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If You Can’t Beat’em, Better Join’em

Uber has never made money in its decade long existence.   It has negative retained earnings of almost $24 billion as of yearend 2021.

It’s business tactics were to subsidize rides as it disrupted markets in the US and around the world to take market share from existing providers-primarily taxis.  Then dominate those markets as competitors left using its monopoly pricing power  to turn a profit.

The company’s ride sharing platform was innovative. It did offer a convenient easy-to-use service that was  ubiquitous for consumers, many times at a lower, albeit below cost, fare.

But the model rested on two assumptions:  that gig employees would cover all the expenses for  the transportation vehicles and that drivers would value the flexible work opportunity as a non-employee or independent contractor.

The model worked for a while.   Then COVID.   Now the basic flaw in the  model has become apparent.   When drivers have a choice, they will prefer to be owners of their business efforts, not working for someone else as  a gig or part-time piece-work wage earner.

Today the worker shortage has caused Uber to seek partnerships with  taxi operators in the US and around the world.

Three Descriptions of this Strategic Partnering

Call for an Uber, Get a Yellow Taxi  (New York Times)

Uber Reaches Deal to List all New York City Taxis on its App  (Wall Street Journal)

But the most interesting analysis driving this change (no pun intended) is this article from CNBC’s Disruptor Column  Once Rivals, Now Partners (March 24, 2022) highlighting added.

In 2015, CNBC’s Kate Rogers interviewed Safdar Iqbal, a New York City taxi medallion owner who was working to make ends meet as valuations for the likes of Uber and Lyft continued to soar.

Iqbal bought his medallion for $570,000 in 2009 and needed to earn about $5,000 a month to break even on insurance, the medallion mortgage and industry fees alone. The Queens, New York-based driver earned extra income by leasing his car to a second driver who worked the day shift.

“This was an investment in the long term,” Iqbal said at the time. Despite those challenges, the 48-year-old said he wanted to make his NYC medallion work. “It would help me raise my family, take care of the kids, pay the rent and later on, work as my retirement.”

“We need something for app hailing with yellow cabs, to have even arms with Uber,” he went on. “Then, I can compete with them.”

As of today, it turns out he may not have to.

This morning, Uber made a sizable shift in its business strategy that has faced opposition from traditional taxi services since its founding in 2009, announcing that it reached an agreement to list New York City taxis on its app.

Two taxi-hailing apps, operated by Curb and Creative Mobile Technologies, will integrate their software with Uber, allowing users to book taxi rides in the Uber app later this spring. (It’s worth noting that taxis are already available in other countries via the Uber app, including Spain, Germany and South Korea.)

“This is a real win for drivers – no longer do they have to worry about finding a fare during off peak times or getting a street hail back to Manhattan when in the outer boroughs,” said Guy Peterson, Uber’s director of business development, in a statement. “And this is a real win for riders who will now have access to thousands of yellow taxis in the Uber app.”

The deal comes as Uber, Lyft and other ride-hailing disruptors grapple with a shortage of drivers. After a dramatic decline in traveling due to the pandemic, ride-hailing companies have struggled to bring drivers back to full speed, which has made rides more expensive.

But several weeks ago, Uber said mobility demand has improved “significantly” through February, with trips back to 90% compared with its February 2019 figures.

Uber has also said figures have continued to improve when it comes to attracting and retaining new drivers, but as indicated by today’s move, there’s still room to grow. CEO Dara Khosrowshahi said as much last month when he teased plans to bring more taxis onto the Uber app, even beyond New York City.

“I will tell you we want to get every single taxi in the world onto our platform by 2025,” Khosrowshahi said in an interview with CNBC’s Andrew Ross Sorkin.

At their peak, the cost of many cab rides skyrocketed at the same time Uber was experiencing torrential growth — much of which was responsible for the company sitting atop 2016’s Disruptor 50 list, just a year after the value of yellow taxi medallions began to significantly decline.

Today, the company is preparing for its strongest travel season yet. Uber said airport gross bookings by the end of February were up over 50% month on month.

Still the broader concern remains the same it always has: whether Uber is taking on too much risk, too quickly with low tangible results. And that could spell trouble in a speculative market environment like the one some analysts believe we’re in now.

For Uber, there may be a level of risk management related to driver defections in the current decision making. As inflation, especially in gas prices, has hit drivers hard and they have pressed for more help from the company, some drivers have quit and recent research from Wall Street analysts and gig economy experts forecast more defections. And some of those quitting drivers are going to taxi companies.

Esterphanie St. Just, who started driving for Uber in 2015 in California, started working with the unionized taxi movement in California in 2019 as frustrations mounted over making the Uber economics work for her. She contends the longer a driver works for Uber, the less they make as more promotions and bonuses go to new drivers churning through the system (Uber denies this).

