Surely the biggest human failure is not learning from failure.
The turnaround of Municipal Credit Union, which NCUA took over two years ago, continues with a six-month ROA of 3.65%. This strong bottom line raised the net worth from 4.42% to 6.32% over the past year, even while total shares grew 14.2%.
Kyle Markland is the third CEO NCUA has put in the credit union since appointed conservator by the New York regulator in May 2019. He is the only interim leader with a previous credit union CEO track record.
NCUA’s Conservatorship Actions in 2019
On May 17, 2019 NCUA conserved Municipal shortly after it reported a first quarter net worth ratio of 7.6%, delinquency of .77%, and an allowance account funded at 150% of total delinquencies, positive ROA—and no taxi medallion loans.
Just 45 days later in the June 2019 call report, the newly arrived NCUA conservator reported a $123 million YTD loss reducing the net worth to 3.41%. No reasons were provided.
By the end of 2019 the credit union had undergone a miraculous turnaround. It reported a $30 million net gain in the 4th quarter alone and a total improvement of over $40 million since the June 2019, $123 million loss.
The June 2021 Results in Context
NCUA’s third CEO selection arrived in mid 2020. The recovery remains steady. So how did this extraordinary performance in the first six months of 2021 compare with earlier activity?
The credit union has grown to $4.2 billion in assets at June 2021, continues to add new members, and has over 50% of its assets in investments with ¾ less than one year maturity. Loans are flat and delinquency continues to decline to .54%.
Two other numbers suggest a slightly more modest assessment. For 63% of the net income is due to significant changes in expenses from the prior year. The provision for loan loss shows a net reduction of $12.6 million for a total reversal of $22.8 from the expense reported the prior year’s first six months. Miscellaneous expense also shows a recovery of $15.4 million a $24.5 million reversal versus the expense of the prior year. Perhaps a bond claim payment?
Together these two “reversals” contributed 63% of the bottom line. Without these, the ROA would have been 1.3% still excellent, but not as spectacular.
When Transparency is Lacking, Credibility is Forfeited
Since NCUA’s conservatorship in May 2019, Municipal has reported operating results ranging from the sublime to the ridiculous. These include a quarterly loss of almost $130 million to a $30 million positive net two quarters later. The two expense “reversals” totaling $47 million in 2021 are not as spectacular, but raise questions about how such dramatic change happens.
Without clear public explanations the impression is that the performance numbers are either entirely uncertain, or subject to great variation not seen in any other credit union this size. Either option raises the issue of what is the credit union’s real operating capability versus seemingly arbitrary changes in accounting valuations.
So the good news is that Municipal is on the way back. The unfortunate news, no one knows how or why. If we cannot learn from failure, one thing is highly probable, there will continue to be more failures.
When the causes of problems are hidden then the possibility of others making similar mistakes becomes greater.
Is Municipal’s turnaround the result of skillful management interventions? Or just adjustments to exaggerated loss estimates? Was conservatorship a means to cover up years of ineffective supervision? Is the current CEO, Kyle Markland, free to make long term decisions to position the credit union, or are all his leadership decisions subject to NCUA approval?
The inability to learn from failure is a human shortcoming. But NCUA’s lack of institutional transparency is a defect undermining confidence in its oversight and judgments. Municipal is just the latest of a long series in which NCUA hides behind a practice of not commenting on problem cases.
That silence harms the credibility for NCUA’s actions; but more importantly it undermines the regulator’s reputation for the safety and soundness of the cooperative system with members and the public.