Author: Chip Filson

Posted on

False Prophets and Chasing Idols

The email marketing headline read:  Is there a merger in your future?

Another suggested the opportunity to protect the CEO’s fate by adding  a “change of control” clause to the manager’s contract.

Many credit union leaders and most vendors are selling a vision of the future they want to help implement.   The focus is on the future, not the present circumstances.

The more apocalyptic the future predictions, the more urgent the message.   These prophets pretend to know the unknowable.   But the failure is not in their projections.   It is their misunderstanding of the present.

What Prophets Do

When leaders present their vision, they are making predictions about the future they hope to bring. In fact, prophets do exactly the opposite! They insist the future is highly contingent on the now.

From all the flotsam of events, beliefs and analysis, real prophets  have the ability to identify what really matters.  Focusing on this is essential for ongoing success.

That’s not predicting the future as much as it’s naming the way human reality works today and tomorrow.  The true prophet dares to tell what is essential in the face of marketing hype, rhetorical cliches and the latest innovation that will cause members to leave current institutions behind.

An Example

Decades ago I first met Rudy Hanley, the long time CEO of SchoolsFirst FCU in California.   He asked how I approached strategy.   As I outlined the model and summarized  growth options, he stated that the credit union’s primary goal was not growth.  It was ensuring the members’ trust.   No matter the circumstances or cost, the critical success factor was continuing to place member confidence at the center of every decision.

If member relationships were built on this foundation, he believed growth would naturally follow.

This is not every CEO’s priority.   Some believe size guarantees success, the bigger, the stronger and the more resilient.   Others put their trust in technology and introducing the most compelling solutions or latest crypto offering.  When winning in the open competition of the market seems to slow, others will chase the chimera of buying out or merging competitors.

All these approaches can bring short term success.  However member-owned cooperatives were established and succeeded as an alternative because of the unique consumer-member relationship.   Emulating the corporate strategies of banks and other commercial firms is following false idols.

There are a host of idolatries at the center of the cooperative system today.   Many aspire to the prestige and stature of banking competitors.   Making money becomes the number one priority albeit always clothed in the phrase of serving members.

Instead of seeking those who are often victims of current financial choices, credit unions aspire to serve everyone.  Speaking truth about why coops exist becomes prophetic because the “powers that be” that benefit from the system, cannot see this simple message.

The Transition of Leadership

The challenge of understanding who coops are and how credit unions are unique is especially front and center in leadership transitions.

One CEO who recently oversaw this change in his institution observed these dynamics:

It’s hard for today’s leaders to make their bones when they are up to bat.

Then lazy new leaders simply fall in line with the best practices of the day, currently community banking tactics 101.

New leaders will not see staying the course as the means to their hopeful ends.  They have been given the reins for change, not just continued success.  They are vested in their peer’s approval not their members, nor history’s standards.  

The new actors today are vested in their choices.  Logic will not be enough – it’s too nuanced to turn back the belief that change is the catalyst to bigger things.

These are a prophet’s words for the present.   Will anyone hear the message?  Or will there have to be a cost to chasing idols versus trusted service,  the core of Rudy Hanley’s leadership?

 

 

Posted on

What Large Credit Unions Might Learn from Elephants

The largest, most powerful land animal is the elephant.  In many of their traditional habitats in Asia and Africa, their numbers are falling due to the loss of their traditional habitat and poachers.

The Elephant Whisperer is the story of a person who lived with elephants on a game preserve to try to preserve a “rogue” herd.

The author Lawrence Anthony devoted his life to animal conservation protecting the world’s endangered species. He was asked to accept a wild elephant herd on his Thula Thula game reserve in Zululand. His common sense told him to refuse, but he was the herd’s last chance of survival: they would be killed if he wouldn’t take them.

To win the herd’s trust, he had to convince the Matriarch  of the herd. The eldest female is the leader, until she relinquishes it. He slept in his Land Rover near them until they accepted him.

In the years that followed he became a part of their family. In creating a bond with the elephants, he came to realize that they had a great deal to teach him about life, loyalty, and freedom.