After hearing more from taxi drivers and learning more about being a yellow cab driver, finally, in December of last year, she started the process of getting a taxi license and began full time as a taxi driver about a month ago.

“The longer you have been in the Uber industry the more they take and you either quit now or quit later, but it will cost you, because you find out you are a rat in maze always chasing, chasing, chasing.”

Another Learning Opportunity

When NCUA announced its intent to sell credit union taxi borrowers’ loans to hedge fund in January 2020, the agency refused to look at options that would have given these member-borrowers a chance to earn their way out of the decline in collateral value from ride sharing disruption.

NCUA  instead took cash at a fraction of the book value of the loans, recorded a $750 million dollar loss in the NCUSIF, and washed its hands of any further responsibility to these credit union members whose fates were turned over to a Wall Street hedge fund.

Earlier this year New York City entered into an agreement to cap the debt owed by individual drivers and extend terms so that remaining loan payments could be covered by earnings.

Drivers Will Determine the Future

Until autonomous taxis are deployed everywhere, the future of public transportation depends on what drivers want to do.   For many people owning your own business, as described in the above article, is preferable to being someone else’s employee.

That was the opportunity that credit union taxi medallion lenders were underwriting.  Assisting members to own their own business.   NCUA washed its hands of the problem by selling at the low point in the cycle of value.   Credit union’s paid for the losses and a hedge fund now has all the upside.

I admit that no one could have foreseen the New York City stabilization plan financed by Covid grants, nor the failure of Uber’s business model to be sustainable.

However NCUA’s challenge is internal, not external forces or events.    If an organization is not willing to learn from prior difficulties, no one can help.  If an organization is determined to learn, then no one can stop them from finding solutions.

If members’ interest are always front and center, NCUA and credit unions will ultimately find  workable resolution for problem situations, no matter how seemingly intractable.

Liquidating  problems is contrary to why coops were founded and their self-help ethos.  The entire industry and its 100+ million members would benefit if NCUA would embrace this collaborative spirit as well.
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Welcome to the Omniverse

Two years ago I knew nothing about the company NVIDIA or even how to pronounce the firm’s name.  Then my granddaughter received an internship followed by a full time offer when she finishes college.

But if you want to see where computing-networked technology is taking us, this may be a place to start.

The company built its reputation as the creator of graphic chips used in computer games.  But as reported in the Wall Street Journal:   its chips are now being snapped up for everything from game consoles to data centers to self-driving cars. .  . Nvidia told analysts Tuesday (March 22) that it now sees a total addressable market of $1 trillion for its growing line of chips and related software.”

The firm is in the middle of its GTC annual developer conference. The keynote address by the President Jensen Huang also aired Tuesday.

His full talk is about 90 minutes and covers the firm’s recent product releases and latest innovations.  The theme of the presentation  is the creation and production of artificial intelligence (AI) “factories.”

These fully automated intelligent processes will change the way most businesses operate from driverless cars to digital biomedicine to warehouse management.

I was unable to follow many of the technical capabilities which NVIDIA will empower.  However he recaps his talk near the end so you may wish to start with this overview before diving into the entire speech.

His opening described NVIDIA’s four layers (integrated stacks) for the networked world designed to “accelerate computing” resulting in “the creation and production of intelligence.”  One example of a critical technical component is NVIDIA’s H100, an 80 billion transistor chip.

The Omniverse: Creating Digital Twins for Real World Events

The platform that combines all of these new technical designs and interfaces is NVIDIA Omniverse defined as an “easily extensible platform for 3D design collaboration and scalable multi-GPU, real-time, true-to-reality simulation.“

You can hear the Omniverse presentation by starting the keynote stream here.  The session  begins with the Apollo 13 “almost disaster” to demonstrate the power of a “replica,” or what Haung describes as today’s virtual equivalent, a “digital twin.”

As I understand, this simulation engine (Omniverse) enables the creation of a digital model that exactly duplicates the physical world.  The two realities work together, the real with the virtual version. Companies across industries now have the power of “enhanced predictive analysis and software and process automation that maximize productivity and help maintain faultless operation.”

Prior AI was based on pattern recognition technology, with robotic programmed platforms.  The new digital world provides autonomous platforms for applications such as driving, monitoring climate change, and even cell and molecular research.

The digital twin duplicates the real world’s physical environment, events and task management. The virtual model can then create new simulations beyond real world experiences.   AI  becomes a self-learning technology that can then be used to manage actual events.

One example: NVIDIA’s Earth-2 project is building a super computer  dedicated to predicting climate change through simulations.  This should encourage changes in human activity now versus waiting till the events actually occur.

