Category: Lessons from For-Profits

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Self-Awareness and Leadership

I heard several graduation speeches at the University of Michigan a week ago.  While the words were directed at the graduating classes, their wisdom went beyond the seniors.

One dean noted that.the four-year journey isn’t  only discovering what area of learning most interests you, but more importantly, who you want to become? What do you want to create? What are you good at? What are your values?   And his charge to the class, stay curious and become more self-aware about your life’s role, whatever that becomes.

I thought how this learning curve applies in most job responsibilities but especially leaders of organizations such as credit union CEO’s.   How many achieve this position of final organizational accountability and then stop learning?  The ascendency is itself was the goal, the payoff.

The CEO Short Timers

An example is a CEO transition failure at Cornerstone FCU which resulted in a merger in just over a year after the Chairman stepped down to become CEO.  This $110 million, community-based operation in Carlisle, PA had become a difference maker in all areas of community life under the long-term leadership of CEO David Keffer.   A transition plan and internal succession in place.  But the Chair decided he wanted the job only to discover he couldn’t handle it.  Within in a year he was reaching out to merge.

CEO’s who achieve the leadership role and stop learning about their own strengths and weaknesses will sooner or later seek a way out.  In credit unions, mergers are a preferred escape route.  Review the Vermont State Employees merger for a case in point.

What Can Be Done?

Personal ambition that overreaches a person’s abilities is not a new leadership issue. But among the many possible antidotes, I believe one idea might help open eyes as these leadership transitions occur. For ultimately these transition failures are examples of character shortcomings.

In American life, the guardians of our values are coaches, teachers, parents, religious and community leaders.  In this arena of moral examples are cooperative volunteers. Their decisions and actions set the circumstances in which leaders are selected and overseen.

If these carriers of our culture’s values fail whether it be in school, civic leadership or volunteer roles, can the organizations  succeed in their public purpose?

While the press and other sources of accountability can call out shortcomings for action, the leaders must still respond.

Living in a moment when “public service” is a grift not a calling, leadership will require an extra effort of courage and conduct,  if the best of our intentions and society’s possibilities are to be realized.   It is sometimes a lonely role, but an example never forgotten.

 

 

 

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What Credit Unions Can Learn from America’s Theater Industry

Just spent a week in New York City on a Road Scholar educational program about Broadway Theater.

In addition to talks with multiple production personnel and an actor,  we saw live performances of The Lion King, Ragtime and a show in preview, Marcel on the Train.  Disney’s Lion King is in its 25th season, the longest continuous performance on Broadway. An example of an innovative, instant and long standing theoretical success.

The 40 authorized Broadway stages are the peak of the theater industry in America,  a business that achieved national standing around the turn of the century.  I believe there is much to learn from  Broadway  success that is relevant for coops.

Key Success Factors For Broadway and Credit Unions

While credit unions in consumer finance and theater’s live entertainment serve very different needs, success in both fields depends on the same three factors:  collaboration, community and creativity (innovation).

From high school class plays to college drama departments to the professional stage, every theatrical production is an extensive collaboration of individuals with diverse skills.  American University’s (AU) theater department’s recent production of Oklahoma showcased this artistic foundation.

It had eleven leads or main roles backed up with male and female dance and singing ensembles of twenty members.  With the six orchestra members, the total performers seen by the audience was 37.

However the list of the creative and production teams was just as long.  In addition to director and choreographer roles, there were individuals  responsible for Solo Tap Choreographer, Vocal Coach, Fight Director, Intimacy Director, Scenic Design, Wardrobe Crew, Stage manager and two dozen more artistic support positions.

In our New York course, we learned that concept to stage can take anywhere from four to eight years for new shows such as Hamilton or Operation Mincemeat.   A revival will require a year or two depending on the production changes.

At every phase of development, the people behind the scenes far outnumber the performers on stage.  And that doesn’t include the business, university or 501 C3 non profit organizations backing the artistic undertaking.

A Community Enterprise

To mount a live theatrical performance requires an artistic community plus an external audience (market) hat will be interested in the play’s themes  and become supporters.

