Author: Chip Filson

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From a Tiny Seed

National Sunflower day is this week.

The center of America’s sunflower growth is North Dakota.  This year, the state’s farmers grew 625,000 acres of the cheery yellow plants, which can be used to make products like nut butter, cooking oil, confectionery seeds and bird food.

Below is my contribution to the annual celebration.  The seed packet said the Autumn Beauty should grow to 6-7 feet in height.   Hard to imagine from a little seed.

But one of the seeds decided to outdo itself.  It is now 12 feet tall with two stakes providing reinforcement.  Here is the crown with more flowers forming.

The current height and still growing.

A proud gardener with nature’s surprise.  Two smaller cousins on the way beside it.

“Be like a sunflower so that even on the darkest days you can stand tall and find the sunlight.”

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A Leadership Example

What does a leader do when something goes awry in an organization?

Some will keep the event quiet, trying to handle the problem privately.  Others will revise an organization’s manual about how to handle such situations.  Some will go public saying the incident has been addressed and will not happen again.

These and other responses are reasonable, but are they sufficient?   Is the organization’s leadership more trusted or effective?

One of the most difficult challenges is when members violate the values of an organization.

Five years ago this was a leader’s response at the United States Air Force Military Academy  when confronted with an incident.

No viewer of this five minute address will question the ideas presented:  replace a bad idea with a better one; if you do not agree with this, then you do not belong; practice civil discourse; or the power of diversity.

The Power of a Public Commitment

But what makes this situation different from many is that the “CEO” goes public, placing his leadership on the line.

Transparency is the most critical component for an organization’s leadership especially if they aspire to be democratic, serve the public or just be respected.

Watch and learn.  The next time you want to make  a lasting point, tell the audience to Reach for your Phones!

(https://www.youtube.com/watch?v=hkUrnHT1VvI)

 

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Cooperatives and Business Ethics

On August 2, Credit Union Times reporter Jim DuPlessis published a followup story to Colorado Partners Credit Union’s (CPCU) sale of its cannabis CUSO business Safe Harbor.

The main news was that CPCU reported a $10 million dollar loss in the second quarter on top of a $40 million first quarter deficit, thus wiping out any gains from what was  announced as a $185 million sale of the business in 2022.

When asked about the $10 million, second quarter increase in salaries and benefits, the article quotes the CEO Doug Fagan:

“The loss in Q2 was due to the final pieces of contractual deal expenses that were not recognizable, per GAAP, until the second quarter. I am not at liberty to disclose any further information on those expenses,” Fagan wrote. “We did not have any write downs in Q2 that were directly related to the sale of Safe Harbor.”

The question is who received the $10 million?  For what contractual obligation?  After $50 million in losses, there is more than money at stake.  This is about the integrity and accountability to the member-owners by CPCU’s board and management of a deal gone bad.

Are Coops More Ethical?

This situation reminded me of a Financial Times November 6, 2013 article following the failure and restructuring of The Cooperative Bank in Great Britain.  The following excerpt suggests business ethics are not as simple as doing the right thing.

“Honest is the best policy, but he who is governed by that maxim is not an honest man.”  Richard Whately, Archbishop of Dublin, was a 19th Century theologian, but the observation is very relevant to the modern debate about the nature of business ethics.

The Cooperative Bank has just announced a restructuring that wipes out the value of existing equity.  Over many years the message of the bank’s advertising has been its aspiration to higher standards of ethical conduct than its competitors. The devil’s advocates might seize on the bank’s financial problems as evidence that honesty does not pay, but that s not what happened here.

The Coop Bank failed for the usual reason banks and businesses fail-bad lending in commercial property and the misguided acquisition  of another business by management whose ambitions exceeded their abilities. . .

Ethics are about what to do when good behavior and profitable business are not necessarily the same thing.

Bishop Whately noted the difference between the honest man and the man for who honesty is the best policy.  When you deal with the man for whom honesty is the best policy, you never know when it might be the occasion on which honest is no longer the best policy.

