Category: NCUA

In a recent blog reviewing the latest events in the May 2019 NCUA conservatorship of MCU, I suggested that the real problem was the failure of regulators, especially NCUA, to publicly explain their actions and intentions. The lack of transparency means that no one is taking responsibility for decisions made. Contrast this approach with the 1977 New York Times report on this earlier Municipal conservatorship.

Although insured by NCUA, Muriel Siebert, the banking regulator publicly stepped up and took charge of the situation.

In the excerpt from the New York Time’s article below, note her directness and actions with the credit union including:

• Her transparency discussing the situation, including citing delinquency and board “struggles”
• Her statement of full cooperation from the NCUA, including funding, if necessary
• Her assurance of continuity of operations including paying a 6.5% share dividend
• Her on site visit to the credit union’s main office and statement that the Department did not intend to retain possession
• Her assurance there would be no wholesale layoffs of staff
• The statement by New York’s mayor Beame extending his appreciation to the Regulator for protecting members interests

This is what leadership looks like: collaborative, goal specific and backed by personal commitment. The turnaround succeeded!

New York State Is Taking Over Municipal Credit Union in the City

(November 3, 1977)

Superintendent Siebert asserted that the credit union “is not insolvent and it has sufficient liquidity for us to be able to run it.”

She said that the union would be open for business as usual at 9 A.M. today and that “we will accept deposits, permit withdrawals and make loans to members as in the past.”

The Banking Superintendent said that the National Credit Union has assured her of full cooperation and that the national group would provide additional funds to run the Municipal Credit Union “should ;hat become necessary.”

She said also that the deposit insurance of up to $40,000 per account would continue “in full force and effect.”

The 60‐year‐old Municipal Credit Union has deposits of more than $120 million and has been paying its members quarterly dividends of 6½ percent. Miss Siebert said it was her intention “to correct the institution’s operating problems” and to continue to pay the usual dividend for the quarter ending Dec. 31.

In explaining the events that led to the takeover, Superintendent Siebert said that Ian examination of the credit union by her department early this year “disclosed an increased rate of loan delinquencies” and that “little was being done by the M.C.U. to collect these delinquent loans.”

Fights for Control Cited

Miss Siebert said the credit unions operations were also jeopardized because a struggle had been waged since 1972 for control of its board of directors. She pointed out that lawsuits had been brought by dissident members of the board and that all this had created problems involving the “effectiveness of management, personnel and various financial controls.”

Late yesterday, she visited the credit union in the Municipal Building at 156 William Street and told the staff there that her department “does not intend to retain possession of this credit union indefinitely.”

“We do not plan any wholesale layoffs of employes,” she said, although we do plan to make some reductions in staff which have already been recommended by our auditors.”

Mayor Beame issued a statement last night, which in part said: “I wish to extend my appreciation to the State Bank ing Department for moving promptly in this matter to protect the interests of the city employees who are members of the credit union.”

The Municipal Credit Union was chartered by the state in 1916 with 19 members.

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In a dramatic turnaround Municipal Credit Union (MCU) reported a $30 million reduction in its 2019 final year to date loss compared with its reported September 30 financial position.

$40 Million Improvement in Six Months

In the September 5300 call report, MCU’s bottom line was a $113.1 million loss. As of December, there was an improvement with a reported loss of only $82.7 million. This was on top of a $10 million-dollar gain from the June 2019 year to date loss of $123.3 million.

How is this dramatic $40 million turnaround in just six months possible? Is it too good to be true?

The short answer is Yes. It is neither true nor good.

Some Background

A brief summary of MCU’s situation from a November 2018 news article outlines the CEO’s embezzlement starting in 2013 to pay for addictions, his total compensation of $5.8 million in 2016, the removal of the Supervisory Committee and Board in 2018, followed by the appointment by New York’s Department of Financial Services of a former bank President and CFO Mark Ricca as CEO in October 2018.

At year-end 2018 MCU, led by the new CEO, reported a positive bottom line of $11.4 million, a net worth of 8% and a stable balance sheet with delinquency of 0.85% more than covered by an allowance account exceeding 228% of past due loans.

NCUA Conservatorship in May 2019

Then on May 17, 2019, NCUA took over the credit union and appointed Kay Woods as the CEO. Forty-five days later the credit union announced a year to date loss of $123 million versus the first quarter’s net income of a positive $2.9 million under the prior CEO.

There was no public discussion by the credit union or NCUA explaining this catastrophic loss. The lack of any reasons raises the question whether this was a hasty judgment or a predetermined action by NCUA. The result reduced the credit union’s 2019 mid-year net worth ratio to critically undercapitalized at 3.4% from well capitalized over 7%, 90 days earlier.