He learned elephants mourn their dead , and recall the time lapse of a year to the day of death to assemble round the remains.  When Lawrence Anthony died in 2012 , they gathered  to mourn him.

The Instincts of the Herd

Elephants care for newborns together.  When one is unable to stand up to nurse, they surround to help lift her up to the mother. Sometimes realizing the infant needed more nutrition, they would seek out Lawrence and his team.

The elephants thrive very much together, protecting and playing with each other but ferocious if threatened.  They will accept help from humans they trust.

An iconic picture of this group effort is when the herd will lie down to sleep for several hours each day.   As shown below the matriarch is at the top, the smaller, younger elephants protected by the older ones.   Most importantly, the picture shows how each member stays touched by another as they sleep.

 

Is there a lesson for cooperatives from this natural behavior of the world’s largest land animals?

Posted on

When The Bullet Hits The Bone…

Two credit union press releases this week reminded me of the 2012 post below by Jim Blaine.

The first was the announcement that five Minnesota credit unions had loaned $31 million to Opal Holdings, a New York real estate developer and investment firm, to purchase a 17 story office tower in Bloomington, MN.  “The financing included two senior secured notes on equal footing issued in June: One for $22.1 million at 5.1% for 36 years and the other for $8.1 million at 5.32% for 40 years.”

The second from Summit Credit Union stating it had completed the purchase of the $837 million Commerce State Bank  “in the largest credit union acquisition of a bank in the state’s history.”

“Twilight Zone”  (by Jim Blaine)

Nobody said it better than Golden Earring.  No, this is not the golden earring you fearfully imagine sprouting some day from your teenager’s nose or navel.  It’s the late ‘70s rock group and the song is “Twilight Zone”.  The question:  “Steppin’ out into the twilight zone.  Entering the Madhouse, fears that have grown.  What will become of the moon, and stars?  Where am I to go, now that I’ve gone too far?”…  The answer:  “You will come to know, when the bullet hits the bone!  Yes, you will come to know, when the bullet hits the bone!”

The Heartland….

The Amana Colonies, 26,000 acres of picturesque Iowa farmland, sheltering seven immaculate villages, are up Highway 151 about 100 miles east of Des Moines.  This is the Midwest, the Heartland.

The place where the Deere and the antelope play.  A warp in time through which, you may, perhaps, be able to catch a glimpse of the future – the future of the credit union movement.

The Amanas were settled in 1855 by the Society of True Inspirationists.  The sect was formed in Germany; adopted a communal structure; and had unique, idealistic, and firmly held beliefs – sound vaguely familiar?  The communities were self-sufficient and prospered richly.  

All things were shared.  Products, such as woolens, handmade furniture, meats and wines, were sold to the outside world.  A sterling reputation was built upon high standards of craftsmanship and a close attention to detail.  The “Amana” name – remember that refrigerator? – became synonymous with quality and value – sound vaguely familiar?

“Why don’t you download this app…”

The Amanas appeared to be the true Utopia, the new Eden.  But trouble, eventually, always comes to Eden.  At first, the Inspirationists called it “The Reorganization”, then “The Change”, and finally, “The Great Change”.  It started as a murmur, became a grumble, heightened to an argument, and ended in 1932 as a split.  

Eighty years of success forced onto the scaffold of change by a diminished intensity of beliefs, a cooling of religious fervor, a forgetfulness of original purpose and vision – sound vaguely familiar?

Their world, however, did not come to an end in 1932.  The Amana Colonies continued on.  The communal structure was abandoned; the religious and the secular were separated.  Homes and personal property were divided; stock was issued in the businesses and agricultural interests.

The Amana Society Corporation now controls and manages the businesses.  The Amana Church Society now deals with spiritual matters.  Today, the Amanas are on the National Registry of Historic Places and the Amana Heritage Society strives diligently to preserve the cultural heritage of the community and its descendants.  Today, the Amanas are still many things, but mostly the Amanas are a novelty, an oddity, a quaint museum of past hopes and ideas.  