Bankers, not bishops, deliver lectures extolling their own personal integrity; the man who repeatedly reminds us how honest he is rarely acquires, or deserves our trust.   The integrity we value is a personal or organizational characteristic, not a business strategy.”

 

 

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Times Change

Zoom, a company synonymous with remote work, is calling employees back to the office.

From the news story:  “We believe that a structured hybrid approach — meaning employees that live near an office need to be onsite two days a week to interact with their teams — is most effective for Zoom,” Colleen Rodriguez, Zoom’s head of global PR, said in a statement. “As a company, we are in a better position to use our own technologies, continue to innovate, and support our global customers.” The company’s new hybrid work approach will roll out over August and September.

 

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The Skill of Keeping Honest People Honest

When humankind invented places for reflection, knowledge, good deeds and community leadership, the laws of nature were not repealed.

Organizational design wether this be a church, non-profit driven entity, a credit union, or political office, leaders are all members of the human race.  With their bundles of good intentions and temptations.

Money is an especially potent allure in critical moments, from petty cheating on travel claims to large self-dealing transactions.

So organizations develop checks and balances to,  in the words of my college roommate, “keep honest people, honest.”

Designs Are Not Enough

Returning from a weekend reunion in Chicago, this was the new design for the Metro exist at Bethesda.

The gates have been altered to heighten the exit to prevent “jumpers” from leaving Metro without paying.  Metro had announced that it was losing so much in unpaid fares, that this redesign was necessary to discourage an ever growing temptation.

The “Barriers” in Credit Union Design

There are three elements of organizational structure in credit unions to discourage the ever present temptations when managing money.

  1. The credit union supervisory committee and its system of internal and external audits;
  2. The oversight and review of policy, process and results by external regulatory exams;
  3. The political check and balance provided through the democratic oversight of members in the annual required election of directors.

When these checks and balances are listed, it is easy to see why credit unions can go “off the rails” in terms of personal and organizational shortcomings.

Human temptation is not overridden by organizational design.  For ingenuity can work around the most explicit of processes or checks and balances.

That is why the most critical aspect of leadership is integrity.   One of the best indicators of this quality is the words leaders use when describing an organization’s activity.   In cooperatives those who talk about MY members, MY credit union, MY board or even MY agency reveal potential misunderstanding of their responsibility.

In cooperatives, the operative word should be OUR.   OUR collaborative system, OUR dual regulation, OUR insurance fund, OUR communities’ needs . . .

Designing barriers can help reduce temptation.  Leaders’ integrity is necessary to keep them meaningful.

 

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FDIC Reports $12 Billion Fund Decline for First Quarter;  NCUSIF Stable and Growing

On June 23, the FDIC released its quarterly financial update as of March 2023. The Fund had fallen by $12.1 billion to $116.7 billion, or a ratio 1.11% of insured savings.

The largest factor in this decline was an increase of $16.7 billion for the loss provision expense for the two bank failures and potential shortfall on the resolution of First Republic.

The Fund’s revenue was primarily from quarterly premium assessments of $3.3 billion (83% of total).  Earnings from investments were only $661 million.   In addition to the loss provision and operating expenses of $508 million, the fund realized a loss of $1.7 billion on sale of investments.

The FDIC’s Assessment Practice

The quarterly premiums are calculated on average consolidated total assets minus tangible equity, not insured savings.   This assessment base is $20.7 trillion or twice the $10.5 trillion of insured deposits at the end of March.

These quarterly fees are not a single rate for all banks.   Rather for the first quarter they are based on CAMELS score and balance sheet complexity.   The range from a low of 2.5 to 42 basis points of each bank’s assessment base.  The annualized total premium for the entire banking system using the first quarter total is approximately 6.4 basis points.

The FDIC presents no other information about the quarter such as a standard balance sheet, income statement and cash flow reports.   So it is not possible to track other performance indicators such as the total loss provisions and management of the FDIC’s investment portfolio.

The March quarter was the first significant bank failure in at least the past eight years as shown in the historical table II-C.

The FDIC’s conclusion about its financial situation is that it will return to its statutory minimum reserve ratio of 1.35% under the DIF Restoration Plan approved on September 2020 by the required time frame of September 2028.  What is unstated is how high the quarterly premiums will be will have to be to make this goal.