Huang referenced several big companies using Omniverse Enterprise to create digital twins of their own operations. These  include Amazon, the German Railway system-DB Netze, Kroger, Lowe’s and PepsiCo.   NVIDIA’s integrated platform “builds physically accurate digital twins or develops realistic immersive experiences for customers.”

The Impact on Financial Services

Data-information management is the core of financial services.  Today the use of  AI inspired technology focuses on automated voice or chat bot responses, some enhanced data analytics and 24 by 7 connectivity.

Currently, NVIDIA’s financial service efforts include the use of deep learning, machine learning, and natural language processing to “boost risk management, improve data-backed decisions and security, and enhance customer experiences.”

I have no idea how this Omniverse capability will affect financial institutions beyond the known task functions for which it is used today.

If you want a simple future example however,  CEO Jensen carries on a live, unscripted Q & A with his digital double (avatar) named Toy Jensen.   I’m not sure which speaker was more credible!

 

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Irony

Voting is the life blood of democracy.  For both political leadership  and within organizations.

Some firms, such as IBM, encourage their stock holders to vote at the annual meeting:

To express our appreciation for your participation, IBM will make a $1 charitable donation to Opportunity@Work on behalf of every stock holder who votes.

Voting is integral to credit union design.  This is the season for annual meetings with members electing their directors.  Unfortunately actual voting is rare.  Most vacancies are filled by acclamation as the number of candidates equals the open seats.

Now CUNA has begun a campaign to encourage member voting. As reported in CU Today:

WASHINGTON–CUNA has relaunched its “Credit Unions Vote,” a campaign focused on getting credit union members to vote in the 2022 midterm election. The campaign ties civic engagement to credit unions’ ability to improve financial well-being and advance local communities, CUNA said.

thumbnail_Credit Unions Vote

“Credit unions understand that elections affect their members’ financial well-being,” said CUNA Deputy Chief Advocacy Officer for Political Action Trey Hawkins. “With the Credit Unions Vote campaign, we will reach out to America’s credit unions providing them with resources to encourage their members to play an active role in both their primary and the November election.”

An Observation:

Yes, elections do indeed affect members well-being. Especially the choice of credit union directors.

If CUNA wants to encourage member’s good voting habits, why not begin by promoting elections at credit union’s annual meetings?

That would seem a more immediate way to illustrate the power of the franchise and their well being.

 

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Inflation, Interest Rates and Managing the NCUSIF’s $21 Billion Portfolio

Last week the Federal Reserve began its long-publicized tightening of monetary policy.  The Board raised the overnight fed funds target rate to .25-.50% .  Six more raises are planned which would take this rate at year end to around 2%.

The consensus of economists is the Fed’s  plan may be a day late and dollar short.  From MSNBC columnist Kelly Evans right after the announcement:

The Fed published a crucial update in its projections yesterday that showed members now expect the short-term Fed funds rate to hit 2.8% by the end of next year–up from only 1.6% in their December projections. In just three months’ time, in other words, as inflation has shot way higher than anyone at the Fed expected, the committee is signaling the need for almost ten rate hikes by late next year, roughly twice as many as they previously thought necessary. 

In his March 21st speech to National Association of Business Economists (NABE) Fed Chairman Jerome Powell unveiled an even more hawkish view.  Increases could be in .50% increments if needed to counter inflation.

Interest rate rises have substantial consequences for the management of the NCUSIF.   All planned revenue for the NCUSIF is from earnings on its investment portfolio of Treasury securities.  The portfolio will be almost $22 billion by 2022 yearend as credit unions keep sending in 1% of the increase in their share deposits.

Robotic Investing

As the public concern about inflation grew in 2021, the NCUSIF’s investment committee  continued using a “ladder” approach.  The resulting multiple investments  had average durations of 5-6 years and average yields of less than 1%.   This was done at an historically low point in the interest rate cycle.

Despite Board questioning, the staff defended their decisions by saying they don’t try to “time the market.”  Whereas the record shows that the staff has substantially modified the portfolio’s average duration over the past seven years from 1,815 days in 2015 to as low as 901 days in 2018.

One consequence of the Board’s questions  is  NCUA has now published its NCUSIF investment policy.   It can be found here with a last modified date of February 23, 2022. The substance appears unchanged from the previous February 2013 policy.

While NCUA did not formally request input, it is in the industry’s self-interest, even duty, to look at this document to suggest how the management of this $22 billion portfolio could be improved at this point in the  market.

The NCUSIF’s Financial status as of January 2022

 

The most recent NCUSIF financials are at January 31, 2022.    They show the $20.4 billion portfolio is $265 million underwater (market value less than book); the  yield is 1.20% with an   average weighted duration of 1,244 days or 3.5 years.

January’s total income was  $21 million and expenses $17.4 million (up 20% from January 2021). Monthly net income is  $3.6 million with no loss reserve expense or recoveries.