Even without any explanation, it did not take a forensic analyst to determine that NCUA’s new conservator had ended MCU’s defined benefit retirement plan and fully expensed the potential accounting deficit shown on the balance sheet as a negative $114 million at March 2019. This entry shown as other comprehensive income/loss has been reported on MCU’s balance sheet for over a decade.

The labor union representing 450 of the credit union’s employees confirmed this benefit cancellation had occurred and been replaced by a 401K defined contribution program in Local 153’s 2019 winter newsletter. The union’s contract had expired in January 2019. There has been no announcement of a new one.

How to Stage a $40 Million or More Turnaround

One way of capping a defined benefit plan’s future liability is to close it. This action will cause all employees covered under the plan to be 100% vested regardless of their vested status at the time of the closing.

The actuarial estimates of a plan’s future funding requirements do not require cash outlays until employees begin to draw benefits, which may be years or decades into the future. Closing the plan however, makes all covered employees fully vested in all earned benefits, regardless of years of service. This vested amount can be paid out if they leave employment instead of drawing the plan’s benefits for years after retiring.

Since the plan’s termination, employment has declined from 688 FTE equivalents to 523. In addition, the credit union announced in December that it was closing six more branches reducing total locations from 23 to 16 as of January 31, 2020.

As more employees will be asked to leave, each will be eligible to receive 100% of vested benefits in cash for rollover into another retirement program or an IRA. Individual lump sum payments will depend on length of service and level of compensation. However, the year-end average salary and benefit of $310,481 per employee (where the payout expense is recorded) suggests the average vested amounts are in excess of several hundred thousand per departure.

Every time an employee leaves, the payment reduces the actuarially projected shortfall of $114 million shown at March 31, 2019. That total assumed the plan’s on-going nature with liabilities projected from current employee staffing, their accumulated tenure and plan vesting schedules.

The $114 million write-down in the June quarter was an accrual estimate, presented as a loss using plan assumptions that were no longer valid since the plan had been terminated.

By presenting what is at best a misleading, and possibly false financial narrative, the credit union created a source to pay laid off and departing employees a “severance” (their 100% vested amount), a rationale for pushing back union contract demands, a reason for closing branches, and an urgency to dismantle the credit union’s operating capabilities, plank by plank.

Six months after the $123 “loss” was reported, the reversal of the accrued liability, appears to be $40 million and rising as layoffs continue. In fact, the $30 million 4^th quarter improvement is due almost entirely to a correction of the earlier significant incorrect presentation of a future liability.

Downsizing Goes On

Currently MCU lists over 25 vacancies on its web job site. Branch closings continue. One has caused a landlord to initiate legal action against early termination. Korn Ferry has been hired to recruit a new Chief Human Resource Officer with “10-15 years’ experience” and one who is “willing to roll up their sleeves as needed.” The union’s latest newsletter said negotiations are still ongoing with no contract.

Lending to members has slowed by 40% from $773 million in total 2018 loan originations, to $465 million in 2019. Loan quality remains strong and delinquencies are still covered by more than 200% in an allowance account reserve. However, this lending slowdown could impair revenue for years to come.

What is the Real Problem?

If the $123 million “loss” was not really a loss, then what is the reason for the accounting manipulation?

Financial reports from prior years portray a credit union that on the surface was doing OK. The credit union avoided both the taxi medallion problems (2017-2019) and mortgage backed security crisis (2008/09). It had a balanced, growing loan portfolio and was serving many blue collar, middle income, civic and nonprofit employees in the New York City area. Chartered in 1916, it is New York’s oldest credit union and had previously survived a previous conservatorship in 1977.

However, news accounts stated that the CEO been supporting addiction habits via embezzlement since 2013. A supervisory committee member, board member and prior human resource executive, have been accused of helping with the wrongdoing.

In early 2018, the MCU board took the lead role for terminating MCU’s CFO, CHRO, and CEO based on investigations following receipt of DOJ subpoenas that alerted the directors to problems. After the board acted, and the investigations completed, they were then removed by the regulator.

The allegedly underfunded defined benefit plan was never an issue in these 2018 events. It had been openly shown in call reports for over a decade. MCU’s executive salaries and benefits, including the $6 million paid in 2016 to the CEO were disclosed in the required IRS 990 filings year after year. Both of these accounts should have been thoroughly reviewed by examiners.