Oklahoma was Rogers and Hammerstein’s first collaboration.  It premiered in 1943 at the height of WW II.  The musical was set in 1905 right before Oklahoma achieved statehood.  The musical reflects a moment when community was essential for survival. Daily life required cooperation, shared labor and mutual dependence.

One song that illustrates the tension between individual  and community well being is The Farmer and the Cowman.  It includes this democratic assertion, I don’t say I’m no better than anybody else; but I’ll be damned if I ain’t just as good. 

(https://www.youtube.com/watch?v=31BI33T9yTI)

When Oklahoma first opened the  the public was living in an era of uncertainty and collective sacrifice.  Oklahoma offered a vision of America built on shared responsibility and thriving community interaction, not personal dominance.

The third factor in theatrical success is creativity.   While the public in the Tony awards will celebrate an individual’s role, the final result is always a collaborative effort that has resonated with a community of followers and critics.

A theatrical success is timely, with events and characters that resonate in the present, as well as timeless appeal across generations.   Oklahoma captures the buoyant optimism that is America in its opening song, O what a Beautiful  Morning.  It includes a memorable phrase of boundless hope: all the sounds of the earth are like music.

(https://www.youtube.com/watch?v=Ks5TgRRhqvw)

Relevance for Credit unions

Both cooperatives and theater emerged as industries around the turn of the twentieth century.  One spoke to the need for economic justice; the other to the growing search for a national artistic identity.

Both of those needs are present today, if not more so. The same organizational capabilities that created these successful enterprises are still essential today:

  • How are the many elements of internal and external collaboration brought together?
  • What is the community whose needs are  the focus of your efforts?
  • Is the message timeless, created for the present but also expressing enduring values?

Credit unions and theater come in many sizes and complexities.  Both are much more than businesses pursuing financial sustainability.  They uniquely rely on and energize local communities. In an era of social divisions and individual isolation, Oklahoma shows us how community is formed, challenged and celebrated.

In Saturday’s final performance, the audience of AU students, friends and family, applauded and screamed with joy for what they had experienced.  From a play created three generations earlier.  And whose message is ageless.

In the show’s finale  you can feel once more the exuberance of this unique creative collaboration. Here’s hoping your performance today will leave your audience feeling as good!

(ttps://www.youtube.com/watch?v=ltQIR5j9984)

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Thrivent Bank’s Post Credit Union Strategy

On June 1, 2025 Thrivent FCU converted to a state issued Industrial Loan Chatered (ILC) bank with FDIC insurance.   There are only 24 such charters  operating in the US,

The process took three years and had to be approved by the credit union’s member-owners with at least 20% voting on the change.. The conversion resulted in the full payout of the members’ collective equity, plus a bonus dividend on shares.  The full details are reported in the post Thrivent Members Approve Sales to a Bank. 

Thrivent Bank’s Sponsor

In its June 2 launch announcemnt, Thrivent Bank reported $1.09 billion in total assets.  It is a wholly owned subsidiary of Thrivent Financial.

The parent company,Thrivent Financial for Lutherans,  is a member-owned, fraternal benefit society.  It is a non-profit , managing over  $193 billion in administered assets, with a tax exemption based on religious affiliation.

According to Thrivent Financial’s 2024 Annual Report, it holds $18 billion in capital and serves 2.4 million members. Its primary products inlude insurance, annuities and health care programs.  The Report has statistics on its community contributions and volunteer efforts.

The parent company’s CEO said the new charter: “combines our legacy of trusted financial advice with a modern, client-first banking solution. Thrivent Bank will help us build relationships with younger clients earlier in their financial journeys – who we can then serve throughout their lives.”

The New Bank’s Strategy

In a November 12, 2025 interview with a Banking Dive reporter, the CEO outlined his focus. The conversion “aimed at broadening the financial institution’s reach nationally and attracting new clients.”

Located in Salt Lake City, the bank is digital only with no branches.

