining a system. It is not the money that will run out, it is the willingness of principals to stay in an unaccountable system.

The new FDIC chair said it best in a speech given to the International Association of Deposit Insurers on Oct. 18, 2018:

The essence of an effective deposit insurance system is the trust of the banking public in the operations of the deposit insurer. The only way to build trust is to make those operations transparent so that your stakeholders have the information and the means to hold you accountable. It is all about being accessible, understandable, and responsive to both regulated entities and those we seek to protect vis-à-vis deposit insurance.

If you do not trust the system in which you live, you do not feel a part of it. It is not your government.

The post The NCUA Spent $1.5 Billion Of Member Funds. Where’s The Transparency? Where’s The Accountability? appeared first on CreditUnions.com.

But the merger also underscored the NCUA’s overarching willingness to wash its hands of that segment of lending after three decades of increasingly strident attacks. In fact, it was the third such action in just a few months, following the liquidations in October of LOMTO Federal Credit Union ($156.2M, Woodside, NY) and in September of Melrose Credit Union ($1.1B, Briarwood, NY).

Press reports repeated the press release explanations that these troubled taxi lenders needed to vanish because of the risk they posed and for the good of their members. Elsewhere, the Pentagon takeover of Progressive sparked banker outcry against PenFed’s open charter, citing concerns about unlimited credit union membership.

But there is more to be learned from this event than the predictable positions of the participants and observers. I believe there are at least three takeaways that anyone concerned about the future of the cooperative model should consider.

Every credit union will have to confront the NCUA’s taxi medallion solution at some point. Waiting without action until the moment arrives only ensures there will be a time when the bell will ring for thee.

Takeaway 1: Diversify Or Die. Myth Or Fact?

Progressive’s balance sheet was heavily concentrated (75% or more) in taxi medallion lending. The loans were conservatively underwritten with loan-to-value ratios that averaged 50-60%. This was supported by a peak net worth ratio in excess of 40% and ROA that hovered between 2-3%. Medallion loans were disbursed among different cities and regulatory environments including Boston, Chicago, and Philadelphia.

But New York City was home to the majority of Progressive’s loans. NCUA board member Rick Metsger in a December 2017 speech cited NCUA letters in 2010 and 2014 warning of concentration risk.

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We have known about this risk for some time and … unfortunately a lot of credit unions will have to pay for losses incurred by a small number of credit unions that gambled on a market that was disrupted and a bubble that burst, he said, adding that the regulator might need to increase loss reserves as taxi medallions continue to decline in value.

But the NCUA’s taxi medallion letter of 2014 made no mention of any potential disruptive event (see page 4, What Affects the Value of Taxi Medallions?). Rather, it stressed broadened underwriting requirements that NCUA examiners presumably oversaw for the next three years before the steep decline in medallion values in 2017.

Predicting the future of the taxi medallion business versus ride-sharing companies is now commonplace. Numerous firms are making business decisions based on their assessments. One hedge fund has bought more than 300 New York medallions at foreclosure sales because, at its core, the medallion is a license to run a business and create revenue. Many forms of secured lending such as first home mortgages and auto lending do not result in a revenue opportunity if the collateral is taken. In these cases, resale is the only option.

Takeaway 2: Niche Versus Concentration

Is concentration risk really the root of the problem? Almost every credit union has created a business niche that could be labeled a concentration. Sometimes this is a product emphasis such as medallion lending, first mortgage lending, indirect auto lending, or credit cards.

Almost every credit union has created a business niche that could be labeled a concentration. Sometimes this is a product emphasis such as medallion lending, first mortgage lending, indirect auto lending, or credit cards.

For example, for the top 100 credit unions in first mortgage dependency, the average first mortgage loan concentration is 82%; for auto lending, the top 100 average concentration is 92%. Niches are a common business strategy.

Almost all credit unions started with an employer or association niche that constitutes member concentration. Three decades ago, more than 20 credit unions focused on IBM work sites (IBM had never laid off an employee) and International Harvester had 27 credit unions serving its plants, offices, and subsidiaries such as Wisconsin Steel. Today there are no purely IBM credit unions and International Harvester no long exists.

Geographic or multi-common bond expansions replaced the concentration of a single employer or industry. However, few credit unions are now so diverse that they are not at times impacted by regional economic or other catastrophic events. Hurricanes, floods, and fires are the obvious examples.

The current government shutdown shows the disruption possible for what is generally viewed as one of the most stable sources of employment and members in the U.S. economy.

Other forms of business concentration include large credit unions that deploy few or no manned branches to credit unions that invest in branch footprints as their primary form of market presence, even in a digital era.

Invoking concentration risk as the cause of failure is a sop. Virtually every credit union depends on some market, product or business niche, or even prior investment decisions as the way it competes for member loyalty.

No credit union can escape the cycles of economic change, technology and product disruption, geographic favorability (Rust Belt versus Sun Belt), the ever-changing configuration of competitors, and even politically driven events.

The problem is not about concentration; it’s about how an organization responds to changes in opportunities and challenges to its members and in its immediate market. These transitions take time, patience, and capable leaders who can build on still-relevant strengths while resolving specific value disruptions from whatever source.

