Have you been born again?  As a PK (preacher’s kid) I would occasionally get that question.  If affirmative, the follow up query, is when did it happen?

This view of spiritual life requires an awakening experience.  Preferably with a specific time and place.   A new starting point; a before and after  event.

Renewal, Not Replanting

My understanding is that awareness of the sacred in life is an every day possibility.  A parallel example for this reawakening is spring.

Plants are coming to life almost a month early this year.  Each flower has its own timetable with daffodils and crocus first- followed by tulips, camellias, alliums and many varieties of lilies and iris.

This reemergent beauty occurs in a sequence depending on the sun, how much rain falls, and of course the temperature.   All the conditions in February were favorable for an early spring flower show. The impact of nature’s role on timing will vary; but the  flowers  seem to adapt naturally to whatever conditions occur.

Importance of New Beginnings

Both organizations and plants operate on cycles.  In credit unions it is usually the annual plan with the yearend results showing the “flowering” of an organization’s purpose.  These outcomes could be  making money, growing a key metric, expanding service or products, or in rare instances, just coming through a difficult economic or leadership transition intact.

Following the annual report is a new forecast, a renewal or a focused extension, not starting from scratch all over.  Similarly one can add plants to a garden but most will come back naturally.

In credit unions, the  required Annual Meeting can both celebrate past results and promote new directions.  It is an opportunity  to gain members’ support,  both  in board elections and with thoughtful presentations about the credit union’s direction.

For cooperatives, the annual meeting should be a special occasion to report and honor the  owners.

Woodstock of Capitalism

Berkshire’s annual gathering in Omaha is an example of an Annual Meeting event in the private sector. The press calls the event attended by tens of thousand Berkshire stockholders, the “Woodstock of Capitalism.”

As a prelude, the firm releases its Annual Report.  The most talked about aspect is not the company’s yearend financials, but CEO  Warren Buffet’s introductory letter about the firm’s direction  and his bits of elderly  wisdom.

The Report for 2022 was released last week.  It contains discussions that credit unions might consider emulating.  The following excerpts reflect company  updates and principles Buffet follows. (I added some emphasis)

The opening:  Charlie Munger, my long-time partner, and I have the job of managing the savings of a great number of individuals. We are grateful for their enduring trust, a relationship that often spans much of their adult lifetime. It is those dedicated savers that are forefront in my mind as I write this letter. . .

The disposition of money unmasks humans. Charlie and I watch with pleasure the vast flow of Berkshire-generated funds to public needs and, alongside, the infrequency with which our shareholders opt for look-at-me assets and dynasty-building.

What We Do

Charlie and I allocate your savings at Berkshire between two related forms of ownership. . .

When large enterprises are being managed, both trust and rules are essential. Berkshire emphasizes the former to an unusual – some would say extreme – degree. Disappointments are inevitable. We are understanding about business mistakes; our tolerance for personal misconduct is zero. . .

Over the years, I have made many mistakes. . . Along the way, other businesses in which I have invested have died, their products unwanted by the public. Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon “creative destruction.”

Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire. . .

The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.

The Past Year in Brief

Berkshire had a good year in 2022. The company’s operating earnings – our term for income calculated using Generally Accepted Accounting Principles (“GAAP”), exclusive of capital gains or losses from equity holdings – set a record at $30.8 billion. Charlie and I focus on this operational figure and urge you to do so as well. The GAAP figure, absent our adjustment, fluctuates wildly and capriciously at every reporting date. . . The GAAP earnings are 100% misleading when viewed quarterly or even annually.

On Repurchases of Berkshire Shares

Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.

Almost endless details of Berkshire’s 2022 operations are laid out on pages K-33 – K-66. . . . These pages are not, however, required reading. There are many Berkshire centimillionaires and, yes, billionaires who have never studied our financial figures. They simply know that Charlie and I – along with our families and close friends – continue to have very significant investments in Berkshire, and they trust us to treat their money as we do our own. And that is a promise we can make.

Finally, an important warning: Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so. Such tampering is often thought of as sophisticated by CEOs, directors and their advisors.

That activity is disgusting. It requires no talent to manipulate numbers: Only a deep desire to deceive is required. “Bold imaginative accounting,” as a CEO once described his deception to me, has become one of the shames of capitalism.

The Last  50  Years

Thus began our journey to 2023, a bumpy road . . . America would have done fine without Berkshire. The reverse is not true. . .

We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate.

Some Surprising Facts About Federal Taxes

During the decade ending in 2021, the United States Treasury received about $32.3 trillion in taxes while it spent $43.9 trillion. Though economists, politicians and many of the public have opinions about the consequences of that huge imbalance, Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless.

Our job is to manage Berkshire’s operations and finances in a manner that will achieve an acceptable result over time and that will preserve the company’s unmatched staying power when financial panics or severe worldwide recessions occur.