The CEO. Brian Milton’s value proposition is to combine its digital platform with  live personal advice and  the financial expertise of the Thrivent  organization:  “everything that we see out there seems to be having to pick one of those two,”

The new web banking platform is still under construction.   The current site provides a fairly standard listing of consumer services.  Savings rates would appear to be at the lower end of the market.  Auto loan rates are based on a matrix of model year and loan term.

The bank’s business financial services  appear targeted to the non-profit sector:

It takes organization, planning, passion and vision to run a business, church, school or charity. It also takes the right financial institution to help you navigate the nuances of business and nonprofit banking. Whether you’re a new or established business, church or foundation, business banking tools from Thrivent Bank will help you every step of the way.  

The one unique prodict focus would be its specfic contact center for studen loans.

A Strategy Combining the Best of Credit Unions and Banking

The web site is still under construction so there is not a lot to see at this time. The CEO stated the bank would rely on ouside vendors to meet its technology (presumably digital banking) solutions.

The banking charter gives the possibility of national reach for younger geneations of retail customers. Those at the beginning of their financial lives may not be the sponsors prime target for insurance products today.  Rather loans may be their first financial need along with basic transaction services.

The bank’s differentiation will be personal service: “We’re not going to be putting bots in front of clients, The human piece is extremely hard to replace.”  This approach is called “purpose based advice.”

The de novo has a lot going for it.  A 120-year old non-profit financial sponsor-owner with deep pockets; the experience and start up relationships from the credit union; and a philosophy of service seeking life-long member relationships.  It has an affinity client base from the parent as an initial focus.

The critical question is whether a digital only delivery strategy can effectively compete with local, personal credit union service centers staffed with experienced personnel.  Being present in and an active part of the communities served is both the foundation and special advantage of credit unions.

Digital offerings for most credit unions, compliment but do not replace  the option for in-person service.  And community presence and involvement. In the few cases where digital-first is the primary go to market effort, those credit unions are struggling compared to the performance of their more grounded peers.

The Thrivent Bank is very unlikely to fail.  The real question is how successful the digital only strategy will be? And at what cost to create a clear value advantage for users?  Especially in a virtual world where options are just a click or AI search away?

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Two Credit Union Initiatives Challenged by Current Events

Credit unions are stewards for vital member owned assets:  shares and their loan IOU’s.  Both are critical in any member’s financial life.   Wise deployment of members’  funds is critical to their confidence and an institution’s reptation.

Cooperative stewardship has many aspects beyond financial soundness. A failure in any of these responsibilities, whether big or small, can create cracks in the foundation of member-owner trust.

Market events this past week raise important questions on two initiatives that are central to some credit unions’ strategic priorities.  The first is out of market mergers/acquisitions for growth.  The second is offering to assist members  purchase of digital assets, for a fee,  as an extension of the credit union’s service profile.

Entering Far Away Markets

As local merger opportunities become less available, credit unions have increasingly sought acquisitions far beyond their core markets.  These involve out of state mergers where there is no prior  connection by occupation, sponsor or other affinity. The continuing credit union brings no prior market recognition.

Sometimes these out of area mergers result in the  jettisoning of all prior local relationships and branding legacies for both institutions. (link)  A complete makeover of market positioning is necessary for the surivor  in both its old and new markets.  This can sacrifice generations of member goodwill, attention  and loyalty.

Last week a major regional bank pushed back against this opened-ended territorial expansion in a presentation to his banking peers.   The story was reported in the Daily Banking Dive on November 7:  M&T eschews the temptation of national presence.  It reads in part:

The Buffalo, New York-based lender remains focused on dominance in its current markets, said CEO René Jones, expressing some doubt that banks can perform at optimal levels as they expand. 

“The most active bank merger-and-acquisition environment in years has lenders chasing scale in far-flung areas of the country. But regional bank M&T is taking a different tack. . . 

 The $211 billion-asset bank has about $162.7 billion in deposits and 960 branches across 13 states from Maine to Virginia. Jones, for his part, seemed to cast doubt on banks’ ability to execute at the same level as their footprint expands.  

“As you get further and further away from home and [add] more geographies, I think the management challenge goes up, because you’re really an organization that is built around culture, and cultural norms, some of which are documented, many of which are not.” 

