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Two Meanings of Goodwill (part I of II)

Tis the season for evoking goodwill.   Company/organizational holiday parties, the daily mail full of greeting cards,  Giving Tuesday, community food drives and dozens of other personal and firm initiatives make Advent a time of joy.

Wonderful and colorful decorations enhance this sense of a special time of year. Sporting events promote opportunities to help others. Even if there is constant hurry up, it is a toward good ends.

Concerts and carols bring back familiar lifelong memories.  There is even a heavenly musical declaration of good will in music.

This most dramatic announcement is in the Messiah’s fourth chorus, Glory to God.  As described in Luke 2 v.14, the heavenly hosts sing to shepherds of Jesus’ birth:  Glory to God . . . and peace on earth. This opening is followed by repeated proclamations  of “Goodwill towards men.” 

Angels celebrating a new era in words repeated still today.

More Than Christmas

 Goodwill is not limited to this holiday season.  In everyday usage, goodwill is the feeling of trust, loyalty and support that emerge from a relationship or event. It is the bond greater than any underlying transaction.  It is much more than a feeling of satisfaction.

Rex Johnson, the credit union lending guru, described this as the art of converting members to fans, not just spectators.

For cooperatives, goodwill is an essential component of their market advantage.  It is rooted in members’ belief that the credit union acts in their best interest.  It is embedded in cooperative design. Current generations expect the fruits of their loyalty will be passed to future ones.

When active, goodwill underwrites member relationships giving credit unions a competitive standing no other firm can match. Although real, it shows up nowhere in a credit unions ordinary financial reports.

Accounting Goodwill

There is also an accounting term, goodwill.  It is an intangible asset.  It arises when a credit union acquires a bank or merges with another credit union. The excess of book value  over fair market value of the net assets gained, creates accounting goodwill.

Credit union accounting goodwill has grown dramatically.  The first reported total as of March 2009 was $160 million.  At September 2022, the total was $2.2 billion recorded in 277 credit unions.  Since that initial March date,  it has grown at an annual rate of 21%.

Goodwill is only 2.2% of these 277 credit union’s net worth.  But in some cases it is much higher: 31% of Chartway’s and 21% of Lake Michigan credit unions’ total capital.

Why an Intangible Asset?

Goodwill is classified as an asset because it provides an ongoing revenue generation benefit that extends beyond one year. It may include  such items as customer relationships, liabilities (shares) acquired at below market rates, corporate expertise,  operating (FOM) authorities, or proprietary technology.

Goodwill is recognized only through an acquisition. Unlike member relationships, it cannot be self-created. It is the excess of the “purchase consideration.”

Negative goodwill arises if the acquired assets are purchased at a discount to their fair market value (FMV) and is referred to as a “bargain purchase.”

A description of goodwill accounting and how it works is at this site.

The Status of Accounting Goodwill in Credit Unions

Since December 2018 the total of accounting good will has doubled to the present $2.2 billion. The reasons are two:  premiums paid on whole bank purchases and mergers with credit unions uncovering significantly understated value.

An example of the premiums on whole bank purchases is GreenState which reported $123 million  (12% of its net worth) as goodwill.  The second highest is State Employees in Albany at $112.5 million (16% of net worth) as a result of its merger with Capital Communications.

Because accounting goodwill is an intangible asset, there are numerous issues about how it is considered in net worth calculations, its amortization, and its role in financial decisions.

Tomorrow I will look at the largest reported individual goodwill totals, NCUA’s view of the asset and how it could change the future of the cooperative system.

 

 

 

 

 

 

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From the Field

The following are excerpts from two CEO November  reports to their employees with examples of  credit unions acting . . . like credit unions.

Inactive Accounts and Escheatment

From Day Air:  Heidi and the Accounting area started with 95 dormant accounts with balances totaling $279,000 and worked those numbers down significantly to keep member money from being turned over to the State of Ohio in compliance with escheatment laws.  Most of those members were located so balances of only $26,000 from 35 accounts are being remitted to the State.