The NCUSIF’s Status

NCUA posts the NCUSIF’s monthly financial statements for public review.  The latest is for May 2023 and shows a stable fund  with positive earnings $70.2 million which is an increase versus the prior year’s $67.2 million.

This result is due to the $50 million increase in revenue from the rising yield on investments.  This offset a $14 million increase(16.5%) in operating expenses and a $10 million higher loss provision expense compared to the first five months of 2022.

The fund’s retained earnings as a percentage of insured shares has stayed stable throughout the first five months at .297. Adding the 1% required deposit gives a normal operating level of almost 1.3%.

The most challenging part of the NCUSIF’s management is the investment portfolio which reports a YTD return of 1.76%.   The overnight portfolio shows a yield of 5.23% for May but the remaining $18.4 billion earned only 1.4%.

The investment portfolio’s market value is $1.4 billion below book.  This fall equates to 27.7% of the NCUSIF’s retained earnings.    As the fund continues to add to its overnight total, the average duration has slowly declined to 2.86 years at the end of May.

Learning By Comparison

The FDIC’s premiums will continue to be an open-ended fee paid quarterly to build back the FDIC, a process that will continue for the next five years.

The NCUSIF is at the traditional NOL of 1.3%.  As it adjusts the management of its investments, the Fund’s primary source of income, this should result in credit unions looking for a premium from their cooperatively designed fund in the years to come.

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An Initial Reaction to the NAFCU-CUNA Merger

I have just read the general announcement.  But am looking forward to learning the details, plans and benefits as these become available.

Here are my first thoughts.  The members of both organizations will vote on the mergers.  This is a good precedent for all coop mergers.   That way the details and commitments are explained to both constituencies.   When only the merging entity votes, the acquiring firm is exempted from commenting, or even committing, to what the intended benefits will be.

The Loss of Competing Views

Competition in ideas can result in more and better options for credit unions.   NAFCU as the # 2 trade association had to always “try harder.”   This was especially important in critical moments of legislative and regulatory change when there were different “proffers” or options presented by each trade group responding to congressional or administration views.    One need only recall the give and take in passing the CUMAA in 1998.

NAFCU’s origin story in the early 1970’s was to advocate for a federal insurance option, a  position on which CUNA was extremely skeptical.   CUNA feared federal insurance would mean the dual chartering system and cooperative solutions would be subjugated to federal control and uniformity.   Both trade groups were right.

As any CEO who has merged their credit union will testify, mergers are acquisitions, not “marriages of equals,” or other PR pseudonyms.  CUNA’s culture, priorities and politics will be, absent explicit goals, the continuing model.

The Importance of Details and Plans

This first step of mobilizing political consensus at the board and CEO level for a merger is the easy lift.  Most mergers defer the messy details until after the deed is done and the surviving leadership takes over both organizations.

Intentions, promises of shared goals, enhanced capabilities, reduced costs-in sum better value for the members-are never identified or stated.  Just rhetorical promises, sometimes sugar coated by adding several directors from the old organization to the new.

Details matter when change of this magnitude and circumstance occur.  What I will be seeking in this process is how the merger will address the top two or three strategic issues facing credit unions and the future of the cooperative option in America’s financial markets.

Every party serving the cooperative system will have a different vantage point from which to provide their priority.   In my view, this strategic assessment should be the number 1 task for this most consequential change in how America’s credit unions will be represented going forward.

Some strategic issues might include:

  • What should be the role and voice of the member-owner, now largely absent, in the evolving credit union model? NCUA prefers consumer protection not member rights.  Credit unions have removed members from any meaningful role in the governance process.
  • How will the continued trends in consolidation and absence of new charters be addressed?
  • Can the unilateral and “me-first” approach of NCUA be transformed to a more collaborative, cooperative effort for oversight and project priority?
  • How can the credit union system be more engaged in addressing the key challenges members face in their communities from affordable housing, student debt overload and fair financial options?

Priorities may vary across the numerous cooperative organizations.  However, without identifying these issues, the merger outcome could be samo-samo.