The portfolio is divided into identical  $2.8 billion dollar maturity “buckets” spread over seven years through 2028.  Just $431 million is held overnight.

One year ago, January 2021, the portfolio was $17.8 billion, with a 1.29% yield, weighted average maturity of 1,184 days or 3.3 years.  The portfolio reported a gain in market value of $459 million.

In January 2020, two months before the COVID national economic shutdown and plunge in rates, the NCUSIF reported an average yield of 1.88% and a weighted average life of 2.9 years.  Interest revenue was $25.5  million and operating expense of $16.9 million resulting in a bottom line of $9.5 million, or three times the January 2022  outcome.

The fund’s portfolio maturity extensions during COVID’s low rate  stimulus environment have put the NCUSIF into a financial hole.  Revenue is much less on a portfolio that is 25%  larger  ($ 5 billion) than two years ago; the portfolio has lost $724 million in market value due to its below market return and maturity extensions at the bottom of the interest rate cycle.

These circumstances  suggest an urgent need for a review of NCUSIF portfolio management and reporting. The current policy implementation is not a positive outcome for NCUA or credit unions.

 Changes to Enhance Transparency and Performance

There is investment expertise aplenty in credit unions.   Some areas for commenting on the newly published policy might include:

  1. How can investment return goals be better integrated with projected income and budgeted expense so that target for investment yield can be set objectively? For example a 2% portfolio yield and today’s fund size would cover all budgeted expenses and still leave over $200 million to grow equity or cover any new reserve expense.
  2. How should the objective of paying a dividend to credit unions be incorporated in the fund’s policy objectives?
  3. How can the fund’s investment decisions be more transparent especially the assumptions used when making decisions and changes to portfolio’s duration?
  4. What additional information should be in the monthly reports posted and provided to the board to evaluate investment performance? For example shock tests?
  5. What financial models does the fund use when making decisions? Can these be made public so that credit unions can comment on the projections and assumptions used?

There are  many potential insights to this critical NCUA board policy that could lead to more effective oversight and performance.  The critical success factor is sending these suggestions to NCUA  to be evaluated for updating the policy.

Auspicious Timing

While there has been no formal request for comments, one approach would be to send suggestions to the investment committee’s new Chair which is the Director of E & I. Kelly Lay was just appointed to this position.  This gives her an excellent opportunity to bring credit union experience to the investment process.  Her email is klay@NCUA.gov.

The timing is also critical because rates will be rising, how fast and how far is anyone’s guess.  Both domestic inflation and international events will create ongoing uncertainty.  But the direction is certainly set.

To continue the robotic ladder when it is known rates will in all likelihood continue to rise, is folly.  It brings no credit to the committee’s work and the board’s oversight.

Yesterday’s treasury coupon yields for 25 weeks was .95% and for one year, 1.31%.    These are higher rates than any of the investment decisions made in 2021.  A portfolio return increase of only 1% would double the fund’s annual revenue.

To decide when to extend out the yield curve should be based on analysis of  what breakeven yield is needed to cover costs and equity growth and any loss reserves.   Whether that is 2% or some other number, the goal should be to optimize yield taking into context the operating needs and sending excess earning back to credit unions.

Circumstances have given credit unions and NCUA a valuable moment to improve the management of this important, ever-growing industry asset.   Will credit unions and NCUA take this opportunity?

 

 

 

 

 

 

 

 

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Three Field Notes

A Refreshing Difference from a Big, Local Bank

“Last year, my wife and I wanted to do some refinancing by taking out a mortgage on our home to pay off a mortgage on one of our investment properties that had a higher interest rate. We went to a big local bank with which we have done business for 40 years, including a number of mortgages and home owner equity lines of credit.

“We applied as we have many times before. The bank kept asking us for more and more documents. After submitting 69 documents (some were updates of documents we submitted earlier), we gave up. We concluded that they simply did not want to lend to us.

“This was hard to fathom.  Over the years, we have never missed a payment on any mortgage or loan. Also, the appraised value of our home, which would serve as security for the new mortgage, is nine times greater than the dollar amount of the requested mortgage.  Our monthly income, from rentals and Social Security, is ten times the monthly payments that would be due on the mortgage.

“There shouldn’t have been any question about our ability to pay. Our best guess is that the bank did not want to loan to us because we are 65 and older, and  retired, so we do not have salaries that can be garnished easily if we fail to make a monthly payment. In any event, we could not believe that they turned us down.

“The good news is that a mortgage broker suggested Honolulu Federal Credit Union (HOCU). The folks at HOCU welcomed us, asked for about a dozen documents, processed our application, and gave us the mortgage. It was smooth, quick, and friendly. We were grateful for the excellent service. We decided to open a couple of other accounts with HOCU as well. We have been happy with all of our interactions with HOCU during the past year. What a refreshing difference from that big, local bank!”

