Category: Co-ops in Capitalism

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A Case Study of a $96 Million Turnaround: Safe Harbor, Cannabis Banking, and Partner Colorado Credit Union

On year ago I described the announcement that  Colorado Partner Credit Union (CPCU) had arranged to sell its wholly owned CUSO (Safe Harbor), specializing in cannabis banking, to a Special Purpose Acquisition company (SPAC), or publicly traded company.

Serving the cannabis business has been a priority for some credit unions in states where the sale is licensed for several years.  This past week credit union leaders and trade associations announced their continued support of changes in  federal law to allow all financial institutions to serve the trade-which is now legal only on a state by state basis.

“CUNA said it supports the Secure and Fair Enforcement (SAFE) Banking Act, a bipartisan bill introduced in both chambers in April that would provide a safe harbor for financial institutions serving legal cannabis businesses.-from CU Today.

The Sale of Safe Harbor, a Cannabis CUSO

CPCU was to receive $185 million for selling its CUSO, $70 million in cash and $115 million in stock. Sundie Seefried – who created Safe Harbor cannabis business while the credit union’s CEO– would be the CEO of the new public company (NASDAQ: SHFS).

A $96 Million Turnaround In 90 Days

An immediate result of this September 28, 2022 closing was PCCU reporting a $55 million net income and an 8.7% ROA for the year ending December 2022.

This extraordinary gain occurred even as SHFS  reported a $35.1 million loss for the year ended December 2022, compared to net income of $3.2 million in 2021.  This result was described as “primarily due to the loss in value of several of the financial instruments placed in connection with the Business Combination.”

SHFS’s December 2022 balance sheet position  resulted in the following “going concern” comment by auditors:

Liquidity and going concern

As of December 31, 2022, the Company had $8,390,195 in cash and net working capital of ($39,340,020), as compared to $5,495,905 in cash and net working capital of $5,922,023 at December 31, 2021.

Included in the working capital deficit at December 31, 2022 is $25,973,017 current portion of the long-term payable owed to the seller, PCCU, from the aforementioned business combination, and $14,359,822 deferred consideration current portion related to the Abaca acquisition. The Company has also incurred a significant cumulative consolidated operating loss for the year ended December 31, 2022.

Based upon these factors, management of the Company has determined that there is a risk of substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the date these consolidated financial statements have been issued.

Results at March 2023

In  the March quarter of 2023 CPCU reversed much of the 2022 gain on Safe Harbor’s sale resulting in a $41 million loss.  The credit union’s net worth ratio between the two quarter ends went from 20.9% to 14.7% as of March 2023.  Its total assets were $699 million which included new subordinated debt of $3.1 million and notes payable of $27.5 million.

The loss was due to a restructuring of the sale terms  for CPCU as described in an SEC filing and company press release:

On March 29, 2023, the Company and PCCU entered into a definitive transaction (Refer to Note 22, “Subsequent Events,” of the consolidated financial statements) to settle and restructure the deferred obligations, including $56,949,800 into a five-year Senior Secured Promissory Note (the “Note”) in the principal amount of $14,500,000 bearing interest at the rate of 4.25%; a Security Agreement pursuant to which the Company will grant, as collateral for the Note, a first priority security interest in substantially all of the assets of the Company; and a Securities Issuance Agreement, pursuant to which the Company will issue 11,200,000 shares of the Company’s Class A Common Stock to PCCU.

This restructure was driven by the SHFS’ financial position.  CPCU is now the majority owner of voting stock (55%) and CEO Douglas Fagan  is  on the SHFS’s board.

SHFS’s First Quarter Earnings Call

On Tuesday SHFS reported its first quarter earnings with an 8-page press release.  The financial results show revenue of $4.2 million, operating expenses of $5.8 million and an operating loss of $1.6 million.

The release also provides operational highlights and a 2023 financial outlook.  During all of  SHFS’s nine years building the cannabis business, CPCU has been the primary banking partner.  This means revenue from all the deposits, loan funding and investment returns are shared with the credit union under a services agreement detailed in the company’s SEC filings.

Credit Union and banking partners are key to SHFS’s business model. As descried on the website, the firm is a  “financial technology company, not a bank. Banking services are provided by contracted NCUA or FDIC insured financial institutions. Some non-deposit products and services are not covered by FDIC or NCUA.” 

On May 11, 2023 SHFS announced another  partnership with Five Star Bank in New York that it said will add up to $1 billion in additional deposit capacity.  SHFS plan  is to scale the business.

External Contexts & Cannabis Opportunity

SHFS’s future is uncertain.

The firm’s stock price is reported daily on its website.  The stock’s value since the “business combination” has declined from a peak of just over $10 to yesterday’s close of $.38.   The total market capitalization  of the company has fallen from over $300 million to $15.7 million at yesterday’s close.