“Having enough people to deploy across that kind of a geography, who will make the same decisions that you make, I think, becomes more and more challenged as you get larger, 

He acknowledged buzz around national scale, “but the question is, what is your reputation and the awareness and how well you do your job for those people that you concentrate on?” 

“We’ve decided not to be a national bank, so we better be focused on achieving our goal where we are.”   He added. “Mergers of equals “don’t make sense.”

The article has further M&T history.  But he is taking a public strategic position that is at odds with many of his peers, industry consultants and forecasters of banking’s future.

Is there a message for credit unions from his experience and performance?  For credit unions, what is the track record of member benefit with out-of-area acquisitions? How do such efforts help the surviving credit unions member-ownes?

Facilitating the Sale of Crypto Assets to Members

Offering members the ability to invest in digital assets in partnership with third parties has become a front line service extensions for an increasing number of credit unions.

This past week the value of bitcoin  declined about 15% from its peak.  This has resulted in sharp declines in the  stock of firms holding significant crypto assets (sometimes called treasury- companies).  These stock traded firms buy bitcoin or other crypto currencies intending to benefit from the  increasing investment hype in these new assets.Their value proposition is to provide consumers indirect exposure to these assets without the hassle of direct ownership.

The market leader in this effort is the company Strategy.   Here is the November 9th Wall Street Journal  story about the performance  of these indirect crypto investments so far this year:  The Year’s Hottest Crypto Trade Is Crumbling.

It describes hownthe recent market selloff in bitcoin and other digital tokens has hit  these crypto-treasury company stocks .  It provides multiple examples of price declines of over 30% in one month.  It documents how ”the hottest crypto trade has turned cold” gives multiple examples of wealthy individual investors and companies who have lost money.

These October events have caused some to reiterate their skepticism of crypto as a store of value. With no performance or use, it is pure market speculation.  While true believers say this is a “buying opportunity” asserting  “bitcoin is on sale.”

The Wisdom of Crowds or the Greater Fool Theory of Speculators?

The Trump administration is certainly crypto-friendly.  There are numerous efforts to bring crypto into the financial mainstream as a “routine” financial investment.

But should credit unions be facilitating diect or indirect transactions at this very uncertain point in the future of alternative currencies?  The fees can be attractive when members both buy and sell.   The credit union would seem to have little to no risk exposure  in the traditional understanding of that term.  The payment is in cash and a third party offers and holds the asset.

But is it wise for the members whom the movement was formed to serve?   Credit unions present themselves as expert in many areas of a member’s financial life.  They offer through third parties, or  CUSO’s, insurance products, mutual funds and stocks, and financial advice, planning and  consultation.

Crypto as a financial assetand  has a vary different character than other currency assets.  The coins are offered via third parties (not governments-yet).  Some stable-asset coins are in theory backed by government issued currency or bonds. But the oversight of this structure is unclear.

Yes, members can go elsewhere to purchase crypto  assets directly or via EFT’s or “treasury company’s” stocks.

But I know of no one recommending that a large part of a person’s savings be put in crypto. The future value is a gamble.  All of he experience so far is at best erratic and uncertain, exuberance followed by quick periods of decline.   Crypto based options appears to be speculation, not an asset of proven value.

The Efficacy of NO

Sometimes the best response a credit union can give a member request is No.  We don’t believe the member’s request for a loan for a specific car, or selling lottery tickets or crypto is a wise decision for  our member(s).

Oftentimes we recall persons in institutions that said No to us.  Especially when we wanted something strongly.  Even though it is hard to understand the No, later we realize it was a decision made for mutual interest-yours and the institution’s reputation.   I believe in time, we remember and respect these moments of wiser concern than what we can grasp, at the time,  on our own.

The Wisdom No

The market is saying something important in both of these recent examples.  Are we willing to examine other’s judgments, not just take our own counsel?

For our purpose is to be wise stewards of our members’ financial well being through example and deed.  And not simply join a herd heading to who knows where in the future.

 

 

 

 

 

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An Annual Meeting that Owners Stand in LIne to Attend

Would your members take time to attend your annual meeting?  Is it an occasion the owners look forward to?  Will they learn something new?  Have a chance to meet board and senior staff?  What would the local newspaper or the credit union press write about the event?

