Category: NCUA

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An Update on the Taxi Medallion Business or:  “Low Balling Price to Win Market Share”

Uber and Lyft have never made money.   Cumulative losses are in the billions.  And continuing.   Two reasons for this lack of profit are spending billions of venture capital funds to subsidize fares below the regulated cab industry.  Secondly, under compensating their driver-business partners.

Now that both firms are public, the pressure for profits by public investors (now that the venture capital funders have made their windfalls) is changing their business and pricing models.

A thoughtful comment by my favorite market analyst (CNBC’s Kelly Evans), suggests the game may be up.  While it does not mean NYC taxi medallions will rise to the former values of over $500,000, it suggests that the future will be much more stable and that drivers and medallion owners can expect reasonable returns—as medallion prices become linked to actual earnings.

Kelly Evans kelly@cnbc.com, June 15, 2021:

Here’s a half-baked thought I’m just going to throw out there: 

Is venture capital bad for society? 

I was thinking about this as we talked to Kevin Roose yesterday about his recent NYT piece, “Farewell, Millennial Lifestyle Subsidy.” His point is that all the goodies millennials enjoyed over the past decade or so–cheap Ubers, food delivery, and on-demand household workers–were never properly priced until the companies all went public, suddenly have to turn (or at least pretend they’re on a path to eventually turn) a profit, and have to raise prices as a result. It doesn’t help this is all happening amidst a historic labor shortage, either.  

“Hiring a private driver to shuttle you across Los Angeles during rush hour should cost more than $16,” he wrote, “if everyone in that transaction is being fairly compensated.” It’s one more reason many millennials have tired of their previous urban/on-demand lifestyles and see the advantages of things like car and home ownership.  

So now that Uber has to shore up its financials, its rides aren’t as cheap and its service isn’t as attractive. This isn’t just a pandemic phenomenon; the company went public at $45 a share in May of 2019, and today trades at just $49 and change. If you’d bought General Motors the day Uber went public, meanwhile, you’d be up more than 60%.  

In other words, the $20 billion that Uber raised as a private company basically just allowed it to underprice rides for a while–long enough to nearly put the rest of the transportation-for-hire business into bankruptcy. How can any viable business, which has to rely on actual profitability, compete with one that’s that highly subsidized by the wealthy (which are most early-stage VCs and their investors)? Are all of these jazzy start-ups really about improving the future, or about using neat technology to earn subsidies that allow them to undercut legitimate businesses all over the country? 

On an even grimmer note, the rise of Uber led to a plunge in the value of New York City taxi medallions, leaving drivers who had bought medallions before Uber’s arrival holding massive debt. A 2019 investigation after more than eight drivers committed suicide in 2018 found the typical driver had $500,000 of debt, and a quarter of them were considering bankruptcy. 

Listen, I’m all for technological innovation. But there’s a difference between hey, now you can book a car from your phone! and hey, our private capital is allowing us to price this way below what it should actually cost.  

Now that we’ve seen how many of these stories actually play out, perhaps we customers ought to be a little more discerning. Maybe I don’t need to play in the unsustainably-cheap-to-the-point-of-being-bad-for-existing-businesses game. Maybe the next time we hear of a “disruptor” raising however many millions of dollars to “change the way we do xyz,” our first question should be–are you really innovating, or are you just temporarily lowballing the price of these services to win market share?  

Just a thought. Am I way off base here?  “

**********************************************************

Kelly’s points are very helpful.   We are now seeing the cycle of disruption play out and a new equilibrium being sought.   Four of my previous blogs discuss some of her observations about the fragility of the Uber/Lyft business model.

The common theme of each blog is that credit unions and NCUA should demonstrate as much responsibility to borrowers in a crisis as they do to savers.  Without the former, there will be no return for the latter.

https://chipfilson.com/2019/10/uber-et-al-and-the-taxi-medallion-industry/

https://chipfilson.com/2020/02/an opportunity for the NCUA Board to do the right thing/

https://chipfilson.com/2020/02/NCUA’s betrayal/

https://chipfilson.com/2020/12/disposable-members: an NCUA policy that must change/

 

 

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The Public Policy Role of Credit Union Cooperatives (Part 1)

Most credit union observers agree that the emergence of financial cooperatives was one outgrowth of the reform movements affecting many areas of American society at the beginning of the 20th century.

