Our first-ever Member Forum was held on January 24th, 2010 at the Westcott Community Center. After experiencing our first ever year-end loss, we wanted to give members the opportunity to ask questions and voice their concerns. Cooperative Federal staff and Board members were in attendance to listen and explain the reasons behind the tough decisions made in 2009. Because members preferred the question and answer format, we’ve decided to hold another Member Forum in Fall 2010.
Context: The Master Plan meets the Perfect Storm
The Forum began with brief opening remarks from Ron Ehrenreich, Treasurer/CEO, and Christina Sauve, Community Development Coordinator.
Ron described the strategic plan that led us to where we are today. Last decade, when we made the choice to become certified as a Community Development Financial Institution (CDFI), we embraced an ambitious strategy to branch out across the city and become a major force in Syracuse’s neighborhood revitalization movement. That would involve providing time- and cost-intensive services to those deemed “unprofitable” by mainstream banks. We knew this would be a challenging charge.
Yet, even with last year’s setbacks, we have succeeded: compared to our financial position just before we became a CDFI, we have nearly tripled our asset size and our 12/31/09 net capital ratio is actually about the same as it was a decade ago.
Christina provided an overview of the business plan we followed in 2009. We planned to break even in 2009, after incurring a few substantial one-time expenses – such as the completion of the Northside office and upgraded core data processing system – that were intended to better meet our members’ needs. However, we also faced unplanned expenses due to the financial crisis, such as share capital losses at Members United.* Their money was in well-rated securities, but we still took a loss. We had two depletions of our share contribution in 2009, totaling $95,148. We also had to spend $17,944 to help recapitalize the National Credit Union Share Insurance Fund.
On top of these extraordinary expenses, interest rates have remained very low, so our income was also less than we anticipated ($169,379 less than what we would have earned at 2008’s already-very-low rates, and $282,082 less than what we would have earned at 2007 interest rates). Our NCUA Examiner described this confluence of unexpected events “the perfect storm.”
Finally, we also did not receive a CDFI Fund grant due to priority changes at the Treasury Department. That loss of grant income (about $390,000) was the last straw that led to cutbacks and layoffs in the fourth quarter of 2009.
Questions & Answers
After that 10-minute introduction, the rest of the meeting with dedicated to a Q&A. Members asked questions in turn, which were answered by various credit union staff and Board members. Board member Linda Hall facilitated the Q&A.
Here is a recap of the questions members asked, and the responses that were given.
Do we need to keep funds in Members United? We aren’t required to be a member of Members United, but if we withdraw our remaining membership share capital we will lose our discount on the important services we receive from Members United. Without that discount, those services would become unaffordable.
Are those funds at risk of future loss? The remainder of our membership share capital can potentially be lost, as it is not insured, but these funds cannot be withdrawn now. Any funds exceeding that share capital are not at risk (they are insured by NCUA). We can also, theoretically, recover some or all of those losses if the mortgage market recovers.
How often has Members United taken losses of this nature? These are the first loses of this nature.
How do we make reasonable decisions when we are so linked with others? Members United did make prudent decisions, but was blindsided by the meltdown. We have the option to refrain from additional investments. As it stands, however, we do not have a viable alternative: if we withdraw our membership capital, we cannot use their products and services; we depend on them to provide some of the core services our members need. Because of our size, we were actually among the least affected by these losses; many other credit unions are in “prompt corrective action” (intensive NCUA oversight) or were forced to merge.
Is member money at risk? In what situation would we lose our shares? Member money is not at risk. We have never lost a cent of member shares. They are fully insured by the NCUA and backed by the full faith and credit of the US government.
Isn’t secondary capital uninsured? Yes, that is the one exception – but all of our secondary capital to date has come from nonmember organizations and community partners who chose to take on this potential risk, to invest in our community development mission. Secondary capital depositors receive multiple disclosures clearly explaining that the funds are not insured.
What about the devaluation of the US dollar? Member shares are only at risk of devaluation to the same extent as any US currency is at risk. Globally, US currency is still viewed as a safe harbor, at this time.
What other places are we at risk? We have very few investments; our assets are almost entirely in the form of loans to members. Our priority is to provide liquidity for loans. Members’ accounts are currently insured and guaranteed up to $250,000, and there are ways to structure your savings to insure up to $1,000,000. We have information available from NCUA on how to do that.
Should the credit union lose money year after year, we would be forced to merge with another credit union; that further guarantees that members’ money has no risk of loss. However, we’ve only taken a year-end loss once in twenty-eight years.
Where did Members United have its money invested? Members United is mostly invested in the best tiers of mortgage backed securities – so it looked prudent at the time. Also, we were required to invest in them, and actually saved quite a bit in services as a result. Among the corporate CUs, Members United is one of the best in terms of rates and how they manage their securities—others have completely gone under during this crisis.