Every  credit union that has issued news releases or been in the press this past year knows the value of public coverage.  The annual meeting is an opportunity to celebrate results, profile the leadership and show respect for the owners who make it all happen.

The “Woodstock for Capitalists”

This weekend in Omaha, NE Warren Buffet will lead Berkshire’s annual meeting.  It is a multi-day event for shareholders who travel from across the country and even foreign countries to attend. The excitement and preparations are described in the WSJ article from April 29.  The company has sent tickets to over 138,000 shareholders and another 6,000 to non-owners who want to attend the event and pay $5.

The actual meeting is so popular that CNBC will broadcast the event live-in Mandarin and English.  The high point will be the initial open-ended Q&A with Buffet and deputies answering questions from viewers and attendees—for hours on end.

This public dialogue always makes headlines as the annual report has been released months earlier.  Not just owners, but the general public is interestedd in Buffett’s observations on tariff’s impact, economic uncertainty, the role of America in the world. Viewers will want to know what the company might have in mind with its $350 billion in cash.

Buffett’s annual conclave for individual owners is a long standing show of respect to those millions of small shareholders versus the billions owned by investment companies such as Vanguard or Fidelity.  He rewards their loyalty by being with them, talking openly and sharing his leadership approach including succession.

The spirit is that “we are all in this together” and “I work for you.”  His approach is an example of a leader accountable to owners and creating a community of shared purpose.

A Buffet without Buffett

What credit union wouldn’t want this same spirited outcome?  But few even try even though the cooperative model presumes this same common interest among member-owners.

One credit union that has attempted to create is own sense of shared accomplishment and celebration is the $160 million Affinity CU in Omaha, NE.

At the annual meeting I attended two years ago there were talks by the state regulator, the President of the Iowa Foodbank as well as the required  CEO and Chair reports.  Scholarship winners were recognized, there was a free buffet dinner for entire families, prize giveaways and even video of one of the members telling his story.

The meeting included the election.  After which all board members, new and old, took their oath of office, in front of the owners.

This was an occasion combining all the elements that make Berkshire’s effort a national news event. It is not an organization’s size and resources that creates owner excitement for this required  meeting.  Rather it is the measure of leadership’s respect for the owners for whom they work.

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CDFI Helps Savers Choose How Their Funds Are Loaned

The top 25 banks in the US had total assets of $21.1 trillion at December 2024.   Number 25 was Ally Financial Inc. which is $192 billion in size.

The largest bank was JP Morgan Chase & Co. at $4.0 Trillion.

The largest credit union is Navy FCU which reported  $ 181 billion at year end. The total size of  the cooperative credit unions was $2. 3 trillion.

The bottom line is that credit unions will never win by trying to be bigger than the many options consumers have.  Rather, they have to be better.

Using Their Local Advantage

Last week I presented an internal change in Vanguard’s fund management that gave their investors the option to vote their individual share ownership as they wish. This change empowers each share owner to chose a voting option rather than follow Vanguard’s traditional policy.

Could credit unions give their shareholders the opportunity to invest their savings in specific credit union loan programs?

Now, a CDFI bank has a program to do just that.  A March 25, 2025 Next City article reports how Sunrise Banks’ new net zero banking program lets customers put their money where their mouth is.

It started because one employee, Laura Wildenborg, had spent “spent 10 years taking kids on field trips to go rock climbing or cross-country skiing across the region, all to inspire children to love and care for the environment.”  She is an avid outdoor enthusiast and concerned about the environment.

She pivoted to banking after receiving her MBA in 2020.  She wanted to bring her prior interests to her new career.  This was her approach:

Wildenborg serves as a project leader for Sunrise Banks’ net zero banking initiative, which launched in July 2024. Net zero banking refers to the investment in projects that will reduce or eliminate carbon emissions.

Customers of the bank can opt in and allow their deposits to be loaned out only to net zero projects. Since launching its net zero program, Sunrise Banks has received $5.5 million in deposits and has loaned out nearly $22 million.