As one commentator observed: We are corrupted by the impatience that drives our pursuit of safety and success. We don’t just want these outcomes. We want them immediately.

Cooperative patience, because of the absence of market pressure on stock price, should be a fundamental advantage when credit unions are faced with the need for financial transformation.

Takeaway 3: Liquidity, Capital, And Regulatory Abdication

Announcements from both Progressive and Pentagon singled out Pentagon as the leading choice to provide Progressive the liquidity and capital needed to provide stability and support to its members.

These two factors are present in any problem financial institution. That’s why credit unions designed a cooperative liquidity solution in the Central Liquidity Fund with explicit authority to assist its members in changing economic circumstances. The National Credit Union Share Insurance Fund, by both statute and decades of practice, has provided capital for credit unions to resolve difficult financial and economic challenges.

But if there is no will or ability to use these system capabilities, then either failure or outsourcing to a credit union via merger to oversee the financial turnaround becomes standard operating procedure.

Further, liquidation as a regulatory solution will always bring fire sale prices to asset values. Mergers, especially with larger firms, can result in a loss of market reputation (goodwill) and experience that enabled the creation of competitive value in the first place.

This abdication of the NCUA’s problem-resolution resources is an especially critical lesson. The cooperative system mobilized options so it need not be indifferent to the failure of any institution because in the end, it is members, not the institution, that suffers.

Rather than work through the challenges and problems of a troubled credit union, NCUA’s standard procedure is to run from them.

On April 16, 2018 Progressive’s CEO, Robert Familant, published an opinion article in theCredit Union Journaltitled Taxi Medallion Exec: Don’t Rule Cabs Or Us Out Yet. Nine months later, Progressive chose to merge when it still reported more than 11% net worth ($40 million) and total capital of more than 50% for its $300 million medallion portfolio.

Each member’s pro rata share of net worth was more than $13,000 of common wealth created over 100 years and 172 days. It is now lost to their control.

The effectiveness of NCUA oversight should be a major concern for every credit union because it is credit union members that pay all the bills. In 2018, resolution expenses totaled more than $1.5 billion on top of the NCUA’s $300 million operating budget. Rather than work through the challenges and problems of a troubled credit union, NCUA’s standard procedure is to run from them. The NCUA’s approach has been promotional and/or defensive instead of effective in the creative use of cooperative resources.

Not My Problem? It Is Your Problem!

A CEO might ask, Why should I care?

After all, on the face, how the NCUA handles problems, particularly regional ones, costs members only a few basis points of capital or income.

But how cooperatives resolve institutional problems via the regulator tells them who they are and who they will become. Cooperative leaders unwittingly give creditability to regulatory actions when they keep quiet.

It’s easy to copy the competition. It’s easy to copy the regulatory models of oversight that were created for the for-profit sector. But the cooperative system should be where leaders push one other to be better, to raise both member and collective outcomes, and to encourage new designs for cooperative success.

There have been instances when the public-private regulatory partnerships of credit unions, enabled by legislation and then successfully implemented, helped position the cooperative model to new levels of success.

But that’s not the practice today. The liquidation of credit unions serving the taxi medallion business perpetuates a myth that the system will prosper by just doing away with a few bad eggs. Every credit union will have to confront the NCUA’s taxi medallion solution at some point. Waiting without action until the moment arrives only ensures there will be a time when the bell will ring for thee.

Progressive’s Former Treasurer/CEO Responds

In a letter to CreditUnions.com, Progressive’s former treasurer/CEO Robert Familant offers his side of the merger story.

The post The NCUA’s Taxi Medallion Vendetta Threatens All Credit Unions appeared first on CreditUnions.com.

This shiny coin should not blind credit unions to the fact that the corporate resolution program has been the most disastrous and costly regulatory failure by NCUA.

When cashing this check, bear in mind that the regulator’s estimate of actual losses used to justify holding on to the monetary remnants of the Temporary Corporate Credit Union Stability Fund has now been documented to be in error by over $21.7 billion.

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Here are some other numbers to be aware of when reading the self-congratulatory messages issued by the agency:

• The entire losses on legacy assets had been fully reserved by each of the five corporates. All had external audits. At June 30, 2010, there was $10.5 billion in written-down assets for which no loss had occurred.
• At September 2017 when the TCCUSF was closed, total losses on legacy assets were $3.1 billion less than this written-down total. No corporate’s legacy assets had incurred losses near the amounts which had been expensed by June 2010.
• NCUA’s July 2010 loss estimate of total corporate resolution costs (released in 2011) was $13.9 billion to $16.1 billion. This included the $5.6 billion in capital write downs of the five conserved corporates. This unverifiable estimate exaggerated by over 100% the actual losses the corporates had already fully reserved, but not used.
• As of December 2017, the combined surplus from the TCCUSF program was $5.6 billion; $3.1 billion transferred to the NCUSIF and estimated $2.5 billion surplus in four of the five AMEs, the asset managed estates.
• NCUA’s loss estimate error as of December 2017 was $21.7 billion. Of that, $16.1 billion was the initial loss projection. The rest is the $5.6 billion initial actual surplus available as of December 2017.
• Expenses of the TCCUSF program to date, paid from legacy revenues, include $1.258 billion to lawyers and $1.7 billion for liquidation and NGN expenses. These total operational expenses of $2.958 billion are 215% higher than the entire operating expenses of the NCUSIF ($1.372 billion) for the same 2010-2017 time frame the TCCUSF was in place. NCUA has redirected almost $3.0 billion of income from the corporate assets to its own use.
• At the time of the September 2010 seizure, three of the corporates reported positive regulatory capital even after recording a total of $11.6 billion in lifetime OTTI losses which had been expensed against their existing capital and retained earnings. Only WesCorp reported a significant negative capital position of $4.9 billion.
• As of December 2017, the capital shareholders of the four AMEs that were solvent or had only a minor impairment, were estimated to receive payments as follows: US Central: $1.329 billion; Members United: $493 million (100% member capital); Southwest: $616 million (150% of member capital); Constitution Corporate: $24 million. WesCorp members get nothing.