I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America.

Buffett’s Rule 

I will add to Charlie’s list a rule of my own: Find a very smart high-grade partner – preferably slightly older than you – and then listen very carefully to what he says.

A Family Gathering in Omaha 

Charlie and I are shameless. Last year, at our first shareholder get-together in three years, we greeted you with our usual commercial hustle. . .

Charlie, I, and the entire Berkshire bunch look forward to seeing you in Omaha on May 5-6. We will have a good time and so will you.

An Example for Credit Unions?

Buffet’s approach to his owners has multiple insights as credit unions prepare for their Annual Meeting.  Can it be a time for renewal?

His comments are honest, open and written to inform owners and reassure their trust.

His leadership principles are clear.  His business priorities are stated with conviction and promise.

His benchmark performance standard is the Report’s first page.  It shows Berkshire’s stock return vs the S&P 500 for every year since 1965. For 2022, Berkshire gained 4.0% and the S&P had an 18.1% decline.

Member-owners will reciprocate management’s respect with loyalty. Virtually every credit union today, like Berkshire, has positive stories to tell members, both financially and enabling self-help. The message is not a marketing campaign or commercial.  Rather the meeting is an opportunity to reaffirm who the credit is and renew the principles guiding leaders-as demonstrated in their own words.

This required process should be a moment of fresh hope, like spring flowers.  It should be a time to present the best of what the credit union does; and to reaffirm the ongoing opportunities to serve one’s community.

Also imitate Buffet.  Make it a fun, family gathering.

 

How would the author of “disruptive strategy” counsel credit unions in this time of rising rates and tightening liquidity?

I met Clayton Christensen  following his participation on an expert panel debating the future of higher education and its ever increasing costs.

His message was that college and post graduate institutions were subject to the same disruptive challenges that he had described in multiple businesses.  His theory explained why successful companies often fail even though they appear to have a dominate competitive position.

Further he announced, during the panel, that he would inaugurate such a disruptive effort at Harvard Business School with an Internet course based on his strategic  theory.   I asked if Callahans might talk with him to see if  this course might be a resource adaptable for credit unions.  He gave me his card, his administrative assistant’s name was on the back, and said to call and make an appointment.

Several months later a team from Callahans went to Cambridge.MA to meet his colleagues filming the course modules  for Internet delivery.  After taking the course and adapting concepts to the cooperative context, Callahans launched a course on disruptive strategy for the credit union market.

Even though Christensen died in 2020, today his course on disruption lives on as part of the Business school’s online offerings.

From the Bottom Up

The central theme of successful disruption is challenging market leaders from the “bottom up.” Credit unions might say from the “grass roots”up.

Successful firms generally grow beyond their initial markets and increasingly focus on more profitable segments.   They neglect early and familiar targets to go after more lucrative ones by expanding with more sophisticated and complex solutions.

Then their lower end markets  become vulnerable if new entrants better define the “job to be done”  and add value where the larger firm is no longer investing.  A new entrant gains a foothold at the lower end and can then relentlessly innovate to move up market.

His theory is a framework that asks questions and introduces concepts to sharpen leaders’ strategic intent.  It is not a model dependent on technology driven advantage, but one of business model disruption.

The cooperative design based on local, defined markets (members),  the values of service and collaboration, and self-funded financing is very compatible with Christensen’s theory. For many decades credit unions have been an example of his strategy playing out in consumer financial services.   Their success is measurable and market gains real.

However as credit unions became more financially self-sufficient and the focus on original groups lessens, market ambitions expand.  Today a number of credit unions seem to embrace the “top down” pursuit of more affluent consumers served by regional and national financial institutions.

Some credit unions openly proclaim multi-state, national,  and even global market ambitions.  Others purchase entry into new markets by buying banks or pursing mergers far distant from their proven success.

In doing so credit unions are sacrificing their  competitive advantage of alignment with members or groups.  These credit unions have become “market players” going wherever an opportunity appears, versus serving a distinct area or need.

The Liquidity Challenge

A current example.  Many credit unions today are facing liquidity pressures.  Slowing share growth, continuing loan demand, underwater investments and rising rate competition for shares pose new challenges versus the decade of easy money.  Some respond the way the big players do by bidding for money with CD rates currently in the 4.25-4.75% range and advertising openly for anyone’s cash.

Others have taken a look at their core strengths including local relationships, community presence, branch networks and the fact that many employers are looking for a special benefit to attract and retain employees.   Their back-to-future share growth with new members’s savings rely on credit unions’ core local advantages and reputations within communities that took years to establish.

A Second Message

The public reputation of credit unions rests partly on their values and democratic origins.  One CEO’s mission statement simply reads:  Do the Right Thing.  In the for-profit competitive consumer finance markets, this appeal is distinctive.  Value is about more than price or even great service.