However, SHFS is not alone in its extended financial condition.

SHFS’s  public offering via a SPAC transaction was a way to truncate the time, expense and investor scrutiny of a traditional public offering (IPO).   As reported in an April 27 WSJ article, SPAC’s Are Running Out of Money.”  The story’s lead reads:  ”The SPAC boom took hundreds of risky companies to the stock market. The next stop for many is bankruptcy court.”

The article’s implication is that the SPAC process to take a private company public, may short cut a more rigorous traditional IPO due diligence and valuation process.

Another external factor could also be important.  SHFS is the front end, or entry platform, for cannabis related businesses accessing financial services.  The following is SHFS’s business value proposition:  Our services allow Cannabis Related Businesses (herein referred to as “CRBs”) to obtain services from financial institutions that allow them to run their business more efficiently and effectively with improved financial insight into their business and access to resources to help them grow.

Due to limited availability of payment and other banking solutions for the cannabis industry, most businesses transact with high volumes of cash. Our fintech platform benefits CRBs and financial institutions by providing CRBs with access to financial institutions and financial institutions access to increased deposits with the comfort of knowing that those deposits have been compliantly monitored and validated. . .

A recent WSJ news story suggest that Legal Cannabis Can’t Compete  because licensed sellers are facing steep taxes and regulation.  In states like California (and New York) the article reported unlicensed sales were almost eight times licensed sales.

In many states cannabis began and still is an underground business. So even when either federal or state authorization is achieved,  suppliers may wish to retain their business  anonymity.

Tomorrow I will analyze what some of the learnings credit unions may take from this the effort to “spin off” this credit union created business to become a publicly traded company.

How did cash decline so quickly following the combination?  How dependent is the CPCU on SHFS’s business?

The details of SHFS’s history from SEC filings for this transaction and subsequent updates  offer, I believe, instructive insights for others who may harbor similar ambitions.

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“The Rest of the Story”

Decades ago, radio broadcaster Paul Harvey provided millions of listeners his unique blend of news and views. After reporting an important event   he would often promise to  tell “the rest of the story” but only after an advertising break.

The member testimonial below from Affinity Credit Union, Des Moines, is used in TV commercials and social media to illustrate their efforts for personal service with members.

This two-minute story of a real member going from near bankruptcy to an 800 FICO score is very effective, even moving.

(https://youtu.be/0PXPcuGnAkc)

The Way Back-More Than Financial Wellness

But there is more to the story. James Reasoner, the member in the video, is a recovering alcoholic.  Several times he refers to making poor decisions, but stays silent about the context.

About two decades ago he woke up in a jail cell after a  second DUI arrest.  Something happened in the cell. He describes it as a spiritual awakening resulting in an effort to change his life.

James says of  this decision, “It all started with a little trust and lots of hope.”

Today he attends daily 7:00 AM sessions with his mentor.  In turn he mentors other alcoholics both in person and during Covid, on zoom.  He speaks at periodic recovery meetings while still working at the Firestone tire plant where he is in his 28th year of employment.

Being There for Others

His credit union relationship has also evolved beyond this video testimonial.

Last week at the members’ Annual Meeting James was elected to an initial three-year term on the board.  Below, in the middle, he raises his hand with fellow volunteers while taking the director’s oath.

Knowing Each Member’s Story

The Affinity video is more than an advertising promotion.  It is comparable to a public service announcement.  It illustrates this credit union’s efforts to respond to a member’s unique circumstances.

Beyond the video’s specific example, there is an even broader impact.  It is also the back story of a relationship experience that motivated James to give back more of himself to others.

What a powerful witness for economic democracy when a long-time member volunteers for credit union leadership!

The video’s universal message is that “every member has a story.”  When we listen, that’s when we can truly serve them.

(Note:  Personal story of James Reasoner used with permission.  Thanks also to Misty Haley, who was James’ helper.  She was recognized for 26 years of service at this year’s Affinity Annual Meeting.  )

 

 

 

 

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The OATH

Earlier this week I spent three days with Affinity Credit Union.  I was invited to speak at their Annual Members meeting.  This would be my first live, in- person speech in years, to a credit union with which I had no prior connection.

I asked to come a day early to learn about why this $140 million, 74-year state charter in Des Moines, IA wanted me to speak.  The CEO’s response was simple: I want you to see what we do.  In other words, for me to learn.

I accepted.  In later posts I will share some of the things I experienced.  But one event was totally unique. I had never seen it in my 45+ years with credit unions.  It is an example that  other credit unions should  consider.