 Happy 73rd Birthday: Affinity Credit Union

(March 18, 2022)

MEMBERS CELEBRATE IN HONOR OF UNITED STEELWORKERS LOCAL 310 FOUNDING 

Affinity Credit Union celebrated 310 Day on March 16th and March 18th at the Firestone Tire plant in Des Moines, Iowa. This “310” day  honors  our founding members form USW Local 310. Firestone employees were greeted with dollar bills, marketing gifts and entered to win a $310 cash prize.

In 1949, a group of 10 Firestone workers founded Local 310 Credit Union by pooling their money together to make affordable loans for Firestone workers. The credit union charter members carried a few dollars in a lunch box between work shifts distributing $5 and $10 loans. If someone needed a loan, they would first collect  deposits to fund the loan.

At the time, the founding group did not have any credit union members, had little money to lend, and no desk to consult with borrowers. Nevertheless, they persevered with a resource created by workers, for workers, that fed families, futures, and trust.

Today Local 310 Credit Union, now known as Affinity Credit Union, manages millions in financial assets, while helping 14,000 member-owners in central Iowa do more with the money they earn so they can live the life they want.

“On 310 Day we honor the Legends – the USW Local 310 founding members.  From humble beginnings they demonstrated the meaning of People Helping People and our ongoing mission  of Building Better Lives.”   said Jim Dean CEO.

From Maine Harvest FCU’s Newsletter

(March 2022)

Maine Harvest Loan Portfolio Now Over $1 million

We are pleased to report that our loan portfolio has passed the $1 million mark. This is a huge achievement for Maine Harvest FCU.  Our loan portfolio is dedicated to building a better food system in Maine and is:

  • Broadly diversified across sectors including vegetable, livestock, dairy, fruit, and botanical (herbs, flowers, plants) production;
  •  Across the state from York County to Aroostook County; and
  •  Funded by depositors like many of you who share our mission.

 

Borrower Spotlight

Providing Access to Farmland:
Start-up Farmers Ruth & Jonathan Bayless of Knock Knock Farm

“Working with Maine Harvest Federal Credit Union was a better experience than I could ever have imagined. They guided us through the financial process with what felt like unlimited patience and kindness. I know we would not be on our farm right now without them. We are so glad that they and their mission exist.”

Ruth Bayless, July 2021
Member Spotlight

Susan Kiralis and David Shipman
“The focal points of our China, Maine, home are the garden and the kitchen so when Maine Harvest Federal Credit Union opened it seemed only natural to put our money where our hearts and mouths were.

We have lived in China for the last 35 years, much of that time working at Fedco Seeds and getting to know the farmers and growers who can now benefit from MHFCU.

Working at Fedco, volunteering at MOFGA, serving on its board and at the Common Ground Fair, and now putting our money to work at Maine Harvest, we think we’ve done a small part toward making Maine the way life should be.”

 

 

 
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Ed Callahan… A Look Back

by Jim Blaine (Thursday, March 17, 2016)

Always suspected that the problem with Ed Callahan was that as a youth he was beaten too often by Nuns in parochial school or, perhaps, not beaten enough. Well, whatever, either way the Nuns left their mark – an indomitable spirit!

Ed Callahan was Irish – brash, pugnacious, loud, hard drinking, fun loving – alive! But why be redundant? I said he was Irish!

For over a quarter of a century, we all watched and observed as Ed Callahan created shock waves in the credit union world. No one was neutral about Ed Callahan. His friends were fiercely loyal, his enemies equally committed. Ed inspired many and angered quite a few. Ed had style; he had presence. With Ed, you weren’t allowed to make contact without becoming involved, excited, immersed, engaged.

At Marquette, Ed must have played football in the same way he played life – without a helmet. You had no doubt that Ed Callahan always played for keeps. He had no intentions of losing, that was not one of the options. Ed was very straight-forward; your choices were always clear. The mission was defined; and, there was only one direct path to the goal. That path was either with you, around you, over you, under you, or through you; you could step aside or get on board. It was your choice; but your choice never changed the mission, nor the path, nor the goal.

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 applecarts; rebuke the status quo. That happened at NCUA. Appointed by President Reagan, Ed arrived at NCUA in the midst of turmoil. Ed defined the mission; he reformed and remolded the Agency. He taught a regulatory agency how to stop working to prevent the last crisis. He explained that a coach never executes a play and that on Monday morning it’s never hard to see what went wrong – but it is rarely relevant. Teacher, coach, lessons in life; hopefully well learned, hopefully still remembered.