Also Read:

• How The NCUA Cheated 100 Million Members Out Of $3.1 Billion
• An $800 Million Surprise Raises Tough Questions
• NCUA Audit Reports Shows Something’s Wrong
• What Could Credit Unions Do With $2.5 Billion

The NCUA’s corporate resolution program is a catastrophic failure of its core mission. It exaggerated the potential losses by more than 100% above the amount the CPA firms and corporates had reported. This loss estimation error, now at $21 billion, was used to justify the Wall Street-designed NCUA Guaranteed Notes program that funded the AMEs. The $2.9 billion operating expenses to run the program became a gravy train for vendors, Wall Street bankers, and even the NCUA’s own budgets with no external oversight.

The seizure of US Central, which reported $321 million of regulatory capital, led to the dismantlement of the Central Liquidity Fund and the cooperative system’s backup liquidity line from the Treasury’s financing bank of over $44 billion.

The capstone event of merging the TCCUSF into the NCUSIF gave the agency control of the current $5.6 billion TCCUSF surplus, which directly contradicted the congressional intent in the fund’s enabling language:

These provisions are intended to ensure that activities of the fund are restricted to resolving problems in the corporate system, and not used for other purposes such as for dealing with natural person credit union problems.

The NCUA board knowingly rejected this congressional direction. It continued the corporate example of using exaggerated and unverifiable future loss projections to expand and retain $2.4 billion of the initial $3.1 billion surplus in the TCCUSF. To do this, the NCUA board recorded the first ever operating loss ($229 million) in the history of the NCUSIF during a time of nine years of continuous economic expansion.

The NCUA board openly discussed its circumvention of the requirements to raise the normal operating level (NOL) of NCUSIF via a premium to facilitate the retention of the TCCUSF surplus.

The NCUA’s disastrous, costly oversight of the corporate system resolution ironically shows the underlying financial resilience of the cooperative model. However, no system can be sustained if its leaders ignore real facts, refuse to back-check assumptions and performance, and fail to carry out the explicit requirements of the law.

The corporate resolution was not primarily a financial challenge; the leaders of the corporates had done everything that could be reasonably estimated to fully account for the loss potential and lay a foundation for successful workouts. What instead happened is that the corporates exposed NCUA’s inability to work constructively to resolve problem situations.

Yesterday it was the corporate uncertainty; today it is the disruption in the taxi industry; tomorrow will bring a new challenge for credit unions. As credit unions deposit the 6 basis points tip from NCUA, ask how much longer the cooperative model can bail out regulatory failures.

A new system of accountability for the NCUA is long overdue. If in doubt about the urgency of this change, one should note that the two candidates being floated for the current NCUA board vacancies both had leading roles in the corporate events detailed above.

The post Looking Past The NCUA Pocket Change appeared first on CreditUnions.com.

In January 1941, President Franklin D. Roosevelt gave his four freedoms speech to define what America stood for: freedom of speech, freedom from want, freedom to worship as each person sees fit, and freedom from fear.

FDR was rallying the country away from complacency about the gathering storm clouds across the Atlantic and Pacific. Credit unions need to shed complacency, too, when it comes to making sure every congressman and consumer, legislator and layman, knows about the credit union difference.

That difference isn’t because not-for-profit credit unions are somehow more moral than for-profit banks. Profit is hardly un-American. No, the credit union difference lies in making members more free.

That’s the movement’s purpose, its origins and its reason for being, our raison dtre. (A nod here to the French-American origins of our nation’s first credit union.) ContentMiddleAd

Freedom’s Many Facets

In a speech to credit unions in Massachusetts in November 1984, NCUA Chairman Ed Callahan described how in just three years deregulation had unleashed a spontaneous change from deep concerns over survival to unprecedented growth.

He cited three institutional freedoms as the basis for this dramatic change:

1. Freedom to compete in the marketplace.
2. Freedom to serve whom you want based on terms chosen by board and management.
3. Freedom to be secure under the cooperative safety net established by a reformed NCUSIF.

Ed closed by stating the heart of the credit union difference is not in the rhetoric of people helping people; rather it’s the reality of how credit unions serve the multiple needs of all members & what we do with these new freedoms is our difference.