The OATH

The members’ meeting began at 5:30 with a buffet dinner for the over 200 people in attendance.  The agenda was long running, from “A” to “Q” in the outline given with the Annual Report. There were three speeches by outside guests (I was one), six high school scholarships presented, recognition of three employees who had passed twenty-five years each in service all before the business portion of the meeting.

At the conclusion of the business meeting, the Chair Cindi asked all the newly elected and continuing directors to stand for their oath of office.  The oath was administered by a former chair and director.  He read the phrases and they would repeat together following him.

The oath begins with the words “do solemnly swear” and included the following commitments:

I will diligently, faithfully honestly and impartially perform the duties imposed upon me by the bylaws

I will not knowingly violate. . .any of their provisions

I further swear that I will. . .properly discharge the duties of any office or committee to which . . .I am appointed

I will not discuss the affairs of this credit union or any of its members wit anyone except credit union officials

I will give all possible assistance to any person who may succeed to any office which may hold. .

The nine directors stood together at the front of the room, hands raised, repeating the oath in unison before their families, friends and hundreds of members and guests.  An important and solemn moment of a public commitment to their fellow owners and community.

The Oath’s Origins

As I had never heard about  this happening in credit unions, I asked how it became a part of the Annual Meeting.  Was it required in the bylaws?  By their state charter? By some other tradition?

The practice had been followed long before the current leadership team was in place.  Even prior to the former director and chair who administered the oath this year. He recounted:

It was given long before I got on the board. I was told that it was because it was swearing an oath to the local 310 members (the credit union’s original union chartering group at the Firestone plant) that they would take care of the credit union when it was members and family only.  Local 310 still swears an oath to protect our brothers and sisters to respect and do no harm with actions or pen.

Unfortunately, in today’s environment not every union member thinks it’s necessary to swear an oath to watch out for each other. So it probably goes all the way back to the lunch box (when the credit union was chartered in 1947.)  That lunchbox symbolizes a resource created by workers, for workers, that feeds families, futures and trust. 

A Vital Example for Cooperatives

Vows, oaths or formal swearing ins are rare in organizations today.  Perhaps when joining a church (statement of belief) or wedding vows or perhaps a pledge such as when joining the Boy Scouts.

There is however one universal practice where an oath is administered, when a person joins the military or becomes a federal employee.  The constitution requires the practice as explained in this article:

The reason is simple – public servants are just that – servants of the people. After much debate about an Oath, the framers of the U. S. Constitution included the requirement to take an Oath of Office in the Constitution itself. Article VI of the Constitution says, “The Senators and Representatives before mentioned, and the Members of the several State Legislatures, and all executive and judicial Officers, both of the United States and of the several States, shall be bound by Oath or Affirmation, to support this Constitution . . .; 

The author states the intent:  One purpose of the Oath of Office is to remind federal workers that they do not swear allegiance to a supervisor, an agency, a political appointee, or even to the President. The oath is to support and defend the U.S. Constitution and faithfully execute your duties. The intent is to protect the public from a government that might fall victim to political whims. 

Should Credit Union Directors Swear an Oath?

As volunteers, directors are often seen as an eleemosynary activity, an act of charity.  Therefore the demands of a director should not be the same as in a formal, paid position of responsibility.

This characterization is even noted in federal legislation as recently as the Membership Access Act in 1998.  In setting the new PCA reserve requirements, the legislation directed that the NCUA consider the volunteer nature of credit union leadership when imposing capital standards.

I believe that an annual oath taking in front of members and community,  would not only be good practice, but honor and enhance the  tradition of credit union volunteer leadership.  The requirement could be made a standard part of the bylaws, which is the governing document, as noted in the oath above.

As a public event following the business meeting, it formalizes their accountability to the members whose authority has elected them to their positions.

Most critically the oath taking represents a transparent commitment to one of the most important tenents of cooperative design: the democratic member voting process. It reaffirms the trust members expect and are properly owed by their elected directors.

If you would like to receive a full copy of the Affinity Oath,  contact Kris Laufer at klaufer@affinitycuia.org.

 

 

 

 

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What Solid Cooperative Performance Looks Like

Recent bank failures, growing liquidity pressures, interest rate uncertainty and falling consumer savings have created uncertainty about  credit unions’ financial outlook.

The first quarter 2023 call reports are in.  There are a range of results, as usual.  Below is Wright-Patt’s CEO Tim Mislansky’s summary of the numbers for his team.  He opens with a one sentence conclusion.

Solid Performance

“We ended the first quarter with solid financial results.

Loans to members were up a whopping $70.7MM from February, were up $724.9MM from a year ago and are $177.8MM above our budget.

Member deposits jumped a big $182.8MM from February (due to the month end on a Friday payday), were up $445.7MM from a year ago and are $70.8MM over budget.