Why did this happen?  The guidebook says:  The Amanas were… “a goal:  visioned through faith; created and established by faith; named for a faith and dedicated to a faith”.  And, “the first generation had an idea and lived for the idea.  The second generation perpetuated the idea for the sake of their fathers, but their hearts were not in it.  The third generation openly rebelled against the task of mere perpetuation of institutions founded by their grandfathers.  It is always the same with people.” – sound vaguely familiar?Which credit union generation is this?  Are you still living for “the idea”?  Is your heart… still in it?

“… destination unknown.” 

“Steppin’ out into the twilight zone.  Falling down a spiral, destination unknown.  What will become of the moon and the stars.  Where am I to go, now that I’ve gone too far? 

…You will come to know, when the bullet hits the bone.  Yes, you will come to know when the bullet hits the bone.”

Posted on

Keeping the Credit Union Difference Alive

A timeless observation from Ed Callahan:

The disturbing word banded about this year so far is “comparability.” It came up in President Bush’s plan for solving the S&L mess-to make the NCUSIF’s accounting comparable to those other funds. . .

Comparability is also echoed in the phrase, “bank envy” the desire of some credit union people to enjoy more of the powers of banks. . .This comparability stems from a kind of inferiority complex.  Those that embrace the notion that by becoming more comparable, we are somehow elevating ourselves. In fact, the opposite is true. . .

Credit unions are different.  They were set up to be different and should remain different. They are different because we put the emphasis on the people we serve.  Our strength is we help people.  

Callahan Report, July 1989

Posted on

A Tale of Two Credit Union Liquidity Options

The dramatic drying up of market liquidity since the Fed launched its fight on inflation earlier this year has been multidimensional.

The 16.2% surge in credit union loan demand in the first two quarters  was the highest this century.  Cash on the balance sheet fell by $66 billion in the second quarter alone.  Investments are 30.5% of the system’s assets, totaling $655.5 billion.   Only 42.6% of this total was under one year maturity at June 30.

Most of the remaining portfolio over one year, would be underwater, that is with book value less than current market.  These funds could be converted to cash only at a loss.

Consumer savings previously buoyed by COVID relief plans, fell to 5% in June, and are at a lower level than historical norms.

Finally market competition for funds is increasing.  The SEC 7 day yield on government money market funds is 2.75%.   Online banks such as Marcus are offering one year CD’s at 3% and higher for longer terms.

Credit union’s are responding with multiple balance sheet straggles, such as CD specials, loan sales for cash, higher pricing to slow loan demand, and looking at borrowing and other funding strategies.

Two Credit Union Created Liquidity Options

Credit unions have created two system options to assist with managing liquidity.  One is industry managed, the corporate network owned SimpliCD, a CUSO.  The second is the CLF, created by Congress in 1977.

Both partner with remaining corporates as one option for access.  Credit unions can also go direct as regular members of the CLF or by calling the CUSO, Primary Financial, directly.

Even though both were created by credit unions and both rely on the corporate network for broad coverage, the results of both efforts could not be more different.

A CUSO’s Results

SimpliCD has posted its activity through the June quarter.  With almost 3,000 credit union investor agreements, the CUSO reported $2.9 billion CD’s placed at June 30.  The current largest outstanding was for $239 million and 228 credit unions report current funding.

President Chris Lewis says the market is the tightest he has seen in his 30 years with the industry.  Some credit unions are making early withdrawals from purchased CD’s or sell at a discount for cash.  Finding credit unions to invest in CD’s is getting harder.  Credit unions generally seek  funds in the 1-3 year maturities.

SimpliCD’s advantages include a centralized way to access CD funding, quickly, in whatever amount needed.   Most of the top ten credit unions have used the service in past with the largest placement at $400 million.  Twenty million can be raised in just a couple of hours.

The funds are unsecured and structured so that the $250,000 NCUSIF insurance covers all issuance.  If the transaction is done via the credit union’s corporate account, all monthly interest payments or receipts are automatically settled with confirmations provided to the credit union.

Two current examples:  A billion dollar credit union placed two CD’s as  of September 30th  via their corporate,  $5.0 million for 182 days at 4.1%, and a second $5.0 million for 272 days at 4.15%.

A $150 million dollar credit union placed a $1.5 million 182 day CD for 4.05% at September month end.

The October 3rd rates for secured FHLB Boston advances for equivalent six and nine month maturities are 4.29% and 4.37%.