But let me celebrate the essence of the man – that indomitable spirit – one last time, for those who never had the opportunity; for those who still have doubts; for those who never fully understood. One of Ed’s harshest critics, noted with much wryness, that even in death Ed “couldn’t get it right”. Why, I asked? “Because Callahan died on March 18th instead of on the 17th, his beloved St. Patrick’s Day.” You know this type of critic – cynical, smug, self-assured without much basis, not really worth the effort, but…

Just for the record, I would simply like to point out one final time that – first and foremost – Ed Callahan was a fully-fledged, fully-flagrant Irishman – body and soul! And, no self-respecting Irishman would ever celebrate the end of St. Patrick’s Day until the last bell at the pub had rung. That would have meant that Ed Callahan’s “last call” would have come sometime after 4:00 am – on the morning of the 18th. Style, presence, courage – true to the last! A shamrock of joyful vigor and purpose!  

And one last thought… 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… and countless other adjectives and accolades. 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…  

 
An Irish Prayer 
Live simply, love generously, 
Care deeply, speak kindly, 
Leave the rest to God.!


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A Fee that Credit Unions Should Review for Appropriateness

Increasing attention is being given to all financial institution’s overdraft/courtesy-pay/nsf fee structures.   An excellent summary of many of the issues is in this article from CUSO magazine.

After the reassessments of these fees, there is another one that credit unions may want to proactively review.

The Unclaimed Property/Inactive Account Fee

A member recently told the story about learning of this fee the hard way.   She had been a loyal credit union member for over two decades and had left a small balance of $500 in case a family member needed to borrow.

The regular savings account paid interest of .05%, offered only online statements and had no activity for over two years.  When checking her 2021 yearend balance online she discovered that the amount had fallen by 20%.

The explanation: a $3 per month inactive account fee was being assessed.  She knew nothing about the fee or how long it had been in place.  In essence she felt the credit union had effectively free use of her money and was charging her on top of that!

When contacted, the credit union explained the fee and offered to refund the money for the last two years, which was as far back as their system would go.

Credit Union’s Responsibility for Inactive Accounts

When Ed, Bucky and I went to NCUA in 1981, I can remember credit unions approaching the agency about charging inactive account fees, which in essence was the step prior to forwarding these accounts to the states as unclaimed property.

In Illinois the Department of Financial Institutions was responsible for administering the unclaimed property act and ensuring funds were properly reported, returned to the state after five years of inactivity so the owners’ names could be publicly listed to  reclaim their funds.

My colleagues believed charging a fee during this inactive period was counter to both the spirit of the act and for a cooperative financial institution.

Credit unions claimed  the accounts were costing them money: maintaining the account, mailing monthly or quarterly statements and plus interest.  Even as they tried to reactivate them, they wanted to be reimbursed for the operational “costs” of the accounts.

For others, the not so hidden motive was to fee the account to $0, especially smaller balances,  close out the member, and not worry about reporting it as unclaimed property.

Others asserted that the fee was in fact an incentive for members to reactivate their accounts.

Inactive accounts come in all flavors:  parents opening accounts for their children, now long gone; accounts left when members move out of the area; the account opened for an indirect loan member, etc.

The common characteristics are there is no member-initiated account activity, the relationship is static, and there is high probability the owner is unaware of any fees being charged.   Therefore it is an easy fee to assess as it is mostly invisible to the account holder.

Other Credit Union Examples

One CEO I talked with said they charge $3 a month on about 500 accounts generating $1,500 in revenue.   At any point in time about 40% of the accounts will be sent to the state.

Another CEO said the credit union charges $10 per quarter.   In both cases the fee had not been evaluated for decades.

Both recognized that in an era of virtual accounts, minimal interest on savings and near zero marginal operating costs, the credit union should focus on contacting members, not seeing the issue as a revenue item.

I would urge credit unions to look at their current inactive account policy and fees.   It may not be as consequential as overdrafts, but if a class action attorney situation arrives, just looking up the years of records, charges and potential refunds, would seem to suggest any income is not worth the potential cost.

Also don’t forget abandoned safety deposit boxes must also be reported as unclaimed after the statutory period of inactivity.

NCUA’s Unclaimed Policy

Just as a footnote, NCUA also acquires unclaimed insured share accounts when liquidating credit unions.

It is interesting to note that the agency’s policy is contrary to the legal practice required of credit unions.

As stated on the website, if NCUA cannot locate the party after 18 months, it converts them to “uninsured” and retains the balances for use by the insurance fund.

Invariably, some items may remain unclaimed. Some checks are never cashed; or the credit union’s address information was incomplete. There are also cases when we don’t have a recent address and are unable to get a forwarding address from the post office.