While both are results to be excited about, it is important to remember that we fund our loan growth with deposits. Continuing a pace where loan growth is significantly higher than deposit growth is not sustainable.

Net income for March was $8.7MM and year-to-date is $25.3MM. This is $6.5MM above our budget, but $2.2MM behind last year.”

He proceeds to review key items for the month and changes year-over-year including net interest income, non interest income, loan loss provisions and operating expenses versus budget.  He concludes: “We remain pleased with our early progress in financial results.”

How Were These Results Achieved?

The important issue is not what the results are, but how they were accomplished amidst so much  macro economic uncertainty.

To understand these financial outcomes, one must  look at the other parts of  CEO Mislanksy’s monthly report.  He opens with two recognitions.

The first honors a 47-year retiring employee, Kathy Denniston, in the Member Help Center. The credit union was chartered in 1932.  This employee has been serving members for more than half the credit union’s existence, and arguably during the most difficult  competitive time frame.  Sold performance starts with culture, the commitment of the employees.

The second comment relates a story which Tim calls Moments of Impact.  They are brief descriptions of exceptional responses by employees (partners), in this case the  Enterprise Risk Manager:

I often say that it is everyone’s job to take care of members and Corey did just that recently. Corey is a part of the security team that deals with incident reports – which are commonly sent through if a member or Partner has an accident, gets hurt in one of our centers, or if there is erratic behavior.

A couple of weeks ago, an MHC Partner submitted an incident report because a member who was declined for a mortgage started making some comments about depression and wanting to end his life. When Corey saw this, he replied to the larger group and asked what we typically do in these situations, because he wanted to help. Honestly, we do not have a standard protocol for this situation.

Rather than let it go, Corey took it upon himself to call the member to see if he was okay. He made sure the member had some resources and contacts that he could call for help. Taking that extra step just showed how much Corey cared and the type of people we have here at WPCU.”

The Performance that Really Counts

While financial numbers are one way of tracking performance, for Wright-Patt the focus is not on growing assets, loans or deposits. Growth results from doing the right things. Rather the credit union starts with impact, what it can do for its  members, potential members and  employees.

While over 90% of its deposit are insured, its share stability is due to member loyalty, not insurance. The credit union is trusted by members.  Their loyalty underwrites the credit union’s ongoing success that started  91 years ago and continues to expand quarter by solid quarter. member by member.

(I thank Tim for allowing me to use this example from his monthly report to his team)

 

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Business and Life Wisdom from Warren Buffett (Part II of II)

Last Saturday’s Berkshire Hathaway’s Annual Meeting was preceded by a five hour Q & A with the two founders: Warrant Buffett and Charlie Munger.  Both are over 90 and answered multiple questions about the numerous business decisions at BRK as well as thoughts about life.

Many of their observations were relevant to any organization because of the scope and scale of the companies BRK owns.

However the most important lesson is their example of transparent leadership and accountability.  Buffett’s board is self-selected.  He is Chairman and CEO, roles that will be divided when he leaves.  The company has the fourth or fifth market capitalization of any publicly traded firm.  Its net worth of over  $500 billion is one of the largest in corporate America.

At age 92 with an unmatched  performance record over six decades, Buffet did not have to put himself into the public and shareholders’ conversation as he did. There was no script.  In addition to the tens of thousands in the live attendance there were hundreds of thousands following the life MSNBC telecast around the world.

His leadership example is one every credit union could follow.   In doing so, the CEO and Boards would honor their member-owners’ loyalty, communicate competence, and  fulfill the cooperative democratic governance model.

Following are few of his many insights.  However the most important message is this simple example of a CEO’s public dialogue with his owners.

Buffett’s Business Observations

  • Why problems with commercial real estate seem inevitable.  The value of any property is only what the buyer can borrow without signing their name to back the loan.  Market value depends on how much a buyer can borrow, that is the availability of credit. Downtown office buildings are being hollowed out and banks don’t want the properties.  Many properties have seen their value decline, and refinancing or sale in the new interest rate environment will be more difficult.
  • Money is too easy to raise—startups are selling ideas, not performance; People are just trying to outsmart each other not out-manage.
  • Opportunity comes to BRK when people do dumb things partly the result of easy money.
  • Wall street and company managers are overwhelmingly focused on the short-term, not how well you will be in five or ten years.
  • How well will a brand travel? Buffett gave numerous examples of learning about consumer behavior from his multiple retail businesses.  For example when trying to expand the See’s candy franchise, he learned that consumer’s preference for chocolate is different on the two coasts than in the Midwest.  The See’s brand has “limited magic” and does not fit well in other markets.
  • Why does BRK own so much of Apple? Consumer loyalty—users will give up their second car before they would their iPhone.
  • Because BRK pays no dividends and reinvests all earnings back into its businesses, it makes investments in its power companies that give it an advantage over its dividend paying utility competitors. This is especially important when new power sources and transmission capabilities are required to make renewables an increasing component of energy supply.
  • BRK’s secret to success: Keep a small headquarters staff (about two dozen people) and practice extreme decentralization for managers to run their business.