From Weokie’s Vice President, Operational Support:

We had a deceased account that was up for escheatment, and I noticed that there was a beneficiary, Nick, listed but that we had never heard from him.

I asked Paula about this and all we had was return mail for this person. I noticed an old cell phone listed on the card and suggested we call as most people don’t usually change a cell number, even if moving out of state.

Paula called, left a message, and the beneficiary returned her call the same day. He was still in the same apartment building in New York but had changed apartments.

After confirming we had the man we were looking for, Nick began to tell Paula that he had been adopted and never really accepted by his extended family (cousins, aunts, uncles) but did have one aunt and uncle that were always very kind to him.

Long story short, Nick will now be receiving just over $436,000 that he was not expecting. 

Most of time when we escheat there is not much money but when I saw this account with $436k, I could not see letting this go so easily.

To me, $436,000 is life changing money and so happy that this money will be paid out as our deceased member had wished.

Our Advantage: Day Air

One of our primary value propositions is that we’re local.  We’re Dayton area people helping our friends and neighbors in the Miami Valley with their finances.  It’s easy for people to be attracted to fintechs and Internet banks, but when you have a problem being local can be all the difference.

I just heard a story of someone who was using Chime, had a problem and couldn’t get the issue resolved.  Of course, Chime doesn’t have any local offices – just a website and an 800 number. 

Here at Day Air, we’re human and so make mistakes.  The difference is that we’re local, we’re here to help our friends and neighbors, we’ll address the situation and make it right.   

Day Air’s Selected market updates for staff::

  1. Amazon announced a hiring freeze and the following companies announced layoffs: Chime 12% of its workforce, Opendoor 18%, Zillow 5%, Lyft 13%, Stripe 14%, Peloton 12%, and Twitter is laying off an undetermined but large number of people.  Meta (Facebook) and Citigroup also announced layoffs.
  2. Carvana’s market cap dropped from $60 billion last year to $1.4 billion.

Weokie and Employee Support:

We hit another milestone in November as the credit union has now contributed $125,000 to the Community Impact Fund to support our zero-interest loan program for members of Team WEOKIE who have found themselves in financially stressed positions.

We have granted $89,161in loans with $43,576 having been already repaid and making these funds available to be re-loaned to other team members who find themselves in financial difficulty.

A chart showed how the $89,000 in loans has helped employees.

 

 

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Dreams Can Be Dangerous

After the Gettysburg Address, the most memorized speech in high school is Martin Luther King’s I have a Dream speech.

Dreams drive human aspiration.  The inspire political and social movements.   America is a land built on the hopes of a better life by the millions seeking this land of opportunity.

Many a credit union purpose statement includes the goal of helping members achieve their dreams.  At their best, cooperatives nurture communities that uplift each other.

Dream Bigger

Dreams also become entwined with human ambition.   In a competitive market-driven economy, it is inevitable that some will be captured by the impulse to grow and dominate.

Patient organic increase, member by member, is not fast enough.  I have described examples of PenFed’s over two dozen mergers of successful, long-serving credit unions that have nothing to do with its prior market or roots. These mergers are incentivized with staff payouts followed by layoffs and ultimately the ending of local presence in exchange for virtual, digital service.

GreenState in Iowa is one of the highest performing credit unions in the country.  But that record was not enough.   They have pursued three or four whole bank purchases outside their home state to achieve even faster growth.

It is no accident that when the economy turned and the real estate markets and rise in rates created headwinds, these were two of the first institutions to announce staff layoffs.

Sometimes dreams come at the expense of others.  At some point, ambition distorts dreams.  Survival dominates decisions.

New Personalities and New Tactics

Chasing dreams of a bigger, commanding future has resulted in some leaders overlooking the incredible success that was right in front of them.   That oversight is the danger every CEO and board will face.

The risk of this loss of perspective about the value of what has been created can be acute with new leaders. The push and pull between past success and future direction can be traumatic.   One observer has described this tension as follows:

“One side says do MORE – more TACTICS, for MORE people, for MORE communities, etc.

One side says do the same.

