Author: Chip Filson

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A Friday Morning Homily

From author and speaker Greg Satell’s article: Values Always Cost You Something

“The truth is that, to mean something, values always cost you something. Otherwise they’re just platitudes. . .

“Values are essential to how an enterprise honors its mission. They represent choices of what an organization will and will not do, what it rewards and what it punishes and how it defines success and failure. Perhaps most importantly, values will determine an enterprise’s relationships with other stakeholders, how it collaborates and what it can achieve.

“The problem is that values are often confused with beliefs. When you’re sitting around a conference table, it’s easy to build a consensus about broad virtues such as excellence, integrity and customer service. True values, on the other hand, are idiosyncratic. They represent choices that are directly related to a particular mission.

“Make no mistake. Real values always cost you something. They are what guides you when you need to make hard calls instead of taking the easy path. They are what makes the difference between looking back with pride or regret. Perhaps most importantly, they are what allows others to trust you.

“Without genuine commitment values, there can be no trust. Without trust, there can be no shared purpose.”

 

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Mid Year Numbers for NCUA

NCUA requires all credit unions to post monthly financial statements for members.

Similarly NCUA posts monthly financial statements for the three funds it manages. This is an important  transparency commitment as all the agency’s revenue is from money provided by credit unions.

Timely publication permits credit unions and the public to follow how the funds are used and overall spending trends.

These monthly updates are a promise the agency made when the 1% NCUSIF underwriting was agreed to by credit unions in 1984.  The dominant concern of credit unions with the 1% requirement was, if we keep sending money, how do we know the government won’t just keep spending it?  (see pgs 18-19 in NCUA’s 1984 Annual Report)

Timely publication is critical for credit unions which provide the funding, to be able to monitor what was being done with their member’s money.

 NCUA’s June 2023 Operating Expense Trends

The following is an overview of one aspect of each fund’s financial report, the trend in operating expenses.

         Operating Expenses   ($ millions)

Fund    YTD June ’22   YTD June ’23     % change

CLF          $       521          $     1,051                  98 %

Op Fund $ 61,145          $ 69,770                14.1%

NCUSIF   $101,164        $115,010               13.7%

TOTAL     $162,840       $185,131                14.1%

These numbers actually understate several expense or cash outlays.   For example the NCUSIF operating expense does not include a YTD $20 million increase in the provision for insurance losses (a non cash outlay).

In the Operating Fund, NCUA has spent $3.4 million in cash outlays for fixed and intangible assets, but only records depreciation expense of $1.8 million.

Depending on which measure of inflation one uses, the 14.1% increase is three to four times (300%-400%) the most recent reported annual price increase.

The Board Action with a Budget Surplus

The staff’s mid year budget update in the July board meeting, projected a $5.1 million surplus by year end.

Here is the recommendation from staff of how to use these funds:

Based on projections for the remainder of the year, staff estimates that spending will be approximately $5.1 million lower than the Board-approved 2023 Operating Budget. Reprogramming a portion of this projected surplus would provide funding for new requirements related to cybersecurity in the Office of the Chief Information Officer (OCIO), support to credit unions provided through the Consumer Access Division in the Office of Credit Union Resources and Expansion (CURE), reasonable accommodations, and the hiring initiative. The estimated cost of these proposals is $737,000 for 2023, which is factored into the estimated budget surplus stated above. Six new full-time positions related to the NCUA’s cybersecurity efforts and CURE are part of the proposed action for Board consideration. 

Credit union concerns about the spending of their funds sent to NCUA are as relevant today as in 1984.   Staff routinely recommends and the board approves the carryover of funds unspent from prior years, not their return to credit unions.   Or, as in this situation, adding new positions and increased expenditure in other areas as described in the memo.

NCUA provides credit unions with the facts.  It is up to credit unions to respond.   After all, it is the members’ money.

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When Directors Fall Short as Fiduciaries

Yesterday I quoted from  an NCUA letter which emphasized directors’ primary fiduciary responsibility is to the members, not the organizational entity.

What happens when this principal duty falls short?

Sometimes dissenting directors will just give up and resign.   Other times, the entire board votes to hand over their duties to another credit union via merger.

And the members?  Most of the time they just lose interest and take their business elsewhere. But very occasionally, they revolt. That is happening at SECU in North Carolina.

The former CEO Jim Blaine resurrected his blogging skills when he was contacted by current employees and members concerned about the direction of the credit union under a new CEO.  The daily blog SECU-Just Asking was began in December 2022 with this note:  Caution: Rant in Progress.

The website’s posts of events and opinions would not have become a rallying point if it had not touched on issues of interest to many.

Members Go Democratic

Now that public dialogue has transformed into action.

The primary check and balance on directors’ oversight  is voting to fill board vacancies in the annual election.

Rarely is this process effective.  For nominations and election procedures are controlled by the incumbent directors who try to avoid any election with more candidates than vacancies.

SECU members have become engaged.   The result of the public dialogue is a contested election according to  an article from Business North Carolina.

Social Media Mobilizes Members

Members turned to social media to rally support.  Here is a Reddit example.

How NC SECU is being turned into an elitist piggy bank (and the narrow window to prevent it)

For almost 100 years the State Employees’ Credit Union (SECU) provided low cost loans and financial services to North Carolina’s active and retired state employees, teachers, and their extended families. SECU historically has been one of the only financial institutions that charges the same low interest rates on mortgages, car loans, credit cards, and financial services to all members regardless of whether they come from a rich, middle income or working class family.

