Tell Me Why I'm Wrong

Feat. Randy Karnes

A 21st century model for de novo credit unions

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Are newly hatched credit unions being cannibalized by the industry?

I was channel surfing during the holiday and happened upon one of those Nat Geo shows about survival in the wild. It was striking that among all the threats to newly hatched crocodiles the biggest killer of baby crocs was other crocs. Sound familiar? There’s no secret about it, a new credit union start-up has about as much chance of survival and a normal growth pattern in today’s marketplace as a newborn crocodile. Much like life in the wild the new credit union faces many challenges to its survival, and much like the young crocs the greatest threat may be viewed as coming from its own kind.

Now I don’t mean that other credit unions and credit union institutions purposely make survival difficult for a de novo, but I do think that as a network of shared values and commitment to cooperative principles, we should be doing much more to help to guarantee the success of all new start-ups, and we should fight for that survival with the same fervor that the investors in a de novo bank will fight to protect their investment.

While there are many among us that think that the continued decline and consolidation is in our collaborative best interests, please don’t count me among them. New start-ups are about new ideas, new people, new excitement and new blood in an industry overwrought with risk aversion that often overrides the best interests of our owners. It wouldn’t be too much to say that anything new—procedure, policy or product—is more often initially viewed with excessive skepticism.

Admittedly, my position is an anecdotal composite of my 45 years in credit union management and consulting and not a peer-reviewed academic study of the success ratios of new credit unions. We can agree that a network of fewer than 6,000 CUs that continues to contract in the asset ranges of its smallest institutions will logically bring us to the assumption that any ne devo credit union will be fighting the same battle for survival.

Here are some of the obvious threats to a de novo start-up and some collaborative solutions.

Capital

Much of what challenges any small credit union, but especially a de novo, is the limitation of a small capital position and the corresponding strategic and operations constrictions. ALM strategies, loan policies, costs of operations, new member acquisition strategies, identification of qualified staff and the human resource expenses related to that staff, all of these considerations and much more will squeeze start-up capital positions that will most likely be worst case between $3-5 million or best case between $5-10 million.

Remember the home-based credit union model that was the incubator of hundreds of credit unions since the Great Depression? (I’m talking about the 1930s, not 2008-2014.) The complexities and competitive pressures of today’s financial services market ensures that those days are unlikely to return. Even the volunteer nature and self-sacrifice of many credit unions’ founders is unlikely to play a significant role on the financial success of a de novo as it did in the first half of the 20th century.

Regulatory limitations

What kind of services and products would it take for you to switch from one FI to another? Credit cards, mortgages, brokerage services, mobile services, small business loans, convenient hours? For the modern consumer today, it’s a fair guess that it would require this much and more in terms of a menu of financial solutions. How is any start-up supposed to succeed if you must tell prospective members that you only offer a few core services and you don’t really know when you’ll be offering others? That’s the regulatory box that de novo credit unions face.

Our own federal regulator/insurer automatically limits the chances of success because of financial risk aversion and a natural fear that the de novo lacks the expertise to manage modern financial products and delivery channels. Better for the small to disappear and the large to expand. It’s tough enough to survive with limited capital, but practically impossible without meeting the product and service needs of your potential members. Can today’s technology tools and a new de novo strategy overcome this barrier?

Leverage the network

Who’s responsible for the future health and success of our network of credit unions? We are! All of us, credit unions, CUSOs and affiliated partners should actively pursue those strategies that allow for a healthy de novo environment. We should act as collaborative partners in much the same way that private investors facilitate a de novo bank. We must lend our collaborative expertise, established delivery channels and the strength of our balance sheets to ensure the success of a de novo.

How does a de novo ever grow if it has to tell members that because of limited capital or liquidity it can’t accept a large deposit or has to ration loans? How does a de novo prove itself to new members if they don’t have access to full service debit and credit plastic programs? Why can’t that de novo find an established CU partner who will participate in any lending activity that can’t be met by the credit union? Why can’t a start-up make mortgage loans if it utilizes the expertise of a well-established mortgage CUSO for everything from application to closing to servicing? How about meeting the small business lending needs of a de novo member? Why not offer a robust brokerage services program for alternative deposit and investment options? Surely we can identify and gain the support of a CUSO or credit union to meet those needs, without the new credit union having to give up its branding rights.