The news reports and 5300 call reports suggest that the core issues, whether in 2018 or 2019 were in plain sight all along. Every year NCUA and DFS conduct joint exams with dozens of trained personnel on premises over many weeks. The credit union’s board and supervisory committee records are read, CEO compensation and any loans to executives/board members examined, MCU’s internal audits and the external CPA audit (including the future funding projections for the defined benefit) are all part of the exam process.

External Audit Issued During the Board’s CEO Investigation

The external audit as of December 2017, dated April 11, 2018 from Eisner Amper LLP provided the normal “clean” opinion of MCU’s financial position:

“In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Municipal Credit Union as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017 in accordance with accounting principles generally accepted in the United States of America.”

Annual regulator exams cover all aspects of financial reporting, loan analysis, reserve adequacy, compliance and IT security, just to name some of the areas in a normal on-site review. As a $3 billion credit union, MCU should have been assigned NCUA’s most experienced examiners.

Either NCUA had not identified the CEO’s five-year scheme or was unable to resolve it. The MCU board’s removal occurred only after they terminated the three suspected “bad actors” in 2018. And it was one full year later that NCUA’s current conservator reported the “surprise” loss from the benefit plan termination.

Was the exaggerated loss, currently $40 million, NCUA’s way of creating a “financial emergency” to force their changes on the credit union? Was this an after the fact effort to divert attention from years of regulatory oversights enabling the CEO’s defalcations to go unnoticed?

Silence Creates Uncertainty, Erodes Confidence

What compounds the impression of accounting manipulation, is the continuing vacuum about NCUA and the conservator’s plans. Both have declined to talk to the press. Without transparency, anything goes. There is no accountability, no need to justify actions, no explanations of alternatives. Everything is done by force majeure, justified by an inflated expense recorded a full year after the board is removed with the regulator 100% in charge.

NCUA’s nineteen-month silence during these two separate events, and failure to provide a public spokesperson willing to take responsibility for the conservator’s actions and purpose, suggests that it is avoiding any discussion of its supervisory responsibilities. Instead it wants to point to a $123 million shiny object and reprise a two-year-old act of a confessed CEO embezzlement scheme. An embezzlement loss that should be fully recoverable from bond claims and restitution.

What’s Next?

The easy part is over. Anyone can knock a barn down. It takes a carpenter to build one. Restoring employee and member trust and morale is not achieved by merely showing an improving net worth or high ROA. A wrecking crew approach may remove obstacles to change, but it will also lead to unforeseen consequences when seeking persons to build a resilient future for MCU.

MCU’s financial progress is inevitable, for the credit union was showing ROA and reasonable growth before using the defined benefit plan cancellation as a hammer to justify downsizing and layoffs. Financial results matter, but the critical processes that will show if the situation is on the right track include:

1. Restore meaningful input from the membership, both employee groups and individuals;
2. Find long term senior managers/leaders who understand the requirements to build a sustainable organization with what is left of operations;
3. A frequent and open reporting to all public stakeholders, with timely updates from both those running the credit union and NCUA/DFS who outsourced their oversight to those now operating in secret.

Why Transparency Matters the Most

This final step is in fact the most critical. NCUA has aided and abetted a false narrative of the credit union’s financial situation begun with its purported loss in June 2019.

Cooperatives are very different from for-profit financial firms. Ownership is held in commonwealth, not by individual stockholders. When regulators act without presenting their goals for public understanding, there is no accountability for those exposable for the situation.

When problems occur from external events or internal failings, all cooperative parties have an equal responsibility for resolving them: the credit union leadership and board, the regulators and third parties such as auditors and bonding companies all share oversight responsibility. Effective solutions require collaboration and respect for everyone’s role.

When one party operates unilaterally in secret, or attempts to put blame on another, then collaboration and positive resolution is replaced with scapegoating. Vital information and capabilities are lost. Options are unexamined. And the situation can quickly descend into a failing spiral that no person or team can reverse.

For what employee would want to trust their career prospects to a firm without a leader, with no governance process in place, no stated plan or goals, continuing uncertainty and loss of market confidence? But this is becoming the situation today. Instead of preserving value, NCUA’s actions are destroying the prospects for recovery. It needs to make its case otherwise in public as soon as possible, if it has one.

Read more: 

• Where is the Transparency for NCUA’s Actions at Municipal Credit Union
• The Hamilton Question and New York’s Municipal Credit Union’s Conservatorship by NCUA
• 588,000 Members About to Lose Their Credit Union

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It is one thing to be uninformed on a critical issue of public policy. It is another to open one’s mouth and remove all doubt. And then compound the folly by writing a public editorial after losing a 2 to 1 vote at the most recent NCUA Board meeting.