Life Wisdom

  • Live your life by writing your obituary and then reverse engineering it.
  • On AI: it will change everything except how people think and behave. AI does not replace the gene.
  • How American industry and society performed in WW II: Americans understood the challenge creating a unity of purpose and the mechanisms and urgency to organize capital and industry to win the war. That unity is lacking today.
  • Must refine our democracy -how to keep good parts and call out the worrying. The country has moved from partisanship to tribalism.
  • Charlie Munger on why he left law practice: “Working in a large law firm and moving up is like winning a pie eating contest where the prize is getting more pie.”
  • Why do formerly independent companies and managers agree to be bought out by BRK to become part of a large conglomerate. “We let them operate independently without worrying about analyst’ opinions, stock prices, bank lines, or trade associations’ priorities.  They can just run their business. There is nothing like working for yourself.”
  • Shouldn’t the second half of life be better than the first?
  • Society has trouble preparing for events that seem remote (another pandemic, climate change).

Full details of this live Q & A can be found here:  Buffett@response.cnbc.com, the Warren Buffett Watch.

 

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Warren Buffett’s Annual Meeting and Wisdom for Credit Unions (Part I of II)

Last Saturday was the annual meeting of Berkshire Hathaway (BRK) in Omaha, NB.  The event, called the “Woodstock of Capitalism” was attended by over 40,000 shareholders and broadcast live on MSNBC.

I believe there are valuable observations for credit unions.

Prior to the formal annual meeting agenda Warren Buffett (age 92) and Charlie Munger (age 99) answered questions from online and in-person shareholders for over five hours separated only by a short lunch break. Their goal was to take at least 60 questions.

They covered all aspects of company operations, long term strategy, and recent decisions (eg. selling TSMC stock after holding only two months) as well as questions on Fed fiscal policy, international relations and life’s most important decisions.

The full sessions and excerpts can be found from Saturday’s edition of Buffett@response.cnbc.com, the Warren Buffett Watch.

Three Important Lessons for Coops

Here are my top three takeaways with significance for credit unions.

  1. Respect for shareholders. Buffett: “For fifty-eight years we have regarded shareholders as the reason for our existence.”  The open-ended questions at the meeting came from young and old including families that had owned stock for generations.  No subjects were off limits.   The entire event was a celebration of the firm’s various businesses and designed to be both informative and a good time.

This model of dialogue with shareholders is one that can be emulated by credit unions.  It would increase cooperative transparency, confidence and good governance.  In Buffett’s words: “Management has an obligation to explain to shareholders everything. . .to say what they think is right.  We want owners to understand what they own. . .We are working for the people in this room, not a quarterly operating target from Wall Street.”

This question and answer with ordinary people from all over the country (and other countries) was direct and straight forward.  No talking down or 10-Q explanations.  No discounted cash flows or present value kinds of reasoning; only plain answers to hard questions.

  1. The entire US banking model is under review. After the runs caused the closures of three major banks, the two most frequent proposals have been to make deposit insurance unlimited in coverage or to eliminate short selling of public bank stocks.  Future uncertainty in the current environment seems probable.   Unlimited deposit insurance would make all deposit liabilities of shareholder owned banks an issue of federal government backing.  The second reform would reduce market discipline in the pricing of bank stock performance.

At another point in discussing property-casualty insurance (a market which operates on a margin of only 4%), Buffett noted his strongest competitor was one which created the last significant innovation: State Farm a mutual, not a stock company.  Here is his analysis from the 2019 Annual meeting:

“If you go to business school, you’re taught that it’s only because you have incentives and compensation, all kinds of things, that businesses can be successful. [But] Nobody really got rich outside of State Farm. They sat there, and they are the biggest insurance company,” he claimed.

“When Leo Goodwin started GEICO 80 years ago, he probably wanted to get rich,” he said, referring to GEICO’s founder. “And probably at Progressive, I know people wanted to get rich. And at Travelers and Aetna. You can name them, dozens and dozens of companies.

“And who wins? A mutual company,” Buffett concluded.

“In terms of presence, size, they are still the biggest company. If you omit Berkshire, they have the highest net worth by far. They have $140 billion or something in net worth,” Buffett said, speculating that Progressive’s net worth is about one-sixth that of State Farm.