Ed Callahan used to observe, people will do what they know.  Meaning they revert to the actions with which they are comfortable.   In this case a single national trade association could result is just more resources devoted to political lobbying, PAC’s and PR tacking with each change in the political and economic winds.

Without a plan for what the system should strive to be, a CUNA-NAFCU merger could just perpetuate the status quo but absent an important forum for dissenting views.

 

 

 

 

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Reporting Coop Success In the Glare of Live Market Updates

This is the season for reporting quarterly earnings by all public companies.  Even credit unions must file their 5300 financial updates with the regulator which are then open to the public.

These many forms of quarterly financial reports are required by law and regulation.   For stock companies, shareholders, traders, investment funds and market analysts, the daily news is dominated by the ups, or downs, in company performance. Here is one example of this reporting frenzy:

Earnings season marches on

This week brings another busy slate of quarterly earnings reports, from tech giants to restaurant stocks. Apple and Amazon are the biggest names due up, along with Starbucks and CVS Health. Earnings this season have so far defied expectations and have been somewhat stronger than expected. Here are the big names on deck . . .

None of those big names will be credit unions.  Credit unions are required in their bylaws to post a monthly financial report in a conspicuous place in the credit union and file the quarterly 5300, but few will provide a public description of these results.

Credit union have shareholders, as do all public companies.  The members’ interest in the performance of their firm is the same as the owners of a bank or any other firm.   How is my ownership benefitting me versus other options?

For stock companies, the market readily evaluates this performance as documented by changes in the daily stock price.   Analysts evaluate the current results and make their “calls” about whether a stock is a buy, hold or sell.  Explaining a firm’s quarterly performance to all market participants is an important skill for CFO’s and CEO’s of all companies, even the smallest.

Credit unions generally provide no such reports or future forecasts (guidance). There is no stock price to provide market feedback.   But is the interest of the member-owners any less deserving than those of public companies?  Is the responsibility to coop shareholders by the credit union’s professional staff any less than to a publicly traded or even a private firm?

When Credit Unions Did Speak Up

In the March-April closures of three banks led by Silicon Valley’s failure, credit unions launched major PR campaigns to assure their members that they were sound.  CEO’s stated there were no parallel circumstances in the coop industry.  Some credit unions devoted a major part of the Annual Meeting to this public concern.  Some of these updates highlighted the credit union’s percentage of insured shares, or capital levels, or liquidity.  The message was to assure members the credit unions were able and willing to continue meeting their needs.

I believe each quarter’s financial filing is another opportunity for credit unions to tell their special story.

What Do the Numbers Mean For Me?

Numbers matter and presenting the credit union’s financial position and key trends is a beginning.   The most important message, just like a public company, is to tell what the numbers mean to the individual owner.

How has the credit union enhanced the value it brings to members?  What investments has the credit union made and what was the member benefit?  As the interest rate environment remains high, what changes has the credit union made to its rates?

Members will assume their credit union is safe and sound, or they would have left.  Credit unions will often announce events, such as branch openings, sponsorship with a local sports team or venue, and even the comings and goings of senior management.  These PR events and community engagements matter, but are not the same as the quarterly status report.  At this time everyone presents their financial results-so how did our members specifically benefit?

The Radical Cooperative Model

Since the 2008-2009 financial crisis, there has been a singular focus within financial systems on stability.  Financial outcomes are all that matter.  The more capital the better.  The only equity that matters is net worth, not social responsibility.

Financial performance is evaluated by the money made, not by the people served.  The relevance of a coop is becomes  its size, its growth and its superior numbers.   A credit union that focuses on what it helped members accomplish becomes a radical act.

Transparency is the key to member-owner confidence and trust.  And competitive advantage.  It is as important for coop leaders as it is for those whose performance is judged daily by the fluctuation of share price in the market.

However credit union’s quarterly numbers are not merely about financial outcomes but for how the performance aligned with the aspirations of members.  Coops should be presenting the values and partnerships that demonstrate their role in communities beyond the conventional financial success measures.