Across America, factory workers, farmers, women suffragettes, and city social workers had organized numerous initiatives and political efforts to resolve emerging problems. These initiatives responded to individual abuses and inequalities that became exacerbated during this era of monopoly capitalism converting a largely agrarian economy to an industrial one.

Credit unions were one of many attempts to meet the basic financial needs of ordinary people who had no access to fair financial services of any kind. This experiment begun with St. Mary’s Bank in 1909, then slowly evolved state by state over twenty-five years. These various examples became the proof of concept that resulted in the passage of the Federal Credit Union Act in 1934 as part of FDR’s new deal initiatives.

Filene and Bergengren convinced the administration and Congress that a national program for expanding consumer credit could help with recovery during the depression by increasing demand for consumer goods and services with credit.

The following slides provide snapshots of the evolution of the “movement” from social initiative to a fully formed financial system alternative for consumers. They summarize the ever changing balance between mission/purpose and institutional financial success as overseen by the federal regulator.

  1. The Need for Fair Consumer Credit

  1. Roosevelt’s support. 4,793 federal charters were issued from 1934 through 1941 when new charters fell temporarily to around 100  per year during WW II.

  1. Credit unions were first overseen by the Department of Agriculture. During WWII oversight was transferred to the FDIC. Post war, the bureau of federal credit unions became a department within HEW. In 1977 the National Credit Union Administration became an independent agency.

  1. In 1977 NCUA’s independent status began with 13,050 active federal charters. At the end of 2020 there are 3,185 active federal credit unions. Of the 24,925 federal charters granted, 92% were issued in the forty-four years prior to NCUA’s becoming an independent regulatory agency. Under NCUA the balance between mission/purpose and economic performance has increasingly focused on financial performance.

  1. Today NCUA’s safety and soundness measures dominate cooperative oversight.

  1. The absence of new charters has stifled entrants with innovative ideas. The industry has consolidated and become more homogeneous in business strategy.

Slides: 3-6 are by Steve Hennigan, CEO of Credit Human FCU using feedback loop analysis.

The traditional view of credit union’s special role justifying their tax exemption has three bases: their cooperative, member-owned structure, the legislative intent to serve people left behind by existing financial options, and the field of membership-common bond-requirement.

As the cooperative business model has evolved, so has the concept of purpose and credit union’s role in their communities. Today member’s financial health is an animating concept for some. Other credit unions continue emphasis on superior service, better value, and member relationships.

Consumer financial services are now available from multiple providers. Credit union’s success confirmed that consumer lending is an attractive business opportunity for banks and other start up firms. Today many financial options and new entrants, from payday lenders to online lending startups, target consumers.

More than a Business Model–A Design Advantage

The founding pioneers of credit unions did more than prove out a new business segment with consumers. The cooperative model was one in which people:

  • Found a solution by working together;
  • Identified common challenges to organize and solve it themselves;
  • Prioritized mutual needs overcoming fears that they couldn’t succeed;
  • Created a community and bond that formed relationships to sustain efforts;
  • Accomplished something they had never done before to get something they didn’t have.

Cooperative purpose established these core traditions that are the foundation for continuing credit union relevance and uniqueness in an ever-changing economy.

The question is, if credit unions did not exist, would we create them today? What needs would they serve? Is purchasing the assets and liabilities of banks, consistent with the credit union cooperative role?

 

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

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

The Less than $10 Million Segment Trends

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

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

Why Credit Unions Should Be Concerned With this Trend

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

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

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

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

The Federal Regulator’s About Face

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

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

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

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

So What?

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

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

Punching Above Their Weight

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

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

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

The Democratization of Financial Opportunity

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

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

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

Can Small be Big Again?

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

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

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

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

 

 

 

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Two Reflections from Memorial Day

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

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

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

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

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

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

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

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

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

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

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

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

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

The Question for Credit Unions

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

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

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

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Just a Coincidence?