Harper’s Rationale for Implementing Risk Based Capital Rules

The core logic in his December 16 press release follows: (https://www.cujournal.com/opinion/ncua-a-day-late-and-a-dollar-short-after-delaying-capital-rule

After the Great Recession, the Federal Deposit Insurance Corp. and other banking regulators moved promptly to update and implement their risk-based capital standards. Yet the NCUA wants to delay implementation for a second time. Why should it take complex, federally insured credit unions with $500 million or more in assets seven or eight years longer to implement their comparable risk-based capital rule than it took for banks and thrifts to implement theirs? That’s an uneven regulatory playing field…

Pursuant to the Basel Accords, which sets international best practices, no modern financial institution’s regulatory system operates without a meaningful risk-based capital component. Not only would the 2015 RBC rule finally bring the NCUA into greater compliance with the Basel framework, it’s required by law in the Credit Union Membership Access Act. That’s why the risk-based capital standard is consistent with the cooperative nature of the credit union system and provides comparability to the other federal banking regulators.

The Argument is Dead Wrong

Apparently, Board Member Harper and his staff have been so busy that they have failed to note that on September 17, 2019, the FDIC eliminated all risk-based capital requirements for community banks with assets less than $10 billion. The policy was supported by the OCC and Federal Reserve.

Banks are no longer required to calculate or to report the ratio. They will be considered well capitalized under PCA if they meet a simple leverage ratio.

This simple leverage ratio is the PCA model for credit unions. The banking regulators have endorsed the credit union’s current and historical approach to capital adequacy measurement.

Harper now wants to impose this failed system on credit unions. The banking regulator’s actions acknowledged that RBC is not only burdensome, but more importantly, it does not work in practice. As one banking analyst Tom Brown observed as early as 2014:

We’ve already seen that the risk-based approach does not work. It’s obvious that neither man nor model can adequately assess a given asset’s risk under all circumstances before the fact. It doesn’t make sense to spend a lot of time trying. It does make sense to have a minimum leverage ratio, but it should be the same for banks of all sizes.”

Source: A Loss of liquidity, not inadequate capital, is what often dooms banks. Bankstocks.com, April 22, 2014

Similarly, Harper’s references in his editorial to Basel, the taxi medallion failures and the role of capital in credit unions are inaccurate. More importantly his reference to an “uneven regulatory playing field” demonstrates a complete failure to grasp cooperative design, its distinctive strengths versus for-profit financial models, and the unique role of the NCUSIF’s pool of credit union capital.

The Failure of NCUA Board Leadership

When NCUA board members appear so oblivious to the realities of their responsibility, other leaders must step up. Call out the erroneous facts and logic. Present reasonable solutions. And if that fails, go to Congress and the press.

This public bumbling undermines the public reputation of the NCUA board and the cooperative system it regulates. It calls to question the ability of the board members to oversee their responsibilities not just for policy but also for basic tasks of examination, supervision and funding oversight.

The track record described below suggest the current NCUA board has a long way to go to overcome a growing list oversight failures.

Read more from the blog:

• The Cost of Not Learning from Our Brethren’s Mistakes 
• A Credit Union Member Takes a Stand After a $40 Million Loss
• Where is the Transparency for NCUA’s Actions at Municipal Credit Union?

 

In May, NCUA became conservator of the $3.0 billion Municipal Credit Union in New York City.

In the June call report, 45 days after the conservator took over, Municipal reported a $123 million YTD loss. This appears to have been caused by the termination of a defined benefit plan triggering a required funding of the shortfall. This loss reduced the credit union’s net worth ratio to 3.41%, or undercapitalized, from over 7% the quarter prior to NCUA’s becoming conservator.

The September 2019 Update

The most recent call report implies that the credit union had net income of $10 million as the YTD loss has been reduced to $113 million. Comparing June and September call reports shows total membership declined by 35,000 and total employment reduced by 104 (to a total of 591) in the three months ending September.

The average salary and benefits are $369,000. Total salaries and benefits have increased to $163 million from $62 million for the previous year. This extraordinarily high number suggests the credit union is paying out the terminated defined benefit program.

The professional services expense is running almost three times greater than the prior year: $18 million versus $6.9 suggesting the consultants are well compensated, or is there another explanation?

The credit union’s loan originations are down significantly at $378 million from $615 million in 2018. Shares declined by $76 million in the quarter. Delinquency is .85% and the allowance accounted is funded at 227% of total delinquent loans. Net worth is 3.87%, or still undercapitalized.