We should be holding up a model that is better for individuals, especially those often unaware of better opportunities.  The quarterly updates should show how a credit union’s purpose is more than making money.   It is a report on the difference made for the members.

A Renewed Commitment to Using Numbers to Say Who We Are

As all three major U.S. stock indices closed higher for July, the S&P 500 and the Nasdaq mark their fifth consecutive months of gains, and the Dow is riding a 14-day winning streak, its longest since 1987; however  cooperatives have a different benchmark to report.

Our momentum is not market driven, but member focused.  There will be a big new batch of corporate earnings the rest of this week not to mention the July jobs report due Friday.

Instead of  live market updates, we should be offering our reports of improved member lives and opportunity.   That is the difference coops should make.

 

 

 

 

 

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How This Story Ends May Show the Future of a Unique Coop System

Oscar Abello, economic editor at the non-profit reporting site Next City, finds instances where credit unions provide “solutions for liberated cities.”  In his latest coverage, the event is a six plus years effort to charter a new credit union for North Minneapolis.

However the end of the story is not clear.   Will there be a new community financial institution, or will the process be stillborn?

Abello poses this fundamental question:  The travails of Arise Community Credit Union, set to be Minnesota’s first Black led-credit union, raise the question: How hard should it be for communities to have their own financial institutions?

The link to his analysis posted on July 11th can be read here.  While recent events are promising, the charter has yet to be granted.

I have three takeaways from his description of this new chartering effort.

Three Lessons

  1. New charters require people with passion and commitment, that is entrepreneurs who believe in their cause. His article profiles Daniel Johnson the CEO-designate who left a successful financial career to serve a clear community need where businesses have been “disinvesting” for years.

Johnson’s motive for leaving his career security: “The community said,(after George Floyd’s death) ‘We don’t want another park. We don’t want another place just to throw flowers. We want something more tangible, something that we can have as an institution that will be around long after we’re gone.’”

  1. In addition to the community’s decline, the market timing was right as Minnesota had just capped payday lenders at 50% APR: One fact: “The average borrower took out nine payday loans, at an average loan amount of $365, and was charged an average of 197% interest per loan.”

The process is not easy as Abello describes:  But chartering a new credit union today is like traversing a long-lost trail through the woods, one that used to be well-traveled but is now overgrown or littered with fallen trees or other obstacles no one has had to navigate previously.

Prior to 1970, there were 500 to 600 new credit unions chartered across the country every year. After a steep decline to near zero, the numbers have never recovered. Over the past ten years, fewer than 30 new credit unions have been chartered across the country.

Changes of leadership, loss of local funding from foundations, the challenges from Covid have led to stops and restarts.   The  Minnesota Credit Union Network and AAUC have stepped up to help.  Credit unions have contributed to a $1.0 capital fund and pledged deposits of several million when up and running.

NCUA is apparently requiring $3.0 million in committed capital based on the credit union’s projections to be $10 million in assets in three years-or a 30% net worth ratio.  This capital base would equate to 50% of the first year’s asset goal of a $6 million balance sheet.  This is an amount not required by law, regulation, or common sense.

In addition to this enormous fundraising barrier, the requirement distorts the fundamental dynamics of self-help for a new charter.   Raising capital encourages investments in fixed assets and operational capabilities that may not be required for years.  It discourages the boot-strapping and learning that must occur when a new  charter reaches out to find the best ways to serve their community.

  1. The chartering process is failing the communities which most need credit union support. Abello points out that “out of 4,700 credit unions across the country, only 500 are self-designated minority credit unions.”

The executive director of the Minnesota Credit union foundation has a new goal from this effort: “One thing that we’re working on right now is coming up with a playbook because the chartering process is quite complex, and really trying to take the learnings that that we’ve had working with Arise and trying to come up with a resource that’s going to be helpful for additional groups going forward.”

Abello tentatively answers the question he posted at the beginning with this observation:

“If a community wants it, if it can prove there is a market for such services that no one else is meeting, and if it can marshall the necessary financial, professional, technological and other resources necessary to pass regulators’ muster, then for now, any community has the right to try and answer the question for itself.”