The CUSO was originally founded by Corporate One in 1996 and converted to corporate wide ownership in 2004.  In addition to the speed and ease of one stop funding, the CUSO has earned the trust of its credit union users who range in size from the very smallest to the largest.

Lewis comments that the other advantage of SimpliCD is that credit unions can “keep their borrowing powder dry” for use as secondary liquidity.

The CLF Today

Opened in 1978, the CLF was intended to be the third leg of the regulatory structure which added share insurance in 1971 to NCUA’s initial chartering and supervision responsibilities.

Last week I received this query from a colleague:

Today, as interim CEO,  something came up, and I immediately thought of you.  It’s the CLF.   While we are managing liquidity well, but don’t have the FHLB currently – I put it in process –  I thought I read that the CLF was broadened in scope through CARES ACT and was more user friendly.

I contacted the Corporate CU, as we are just under $250M, and asked about it, and they said no one is using it.  I thought that response was very odd considering the drain on the system of over $80 billion from March. 

Seems from what I was told that the CLF doesn’t have much value.  Do you believe this is true?   Am I missing something here?

Any advice would be greatly appreciated.

As of July 30, 2022, the CLF has $1.3 billion in total equity, all invested in treasury securities.  Its total borrowing authority from the Treasury is $29.7 billion.   The 10 corporate agent members, and the 349 direct credit union members cover approximately 26% of all credit union assets.

The CLF has not made a loan since the 2009 financial crisis.  Its major activity then was to lend $10 million to two conserved corporates guaranteed by the NCUSIF.   There has not been a loan extended since.

The CLF currently earns 1.39% on  its portfolio and spends about $1.2 million to keep the CLF open.  It currently pays 80% of its net earnings to its credit union owners.   The CLF continues to add to its retained earnings of $40.5 million even though it has had no “risk” assets for over 12 years.

A Story of Two Systems

Both SimpliCD and the CLF were formed to serve credit unions.  The CUSO managed by credit unions is active at every level providing financial intermediation, funding, and market options to almost two thirds of all credit unions.  It partners with its corporate owners to market, inform about funding options and facilitate transactions.  It is active in both good times and periods of stress.  It continues to innovate, be present and evolve.

The CLF does not interact with credit unions.   It has created no programs or options.  Until the leadership of the CLF engages with its member-owners and the system to develop solutions relevant for them, it will remain unused, untried and without purpose.  A vestigial regulatory organ frozen in bureaucratic time.

 

 

 

 

Posted on

What is the “New Normal” Interest Rate Curve?

The recent Federal Reserve increase in short term rates to fight inflation, is seen by some to be a “temporary” increase.  At some point when relevant price indices have fallen into an acceptable range, the Fed will settle back to some lower initial reference point such as 1%.  Interest rates will then revert to the pattern of the decade of the 2010-2020 pre-covid era.

But what if that assumption is wrong?  What if the Fed’s definition of normal, a 2% real rate of interest on top of an assumed 2% long term growth rate, means the overnight baseline is closer to 4%?

Today the overnight rate is 3%.  The Fed is promising at least two, maybe three, more rate hikes this year? How would  a “new” 4% normal affect the rest of the curve?   What pricing and investment assumptions from the most recent decade would have to be rethought?

What If  Recent Past Rates Are Abnormal?

A commentator on MSNBC observed this past week, that interest rates have not been “market determined” since at least 2008.  He commented that the Fed policy of low overnight rates and quantitative easing created an artificially low interest rate curve to respond to economic crisis and to get the economy growing.   Some would move the starting point back to the post 9/11 era of lowered rates to avoid a recession following the attack on the World Trade Center.

Two analysis can help address this question of what the “normal” post Covid, inflation fighting yield curve might be like.

One is a May 4, 2022 article by Tony Yiu, which asked Why  was there Basically No Inflation in the 2010’s?  Here is part of his analysis.

Why did inflation not arrive earlier during say 2014? Or 2017? After all the Fed had been stimulating the economy and markets using easy monetary policy and QE since 2008. So why did inflation not spike until a few months ago?