Credit Unions Enhancing Personal Freedom

In America, personal freedom is inextricably linked with economic success. The competitive forces encouraged by a capitalistic economy means that many are still not free from want. Economic inequality continues to grow; personal opportunity is frequently bequeathed by the circumstances of one’s parents.

Freedom from fear affects not only those whose jobs have been newly disrupted by global forces but also those who have always lived at the margin. Those living in immigration’s shadow now face a particularly potent mix of fear and economic uncertainty.

At its very best, each credit union member is seen as a person worthy of respect and support. A while back, while waiting for Jim Blaine, then CEO of SECU in North Carolina, to drive me back to the airport, I watched him listen to a branch manager present a heads-up on a loan application.

The manager said this member will go delinquent several times over the loan’s life but will always make it up. This is what his experience suggests. Jim and the branch manager agreed to make the loan, despite the member’s credit history. The decision was based on the person who had the need not a formal credit policy.

Happy Inter-Dependence Day

That is how credit unions enhance members’ freedom. A sense of financial well-being is empowering for every individual. Many who cannot earn enough or aspire to the comfort of a retirement nest egg will need a financial institution that will serve, not exploit, their financial needs or uncertainty.

The essence of the cooperative model is where members and the credit union co-create equitable opportunity for all.

The irony of Independence Day is the interdependence on which all personal freedom rests. FDR gave this meaning in time of war. Ed Callahan illuminated the credit union contribution in times of economic stress.

Cooperatives daily demonstrate that freedom is more than celebrating a past event, it’s a daily practice of serving one’s neighbor in a way that enhances everyone’s self-worth.

Happy Fourth.

The post Happy Inter-Dependence Day: How Credit Unions Make Us More Free appeared first on CreditUnions.com.

If you want to know where you’re going, you have to know where you’ve been. Evaluating this latest regulatory action in the 10 years of NCUA decisions since the Great Recession, there’s a growing disdain for member rights and property and a significant weakening of the pillars of the cooperative model.

Unlike privately held financial firms, coops are member-user owned where the capital created becomes common wealth. The regulatory structure is built upon similar, collectively founded common institutions, especially the Central Liquidity Fund and the National Credit Union Share Insurance Fund.

The NCUSIF and CLF are unique reflections of cooperatives’ collective strength, an advantage every individual institution can benefit from. However, should credit union leaders act as if their individual firm’s well being is not connected to the NCUA’s oversight of these cooperative pillars, then the whole system is at risk.

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Sadly, credit unions’ collective shrug of the shoulders at the NCUA’s holdback of billions of members’ funds from the TCCUSF surplus continues a decade of supine genuflection in the face of their regulator’s self-serving feeding at the trough filled by members’ funds.

If credit union leaders do not speak out for responsive cooperative leadership by regulators, who is going to speak up for credit unions when their institutions are seen as no longer unique?

The NCUA’s Failure To Follow The Law

Congress in passing the TCCUSF in 2009 explicitly stated: These provisions are intended to ensure that the activities of the Fund are restricted to resolving problems in the corporate credit union system, and not used for other purposes, such as for dealing with natural person credit union problems.

But the whole justification last year for keeping the TCCUSF surplus, instead of returning it to credit unions, was to cover potential natural person credit union problems.

That action was after the NCUA’s seven years of oversight updates that explicitly projected that credit unions would receive a rebate of their $5.0 billion in TCCUSF premiums. In the semi-annual Resolution Costs Detail report posted on the NCUA’s website, one column is headed Projected Rebate on Assessments Paid to Date. The last entry for Q4 2016 shows an estimated rebate of $2.6 billion to $3.1 billion.

In addition, by retaining the TCCISF surplus versus returning members’ funds, the NCUA circumvented the explicit statutory requirement that the NCUSIF’s normal operating level (NOL) cannot be raised above 1.3% via a premium but only by retained earnings. TCCUSF surpluses are simply not NCUSIF retained earnings.

Also Read:

• An $800 Million Surprise Raises Tough Questions
• NCUA Audit Reports Shows Something’s Wrong
• What Could Credit Unions Do With $2.5 Billion

The NCUA Is Untethered To Facts: A $22 Billion Error

The NCUSIF’s financial statements, projections, and assumptions have been untethered to actual facts since the 2008 financial crisis.

Its first Resolution Cost Report on the status of the TCCUSF as of July 2010 projected a total loss of as much as $16.9 billion including the write off $5.6 billion in depleted corporate capital. This same report estimated that as much as $9.2 billion more in projected remaining assessments by credit unions could be needed. That’s on top of premiums already paid.

Today the minimum surplus from the corporate resolutions is $5.2 billion. This includes the $3.1 billion already taken by the NCUSIF and a minimum of $2.1 billion to be distributed to the shareholders in the liquidated corporates based on their September 2017 five Asset Managed Estate (AME) statements.

To date, the NCUA’s projected loss estimates used to justify the five corporate liquidations is incorrect by more than $22 billion.

To date, the NCUA’s initial projected loss estimates used to justify the five corporate liquidations is incorrect by more than $22 billion.

In the final call reports of August 2010 before the five corporates were seized, WesCorp reported the largest negative regulatory capital of $4.9 billion. Three of the corporates were solvent and held more than $430 million in capital, while Constitution reported a potential $23.5 million deficit.