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

First Story: 

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

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

Second Story:

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

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

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

NCUA liquidated all six credit unions in April 2016.

The Same Coin

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

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

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

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

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

Hiding Shortcomings

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

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

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

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

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

 

 

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The NCUA Board’s Emerging Redesign

Since Todd Harper moved from a minority board member to chair in February, board members have become more vital in overseeing agency activities.  Their increasing dialogue and comments at public meetings, if followed through, could be a harbinger of greater NCUA accountability to the credit union system.

In theory, the board should be the true point of connection with, and representative of, the best interests of credit unions and their members.  In practice, chairman of different backgrounds, parties and ambitions have acted as the sole leader for the agency.  Some have openly stated and/or acted as though credit unions have no role in the agency’s spending, its problem solving, or its management priorities.

Some non-chair members have occasionally treated their status as a part time job, a public sinecure requiring only visibility at board meetings, like credit union volunteer directors.  That does not seem to be the case now.

Three Diverse Backgrounds

The opportunity for a more vibrant, effective board comes from the very different experiences of each member.

Kyle Hauptman, vice chairman is the newcomer and “outsider.”  No credit union background, a professional career in finance, he brings the ability to see the industry from an objective point of view.  To become a quick learner, his first decision was to find a senior advisor who had a deep knowledge of credit unions from outside NCUA and government.

Chairman Harper is the “insider.” He describes himself as the first NCUA staff person appointed to the board having served as Chairman Matz Senior Policy advisor and PACA director from 2011-2017.  He references his time as a hill staffer working on financial legislation and draws parallels with FDIC to support his views. Although his term has expired, he continues in place until his successor is appointed.

The board “veteran” is Rodney Hood who served on the NCUA board from 2005-2009 and was reappointed by President Trump again in 2019.  His positions are influenced by the priorities he promoted as Chairman from 2019 through January 2021.  However, as he is no longer in that priority setting role, his perspective from his earlier tenure seems to increasingly inform his approach.

The Signs of Change

Board decisions are usually determined in advance, or else not placed on the agenda.   Therefore, the discussion around reports, the dialogue with staff and the comments related to the agenda become more informative than formal policy votes.

The “Veteran”

For example, Hood has presented statements about his focus going forward.   He has used the phrase “evidence based” judgments versus relying on forecasts of future “facts.”   In reference to the corporate crisis which broke in his first tenure, he cited the virtue of “patience” as an important lesson when making consequential decisions in uncertainty.

He has commented on the agency’s management of the level of cash in the operating fund:

I will be asking tough–albeit fair– questions about the Operating Fund carryover balance

In my view, his most consequential statement in the May board meeting came during the request for credit union comments on the NOL level in the NCUSIF.  His words:

Again, Mr. Chairman, we must recognize that our model is a very different premium model than the FDIC’s model.  Credit unions are legally committed and bound to update a large majority of the fund’s equity contribution. Credit unions today provide the bulk of the capital contributions that are the basis of the fund’s soundness.  It’s a cooperative insurance system that we run at the NCUA.

This was a statement that every credit union would agree with. The fact is that credit unions legally stand behind the fund, not the government. More importantly it came during a week in which the chairman had endorsed legislation to change the NCUSIF’s cooperative model to be more like the FDIC.

The “Outsider”

Kyle Hauptman presents his topics in a more Socratic dialogue with staff. Several meetings ago, he referenced discussions during a credit union meeting indicating credit unions felt inhibited about critiquing examiner conduct.   He asked if it were proper for credit unions to record their meetings.  Staff waffled.   He then opined he thought it would be OK.

From his first board meeting he repeated his view that the agency is spending members’ money.  That NCUA has a fiduciary responsibility for these funds and should not be holding excess balances that credit unions can use more effectively making loans.  He stated the regulator should not have an “itchy trigger finger” when it comes to making decisions costing credit unions.

He has requested staff to enhance communication of board decisions with credit unions, preferably on the website.  One example was the process for distributing dividends from the AME surplus; and in May, how credit unions can present their views on the proper level for the NOL.