Now doing the same is more – more of the right things, for right reasons, and for the right people.  But it sounds like less – people, especially people not vested in the “right” things intuitively chose more, new, often along the lines of the competition.

Professionals are easily swayed toward competitive calculations based on just MORE and peer trends and ideas that serve professionals.

Therefore cooperatives are a niche easily outgrown and defeated as missions wane, as purpose grays, retires and dreams end.”

Keeping Dreams Alive

Examples of both positions are abundant in credit unions today.  The test of any system, especially one that claims to be democratic, is whether we can discuss what troubles us.   The founding generations will continue to move on with their dreams.

Cooperative success is more than management tactics. The good news is that it  only takes a few leaders dedicated to this unique approach to member well-being to preserve the ideals, not just the balance sheets, they inherited.

 

 

 

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A Jubilee Event

“Forgive us our debts, as we forgive our debtors.”   We say these words in the Lord’s prayer.  Where have we seen this ever done in “real” life?

Society, especially market-based ones, do not practice debt forgiveness.  Capitalism is built on finance, i.e. all kinds of debt—corporate, consumer and government.

In the bible, the Jubilee year – occurring after every seventh Sabbath year, thus, every 50 years is an economic, cultural, environmental and communal reset, when the land and people rest, and all those who are in slavery are set free to return to their communities. (Leviticus 25:1-13).

Debtor’s prison or indentured servitude, was a reality in England and other countries for those who failed to pay up.  It was the basis of more than one of Dicken’s novels.  Scrooge is more than a Christmas story.  It was reality.

President Biden’s forgiveness of either $10,000 or $20,000 in student debt has been met with gratitude by millions of former students who have applied for this reduction.

On the other hand, multiple organizations and opponents have taken to the courts to stop the plan absent Congressional approval.  The question of whether the President has the authority to do this unilaterally is now before the courts.

Some former students who paid off their loans, feel this action is unfair to those who honored their obligations.

Credit unions were founded to provide debt.   Credit for members funded by savers.   Often the  phrase “for provident and productive purposes” is intended to show debt as a positive event.

Founding stories such as that at BECU where a small group employees contributed 50 cents each in 1935 to create Covenant credit union to provide tool loans during the depression, are apocryphal.

Credit unions spend much effort and processes to make sound loans, track delinquency and minimize loan losses.

But debt forgiveness?  That is rare indeed. Recently this video by Canvas Credit Union shows the power of debt forgiveness. Addie Greenacre, a long-time Canvas member, wife and mother was surprised with a $40,000 loan payoff as part of a drawing during an auto refinance promotion.

It is a powerful example of what removing the burden of debt can mean to a person.

(https://www.linkedin.com/company/canvasfamily/videos/)

How do credit unions founded to provide debt ensure that loans lift up and don’t become a lifelong burden?

Looking at the Canvas Credit Union model one sees an organization dedicated to financial well-being. In their words, We’re here to Help You Afford Life.

While this “debt forgiveness” may have been a promotion, it demonstrates the power of jubilee thinking for people, and a community.

As credit unions review their personal loan portfolio at yearend, seeking those with the longest tenure or constantly rolling over draws, might a debt jubilee be a timely addition to every credit union’s service profile?

It can literally change a person’s life.  Isn’t that what credit unions were meant to do?

 

 

 

 

 

 

 

 

 

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Who is NCUA’s Customer?

Several leading business schools, Harvard, Yale and Wharton, have offered courses to explore the role of capitalism.  Does business have a responsibility beyond expanding shareholder wealth?  How do concepts like ESG or DEI impact strategy?

Five years ago one professor noted these issues would not be part of the core curriculum.  Why are these courses outside the norm being offered?  Who is the school’s customer?  Are business schools becoming socially progressive?

A cautionary note about these boot camps for capitalism becoming more socially conscious was given by Jim O’Toole a long time USC business school professor.  “In the Dean’s view, the business community is their primary stakeholder. . . ranking of business schools reflects who hires the students. . .  most business are not trying to hire woke students.”

The Question for NCUA

Every organization, no matter the legal design or setting, has a customer.  Even governmental agencies.