Share accounts claimed within the 18-month insurance period are paid at their full-insured amount. At the expiration of the 18-month insurance period, shares that are not claimed are considered uninsured and written down to share in the loss to the National Credit Union Share Insurance Fund. Even if shares are uninsured when they are claimed, there may still be a distribution.

On rare occasions, the liquidation of a credit union may result in surplus funds. If a surplus remains, a distribution to the shareholders is required. This may occur several years after the credit union is liquidated and it is sometimes difficult to locate these members.

This is another example where NCUA exempts itself from the rules credit unions are required to follow to protect member’s assets.

 

 

 

 

 

 

 

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RBC Update: 257 Credit Unions in NCUA’s “Hotpot”

In two weeks, credit unions will be able to calculate their newly imposed capital ratios.  Three different calculation requirements are now in effect.

Using yearend 2021 data, there are 212 credit unions over $500 million that will likely have to use RBC (risk based capital) because they had net worth below 9% at December 31.  Another 45 credit unions between $400 and $500 million reported net worth below 9%.  They will be subject to RBC when their total assets exceed $500 million.

This total of 257 credit unions is probably the minimum number as credit union share growth is usually seasonal, concentrated in the first four months of the year.  That is, assets will increase faster than capital can be earned at the same pace.

RBC’s Impact

RBC has still not hit home for some. These credit unions are telling members they are well capitalized because they exceed the 7% net worth level. Those so doing often fall short of the new 9% minimum.

The impact of RBC is best described with the boiling frog analogy.  A frog put in boiling water will immediately jump out. But put the frog in a pot of cold water, slowly raise the temperature and the frog will hot-pot to death.

Many large credit unions view RBC similar to  a pond Kermit.  As the RBC multiplex calculations slowly engulf quarter by quarter many will find themselves in unfathomable amounts of  creeping normality.

Some will immediately jump to the seeming sub debt life preserver to stay above the 9% threshold.   Soon they will realize that  option itself requires more leverage just  to  breakeven.  Sub debt  just made the water deeper and harder to jump out of the pan.

RBC and NCUA’s Record of Risk Analysis

In an April 30, 2010 speech to the Illinois Credit Union League 80th Annual Convention Chairman Matz  offered these remarks on the corporate crisis:

“Let me start by assuring that I fully recognize the legitimate anger many of your feel.  The anger has come through loud and clear. . .I have heard directly about the pain you have felt. I know that many of you blame NCUA: After all, two examiners were on-site at US Central and WesCorp.  NCUA definitely shares some of the blame (and then comes the big qualifier) but there is plenty of blame to go around.”

What she forgot is that the regulator’s role is because crises are to be expected.  And when they occur, to be managed prudently.

The Irony of the RBC rule which is supposed to “protect the insurance fund” is that NCUA is often the source of the problem.  As one veteran CEO observed:

“All the losses -excluding a relatively low level of cu management  fraud – that NCUA has incurred is the result of errors in risk analysis by NCUA. They don’t like to acknowledge that fact, but the logic is inescapable.

By decreeing that most assets are now in complex credit unions, the industry is far more subject to the whims of a less than stellar team of NCUA executives who are increasingly enthralled by the “predictive” accuracy of astrologically and phrenologically based statistical models.”

The most catastrophic error in risk analysis is the Corporate crisis referred to by Chairman Matz. NCUA is now projecting a minimum of $5.7 billion in recoveries from the corporate AME’s.  Over $1.2 billion is still due shareholders of the four corporates.

This is the exact opposite result projected for years after the conservatorship when total costs of $13.5 to $16 billion  were estimated by NCUA.  The agency never revealed their analysis always referencing the results of their “engaged securities expert, Black Rock.”

 Learned Helplessness and the Actions of Others

With RBC it is easy to slip into a state of “learned helplessness.” That is  behavior exhibited when a person is repeatedly exposed to negative stimuli beyond their control.  Think regulatory burden.

The term describes experiments in which humans subject to loud noises, did nothing. seemingly helpless to change.

Not all the human participants responded the same way. Many blamed themselves for “failing,” but others blamed the way the experiment was framed. They knew it set them up for failure. In other words, not everyone is equally susceptible to learned helplessness.

Those who do not become passive when confronted with apparently uncontrollable situations are because they see others act with courage, overcoming difficult odds.  These leaders actions inspire others not to give up.

There is an initial segment of 257 credit unions who will be subject to the sophistry and real burden of RBC.  Some will throw in the towel, some will try to comply, and others will look for an “out” such as RBC or shrinking the balance sheet.

The hope is that most will have the courage and resilience to persevere until wiser heads prevail in Alexandria.

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The Credit Union Movement In Five Phases

For some time I have followed the writings of Father Richard Rohr.  He is a Franciscan friar, wisdom teacher, and founder of the Center for Action and Contemplation in Albuquerque, New Mexico.