You might say that this strategy limits the revenue potential of the de novo. It becomes much more dependent on fee-based non-interest income than spread, so how does it pay the bills? It utilizes trusted network partners to the maximum of those solutions being available. For starters you can look to the CU*Answers Scholarship program which provides two years of free core processing for any de novo. What is no cost core processing and all of its electronic delivery capabilities worth? I’m told that you can calculate that being approximately $1.50/member/month.

What kind of savings would a de novo appreciate using networked outsourced back-room operations, like an in-bound and out-bound call center, accounting services, compliance services, credit decisioning, data analytics expertise, lock box services and many operational functions that often test both the financial capacity and skill sets of a de novo. I certainly believe that it is both a fiduciary responsibility and sound strategy for a de novo board of directors to oversee an operation that utilizes a strategy that lowers the cost of services to members, provides the highest level of professional operations and provides the flexibility to meet the changing needs of its owners/members.

Adoption of new delivery channels

Many of today’s credit unions continue to be plagued by the burden of legacy brick and mortar branch networks. It’s tough for many of today’s CEOs to tell members that one or many branch locations are the best use of credit union resources to meet the changing needs of members. Today’s de novo doesn’t have to deal with the fixed asset costs of a physical location for service delivery, not if you start from the position that all products and services will be provided through virtual services like home banking and mobile banking. That cash can be delivered through shared ATM locations, and that loan services can be delivered via any device plus a human call center or video services, then the de novo has only to support the physical location needs of management and those operations that are self-managed.

A support consortium for de novo opportunities

Organizing and starting up a new credit union was a relatively straight forward exercise in the 20th century—as we’ve seen, this is no longer the case. Fortunately, we have the resources within our national credit union network to support a healthy and vigorous de novo environment. First and foremost is the availability of credit union capital. The strategies for capital deployment among credit unions are atrocious and greatly mismanaged. Few credit unions have come anywhere near their regulatory limitations for investment in CUSOs or other allowed activities. Do we begin to walk the talk about being cooperatives with a shared vision and start to identify underutilized capital that can be leveraged to support de novo strategies? Can a consortium of committed CUs be identified that would have pools of capital investment available for supporting a healthy de novo environment?

Secondly, the consortium could support the need for de novo loan participations. In the start-up period loan demand often exceeds deposit growth. It sure doesn’t send a good vibe out to your potential new members that you may not have the capacity to meet their loan needs, either by dollar amount or loan type. A network solution that matches de novo loan demand with supportive participation partners is sure to increase the long term viability of a de novo.

A third function in a consortium of de novo supporters can be filled by CUSOs. Just about every daily operational activity can be supported by a CUSO whose business model is to provide an outsourced solution for the credit union who does not have the scale or expertise to offer or manage certain products, services or delivery channels. Supporting the de novo environment is another way to expand the market for any CUSO in any line of credit union business.

This same consortium of supportive credit unions and CUSOs can play a considerable role in educating the regulatory community of this realigned business model for new credit unions. The regulator needs to adapt to the new energy around the de novo that represents a network wide support system for new CUs and provides levels of expertise and financial support that have never been seen in the past.

Finally, we need to build a comprehensive marketing effort to build awareness among those who share a common bond that starting a credit union is an achievable goal and that there is a capable and well-resourced network of supporters available to help them. Those who have been around for a while can remember a time when this was one of, if not primary, functions of state leagues. Most leagues had a dedicated individual or group of advisors who traveled the state supporting the organization of new credit unions both pre and post chartering. It is a common theme that we have heard from those wishing to start-up a credit union today finds such resources lacking. They are most often directed to NCUA as their primary source of information and guidance. Let’s see… an agency dedicated to small credit union merger as a strategy acting as primary advisor and cheerleader for the de novo credit union. Sounds disastrous to me.

Meeting more aggressive goals

Much like the private investor in the local community bank, our credit union network needs to recognize the power and opportunity of co-operative ownership in new credit unions and the vitality that brings to all of us. Leveraging the co-operative business model not only acts as a force multiplier for our shared efforts to gain market and build our co-operative brand, but it puts all on notice, the general public, legislators, regulators and our competitors that we mean to fully exploit what we believe to be our social and economic advantages. It is the proof that we will not be satisfied to continue to see a contraction of the number of credit unions nor the minuscule position we hold today in the retail and commercial financial marketplaces.