So back to the question of where was all this inflation in the 2010s? My theory is that during most of the past decade, the stock market (both private and public), the real estate market, and new markets like crypto acted like a massive sponge that soaked up all the money that could have otherwise gone towards pushing up the prices of goods and services.

This created a positive feedback loop where:

  1. Stock prices and home prices go up incentivizing people to put more money in the stock and real estate markets.
  2. Money going into asset markets instead of chasing goods and services keeps inflation low (home prices are ironically not a part of CPI).
  3. Low inflation allows the Fed to keep interest rates low, which stimulates credit growth (along with rising collateral values).
  4. Credit growth causes even more stock and home price appreciation as significant amounts of the newly borrowed money gets plowed back into asset markets. And back to step 1 to repeat the cycle all over again.

Notice two things about this. First, this feedback loop results in the financial economy getting increasingly bigger than the real economy as money keeps getting sucked into well-performing assets like stocks and real estate.

And second, it’s not just low inflation and low interest rates that cause asset prices to go up. But because of feedback, there’s a causal effect in the other direction as well where increasing asset prices help soak up money keeping inflation low.

This positive loop obviously can’t go on forever. At some point, like the players in the casino, people will start to realize that there’s just not enough real stuff to go around (and not enough future earnings to justify the valuations). People seem to be finally realizing this based on the massive declines of stocks like Zoom and Netflix.

This realization kicks off a rush for the exits and a decline in asset prices. And because rising asset prices helped keep inflation low, the reversal into a negative feedback loop forces all that soaked up money to pour back into the real economy to chase goods and services, thus higher inflation (and higher interest rates).

Finally, a unique aspect of this current selloff is that where Treasury bonds are usually a place that investors can escape to during a market downturn, they’re part of the problem this time. Near zero nominal yields (and extremely negative real yields) mixed with high inflation makes Treasury bonds all risk and no reward (I first wrote about this here).

Long-Term Mortgage Market Rates

The decade of 2010 also saw the lowest 30-year mortgage rates ever, fueling a housing boom with double digit price appreciation.

Jim Duplessis of Credit Union Times published a September 26 article which examined the outlook as current mortgage rates hit a 20-year high.    His analysis with the relevant data link follows:

Rates in the 7% neighborhood might feel high for those who started buying houses in the last 10 years but they are on the low side for the past 50 years, based on Freddie Mac data published by the St. Louis Fed.

For more than half of the 2,687 weeks from April 1971 through Sept. 22, the rate was at least 7.4%. The median was 9.1% from 1971 to 1999 and 4.8% from 2000 to the present.

Rates peaked at 18.63% for the week ending Oct. 9, 1981 when the Fed under Chair Paul Volcker was battling inflation that had started during the Vietnam war. Volker’s aggressive rate hikes sent the nation into a recession, but knocked back inflation.

The lowest rates from 1971 to 1999 were 6.49% for the week ending Oct. 9, 1998, when the nation was in an economic boom. The lowest over the past 51 years was 2.65% for the week ending Jan. 7, 2021 at the peak of the refinance boom that vanished as rates rose this year to tame inflation.

A “New Normal”

Both analyses suggest the most recent two economic decades are an aberration in terms of a significantly lowered interest rate yield curve.

The efforts to reduce inflation will be a central part of where current rates end up.  But then what?

History suggests that the yield curve will shift to a higher level versus what many consumers, businesses and investors grew accustomed to since 2008.

There are other factors as well.   There is increasing evidence that lower rates while seemingly consumer friendly, do distort the allocation of economic gains disproportionately to higher income individuals while incentivizing multiple forms of financially driven wealth (speculative) strategies.

Anyone can predict the future.  No one knows it.   But believing that recent experience is the best or only guide to future rates, would appear a much too narrow perspective.

Posted on

A Poem for Autumn

 

“In the following Sonnet #73 Shakespeare begins with a simple observation that in gazing upon him his lover sees only the remnants of age (“yellow leaves”) hanging upon the withered skeleton of his aging self (“bare ruined choirs” = leave-less trees).