December is a pivotal month on the NCUA calendar.   Multiple budgets, staffing changes, project priorities are being reviewed at the board level.  The NCUSIF’s NOL is reset.  The 2023 expense parameters are laid down including the OTR and the FCU operating fee.

Who is NCUA’s customer?   How does this focus affect these multiple spending and organizational priorities?  Is there evidence NCUA is becoming more sensitive to its customers?

Who is NCUA’s customer?

Is it the 100 million plus credit union member-owners?    There is no evidence of this.   In fact I can think of no example in which NCUA has responded to individual members’ concerns, let alone supporting their ownership rights.  In fact NCUA has ignored numerous situations where members are routinely disadvantaged by their own institution.

Could it be the 4,500 cooperative institutions?  Much of NCUA activity is directed toward the industry, its examinations, supervisory and admin roles and rules.  But NCUA does not treat these as customers in any traditional sense of the term.  It is very unusual for anyone at NCUA call out a credit union’s contributions on behalf of its members or communities.

Perhaps Congress is the “customer.”   NCUA claims independence from any traditional Congressional oversight via appropriations.   It keeps its own funds and maintains backup liquidity from Treasury.   It is an agency completely self-sufficient,  outside of any Congressional approval.

If not Congress, then the executive branch which nominates the three-person board.   Certainly board members assert party loyalty and will sometimes make overt efforts to follow administration priorities.  But in the overall governmental structure, NCUA is not a very visible part of any administration.

There is one other possibility which is alluded to in the frequently used justification for NCUA’s actions to “protect the insurance fund.”   From whom or what is never spelled out.  But the implication is NCUA is guarding the US Treasury from credit union’s somehow calling on the government for support.  There is no legal basis for such a belief, but this phrase is often used to justify some new rule or abrupt action without further explanation.

If all the obvious constituencies for who is NCUA’s customers do not align with current practice, then who do NCUA board members and senior staff see as their primary customer?

The  answer:  themselves.   The primary purpose of NCUA is self-preservation.

Just like the business school curriculum, the ultimate customer determines the outcome.   It is not the credit union member, credit union institutions or even a cooperative system that drives NCUA’s agenda and budgets.   It is institutional growth as measured by budgets, staffing and multi-year capital projects.

You might ask where does purpose fit into this organizational picture?  It doesn’t.

If in doubt about the agency’s priorities, just follow the money in the upcoming board agenda setting.  While there are multiple constituencies that claim an interest in NCUA’s activities, only one stakeholder matters when it comes to counting the money.

 

 

 

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Two Suggestions for Giving Tuesday

I am sending donations to  the following 501C3’s organizations this Giving Tuesday.

While the demands for charitable giving may seem endless, identifying special circumstances or organizations in need today, is an expression of gratitude.  Gratitude makes us human.

Music Mission Kiev

Founded in the early 1990’s by a Presbyterian choir director, the intent was to introduce forbidden choral classics of the Western repertoire to the classically trained musicians upon Ukrainian independence from the former Soviet Union.

The group performed the first Messiah concert ever in Ukraine.

Their mission expanded to offer care for widows and orphans and bible studies.

Their efforts today are literally on the front lines.  One orphanage was occupied by Russian troops until liberation.

Their funding request today is: On Tuesday we will raise $21,600 for Ukrainian soldiers suffering from PTSD and brain injuries.

$21,600 will provide a year’s supply of medicine for at least 40 soldiers as follows:

$1,800 — Supplies 40 soldiers with treatment for 1 month.
$540 — Support 1 soldier’s treatment for 1 year.
$270 — Support 1 soldier’s treatment for 6 months.

Contact infor:  Music Mission Kiev PO Box 161849, Altamonte Springs, FL 32716.  Phone:   407-699-7172.     

Their most recent concert recorded in late October in Kiev during the missile attacks, can be viewed here. (https://www.youtube.com/watch?v=U8ALGRrXRJQ)

Next City

My second donation is to Next City a journalistic effort to recognize  initiatives to make urban environments more livable.