Can you confirm the year-end figures and total losses? Our net worth ratio was 7.8% at 12/31/09, and our net loss was $342,536. Much of that loss was due to decreasing interest rates on loans, including Adjustable Rate Mortgages adjusting down to lower rates.
Ultimately, we knew that we would need some reserves in order to provide a “cushion” during a time of expansion. We spent years building a buffer of net capital, close to 11%, and this cushion did was it was intended to due: it helped us absorb the grant losses as well as manage extraordinary expenses and reduction in interest income. We are still well-capitalized at the beginning of 2010. The NCUA deems a credit union to be well-capitalized if their net capital ratio is 7%, and we are above that. The Treasury Department’s standard for Community Development Credit Unions (CDCUs), like us, is actually lower: 6%.
What is the net ratio without grant income? It has not been our practice to evaluate our financial condition separately from grant income, because it is so integrated with our overall operating budget. While certain grants do cover specific programs – like classes and community development staff – other grants offset loan officer and member service representative salary, pay for training and equipment, and offset general overhead. However: given the recent turn of events, we ARE making an effort to evaluate our finances in finer detail. Our new core system accommodates departmental accounting, and we are implementing that.
We do have diverse sources of funding, but we had the “perfect storm” with all these losses simultaneously. Perhaps our expansion was ill-timed, but for all of our diligence in planning we did not predict the severity and length of the recession. Although interest rates were falling fast in 2008, no one predicted that they would continue to free fall in 2009.
The Budget Committee does worry about grant money not coming through, and though we look forward to the day when grants are not a part of the equation – we’re not there yet.
The community development services the credit union provides are important, and if grants are necessary to support those services, I am for it. But I am concerned about the way the layoffs were conducted. What have you learned about the process? The layoff process was heart wrenching, and there really was no good way to do it. The Board decided to make equal cuts across each department, and left the final decisions up to the management. Because we are a financial institution, we felt it was an important security measure to do all the lay-offs in one day—even though, of course, it wasn’t easy for anyone. We didn’t have a playbook for this; the last layoff was over 15 years ago** and it was voluntary. The Board and Management are working on such a playbook with guidelines and best practices.
We realize that there is room for improvement when it comes to human resources; there has been a lot of tension due to the core system conversion in particular. The Personnel Committee is also overseeing the “tightening of ship” in terms of HR policy.
Were layoff decisions based on seniority? Did you consider “demoting” or re-allocating senior staff and laying off more junior staff? The decisions were very difficult. We considered various scenarios and made choices based on the credit union’s needs. There were no specific criteria, and the layoffs were not based on employee performance or seniority. The employees we laid off were respected team members and friends, and we were all sad to see them go.
Did you consider attrition or pay reduction? We considered all options, trimmed operating expense budgets across the board, and decided layoffs were the only viable solution to regain our financial footing. Only a drastic reduction in expenses would make up for the operating deficit.
Why were all the layoffs done in one day? We had to act quickly in order to protect the interests of the credit union – and not create an environment of fear that may cause us to lose other staff members. As much as we dislike it, this is a financial industry standard. All employees have access to privileged and sensitive systems and books, and as a credit union we are legally obligated to protect that. It would have been an uninsurable risk and would have affected the bondability of the entire organization, including all remaining employees.
The credit union has an independent audit, yet those records are unavailable to members. The level of turnover in your accounting department is a significant red flag, particularly with one case involving a criminal litigation. How can members understand that situation and be assured of the soundness of the credit union? The Board and staff do not perform audits; we opt to contract with an independent firm to conduct the audit even though it is not required for a credit union of our size. The entire audit contains confidential information, so to make that document public would be a violation of member privacy and could put the credit union at risk (including the security of staff). The Board will look into what sections of that audit we can share, such as the summary letter issuing a “clean” opinion and stating that the credit union is sound.
In addition to the opinion audit, our finances are closely reviewed by the Budget Committee, Board of Directors, and Supervisory Committee as well as an extremely stringent NCUA Examiner. The NCUA examination cannot be shared.
Similarly, we are unable to comment on the Bill Hamler incident to which this question refers because we are prohibited from sharing information on individual staff (past or present). The NCUA Letter of Prohibition, which is on the NCUA website, contains all the information that can be made public.
*Members United Corporate Federal Credit Union. Corporate CUs exclusively serve other credit unions, providing affordable access to services such as electronic payment processing.
**One member stated that her sister was also laid off in 2009, earlier in the year. The Personnel committee resolved to review the matter but could not discuss it in a public setting. Including this case, it is still true that the only credit union layoffs to date took place in 1994 (1 FTE, voluntary) and 2009 (4.25 FTEs including 3 FT staff and 3 PT staff).