“That Shakespeare was only 30 (probably younger) at the time he wrote the poem speaks to his ability to imaginatively command a scene he had not yet experienced. From that he expands to a meditation on death (“after the sunset fadeth in the west”) and in the third quatrain expands even that metaphor by likening his aging body/self as the last ashes of his burning youth.

“He pivots from these tokens of gloom to end on a positive affirmation of love, for as he tells his beloved he recognizes that it only makes his lover’s love stronger that he loves one who must soon leave (die).” (by Dr. Andrew Roth, Book Notes # 116)

Sonnet #73

That time of year thou mayst in me behold

When yellow leaves, or none, or few, do hang

Upon those boughs which shake against the cold,

Bare ruined choirs, where late the sweet birds sang.

In me thou see’st the twilight of such day

As after sunset fadeth in the west;

Which by and by black night doth take away,

Death’s second self, that seals up all in rest.

In me thou see’st the glowing of such fire,

That on the ashes of his youth doth lie,

As the deathbed whereon it must expire,

Consumed with that which it was nourished by.

This thou perceiv’st, which makes thy love more strong,

To love that well which thou must leave ere long.

 

Posted on

Credit Unions and Liquidity Management

Managing liquidity will be an ongoing priority during the interest rate transformation now being led by the Federal Reserve.

Today  I want to show how credit unions have prepared.

Relying on a Cooperative System

Credit unions managing  74% of assets ($1.57 trillion) use the FHLB system.   To borrow from the banks, credit unions must invest in a bank’s capital with borrowings a multiple of their contribution.

As cooperatives, the banks are owned by their members, pay a dividend on the capital and offer multiple borrowing, hedging and funding options.

These 1,271 credit unions report a total of advised lines of  credit of  $288.1  billion at June 30, 2022.

The credit union funded CLF at June 30 reports total membership 349 regular members plus 10 corporate agents which have funded the CLF capital requirements for their members with less than $250 million in assets.

The total CLF capital contributions represent approximately 26.2% of all credit union shares as of June 30.

In addition the CLF has total borrowing authority of $29.7 billion but has no advised lines of credit with credit unions.  This lending capacity, if fully utilized would equal just 10.3% of the total advised lines credit unions report from the FHLB system.

Two Observations

Credit  unions rely on the cooperatively designed, privately managed FHLB with boards elected by the owners, as their primary source of external liquidity.

The CLF, specifically designed for credit unions, has not evolved to respond to credit union needs.   The CLF managed by NCUA has no credit union representation or programs to encourage credit union involvement.

There have been no loans from the CLF to credit unions since 2010.   At that time the two most significant loans were initiated by NCUA as part of their corporate conservatorships of US Central and WesCorp.  These two borrowings were for $ 5 billion dollars each, guaranteed by the NCUSIF.

In the upcoming period of enhanced liquidity management, credit unions are turning to the organizations they own and can rely on.

 

 

Posted on

Cooperative Democracy: an Oxymoron?

Mark Twain Was Right: If Voting Mattered, They Wouldn’t Let Us Do It. There’s only one way to make your voice heard and it isn’t by protesting.

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

James Clear: “Every system is perfectly designed to get the results it gets. If you want better results, focus on your systems.”

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

When the coop’s democratic owner advantage is not used, it goes away. Co-ops become indistinguishable from banks. Members are just another name for customers. And leadership progressively presumes its judgments and choices are the primary basis for all decisions–even those ending the charter’s independent existence.

When democratic practices are habitually circumvented, they are difficult to restore. Without regular succession processes, the ability to find new leaders, or even generate interest in leadership is squelched. And at any moment, the sirens of self-interest can appear, canceling the credit union’s future for all members.

Democracy matters until it doesn’t. The good news is that this is a fundamental flaw that every credit union has in its own power to fix. (CUSO Magazine)

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

From Mike Mercer:

‘The extent to which cooperation is the norm depends on the extent to which the behavior is nurtured by the institutions of a society.’  In a time when power is concentrated in the hands of individuals with lots of capital or those with the keys to redistribution of wealth, it is hard to imagine that decentralized cooperation will organically be embraced from within the citadels of existing power. Rather, the cluttered path to a more civil economy will have to be cleared by those who lead democratically structured organizations that have already been formed to foster cooperative behavior.