The  article gives several examples of customers being surprised to know they can choose how their deposits are used.

Wildenborg says one customer shared that he never thought about what the money in his bank account was used for.

 “With this program at Sunrise, we put that money where our values are, which means in the projects that will reduce carbon emissions — in turn having a positive impact on our community and environment.”

It’s Not the Size That Makes a Difference

Sunrise Banks, headquartered in St. Paul, Minnesota, lends to residents and small businesses in underserved communities.  It has $2.3 billion in assets and $2.1 billion in deposits, making it the 15th-largest bank in the Twin Cities.

Here is a video that describes their approach to the community.  Their motto is our success depends on the success of the communities we serve. Note the use of the word “movement” in the video.

(https://www.youtube.com/watch?v=B5C14WIqmC8&t=68s)

This organization focuses on its local impact and connections, not its size.  That used to be the credit union advantage.  Is that still the thinking?

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How to Serve Owners: Examples from Two American Icons

Organizations succeed by what they accomplish externally for their owners, not because of superior internal cultures or unique strategies.

As Peter Drucker, management consultant, educator and author, stated, “all results are on the outside,” meaning that the true measure of an organization’s success lies in the outcomes it achieves externally with its customers.  In credit unions these are the owners.

Berkshire’s  Annual Meeting Celebration

Warren Buffett, the founder of Berkshire Hathaway, has overseen a 28% increase in the stock (BRK B) price over the past year.   However, whatever  the company’s return to shareholders, there is a weekend celebration inviting all owners to Omaha to hear from the founder directly.

The event is much like a credit union conference complete with an exhibit hall full of Berkshire- owned vendors.  Here is this year’s Guide to the festivities:

The 27-page guide includes an invite to a 5K race, the location of all Dairy Queen restaurants in the area, plus numerous other sites and information for navigating the three days of events:

The formal annual meeting in the CHI Convention Center is the main event on Saturday.  It begins with four hours of open Q & A questions from the live audience and from viewers on CNBC’s live broadcast.   Buffett, and maybe one or two of his senior staff, will respond to all queries.

The formal  meeting with votes on motions starts at 1:00 PM.   But the owners have their say first.

This meeting is a demonstration of Berkshire’s commitment to put its owners’ interests first.  It is a long standing tradition with shareholders attending year after year.  It is a capitalist feast of business successes and company good will that creates long lasting relationships with the company’s individual shareholders.

Can  member-owned credit unions find a better example of trust, leadership and pride in our movement?   What if Navy FCU or SECU decided to celebrate their success in a similar manner with workshops on personal finance, examples of member owner businesses and a meeting where members had their say?

Such an occasion would be noteworthy for the institution, but more importantly, it would be an example of the cooperative movement having its “Woodstock Moment.”

Giving Member-Owners Choice

A second example that credit unions can learn from is a recent innovation from the Vanguard mutual fund family.

Vanguard is a pioneer in low cost, index fund investing.  Warren Buffett’s advice to young investors singles out Vanguard’s approach as the easiest and most likely successful way to financial wealth accumulation for every day folks.

A second unique feature of the firm is that the  company that manages the funds is owned by each of the individual funds.  In other words it is a mutual coop, not a public or privately owned investment company like T. Rowe Price or Fidelity.

It has recently offered a unique way for individuals who own their funds to directly exercise their proxy voting preferences in the companies in which their fund’s invest.  This is a description of Vanguard’s new “Voting Choice for Member Owned Stocks.”

” It provides a way for you to participate in the proxy voting process by choosing a proxy voting policy that will help direct how your shares in select Vanguard equity index funds are voted on shareholder matters at the companies held in those funds.

Public companies hold shareholder meetings where key issues—such as electing the board of directors and executive pay—are presented to a shareholder vote. Proxy voting enables shareholders to cast their votes without attending a specific company’s meeting.

Investor Choice currently offers five policy options that reflect a broad range of approaches to proxy voting that you may choose to apply to your participating Vanguard equity index funds.” 

One example would be Company Board-aligned Policy.