His spirituality concepts are universal, informed by all denominations and spiritual traditions.  His focus is the search for unitary conscience.   Recently he summarized five stages that religious and cultural developments have historically followed.  He calls these the five M’s: human, movement, machine, monument and memory.

I have paraphrased his approach below to apply it to credit union evolution.  I believe the framework is useful for understanding the different motivations credit unions draw upon with cooperative design.  (Adapted from Richard Rohr, The Wisdom Pattern: Order, Disorder, Reorder )

The Five Stages

“It seems that many great things in history start with a single human being. If a person says something full of life that captures reality well, the message often moves to the second stage of becoming a movement. 

That’s the period of greatest energy. Credit unions greatest vitality  as a “cooperative  movement,” resulted in thousands of new institutions formed annually.  Each was an expression of a larger vision for community. The movement stage is always very exciting, creative, and also risky.

It’s risky because the movement in history is larger than any city, state, country or economic system. Society is unable to foresee its full scope or meaning. We feel out of control in this stage, and yet why would anybody want it to be anything less?

Yet we move rather quickly out and beyond the risky movement stage to the machine stage. This is predictable and understandable. Systems are developed to support individual often independent firms.

The Dominant Machine Stage

The institutional or machine stage of a movement will necessarily be a less passionate manifestation. This is not bad, although it is always surprising for those who see credit unions as the end itself, instead of merely a vehicle for the original vision.

There is no other way; but when we don’t realize a machine’s limited capacities, we try to make it into something more than it is. We make it a monument, a closed system operating inside of its own, often self-serving, logic. By then, it’s very hard to take risks for those most in need following core values that inspired the movement phase.

Eventually these monuments and their maintenance and self-preservation become ends in themselves. It is easy just to step on board and worship their success without ever knowing why they came to be.

At this point, we have jumped over the human and movement stages, becoming like the for-profit institutions we were meant to supplant. There is little hint of knowing who we are meant to serve. Members are often frozen out of any meaningful role other than consumers.

In this stage, credit unions are a platform for building ever larger financial firms while holding on to a memory of something that once must have been a great adventure. Credit unions are no longer serving a distinctive role. Rather they mimic the priorities of the existing capitalist, market driven competitors.

Overcoming the Monument-Memory Entrapment

Increasingly credit unions avoid addressing the most disadvantaged segments of society we were organized to serve.

To avoid becoming trapped in the monument stage with the initial vision merely memory, renewal is needed. Innovative efforts are necessary to keep in touch with the human and movement aspirations. This is not  being naïve about the necessity for machine-like competencies and the inevitable human drive to embrace monuments.

We must also be honest: all of us love monuments when they are monuments to our human ambition, our movement, or our machine.”  (End paraphrase)

Applying Rohr’s Insights to the Credit Union Movement

It is feasible to align the different phases of credit union history with this model.  The more powerful application however may be to help  leaders or institutions recognize that all five stages can be present and called upon at the same time.

Can the machine success be augmented with the human passion of the creation phase? I saw one credit union CEO attempt to connect these seemingly contrasting impulses.   He organized a public member meeting each week at a different branch of the credit union.  Fifty visits led by a senior staff person for every branch over the year.

Videos were made of the visits and shared with staff and board.   The results were not, I believe, some dramatic new product or service concept.  Rather it reinforced respect for the members and  their opinions  as well as supporting staff in scattered branches.

I believe the model’s usefulness is most helpful if not seen as linear, trending in a single direction.  Rather it alerts us to the multiple motivations which contribute to success.

If we focus only on the competencies of the machine stage leading inevitably toward monuments, then we lose the important advantages of the initial creative era.   For it is human needs and relationships that were the origins of every credit union and, still today, its most important foundational advantage.

 

 

 

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Met Opera Benefit Concert: Music for Ukraine-March 14

Mar 14, 2022

Listen Monday, March 14th, at 8pm.

Program notes courtesy of the Metropolitan Opera.

Click here for the upcoming Metropolitan Opera broadcast schedule.

The Metropolitan Opera presents a special live international broadcast on Monday, March 14: A Concert for Ukraine, a performance offering support and solidarity with the citizens of Ukraine. Met Music director Yannick Nézet-Séguin will conduct the Met Orchestra and Chorus and a roster of star soloists – Lise Davidsen, Elza van den Heever, Jamie Barton, Piotr Beczała, and Ryan Speedo Green – in a program that includes Strauss’s Four Last Songs, the stirring final movement of Beethoven’s Ninth Symphony, and works by Barber, Silvestrov, and Verdi. Vladyslav Buialskyi, the Ukrainian bass-baritone who recently made his company debut, will open the concert with the Met chorus in a rendition of the Ukrainian National Anthem.