However, all five had already recorded total OTTI expense write-offs of $11.6 billion that had been taken out of these regulatory capital numbers. As of the most recent legacy asset updates, there is still more than $3.1 billion in unused OTTI reserves, with four of the five corporates showing unused amounts of 35% to 49% of the total loss estimates. These losses, taken out of capital, have yet to occur.

Click here to see spreadsheets that lay out the actual performance of each corporate.

The corporates were highly over-reserved for potential credit impairments on the legacy assets. These loss shortfalls are not simply recoveries. Rather, the continued principal performance of these securities has created additional flows of interest income that NCUA estimates will exceed $1 billion.

To paraphrase the words of former Secretary of State Rex Tillerson, if we as credit union leaders become accepting of alternative realities that are no longer grounded in facts, then we as member-owners are on a pathway to losing our cooperative institutions.

Continued Untethering

The NCUA’s refusal to use actual numbers and instead project unverifiable future losses was most recently demonstrated when it raised the NCUSIF’s normal operating level (NOL) from 1.3% to 1.39% of insured shares. In projecting future losses to justify the new, higher NOL, the NCUA used the following economic assumptions for 2018-2019:

• Higher and steadily rising unemployment to 7%
• Short-term interest rates near zero
• Long-term rates rise slowly, but always stay below 3%
• Sustained decline in housing pricings will result in a 17% decline below the base year

Just like the earlier corporate projections, these assumptions are completely unhinged from any actual numbers or plausible future events.

Compounding this dystopian, imaginary future, the agency then stated it needed to keep another $400 million (4 basis points) due to a possible contingent liability incurred from the remaining NCUA Guaranteed Notes (NGN). The NCUA’s own auditor, KPMG, had opined for six consecutive TCCUSF audits, and in the year-end December NCUSIF audit, that no such contingency exists. The NCUA ignored this long-term audited fact.

Destroying The Liquidity Pillar

The extreme misjudgment of the actual risks in the corporate system resulted in the closure of four of the five largest corporates then in operation. By liquidating US Central, the agency also destroyed the innovative and unique liquidity safety net created by credit unions with the CLF.

This CLF-Corporate partnership gave access to more than $44 billion of guaranteed liquidity from the U.S. Treasury for any credit union to draw upon in the event of a liquidity crisis. That system-wide, internally mobilized government backup line is now gone. Every credit union must now negotiate its own backup liquidity with the FHLB, the Federal Reserve, the CLF, or other lenders.

Instead of mobilizing all the system’s surplus, the CLF’s unique cooperative safety and soundness solution has been trivialized. Virtually every study of financial crisis, including the recent Great Recession, demonstrates that liquidity shortfalls are the lynchpin for the crisis. As markets implode, capital losses ensue because liquidity dries up normal market pricing and transactions can no longer take place without unanticipated losses caused by market dislocations.

This 30-year liquidity pillar had provided the highest possible confidence (a lender of unfailing reliability) to credit unions during the deregulation restructuring crises of the 1980s (including the closure of Penn Square Bank), the periodic market scares in 1987 and 1997, the uncertainty around Y2K liquidity, the market uncertainty after 9/11, and the inevitable cycles of economic recession or downturn.

By terminating this vital public-private partnership, the NCUA has undermined the system’s collective safety and soundness.

By terminating this vital public-private partnership, the NCUA has undermined the system’s collective safety and soundness.

A State Of Perpetual Crisis

The NCUA learned during the 2008-2009 corporate credit union crisis that it could act unchallenged by credit unions or any other authority, unhindered by traditional process and accounting rules, and project unverifiable future losses which imposed enormous and immediate premium expense consequences for the industry.

Wildly inaccurate forecasts gave the agency carte blanche to raise its budget. In hiring outside experts to validate their various projects the agency turned its back on the traditional solutions of working with credit unions to resolve problems.

This pattern of predicting an extraordinary crisis was shown once again in February 2018 in releasing the year-end financial statements for the NCUSIF. For the first time ever, and during the longest period of economic growth in the nation’s economy, the share fund reported its first ever loss, $229 million.

To reach this unprecedented result the agency in the month of December expensed the single largest provision expense ever of $657.8 million. This resulted in an allowance account at year end of $925 million or 49 times the actual net cash losses in the year.

The results suggest one of two causes. One, the NCUA is facing the worst natural person loss in the history of the fund. If that’s the case, what does this say about the agency’s supervision oversight in an era of the longest uninterrupted economic expansion in U.S. history?

Or, once again NCUA is exaggerating actual problems to be able to retain funds that should have gone back to members. This second explanation seems the most plausible. The NCUSIF received more than $500 million in additional TCCUSF surplus after the initial Oct. 1 merger. If this additional surplus had not been expensed via this extraordinary reserving, more than $500 million in this new TCCUSF-related revenue would have added to the dividend for members. It would have increased further the excess reserves beyond the NCUA’s new NOL cap of 1.39%.

Accountability Gap Endangers The Cooperative System

When an agency routinely ignores the law and creates hypothetical facts to justify actions, the institution is bereft of professional leadership, accountability, and oversight. The danger is much worse than inefficiency. For the behavior portrays an agency unable to perform its core mission to sustain the credit union system.