What is Going On?

What is the purpose of all of these very expensive charges? Why close out the retirement fund now when liabilities will stretch decades into the future? Why were over 100 employees let go? What is the reason for the decline in lending? Is this tied to layoffs? Who is responsible for these decisions? Is anyone overseeing this rundown of the credit union? What is the plan?

Most importantly, whose interests is the conservator serving. Is it. . .

• The employees who are taking the brunt of the layoffs?
• The members whose numbers fell by 35,000, shares by $76 million, and loans by $24 million in the September quarter?
• The conservator’s reputation and/or compensation?
• The NCUA’s desire to protect its public standing?
• The credit union system’s trusted role in New York City and the state?
• The cooperative option in the nation’s financial system?

No Transparent Goals

No one knows, because NCUA has not provided any information that would give all stakeholders insight into the goals of this regulatory seizure.

Without any goals, it is easy to defend whatever outcome occurs. (“We tried our best.”)

Options are not debated. Critical constituencies are left out of the deliberations. The result is that confidence in the outcome will always be open to question.

Operating in secret will only create further uncertainty. Is the goal a turnaround to return the credit union to its owners and the community? Or is this just a dressing up exercise to sell off this 100-year franchise and branch network to the highest bidder? And thereby let NCUA wash its hands for its responsibility in this situation?

The silence of NCUA board members, some of whom have been before congress twice in the past ten days, is deafening. It is easy to talk about future visions and past activities, but who is dealing with the here and now? Not even Municipal’s website mentions the NCUA’s takeover.

Chairman Hood, this is occurring on your watch. Are you a CEO on the bridge or one sleeping in your cabin?

Who is Affected by Municipal’s Conservatorship?

The field of membership from the web site:

Who Can Join?

You can Join MCU if you are:

• • • An employee of the City of New York
    • An employee of a hospital, nursing home, health facility, or their affiliates located in New York State
    • A Federal employee who works in the five boroughs
    • A State employee who works in the five boroughs
    • All students enrolled in a college, university, school, or institution, in the City University of New York (CUNY) education system
    • All students enrolled in St. John’s University who are attending campuses located in New York State
    • An employee working for agencies operating within the City of New York metropolitan area and which are at least in part funded by the City of New York or the State of New York
    • A retiree receiving a pension or annuity from one of the organizations that qualify for membership in MCU
    • An employee of an insurance company that offers health related insurance in the State of New York
    • An employee of companies that produce and/or supply hospitals in the State of New York with medical and other types of healthcare products
    • An employee of the City of Yonkers or Mount Vernon
    • An employee of a private college located in the City of New York
    • An employee of a private or public college in the counties of Nassau, Suffolk or Westchester
    • An employee of the Archdiocese of New York or Brooklyn
    • A member of certain private employers or industry groups
    • A family member of a member or individual who is eligible for membership. Eligible family members include those related by blood, marriage, adoption or living in the same household, including spouse, parent, stepparent, child, stepchild, sibling, stepsibling, grandchild, grandparent, or great grandparent. “Household” means living in the same residence and maintaining a single economic unit.

There seems to be a lot of confusion, intentional or otherwise, about why credit unions cooperatives exist.

For some, buying banks is just another “voluntary, market-based transaction.”

One NCUA board member has asked that credit unions be subject to more rigorous consumer exams, just like the banks have.

For others, having greater capital and balance sheet options is necessary to “level the playing field.”

A Reminder of the Difference

At a time in the past when credit unions were in the words of the NCUA Chairman “on a roll”, he reminded them of their most important characteristic:

“Your future is brighter now that it has been ever before. You have the flexibility to do things you were never able to do. Plus you have the most important ingredient of all-the element missing in banks and S&Ls: your relationship with your members. You are cooperatives first and financial institutions second.” – Chairman Ed Callahan, NCUA 1982 Annual Report, pg 10.

From Senator Sherrod Brown’s (D-OH), opening statement at the February 14, 2019 confirmation hearings for NCUA’s nominees Harper and Hood:

“Mr. Hood previously served as an NCUA Board Member from 2005 to 2010. Mr. Harper worked in the NCUA’s office of Public and Congressional Affairs and served as the chief policy advisor to the Chair from 2011 to 2017. Both nominees possess a deep understanding of credit unions and the issues that affect them.” [emphasis added]

From Senator Brown’s questioning of NCUA Chairman Hood at Senate Banking Committee hearing, December 5, 2019:

“I just am not sure you understand what an independent regulator is.”