“We’re spending $2 billion a year telling people the same thing we’ve been telling them for 70 or 80 years.” But when all is said and done, “State Farm still does more business than anyone else, and that shouldn’t exist under capitalism.”

“If you [had] a plan to start a state farm today and had to compete with Progressive, which would bring the capital [for] a mutual society from which you are not going to withdraw the profits? It makes no sense at all,” he said.

With the market driven banking model increasingly under question, and the example of State Farm’s mutual success, is it possible that  the cooperative credit union model is the best alternative design for resolving the uncertainties and internal contradictions of stock-owned depository financial institutions?

  1. How his insurance model benefits all BRK businesses. And why it suggests the FDIC is a flawed insurance model.

Insurance is a paid-in-advance business.  This gives a firm the ability to earn on the capital and invest the float before paying out claims expense.

As an example, last year BRK was earning 4 basis points on its $125 billion  cash, or about $50 million per year.   Recently the company bought a Treasury bill at 5.92%.  The company will earn about $500 billion this year on its cash.  This float from the insurance doesn’t cost anything. Capital stock is very expensive. Debt has to be repaid like deposits.  Importantly BRK has multiple options for investing its float.

The FDIC has no capital base.  Its primary revenue is from premiums.  The combined losses of an estimated $35 billion on the bank failures so far this year will be paid by the banking community. FDIC has not been able to accumulate earnings from its capital base to cover its risk.

The NCUSIF has a 1% capital base that matches-grows or declines-with the level of total insured shares. The earnings on this capital and additional retained earnings of .2-.3% of insured shares are sufficient to cover even the most extreme risk scenarios.  So long as the investment portfolio is well managed.  The NCUSIF’s breakeven earnings level is between 2.5%-3.0%.  That outcome should be the measure of NCUA’s management effectiveness.

The three areas above are a trifecta for credit union optimism:  the  public example of shareholder-owner engagement, the questions around the US banking model, and the sounder NCUSIF financial structure.  All three are inherent in cooperative design.

Tomorrow I will share some of Buffett and Mungers’ comments that have direct relevance for credit unions’ businesses.  As well as some of his wisdom about life.

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The Legacy Effect of Credit Unions

I’m 78 years old.  Many  requests for donations to support various organizations from prior years now come with a special option: Become a legacy member.

These institutions cover the entire spectrum of public and civic service: hospitals, colleges and universities, churches, choral groups, and local theaters.  The appeal here in D.C. even includes the many public museums, National Archives, Smithsonian institutions, Library of Congress et. al.  that are part of the Washington community.

A legacy commitment means that an individual will make a bequest to the organization in their will or via an estate planning vehicle such as a trust.   It is not an immediate contribution, but rather a commitment made upon passing to support an endowment-like fund for the organization’s continued operations.

These legacy commitments are shown separately in donor listings to recognize this future intention.  Last Sunday was Legacy Sunday at our local church.  The bulletin insert asked Are You a Member of CCPC’s Legacy Society, listed the names of both living and deceased members who had made a commitment along with statements of support by individuals such as:

“I pledge every year.  None of us know when we will pass away, but I feel like this is a last commitment to the church.  Think of it as my last pledge.”

Credit Unions’ Legacy Commitment

A credit union recently sent me their founding story from 74 years ago.  It reads:

On April 29, 1949 ten tire factory floor workers set their names together in a bond of common trust that lives today as the cornerstone of the credit union.  

Long on hope, but short on cash, the credit union charter members carried a few dollars around between work shifts in a lunch box distributing $5 and $10 loans for the small essentials of life.

On a factory floor or at a cafeteria table, in a quick exchange of papers and promises between shifts, the hushed request for a $10 loan for groceries, the nod of a head in answer, a review meeting after hours, a handshake-this was Local 310 Credit Union in action in the founders’ first days.

A plink of quarters in a metal lunch box carried from shift to shift sounded the word: here is a resource created by workers for workers, that feeds families, futures and trust.

That credit union still thrives today.   Those founders met not just current needs, but created a legacy that continues to serve members and communities generations later.

The Legacy Impact from a Lunchbox

Like all founders, these credit union incorporators created a perpetual legacy not just a financial intermediary for the present.  Today this credit union’s  board and members carry on the founders’ belief in serving their community through an organization “where they know your name.”

Some current members are the grandchildren of the first organizers.   Their legacy is to continue to “pay forward” what they inherited to their children’s children.

These members will soon celebrate their 74th Annual Meeting.  Almost 300 have signed up for the event with dinner. They are witnessing to the power of service, hope and trust that a cooperative brings to  members. Far beyond the current economic uncertainties or the latest fiscal year outcome.

These individuals both continue and increase the legacy they now celebrate, so the credit union can continue to be there for future members.