The New York Times columnist  David Brooks  distinguishes between what he calls “résumé virtues” and “eulogy virtues.”

“Résumé virtues are what people bring to the marketplace: Are they clever, devoted, and ambitious employees? Eulogy virtues are what they bring to relationships not governed by the market: Are they kind, honest, and faithful partners and friends?”

In a YouTube video Christensen summarizes his understanding from his own life and work in a 2012 Ted talk How Will You Measure Your Life?  This 19 minute video opens with his discussion of why successful companies fail.  Then he extends the analysis to his own HBS classmates lives and the personal disappointments they have encountered while achieving material success.

(https://www.youtube.com/watch?v=tvos4nORf_Y)

The source of both corporate and personal disappointments is the same.  We live in a system that rewards short term achievements, investments that will pay off now, not in the years to come.  Creating successful relationships whether in family or businesses, does not result from short-term thinking.

He closes  with how to “measure” your life’s success at minute 17.  If you have only two minutes, listen as he presents what David Brooks calls the eulogy virtues.

Christensen’s Two Messages

Christensen’s  theory of disruption is a classic way of understanding credit union advantages from a strategic standpoint.  The framework focuses on long-term competencies combined with “job-to-be-done” tactics.

This approach asserts that it is not the demographic characteristics of the member that motivate market choices; rather it is what the member wants to accomplish that determines which financial firm the member will chose.

The second point is equally consequential.  Your “success” (personal and professional) will depend on “how well you help other people to become better.” Even if this just entails giving your business card to a stranger in the audience.

Both observations seem to me an endorsement of  a credit union “calling.”

 

 

 

In March  2021 Colorado Partner Credit Union announced that Sundie Seefried, its 20 year CEO would step away to lead a new cannabis banking company called Safe Harbor Financial.

Safe Harbor was a CUSO formed through the combination of the credit union’s cannabis banking arm and its division that licenses those services to other financial institutions.

At December 2021 yearend Partner Colorado reported $575 million assets, six branches and serving 36,000 members.   Its CUSO investment, presumably all Safe Harbor, was valued at $8.2 million up from $3.8 million the prior year.   These valuations were achieved with a  reported total cash outlay of only $750,000.

In February of 2022 there was a new transaction announced: Safe Harbor CUSO’s cannabis industry-focused financial services would be acquired by ”Northern Lights Acquisition Corp, a special purpose acquisition corporation (SPAC).  

A special purpose acquisition company (SPAC) is a “blank check” shell corporation designed to take companies public without going through the traditional IPO process.

A $185 million Purchase Valuation

The terms according to one news report were that Northern Lights will pay $70 million in cash and $115 million in stock. Sundie Seefried – who created Safe Harbor – will be the CEO of the new public company.

The full February 14, 2022 press release projected the equity market value of the post-sale closing company to be $327 million.

In an interview the CEO Seefried described Safe Harbor’s competitive advantages in managing the financials for businesses conducting legal marijuana transactions:

“The amount of work necessary to manage that BSA risk is expensive,” Seefried said in July. “And the resources are demanding, in terms of the monetary system that you have to purchase. 

“We did cannabis and we did it thoroughly,” she added. “We think we have the compliance program to a good state of stability here.”

The only financial information I could find about the Safe Harbor CUSO was the following;

The company had almost 600 accounts across 20 states and $4 billion in transactions in 2021. It would appear to be a fee intensive business model in return for its compliance expertise and financial transaction management.

What Does this Example Mean for Credit Unions?

Credit union sale of all or partial ownership of a CUSO business is not a new event.  Several major examples include the sale of CUSO Financial Services (CFS) a broker dealer, with minority credit union ownership, sold to Atria Wealth Services in 2017.

Prime Alliance Solutions was a significant national CUSO offering first mortgage services to an estimated 1,900 credit unions.  It was developed by BECU, the majority owner with a limited number of other credit owners and Mortgage Cadence. The CUSO venture was sold to Accenture, in a private sale, in 2013.

Another industry CUSO model that is a frequent target for acquisition is data processing.  The largest credit union owned processor USERS was sold to Fiserv in the 1980’s.  A number of other regional DP firms have also been acquired by private companies.

What make the Safe Harbor-SPAC transaction unique is that the business will now be publicly traded.

At this time several aspects of the transaction seem noteworthy.