At the end of 2024, Vanguard had $10.4 trillion under management of which 82% were in index funds.

Vanguard serves over 50 million clients globally.  What kind of technology support must have been developed to allow an individual investor to cast their tiny share of a company’s voting proxy in line with each investor’s preferences?

In the past Vanguard has followed its Investor Advised Funds Policy, a single option.

The Credit Union Takeaway

If Vanguard can empower their  individual investors to exercise their minute share of corporate governance, should credit unions be exploring  options to enhance member-owner preferences? This is more than greater product choices for credit card or varied savings plans.

Some credit unions now give members options for charities to which they can direct interchange income.  But what are other ways members might be willing to participate in options such as funding affordable housing for seniors or first time home buyers?   Is it possible for members to have a say in prioritizing community ventures and partnerships?

Vanguard, a $10 trillion firm with 50 million clients, returned the owner’s proxy voting power back to the individual.  Might credit unions find a way to engage their owners in how their savings and credit extensions are being directed?  Or, as in public company voting, to approve senior executive compensation? Or even in buying a bank?

 

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The Lehman Trilogy and the Arc of American Finance

The local Shakespeare Theater’s run of the story of Lehman Brothers family in America incorporates multiple themes.  They are all very much  present in America today.  I believe they  can inform the credit union story.

The play is an adaptation of a novel about the Lehman family. Three actors portray 55 different characters in the 163 years of the family’s timeline.

Although the firm’s $600 billion bankruptcy was the central drama of the 2008 financial crisis, the family had long been absent from any leadership roles when this occurred.

An Immigrant Story

The play is the story of a German Jewish family settling in Montgomery Alabama in 1844.  After first opening a dry goods store, they expand to become  “middle men” in the cotton trade between southern plantation growers and Northern textile mills.

They eventually open a New York office to enhance their trading activity and expand to other commodities post Civil War.  These trades include wheat, coal, iron ore, that is  the raw materials at the center of America’s industrial revolution.

As their trading activities expand they become a “bank” and underwrite the new industries being founded  from railroads to computers and entertainment after WW II.  Eventually these material commodities are supplanted by stock trading which brings the firm close to collapse in 1929.  Outside owners will now control a majority of the firm.

Post WW II trading activity dominates its traditional investments in other industries. These traders buy out the firm’s presiding CEO, Pete Peterson, putting their priority on a strategy that eventually leads  to the 2008 failure.

The story of growing economic wealth is interwoven with the family’s old world religious and family values. Jewish celebrations are initially central to life, but gradually become less so as succeeding generations assimilate into American culture.  Their religious observance is “reformed.”

A Three Part Saga

Part family history, part portrayal of evolving moral values and part the story of how finance becomes central to American enterprise give the play multiple layers of meaning.

As I watched this century and a half saga, many parallels with the present day credit union story come to mind.

Credit unions have largely moved away from their focus on a local group or community to become a diversified mixture of legacy founders and new market expansions.  The values and passion so critical for success in early years have been replaced by professional managers brought in for their expertise.

Growth becomes central to reporting success.  Corporate wealth creation versus member well-being is celebrated.  Instead of open governance, oversight is increasingly concentrated in a few hands where leaders perpetuate their tenures.  Rather than paying their success forward to future generations, incumbents explore options to cash out when their term in leadership is ending by turning control over to other firms.

The Past Is Gone

The Lehman family gradually lost control of their “bank” when market circumstances required new capital.  Evolving  financial trends for their trading skills also changed the firm’s purpose.  Middleman roles gradually evolved from buying and selling actual commodities, to underwriting new businesses and then merely trading pieces of paper, i.e.  stocks.  Ultimately finance became just digital transactions.

In this new world, everything becomes a number.   And everything has a price. Finance becomes just a way to make money, versus investing in tomorrow’s economy.

Buying and selling (acquisitions) become critical skills.  Member/customer trust is eroded because   consumers no longer believe you will be there for them.  Money management becomes the epicenter of success.  All ties to previous values and economic roles are ended.

That in short is the story of Lehman Brothers creation.   Is it an object lesson for credit unions?

 

 

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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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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.