Perhaps the most heartening discussion in May was on the seemingly arcane rule for derivatives.  The back and forth with staff on the role of derivatives and later, on the changing reference rate for LIBOR, demonstrated a knowledge of financial markets that is very rare at the board.

The “Insider”

Chairman Harper has continued to put forward his views while at the same time affirming some of the comments of his fellow board members.  He supported a “look back” to assess the agency’s management of the corporate crisis.   He concurred with Hood’s description of the NCUSIF as a cooperative fund.  There appears to be no opposition to increased director reliance on actual facts versus that is the way we have always done it; for historical evidence versus hypothetical models.

His challenge is whether he can move on from his tenure with  Chairman Matz when she declared that “credit unions did not represent their members,” had “no interest in the agency’s budget,” and that as an independent agency, it “was not good government for the people who are regulated trying to participate in the budget making process of the regulator.”

The Big Test Coming Up

The most important issue on the horizon is how the board will respond to the comments submitted by credit unions on the maximum level of the NOL in the NCUSIF.

That cap now is 1.38, a result of decisions made in 2017 when the TCCUSF fund was merged with the NCUSIF.  From then till today, is the first time in the history of the fund, that the NOL has been set above 1.3% of insured shares.

This 2017 decision was preceded by a request for comments on the board’s merger proposal.  The two-person board received 663 comments during the 45 days provided.  The NCUA staff stated in its summary of comments that only 12 credit unions appeared to support the agency’s plan.  That is 98% were opposed.

A focus of the critiques was the false modeling to justify the NOL increase to 1.39%.   Credit unions universally opposed this action, yet NCUA changed not a thing from the original proposal.  Credit unions spoke, but NCUA did not listen.  Even when presented with facts that contradicted the agency’s financial assumptions.

A long analysis of this event is reported in Time for Real Credit Union Disruption.

Unity, Not Uniformity

Unity is not the same as uniformity. NCUA board members have different competencies and points of view.  Unity relies on reconciliation of differences, not giving them up. This is done by uniting around what is held in common. Hopefully, that core is deciding for the best interests of credit unions and their members, not NCUA, or even a specific political philosophy.

A pragmatic, fact-based approach can create unity for the NCUA board’s most critical decisions.  That could transform the board into  a true asset for credit unions that continues to appreciate not diminish in value.

 

 

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An Emerging Board Design at NCUA?

A critical factor in credit union success is the board’s role.   Credit unions fail when boards are weak.  Board recruitment becomes static, CEO succession plans are lacking, and longevity, not oversight, the primary qualification for renomination.

In a credit union it is the responsibility of the CEO to develop the board as an asset of the organization.  There is no such direct responsibility for NCUA’s board. The three members are often selected by different administrations; political connections, not credit union knowledge, is the deciding factor in who is appointed.

If the NCUA’s board is to be an asset, it will require the efforts of individuals chosen with different skill sets, backgrounds and possibly differing views on the regulator’s role, to make it so.

The Current Situation

The current NCUA board is showing signs of designing a role that could be much different than in past years.  By leadership style and bureaucratic habit, the NCUA chairman often operated as the final authority with the board expected to follow along, even with a 2-1 vote.

An Initial Example of Board Redesign

A critical organizational skill is learning from the past, not in the that’s-the-way-we-always-done it, but a willingness to evaluate the effectiveness of critical decisions or agency processes.

In the February meeting all three board members agreed that a “look back” on the entire corporate resolution process could be helpful. What can be learned from this event in which projected losses in the billions and caused five corporates to be liquidated?

Today the surpluses are over $6 billion and four of the corporate’s shareholders will receive all (and two a bonus) or a significant portion of their membership capital shares.  This change of fortune in the tens of billions by itself would justify a reassessment.

The Value of Reviews

Effective board oversight can improve the agency’s capabilities going forward.   Transparency is enhanced and responsibility better understood.

A minor example of the benefit of the board’s public role is how the agency reports its management of the NCUSIF investment portfolio approaching $20 billion.  This interest revenue is the primary income source for the fund and its financial model.