There were 13,000 federally chartered credit unions when the three-person, independent NCUA board was created in 1977. At year-end 2017, there were approximately 3,300.

While consolidation is a trend in all financial firms, the difference before 1977 and now, is that under the NCUA new FCU charters have become increasingly harder to obtain. In the 43 years of federal chartering prior to 1977, the number of active charters increased in all but eight years, and three of those were during World War II.

In the NCUA’s four decades, there has not been a single year in which the number of FCU charters has increased. No more seed corn is being planted by future cooperative entrepreneurs.

In the NCUA’s mismanagement of the CLF and NCUSIF institutional pillars, the distinctive cooperative model is in danger of extinction. By both deed and example, the agency’s supervisory record is one of the inexorable demise of the credit union chartering system.

In the NCUA’s mismanagement of the CLF and NCUSIF institutional pillars, the distinctive cooperative model is in danger of extinction. By both deed and example, the agency’s supervisory record is one of the inexorable demise of the credit union chartering system.

Should Anybody Care?

The cooperative model’s design depends on the norms and values of collaboration, connection, community and self-reliance. These organizational requirements rely on democratic commitment to give direction and oversight to the collected resources. Democratic integrity relies on individual character.

To initially succeed, interdependence was essential for every credit union. Sponsoring groups, vendor subsidies, movement support, and regulatory encouragement all assisted the sweat equity of founding members.

Today this legacy of interdependence is not central for the financial success of most credit unions. Each credit union can sustain itself from its own inherited or created resources.

However, reputation risk affects everyone: those directly involved and onlookers just trying to mind their own business well. Credit unions still share a common destiny heavily influenced by NCUA actions, not just rule and regulation.

The above history portrays an agency that has lost its core purpose and any sense of answerability. These actions put the entire system at risk. The risk is unlikely to be as dramatic as total financial collapse. More likely it will be a subtle, step-by-step erosion in the public’s confidence in and need for tax-exempt firms that more and more seem like every other financial option.

If credit union leaders do not speak out for responsive cooperative leadership by regulators, who is going to speak up for credit unions when their institutions are seen as no longer unique?

The post How The NCUA Cheated 100 Million Credit Union Members Out Of $3.1 Billion appeared first on CreditUnions.com.

SECU is the nations second largest credit union at $38.8 billion. Blaine was CEO from 1979 until his retirement in 2016.

Even though Blaine is well known, the change took some credit union leaders by surprise. Blaines leadership of SECU was widely viewed as a textbook example of how to use a cooperative charter. Some leaders expressed concern, however, about how his business approach might clash with current NCUA policies.

A spokesperson for the National Association of State Credit Union Supervisors expressed full support. Jim was an active member and supporter of the state chartering option, a high-ranking NASCUS executive said, speaking on the condition of anonymity. While we have sought to have a state regulator on the board, Jims nomination is almost as good. As a CEO he actively employed former state regulators. We hope he will do the same at the NCUA.

Some CEOs were ambivalent about what Blaines management philosophy would bring to the credit union industry. A top executive at a large mid-Atlantic credit union who also wished to remain anonymous said that, Jims business tactics were from the last century. He did no risk-based lending, did not use FICO scores, and said that a capital level above 7% was stealing from the members.

Placing Blaine as NCUA chair is like putting an Amish farmer in charge of the Department of Agriculture, that CEO said.

While CEO at SECU, Blaine also notably rejected all merger overtures, relying on internal growth only and instead focusing on helping other, small credit unions survive on their own.

One CEO who has actively merged in numerous other credit unions expressed unease: Mergers are an important part of our growth strategy. If he should discourage voluntary mergers, that could dramatically slow the industrys necessary consolidation. Should that happen, we would just have to spend more effort buying banks.

One member of the Global Womens Leadership Network expressed strong support for what she called Blaines stand-up leadership. However she expressed disappointment that the administrations three board appointments of Blaine, Todd Harper, and Rodney Hood were examples of an outdated cooperative leadership culture. Lets get some diversity here, she said. Jim is our Bernie. How about letting AOC name somebody?

Both CUNA and NAFCU learned of the appointment only at the last minute. As CEO Blaine had left CUNA over policy differences, only to rejoin shortly prior to retirement. CUNA stated it looked forward to challenging dialogues.

A NAFCU spokesperson expressed hope that if Blaine were to restart his blog to communicate directly with credit unions he could at least show a better side in the official agency site photo.

Two recent NCUA chairs also reacted to the change.

One former chairperson said that Blaine was certainly well qualified. He was always telling me how to do my job. Now that he is in fact the chair, he will learn how difficult it will be to fill my shoes. He will learn you have to go with Plan A because there is never a Plan B.

Another former chair and board member said that Blaine knows well how to make tough decisions.

He will listen to agency staff, respect their singular expertise , and strongly support their seasoned judgments. His tenure will continue my leadership practice that NCUA knows whats best for credit unions and their members, he said.

Potential Policy Differences

The only muted concerns about Blaines choice was what policy changes he might make at the agency. This concern was expressed by one North Carolina credit union who wondered whether the two Tarheels on the board (Blaine and Hood) will stick together to pass whatever changes Blaine may propose.