As stated in the credit union’s founding story:  we stand on the shoulders of legends who carried a crumpled dollar bills from lockers, to cafeteria, to work stations in a steel lunch box-symbol of a special bond between people who care about people.

That is a Living Legacy we should all want to support.  A unique benefit of cooperative design.

 

 

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Lessons From the Field: Sharing the Good and Bad

Managers’ monthly reports to staff are an important way of communicating both successes and short comings.

This April report includes a fraud effort recounted in detail.  The learnings prevented a second theft. The CEO  then characterizes the $125,000 loss as a tuition payment.

We processed a wire transfer request for a member on Friday, March 24 for $125,000 and unfortunately incurred a fraud loss.  The caller impersonated the member, knowing the answers to all out-of-wallet questions asked (e.g., name, address, account number, mother’s maiden name, etc.), and also knew the account’s code word and year that the account was opened.  The phone number was spoofed, making it appear to be the member’s phone number. 

The caller changed the contact information of the account, then called again to request the wire transfer.  Another wire request from that account was made on Monday, March 27 and the call was appropriately escalated by front line associates.  After determining that identity theft occurred, the account was locked down, law enforcement was contacted, the member was contacted, and appropriate affidavits of forgery forms were executed. 

Our fidelity bond which would typically cover insured perils such as this will not cover this loss because we didn’t place a verification call to the old number on file.  This step is required by the bond company and is documented in our wire procedure for all accounts with contact information changes within the past 30 days.  The wire transfer procedure was amended and training was being enhanced as appropriate. 

As is typical, losses such as this are thought of as tuition payments, making everyone on the team smarter as we move forward.

Everyone in the organization needs to be aware of this fraud threat. On April 25 the same fraudster called into the lending call center.  He had enough data (name, address, account number, last four of social, etc.) to convince the first associate he talked to that he was a legit member.  He then used social engineering techniques to obtain various other pieces of account information.  He accessed online banking and changed some contact information; he again requested a wire transfer. 

The fraud attempt was caught so no additional loss was incurred.  But we still have to deal with reputation risk with our member and establish a brand new account, which can be time consuming. 

Net Promoter Scores:  Both 10’s and 0’s Shared

Many credit unions rely on the net promoter score processes  to monitor operational performance in real time.

Often just the overall score, usually in the mid 80’s, is shared with staff and the overall trend.  Sometimes a compliment will be added to the update.

This credit union CEO believes both high and low scores can inform and lead to better service.  He shares the verbatim comments.  Here are a few examples from the 248 remarks submitted by members during the month:

  10. When I had my debit card number stolen my savings & checking accts were cleaned out, you all took care of me. I was very upset! I had all my money back in 2 days. I’ve always been a fan of credit unions instead of banks.

 10. The customer service was excellent and Palisha was amazing. She answered all of my questions and made sure I was comfortable with everything. She broke everything down for me and was very communicative.

 10. Gave me loans when my own CU turned me down.

And areas for improvement:

 8. Online banking is not user friendly, when I contact the branch no one is helpful. I set up a credit card payment years ago and want to increase the amount and no one seems to be able to help me. I bank at a few other institutions as well and I never have the same issues.

  0. Make it so the app is usable to pay car payments without having to have a bank account- sign in to car account. Same with website. Such a chore to make car payments.

 0. because I live in Tennessee now. Open a branch in Knoxville.

4. Work with me on my credit or a loan to build credit I have always paid loans off and now my income is more annually.

Transparency and effective leadership are interdependent.  Staff feels part of a team when occasional shortfalls, or even errors, are transformed into  lessons from which all benefit.

 

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Credit Union Learnings from the Costs of Regulatory Mismanagement

With this morning’s announcement of First Republic Bank’s failure and subsequent sale to JP Morgan, the total cost to the FDIC of the three recent bank failures is approaching $35 billion.

The banks will pay for these losses through greater FDIC insurance premiums.  That additional  bank expense will be passed on to their customers.   There is no government tax money being used.

I believe there are important initial  lessons from these current failures for credit unions:

  1. Regulatory mismanagement is extremely costly. The institutions and their customers will pay for these shortcomings.
  2. The initial response will always be to issue more regulation-in this case both capital and liquidity requirements.
  3. The problem is  “bureaucracy,” not individuals with responsibility in the agencies.
  4. All of the explanations offered below have been part of NCUA’s own playbook in the past.

The question for credit unions Is whether NCUA is exempt from the internal bank regulatory shortcomings described below?   Or is it that the problems have yet to surface?

Regulatory Self-examinations

Before today’s announcement of this third failure, last week the FDIC, FED and GAO had issued preliminary postmortems of why SVB and Signature banks had failed.  The headline summaries of these reports signaled the “self-criticism”  of the agency’s performance.