At a time of an historically low Treasury yield curve in December, the question was posed, What is the NCUSIF’s IRR Policy?

Just 45 days later February 16, 2021, the NCUA’s investment committee invested $600 million for seven years yielding .90%, seemingly oblivious to the recent uptick in rates and the increasing talk of inflationary pressures.

February is the last investment report issued by NCUA. The March NCUSIF update included no transaction information.  With over $800 million in additional 1% deposits now in hand, it is highly likely that there have been subsequent investments.  Is the committee using judgment or just locked into a pattern of laddering investments whatever the outlook for rates?

A $16.8 Million Loss of Income

We know that less than 60 days after this February investment was made, the cost of this decisions versus waiting for another month or two to see the direction of interest rates.

With the 7 year treasury now running .40 basis points higher, the lost revenue versus investing  60 days later is $2.4 million per year, or $16.8 million over the seven year life.  The foregone revenue from just this short pause, would be $850K, an amount recovered in four months from the higher yield.  The security purchased in February will remain under water, less than book value, if rates do not return to the levels at the time the investment was made.

The Board as an Asset

The board is not making investments, but it should have a way of monitoring decisions especially in uncertain or unprecedented times.  Timely transparency, both for the board’s oversight role and credit union confidence in the fund’s management, enables both outcomes.

All three board members bring different experiences, capabilities, and points of view to their role.   Even if there are individual policy differences, that should not prevent all having a common goal of making the NCUA board a source of agency strength and of pride for credit unions.

I will describe tomorrow some encouraging signs of a more deliberate and substantive role emerging from recent meetings.

 

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Questions from Cicada Coop, a Life-long Credit Union Member

Yesterday I began a conversation with a bug I had not seen for 17 years. My cicada colleague is unusual in that he was also a credit union member. A real fan of co-ops. His whole family had joined two decades earlier; all 10,000 located at Wilson Lane.

The Credit Union NCUA Relationship in 2004

His first question upon this reincarnation was how were credit unions doing? Specifically, he wondered if the mutual relationship between his coops and NCUA had continued.

From his backpack he pulled the 2003 NCUA Annual Report and began to quote from it as a reminder of what intra-industry efforts looked like back then.

Among the items he showed are the following excerpts from the Report.

Budgeting and Efficiency

“Last year NCUA continued its emphasis on accountability within the agency’s budget process conducting its third Annual Public Forum and Budget Briefing resulting in stakeholders have a better understanding of the agency’s budget and operations. The efforts put forth . . . have resulted in a more effective, efficient federal agency.

Among the notable accomplishments achieved are a reduction in staffing levels from the all-time high of 1,049 employees in 2000 to the 2004 budget level of 963, the reallocation of resources which included closing of one regional office and relocating another at as savings of $27 million over the next ten years. These are important ongoing internal agency initiatives that will continue to have high priority in 2004 and beyond.” (Pg. 5)

Cost Control and Transparent Operations Are Key

“The 2003 budget was $887,500 less than the approved 2002 budget.” (Pg. 8)

Overhead Transfer Rate

“NCUA remains committed to increased transparency in operating the agency. . .First in November 2003 the NCUA Board overhauled its method of calculating and assessing the overhead transfer rate. Calculated annually the new method is more comprehensive. The formula has been expanded to take more factors into account, providing greater equity and accuracy in calculating and allocating costs.

Second, the NCUA Board held its third public budget briefing and encouraged public attendance and comment. This open budget process serves to underscore NCUA’s continued recognition the responsibility to share all material budgetary considerations with agency stakeholders.” (Pg. 9)

Strategic Leadership Summits

“Each January the Office of Strategic Program Support and Planning (OSPSP) plans and executes NCUA annual strategic leadership summit. . . OSPSP conducted several stakeholder panel discussions during the 2004 summit to gain insight from various perspectives on issues and concerns facing the industry. Panels included CEOs from small and mid-to-large credit unions, certified public accountants, credit union consultants, and third-party service providers.” (Pg. 18)

My Response

I told Cicada Coop all the examples he chose had taken a U-turn while he was away. As evidence I said a recent NCUA Chair had declared in congressional testimony that: “An independent regulator is not answerable to the entities it regulates.”