The obvious answer is few would want to navigate this obstacle course before even entering the market’s fray.

Why did CEO-designate Johnson decide to join a startup in this context of financial consolidation, established competitors and bureaucratic barriers:  “It’s important for people to be able to see that an institution has planted a flag that really represents them and isn’t driven by stockholders.”

In other words:  You own it.  But will that motive be enough to overcome a process that discourages new coop charters?

How this story ends may be a harbinger for the future of the unique credit union financial system.

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Trego Montana, Population 805: Where Members are on Center Stage

If credit unions are about the members, then it follows that members are the best way of telling a cooperative’s story.

This short video is credit union storytelling at its best.  It captures the viewer’s attention for it shows members serving their community.

(https://www.youtube.com/watch?v=D-53C6_2Tsc)

I asked Elizabeth Kozar, marketing manager at Whitefish how this approach was developed.  Here’s her thoughts on why this media is so effective.

Authenticity and Connection

Short-form documentaries provide an opportunity to capture the authentic experiences and lives of Whitefish Credit Union members. By showcasing real people and their personal narratives, the Credit Union aims to establish a strong emotional connection with the audience.

These stories humanize the Credit Union, allowing current and potential members to relate to the circumstances and challenges faced by others in their community. 

Engaging Visual Format

Documentaries, even in a short form, offer a visually compelling way to present narratives (especially being in beautiful NW Montana). By combining interviews, real-life footage, and relevant visuals, the Credit Union can create a captivating storytelling experience. The medium helps to engage viewers and hold their attention, allowing them to immerse in the stories being told. 

Storytelling’s Impact

Humans have an innate inclination towards stories, as it helps us make sense of the world and creates emotional connections. Good stories inspire, motivate, and educate an audience. By using short-form videos, we can effectively convey the triumphs, challenges, and values of our members.

Building Trust and Credibility

In an era of increasing skepticism and mistrust, transparency and authenticity are crucial for financial institutions. Short-form documentaries enable the Credit Union to showcase our continued commitment to our members by highlighting real experiences. By sharing these narratives, the Credit Union demonstrates their dedication to serving their community and building trust.

Differentiation and Branding

In a competitive financial landscape, Whitefish Credit Union aims to distinguish itself by leveraging storytelling. The use of this form stands out from traditional marketing approaches.  It delivers content that resonates with our audience. The videos create a distinct identity and position the credit union as an institution that values its members’ experiences.

 How Did You Identify Members to Profile?

To find members for the videos, I reached out to Whitefish Credit Union’s branch staff to gather information about individuals with compelling or unique experiences. By leveraging the staff’s personal connections, I identified potential candidates who had faced challenges or benefited from the credit union’s services.  

Respecting privacy and obtaining consent, the team collaborated to select the most diverse and relatable stories.  This collaborative effort resulted in a collection of authentic videos that highlight the positive role of the Credit Union on its members’ lives. 

The reach and impact of the Member Story videos is magnified with a multifaceted approach.  

For each video, a dedicated webpage is created that features a story write-up, accommodating those who prefer reading over watching.  We leverage :30 and :15 second clips from each story for various platforms, including broadcast TV, YouTube ads, and social media channels which expands our audience reach. 

Members also promote their stories allowing greater depth of use. Bob Marshall Wilderness Foundation played their story at the beginning of their film festival this year reaching an audience far beyond our traditional marketing channels. Ninepipes Museum has their Member Story on their homepage. 

The Future

Whitefish intends to continuously explore for new examples of inspiring narratives of members in their communities.

These stories document a larger reality.  When members’ lives are the center of a credit union’s messaging, the unique and unmatchable power of cooperative design is celebrated.

Members’ stories mirror our lives, the ups and downs.  This couple’s story captures the spirit of Montana and life’s challenges: Working with their hands: the farrier and his wife.

(https://www.youtube.com/watch?v=UaaiAne8Vz4&list=PLnh8CdRSC2lh353cuh6lb2WyLL94XW6uu&index=13)

Credit unions exist to foster community through trust and engagement.  These short-form documentaries are an art, portraying humanity at its many crossroads and living life with passion.