One concern was Blaines rejection of indirect lending, which he opposed while CEO saying that the credit union must stay on the side of the member, not the auto dealer. For example, could he interpret the FOM to say that only preexisting members can be financed at a dealership. One Texas-based federal credit union said that such an interpretation would shut down their business model.

Blaines approach to mergers also could ruffle feathers. He believes members should be given the option of a voluntary liquidation with the net worth distributed directly to members rather than given to the surviving credit union. If members then wished to join another credit union or continue with whoever purchased the loans and deposits, they could have a choice.

He has observed credit unions are routinely buying banks for cash at 1.5 to 2.0 times book value (tangible net worth). In the voluntary merger that would mean an average payout to every member of between $1,000 and $2,000 of equity.

As CEO Blaine also published his salary on the internet. At times he stated his belief that the CEOs compensation should not exceed a specific multiple of the average salary paid to the credit unions employees.

One critic suggested that for Blaine to force this disclosure on credit unions would be unsettling: This is especially problematic at this time. All the credit union associations are trying to get the same tax treatment as bank CEOs so that credit union CEO salaries in excess of $1 million are not subject to an excise tax.

Another point: What will be Blaines stand on the risk based capital changes due to go in effect in 2020. One CEO is positive about Blaines capital position because of his support for secondary capital. With industry net worth above 11%, I just hope he will declare everything above 7% to be secondary capital. Then the excess can be used however the credit union wants to reward or serve members.

Former Colleague Gives Final Word

Tom Dorety, who worked with Blaine at SECU before leaving to eventually become CEO at Suncoast Schools, reacted when he heard the news. Youve got to be joking! Blaine would never take the NCUA job. The commute is too long.

Happy April Fool’s Day!

We hope you enjoyed this April Fool’s ruse from Chip Filson. What’s no joke, however, is thattoday isthe 34th Annivesary of Callahan & Associates. On April 1, 1985, Ed Callahan, Bucky Sebastian, and Chip Filson officially founded the company. Happy Birthday, Callahan.

The post White House Finalizing Remaining NCUA Board Appointment appeared first on CreditUnions.com.

A critical role of owners of a firm or citizens in a democracy is the willingness to ask tough questions. Especially when bad news is a surprise.

Some credit unions are asking why they should care about how the NCUA manages the NCUSIF? Because it’s members’ money.

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Similar to all other assets, each credit union is accountable for the safety of this deposit. However, the state of the NCUSIF also communicates the credit union system’s financial reputation to Congress and the public at large.

At stake is not only member resources but also the public perception of the industry. So, when the NCUA board announced the worst monthly financial performance in the history of the share fund, credit unions should take notice.

The following summary and data will help credit unions ask tough questions that should accompany surprising bad results, whether reported by a credit union or a government agency.

The Bad News

At the February meeting, the NCUA board revealed a monthly provision expense increase of $657 million and an $815 million reserve for specific credit union losses as part of a 300% one-month allowance account increase to $925 million. These charges created the first-ever yearly loss for the NCUSIF of $229 million. These results come at a time of almost unprecedented national prosperity in the economy and for financial institutions.

The November NCUSIF financial report to the board indicated none of these last-minute problems. In fact, just prior to its merger with the Temporary Corporate Credit Union Stability Fund on Oct. 1, the NCUSIF recorded a $74 million provision expense. This brought the total allowance account to $286 million, of which only $21 million was for specific credit union problems.

In other words, everything looked normal 11 months into the year.

Even with this worst ever monthly and yearly financial results, the NCUA met its 1.46% equity target precisely as projected in July 2017. Even better, the agency announced that the projected dividend of more than $700 million from the $2.6 billion merged assets of the TCCUSF would go forward as predicted.

How Did These Two Results Occur?

In the face of this newly discovered financial disaster, the NCUA booked another $500 million to $600 million of income from the assets of the five asset managed estates (AMEs), the accounts created for the liquidated corporate credit unions. This brought total recoveries to more than $3.1 billion from the surplus of the five corporate credit unions liquidated during the financial crisis.

If the NCUA had directly added this last-minute income to reserves, creating a year-end equity level of at least 1.52%, it would then be required to dividend another $600 million on top of the $700 million previously forecast for a total of more than $1.3 billion.

Also read: The NCUA Makes The Wrong Kind Of History

How can the NCUA hold onto these last-minute funds? The answer, expense it away. Thus, the one-month, unprecedented loss expense of $657 million wiping out the new income. This number was exactly the right amount to record an equity level at the previously projected 1.46%.

Since 2009, the NCUA’s allowance account has shown no link to the actual losses recorded. No one has challenged this lack of factual relevance in the past. The regulators assert they are acting prudently. Who can question their judgment?

Click here to read the NCUSIF performance numbers for the past 10 years.

When managing the common wealth created by the cooperative model and the source of all NCUA funds, uncommon leadership is necessary to avoid the conflation of self-interest and fiduciary responsibility. The obvious question is, has the NCUA’s self-interest overridden its responsibility to members for stewardship of credit union funds?