Their writers focus on case studies which address some of the most important challenges of urban life.  Their Partners for the Common Good series highlights CDFI funding initiatives such as this black owned wine and jazz club in Grand Rapids, MI.

Another example is the 15 minute neighborhood app that helps anyone see if the essential services are available within  a short walk.  The app’s concept  is simple:

The ability to find what you need to live daily within a 15-minute walk is one of the “secret sauces” that make cities great places to live. That’s why I found the news that a digital mapping and location software developer created an app that could tell users whether their neighborhood cleared the bar and what they had access to in minutes so fascinating.

Next City’s mailing address is:

Next City
P.O. Box 22449
Philadelphia, PA 19110

Their focus on reporting successful examples that improve the communities  mirrors the original credit union goal of enhancing common values and individual economic opportunity through cooperatives.
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On Credit Unions and Mergers as a “Strategy”

Anything that can’t go on forever will eventually come to an end.

“The idea that we could strip-mine useful and productive businesses forever has an obvious flaw: eventually you will run out of productive businesses.

But there’s another, slightly less obvious flaw: long before the entire productive economy grinds to a halt, everyone who relies on it will get very, very angry.”   (Cory Doctorow on November 20, 2022)

 

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A “Magnificat” Performance

One of the most unusual recordings of Bach’s Christmas oratorio, Magnificat, is this by the Harvard University Memorial Church choir in 2001.

Recorded virtually, it is possible to watch simultaneously every soloist, the conductor and every member of the orchestra as individuals-and to hear their collective performance.

A joyous wonderful experience, visually and musically.

(https://www.youtube.com/watch?v=kQqmtUgttm8)

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Thanksgiving Thoughts

A Prayer of Thanksgiving

Written and offered by Dr. Colleen Hanycz on 1/25/21 at the “Introduction to the Xavier Community” event upon her selection as the 35th president of Xavier University

“Before I begin, I would like to offer a brief prayer of thanksgiving that I have relied upon heavily, especially throughout the past year as we have suffered as a community, and as a nation, and as a world, in so many ways:”

Let us remember that we are in the holy presence of God.

Loving Creator,
We asked for strength, and you gave us difficulties to make us strong.
We asked for wisdom, and you gave us problems to solve.
We asked for prosperity, and you gave us purpose and brains to use.
We asked for courage, and you gave us fears to overcome.
We asked for patience, and you gave us situations where we were forced to wait.
We asked for love, and you gave us troubled people to help.
We asked for justice, and you called us to be just and to lead with integrity.
Lord, we have received nothing that we asked for or wanted.
And yet, we received everything that we needed.
For this, we give thanks.

A Family Gathers Once Again

 

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Thanksgiving Poem

Gettin’ together to smile an’ rejoice,
An’ eatin’ an’ laughin’ with folks of your choice;
An’ kissin’ the girls an’ declarin’ that they
Are growin’ more beautiful day after day;
Chattin’ an’ braggin’ a bit with the men,
Buildin’ the old family circle again;
Livin’ the wholesome an’ old-fashioned cheer,
Just for awhile at the end of the year.

Greetings fly fast as we crowd through the door
And under the old roof we gather once more
Just as we did when the youngsters were small;
Mother’s a little bit grayer, that’s all.
Father’s a little bit older, but still
Ready to romp an’ to laugh with a will.
Here we are back at the table again
Tellin’ our stories as women an’ men.

Bowed are our heads for a moment in prayer;
Oh, but we’re grateful an’ glad to be there.
Home from the east land an’ home from the west,
Home with the folks that are dearest an’ best.
Out of the sham of the cities afar
We’ve come for a time to be just what we are.
Here we can talk of ourselves an’ be frank,
Forgettin’ position an’ station an’ rank.

Give me the end of the year an’ its fun
When most of the plannin’ an’ toilin’ is done;
Bring all the wanderers home to the nest,
Let me sit down with the ones I love best,
Hear the old voices still ringin’ with song,
See the old faces unblemished by wrong,
See the old table with all of its chairs
An’ I’ll put soul in my Thanksgivin’ prayers.