1. The Safe Harbor sale is unique in that the stock will now be publicly owned.  In the past some credit unions converted to stock banks such as HarborOne, but this is the first CUSO to be traded on a public stock exchange.
2. The creation and development of this unique financial intermediary is a tribute to the CEO who has worked on this business model since 2015. You can listen to her discuss the intricacies  in  podcasts posted on the CUSO website.  Her biography says she has served in the Credit Union industry since 1983 and became CEO at Partner Colorado in 2001.   She holds a Bachelors in Business Management from the University of Maryland and an MBA in Finance from Regis University.
3. If the CUSO is indeed wholly owned, the transaction should produce a windfall for Partner Colorado and its members. In the FAQ’s on the Safe Harbor web site this relationship is described as: Yes! Your accounts are held at Partner Colorado Credit Union and will be insured through the NCUA Share Insurance Fund.  This would indicate an ongoing business relationship.

Wall Street Is Discovering Main Street Coops

My biggest takeaway is that this is another example of wall street firms discovering  credit unions as a source of new business.   In addition to this public listing, brokers, hedge funds and investment advisors are actively soliciting credit union purchases of banks, placing subordinated debt financing to enhance capital ratios and increasingly bringing wholesale financing and other funding opportunities to the industry such as fintech startups.

In subsequent posts I will review some of these other activities and what we can learn from them.

The Need for Transparency

One purpose in writing about these events is so they can be fully and openly talked about.   At the  moment most of the investment banking activities  are private with limited or no public disclosure.

For example two credit unions closed on subordinated debt capital  with identical structures in December 2021.   But the rates paid by the two credit unions appear to be significantly different.  Both are sound institutions but even they must rely on what their brokers and advisors privately tell them about the market which may not be indicative of other options.

The second reason is so that member owners, whose funds are used, will know how they  benefit from these transactions.   Rarely have credit unions discussed these transaction with members.

The annual meeting’s business report and election of directors would seem to be an ideal moment  to explain the financial impact and member payback on these investments.  I have yet to hear of this being done.

A Payday for Members?

Hopefully the members will be the big winners in SafeHarbor’s public offering.  The history of this effort was that it was all done with the credit union’s resources.

Partner Colorado valued its CUSO investment on the 5300 report for December 2021 at $8.3 million while reporting  a total cash investment of only $755,000.   With a SPAC cash and stock purchase of $175 million, will the members be in for a big payday?

 

 

Yesterday Kelly Evans, a CNBC host, reported a meeting last week between Elon Musk and the senior management team at Volkswagon.  And no, it had nothing to do with merger or buying technology.  Here is the opening of her story:

Here’s a headline that should stop you in your tracks: “Tesla’s Musk dials into Volkswagen executive conference.” My first thought, when I saw this, was that it must have been either some kind of quirky Elon Musk prank or a weird fluky accident.

But it was neither. It was, in fact, an invitation by the CEO of Volkswagen for Musk to address a meeting of 200 top Volkswagen executives in Austria, in order to “galvanize [their] top brass for a faster pivot to electric vehicles,” according to Reuters. I’m sorry, what?! Can you imagine, circa 2015, “Microsoft invites Adobe CEO to talk about transitioning to the cloud,” or today, “Facebook invites TikTok CEO to talk about their success in short-form videos and algorithms.” Or maybe, “Jacksonville Jaguars invite Patrick Mahomes to talk about success on offense.”

Anyhow, Volkswagen’s CEO, Herbert Diess, confirmed his invite and Musk’s “surprise” Thursday video appearance on Twitter and LinkedIn. “Happy to hear that even our strongest competitor thinks that we will succeed [in] the transition if we drive transformation with full power,” he wrote. You have to give Diess credit. He sounds like a disgruntled CEO who sees the future but can’t pivot his company fast enough, and is now pulling out all the stops to get there–including inviting his “strongest competitor” to give his own employees a pep talk.

How did this happen? How could the CEO of the world’s largest automaker for much of the last decade be calling a company that won’t even deliver a million cars this year his “strongest competitor”?

The Credit Union Analogy

Would your credit union’s success be such that a bank or other financial institution (mutual fund, insurance  firm or broker dealer) would invite you to share your vision for the future of financial services?

Or, is the bank just inviting you over to see if you would like to buy them out at a multiple of book value?

Unfortunately, banks are unlikely to ask for an Elon-Musk kind of briefing thinking they there is little to learn from credit unions.  They believe coop success is due to an uneven playing field, especially the tax exemption.

A good test of how your competitors, local and otherwise, view your effectiveness is not the dollars they spend lobbying, but rather whether they seek to emulate your credit union’s perceived advantage.

Unlike Volkswagen, I have not heard of any banks trying to become credit unions in practice or by conversion.   But I read a  lot about credit unions buying banks.

Which model do you think has the real competitive edge? And which is most likely to transform financial services as they exist today?

When competitors respect you, then you know you are doing something special in their eyes.

Even when interest in your business initiatives are only from your co-op peers, that is one indication that your credit union could be “driving transformation with full power” using Elon’s criteria for strategic advantage.