He did not believe there could have been such a turnabout. He cited other examples of mutuality such as the six consecutive dividends from the NCUSIF to credit unions from 1995 through 2000. So, I said, come on inside and I’ll show you the videos.

Tomorrow I will share these videos and what I believe caused this rupture. And then his family’s reaction to this changed environment.

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A Case Study of an Industry Collaborative Initiative

 Earlier this year I described a trifecta opportunity for credit unions.   The three challenges were:

  • Tapping the entrepreneurial interest of the current college generation;
  • Supporting new credit union charters to plant  seeds for future relevance and growth;
  • Providing leadership to prioritize opportunities for those left behind (DEI) due to historical inequalities.

An example combining all three elements was Gary Perez’s efforts as CEO of USC Credit Union to create a project to charter student led credit unions at the 107 historically black colleges and universities across the country.

Recently I found the following program that would seem to be an ideal way to meet all three opportunities.   And maybe jump start Gary’s efforts.  It reads as follows:

 Student Internship Program 

The OCDCU 2000 College Student Summer Internship Program was the most successful to date. The program creates partnerships between low-income designated and other credit unions (large or small) and college juniors and seniors to train and develop a pool of potential future credit union managers. The students selected are business, finance, or marketing majors. 

 With technical assistance grant stipends, the 2000 summer intern program matched 29 college student interns with 58 different credit unions. Stipends provided the interns totaled $72,500 in 2000 compared with $67,500 in 1999 for 27 students. 

Source:  pg. 16 NCUA 2000 Annual Report

 Wouldn’t a relaunch of this joint initiative now be a powerful signal of the credit union system’s responsiveness to today’s special challenges? Especially in an increasingly tight labor market?

 

 

 

 

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Should NCUA Be Helping with the Country’s Immigration Surge?

The unprecedented flow of persons seeking to enter the US in the Southwest is at very high levels. This is a situation  that concerns many people of goodwill.

Should NCUA leadership be seeking full time staff to go on temporary assignment to help out?

If confirmed that this volunteer recruitment effort is underway, the situation raises important questions. These include:

Who at NCUA approved this request and under what authority?

How does the effort assist the credit union system which funds all the agency’s activities?

If NCUA can spare these “volunteers” for months at a time, how critical is their role in the agency to begin with?

If this is a proper action, why is it being done with no transparency?

The Cooperative Way

Finally, if the situation is so urgent and just, why not ask credit unions to participate?

When Hurricane Katrina devastated New Orleans, the agency opened its office to volunteers and former employees to man telephone lines answering member calls and coordinate industry recovery efforts.

Few would turn away when asked to help one’s fellow human beings. But NCUA should follow the appropriate authority when asked to deploy its “independent” agency resources. More importantly, as a government agency such actions should be done with full public disclosure.

The Collaborative Advantage

On many occasions credit unions have  provided collaborative solutions to strengthen their system.  The resource sharing and mentoring programs as well as the credit union funded NCUSIF and CLF configurations are some examples of agency-industry joint efforts. Volunteer capital is a cooperative advantage and value.

Increasingly however, NCUA leaders have pursued unilateral actions without industry participation or, when asking for comments, do what was proposed despite substantial objections.

Individual volunteering is the American spirit at its finest, whether the Peace Corps, AmeriCorps, or thousands of non-profit and charitable endeavors.  It is an unfortunate precedent for leaders in an independent agency to privately promote an activity, apart from its mission.  And for senior leaders  to then solicit their employees to take part.

The agency must be transparent; this is not simply an internal matter.  For it deploys personnel hired and trained with credit union’s fund for activities unrelated to the agency’s purpose. NCUA is not a private business or organization, but a congressionally defined institution.

Moreover, should something go awry, NCUA employees should have the confidence their good intentions are known and supported by the industry they chose to serve.

There is a right way and a wrong way to request staff to volunteer no matter how worthy the cause. Doing so secretly impedes necessary, open discussion and could bring unintended consequences tarnishing positive intentions.