However before turning the spotlight on themselves, the reports pointed directly at the banks’ management, from the Wall Street Journal’s account: 

The Federal Reserve report — commissioned on March 13 by Michael Barr, vice chair of supervision at the Fed — argued that SVB failed on March 10 because of “a textbook case of mismanagement by a bank,” and said its senior leadership “failed to manage basic interest rate and liquidity risk.” 

The FDIC report — authored by chief risk officer Marshall Gentry -– offered similar criticisms about the management of Signature Bank, which was seized by regulators on March 12. The FDIC said that Signature Bank failed to prioritize good government practices and often ignored FDIC advisory recommendations prior to its sudden collapse. 

“The root cause of Signature Bank’s failure was poor management,” the report said. “[Signature Bank’s] board of directors and management pursued rapid, unrestrained growth without developing and maintaining adequate risk-management practices and controls appropriate for the size, complexity and risk profile of the institution.”

The obvious political and accountability question is why weren’t the regulators up to the task of effective oversight of these “basic risk”management failures.   The reports then become more self-focused as reported in the Journal:

“Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity,” Fed regulators said, adding that “when supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.”

The two federal regulators also pointed the finger at themselves for failing to adequately supervise both institutions, and emphasized that new guardrails must be put in place to stave off another regional banking catastrophe. Both agencies said they missed weakness in both banks prior to their collapses, with the FDIC blaming a lack of staff to conduct targeted reviews of Signature.

The Federal Reserve’s Mea Culpa

Michael Barr, the Fed’s vice chair for supervision, issued a 114 page analysis.  Here are some of his summary findings in his short introduction:

Our first area of focus will be to improve the speed, force, and agility of supervision. As the report shows, in part because of the Federal Reserve’s tailoring framework and the stance of supervisory policy, supervisors did not fully appreciate the extent of the bank’s vulnerabilities, or take sufficient steps to ensure that the bank fixed its problems quickly enough. 

Higher capital or liquidity requirements can serve as an important safeguard until risk controls improve, and they can focus management’s attention on the most critical issues. As a further example, limits on capital distributions or incentive compensation could be appropriate and effective in some cases.

We need to develop a culture that empowers supervisors to act in the face of uncertainty. . .

Last, we need to guard against complacency. More than a decade of banking system stability and strong performance by banks of all sizes may have led bankers to be overconfident and supervisors to be too accepting. Supervisors should be encouraged to evaluate risks with rigor and consider a range of potential shocks and vulnerabilities, so that they think through the implications of tail events with severe consequences.

Oversight of incentives for bank managers should also be improved. SVB’s senior management responded to the incentives approved by the board of directors; they were not compensated to manage the bank’s risk, and they did not do so effectively. We should consider setting tougher minimum standards for incentive compensation programs and ensure banks comply with the standards we already have. . .

This report is a self-assessment, a critical part of prudent risk management, and what we ask the banks we supervise to do when they have a weakness. It is essential for strengthening our own supervision and regulation.

The Journal’s analysis of  Barr’s report: “Of the four top takeaways about the events leading to SVB’s collapse, three are tied to perceived shortcomings with the Fed’s banking oversight. The report focuses on errors by the agency but not on individuals’ responsibility.

The Fed also pinned some blame on its own bureaucratic structure. Authority for overseeing banks is parceled out to the Fed’s regional bank branches, but in practice, the central hub in Washington provides extensive input and must approve some enforcement actions.”

“Self-assessments-A Critical Part of Risk Management”

Over two years ago, one of NCUA’s board members requested a “look back” on the NCUA’s analysis and response to the corporate resolution.  A response was promised.  Nothing has been done, at least publicly.

Regulatory failures are costly.   Is the credit union system and its oversight subject to similar the bureaucratic shortfalls as the FDIC, Federal Reserve and OCC?

To retain, or recover, confidence in its own analysis, the Fed’s report includes details of its examiners’ findings, board presentations and other verbatim accounts of its oversight.  Transparency is the first step in accountability and trust.  That is certainly a model NCUA could emulate.

 

 

 

 

 

 

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A High School Senior on Money Management

The MD/DC CU Foundation’s annual scholarship contest submissions were up 38% in 2023.  They give first hand insight into how this coming generation thinks about their money management challenges.

Leigh Philibosian, Director of the Foundation said 146 videos, 55 essays and 19 photos were submitted.  Each is a unique insight into the habits and thoughts of over 200  high school and college bound students.

An especially  candid and insightful one-minute video about money management and peer pressure is from the high school senior’s entry below.

This is a member the credit union community should prize!

(https://www.youtube.com/watch?v=NkhzPmg1Y8I)