Unfortunately, this approach to treating everyone fairly is changing because of actions by the current SECU Board of Directors. This group – for the first time in the history of the Credit Union – has decided to charge middle class and lower income members and their families HIGHER interest rates so that they can give upper income people LOWER interest rates.

And that’s not all the current board has done. They’ve also:

-Cut services, like the tax preparation assistance program that was available to all members.

-Raised interest rates for the majority of members and their families, while failing to raise interest rates for savings accounts.

-And finally, in an attempt to prevent their opponents from running candidates and entrench themselves in power they’ve changed the longstanding rules and bylaws for SECU Board elections.

This is wrong and we must fight back to save our Credit Union!

The current board is made up of 11 people that no longer represent the interests of the hundreds of thousands of active and retired state employees, teachers, and their families that the Credit Union was founded to serve.

What can you do to fix this?

The board changed the rules to make it extraordinarily difficult for anyone new to serve and to try to silence members’ voices. The board’s new rules require a candidate to get 500 signatures, obtained in person, in 5 days time.

In order to stop this board’s attempt to convert SECU into another traditional bank that looks out for rich elitists at the expense of regular folks, please sign the petition allowing these three candidates who support returning SECU to its historic mission to be on the ballot for the board election this fall.

(the three candidates and brief credentials were then listed)

Again, you are only signing to allow these candidates the opportunity to run for the board, so that we may continue this discussion. If they aren’t on the ballot, there will be NO discussion.

Please go to www.secujustasking.com and request a petition form to submit.

Thanks y’all

Over twenty comments were posted to this appeal. Some supported, others asked questions.  Here is one:

I sense that SECU is currently being run by bankers who don’t understand the competitive advantages the credit union historically had. Banks long ago outsourced much of their lending decision-making to people looking at an application and a credit score on a computer screen. That saved them a lot of money (those local loan officers weren’t cheap), but it created an opening for someone like NCSECU to have an advantage. . .

. . .there’s no question that SECU could have made a lot more money over the years by risk-adjusting lending rates (preferably by something a little more sophisticated than just credit scores), but they were able to keep rates flat, because that fit their ethos as a non-profit better.

I just don’t buy that this is necessary now to keep the institution afloat–I have yet to hear a cogent argument for why this is the case now. It apparently wasn’t necessary in 2008 or 2001, but we’re supposed to believe that rates being hiked back to something more like historical norms is threatening the institution? 

Or to put it another way, what have they been doing so wrong lately that they aren’t able to weather this storm the way they weathered storms in the past?

A Test Case

Democracy is a difficult process in all circumstances.  American elections are just the most obvious example.

SECU may be the test that illustrates whether the cooperative model of governance can be a real check and balance by members.  Can democratic voting be the means to counter the ever present temptation to become an “elitist piggy bank”?

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NCUA’s General Counsel On Directors’ Number One Responsibility

Fiduciary Duties “Are Properly Owed to People, and Not to Entities”

Credit union leaders often state priorities for their financial institution’s future but not how members will benefit. The following is NCUA’s view of directors’ principal fiduciary duty.

This analysis was in response to a state league CEO’s concerns about a proposed rule on directors’ responsibilities. NCUA General Counsel Bob Fenner wrote on March 15, 2011 as follows:

At the very beginning of your letter, you do not state that you are writing to NCUA on behalf of credit unions. Instead, you and your fellow authors state that “[a]s associations representing 18,280,456 members in nine states . . . we want to call your attention to several key issues.

. . . .” I presume that by “members” you mean the people who are members of the credit unions in your states, and I commend you for attempting to look beyond credit unions as entities and through to the people that credit unions were structured to serve. As our rulemakings make clear, the directors of federal credit unions must also represent the interests of the members of their credit unions.

The “Interests of Members”

I do not believe that a rulemaking clarifying that FCU directors owe their fiduciary duties to the membership of the FCU is a difficult concept or one that should surprise or concern directors. Section 701.4 is intended to make clear that the law with regard to federal credit unions is in direct alignment with the credit union philosophy; that is, that credit unions exist to serve their members; that credit unions are about people, not profits; and that the members own their credit unions. As the NCUA Board stated back in 2006 . . . when making important decisions affecting the FCU, directors should ask themselves the following questions:

What financial services do my members need and want? How do I know this? [And] [w]ill my decision today help the credit union provide these member services in a quality manner and at low cost to the members?

Fiduciary Duties Are Owed to Members

Your letter, however, states that “[i]t is our position that the director’s duty should be to the credit union as an organization, and not to the members of the credit union.” I disagree. As the NCUA Board has discussed at length in rulemaking preambles going back to 2006, for federal credit unions the law (as determined by the FCU Act) and philosophy align: the directors’ duties flow primarily to the membership. Id. at 77154-55.

As a practical matter, however, we believe that in the vast majority of situations what is good for the credit union will also be good for the members. See 75 Fed. Reg. 15574, 15575 (fn. 5)(March 29, 2010). . .

 . . .we also believe that fiduciary duties are properly owed to people, and not to entities. FCU directors must understand the people who are affected by the directors’ decisions and identify which people the directors are serving.

The danger is that, if the directors are allowed to focus only on the credit union when making a decision – without regard to how the members are affected – the directors can justify making self- serving decisions, or decisions that serve primarily the FCU’s insiders, under the guise that the directors are simply doing what is best for the credit union.

Ed. (emphasis added)

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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.