A context for asking this question is the NCUA’s dismissal of Congress’ express legislative language concerning TCCUSF resources: these provisions (of the TCCUSF Act) are restricted to resolving problems in the corporate credit union system, and not used for other purposes, such as for dealing with natural person credit unions.

Is the NCUA’s logic for this most recent income retention the same as for the merger? If this is the case, from which AMEs do these funds come, and what is the current status of each AME account?

Why Is The $500-$600 Million A Last-Minute Surprise?

On Oct. 21, 2017, the NCUA posted for the first time a full record of the allocation of $5.2 billion in legal recoveries from the big banks that sold the toxic securities that brought down much of the corporate credit union system. KPMG finished its final TCCUSF audit on Nov. 14, and as late as Nov. 30, the merged NCUSIF had still not recognized any additional surplus.

In the KPMG NCUSIF year-end audit there is $480 million described as the final paydown on the NCUSIF’s $1.0 billion note in the failed U.S. Central Corporate Credit Union. This total is the major component of the $674 million reported in the audit’s Statement of Changes in Financial Position under the line item Financing Sources Transferred in Without Reimbursement.

In plain language, this is cash from AME assets. And no one foresaw this half-billion dollar income until December?

What did the board do with these last-minute funds? It expensed the newly found riches away and highlighted the $735 million dividend.

What Is The Right Level For The Allowance Account?

The question then arises, is this dramatic, one-month 300% increase the proper level for the allowance account?

According to NCUA audits, the actual loss history for the fund is 1.2269 basis points of insured shares over the past 10 years. This loss record would suggest an allowance level of $134 million as appropriate based on actual experience. For example, the net cash losses in 2017 were only $18.9 million. The allowance at the end of November, before December’s extraordinary loss expense, was $286 million, or more than double this 10-year experience record.

The traditional conservator goal is to restore a credit union to financial self-sufficiency with a combination of new assets, streamlined operations, and capital injections, if necessary, thereby restoring the earnings power of the cooperative.

The NCUA says taxi medallion lenders now pose an $818 million threat to the share insurance fund. It is possible to analyze this judgment by looking at year-end taxi medallion lenders and trends.

This spreadsheet (click here) shows credit unions holding taxi medallions. The total net worth plus allowance account delinquency coverage ratio appears in the final column. The names are drawn from press accounts identifying credit unions originating or participating in taxi medallion loans. Names of the individual credit unions have been eliminated as some might object to being characterized as having any meaningful exposure to taxi medallion loss. Reputation matters to credit unions.

As shown, individual credit union coverage ratios of all delinquencies range from a low of 121% to more than 3,000%, with an average of 781% for this group. It is difficult to see any potential losses from this data.

Below these credit unions are the two credit unions in conservatorship, which means the NCUA is running them and responsible for the accuracy of their financial reports.

LOMTO Federal Credit Union has an allowance account totaling 169% of delinquent loans offset by a negative net worth of $37.5 million. Melrose Credit Union’s $237 million allowance less $187 million in negative net worth leaves $50 million to cover losses in $474 million of delinquencies. Assuming both delinquent portfolios are largely secured by taxi medallions, then there is significant recovery opportunity with the proper case oversight.

The key in both cases is the effectiveness of the workout strategy and managers in charge. The NCUA’s resolution efforts are often contradictory. The agency often prefers to liquidate as many individual problem assets as possible and then try to find a low-cost merger option for the remaining assets and liabilities.

However, the traditional conservator goal is to restore a credit union to financial self-sufficiency with a combination of new assets, streamlined operations, and capital injections, if necessary, thereby restoring the earnings power of the cooperative.

This strategy takes patience, creativity, and empowered leadership while the cycle of collateral devaluation runs its course and reaches a new normal.

This approach not only minimizes loss to the NCUSIF but also shows the recovery capability that cooperatives can accomplish with proper leadership. Unlike private firms, there is no outside venture capital waiting to scoop up failing firms and then nurse the franchise to its full capacity.

No matter what the approach to workouts, it’s difficult to see anything close to a $818 million loss even if the agency wants to hold a fire sale.

Asking Tough Questions: The Role Of Boards And CEOs

From the financial facts provided, any credit union executive should be able to develop questions they believe need to be answered, including:

• Is the worst year ever in NCUSIF’s history justified?
• Are the last-minute parallel offsets of income and expense in December just coincidence?
• Is the NCUA’s resolution capability so limited that an $800 million expenditure of credit union funds is necessary to restore two credit unions to self-sufficiency?

While reviewing the above data and the NCUSIF’s year-end audit, leaders might also want to read the footnote on page 44 regarding another contingent reserve. The NCUA asserted that the fund needs to hold onto four basis points $440 million of member funds because of the contingent liability from the NGN notes guarantee transferred upon the merger.

The note reads in part: Changing the assumptions for reasonably possible variations in certain macroeconomic circumstances such as a decline in housing prices from its most recent peak in the external model would have resulted in no expected losses associated with the re-securitization transactions under any scenario as of Dec. 31, 2017.

That has been the same conclusion for the past five years. Why is the NCUA continuing to hold these funds? What does that indicate about its approach to other contingency funding?

Will there ever be a more important time to ask tough questions?

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