Will you notice if there’s a bump in the road?

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Thinking about how we respond to negative trends

Every quarter, we write a report to stockholders, the State of Michigan, and the NCUA (we file every 90 days and have since the early/mid 1990s) detailing our quarterly financials. One of those things that gets filed in a room or can like CTRs… (we flatter ourselves) — just there in case someone ever gets interested. In our latest, I wrote a tongue-in-cheek article pointing out how we had somewhat embarrassingly missed the mark on our budgeted net income for the first quarter of our 2018 fiscal year. (We still had our second best start to any fiscal year in our history, but fell short of our projections.)

It’s been many years since I’ve had to write a report where we were off plan at the end of a quarter. And I was interested to see–would anybody notice? So far… not really. Like many firms, CU*Answers has ridden a very long winning curve up as a vendor for the CU industry and seldom publicly has to admit that it ever worries about that streak. And since the firms that are now gone from view are silent, all we hear about is streaks of good luck for the most part. We know the industry is consolidating; we know the industry is polarizing to the point where those at either end can see no relevance in calling each other peers any longer; we know that it is more likely that our industry will be redefined by others (competition, regulators, or those simply unaware of who we are and were) instead of experienced CU architects. We know a lot….but we act so little on big things.

So on a day where I am filing a tongue-in-cheek quarterly analysis of a blimp on the radar, I wonder what I would write if losing/struggling was the streak? Multiple quarters where our plan could not be reached, where our goals seemed less than bright, or where we fell short of expectations that extended our futures. What would I write? What would I change? What would I push to engage?

Quietly I wish I had kept the phone numbers and emails of CEOs that are now gone from view. Ex-CEOs that could tell me what they had wished they had done when they faced downward curves on the way to the end. I worry that lessons lost and archived outside our industry now are what is needed. What did we miss when we justified the NCUA or regulators actions to end an organization? What did we miss when no owners really dug into a vote to end a charter? What did we miss when the life-cycles of leaders and volunteers were more important than CUs needing young blood? What did we miss when we followed models based on scale that left local communities and individuals on the sidelines? What did we miss that are the keys to turning a streak back towards winning?

Some might say we missed nothing, we witnessed progress and the natural march towards an industry’s maturation. But that sounds like short term winners talking to me. Tell me why I’m wrong.

Crafting approaches to how you delegate is the key to how you respond to your board

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Finding your comfort zone with “teach, negotiate, and tell” ratios may be the key to every interaction

I was recently working with two new CEOs and discussing the art of both building teams and of reporting to the board of directors. We got started on the idea of using a formula to govern your interactions with each. For my staff, I use the following: 80% Affirmation, 10% Adjustment, and 10% Reversal/Rejection. When presenting to the board: 60% what we’ve done, 20% what we’re doing, and 20% what we’re considering.

Finding the right tone and approach to this is key to your role as CEO. Strict adherence to this way of thinking is not the objective here; rather you should always keep these ratios in your head as you delegate assignments and work with your board to build a better organization. Team members need the feeling that you have truly entrusted them with the assignment and are relying on their skill set. Board members similarly need to be involved and trusted. When you read through these, relate them to the concept of TNT: Teach, Negotiate, Tell.

Working with your staff

This ratio is about building trust and confidence in your teams, and continuing to develop them over time. Veering away can be damaging both to the speed at which you’re developing products and services (by making too many adjustments) and to the relationship you have with your team (by rejecting their ideas too often).

80% Affirmation

This comes down to trust. If you have delegated to the right person and communicated the objective well, the variance in their outcomes will be slight or minimal in comparison to your expectations for the assignment. Remember leading is adjusting and if the team member is 5-10 degrees off your track that adjustment is generally small; pace is the key and constantly forcing adjustments for slight differences will slow the machinery. Leaders need great instincts and speed to adjustment. Affirmation is letting the teammate Tell you; receiving their tell interaction in the right way builds trust and confidence in their ability to make calls.

10% Adjustment

When the team member is on the right track, but has veered off to the side a bit too far, use a Negotiate/Teach approach to make the adjustments necessary to reach a consensus on the assignment’s direction. 10% Adjustment is the act of finding the win-win in the move forward. You’re reassuring the staff of your confidence in them to make the right decisions, but working with them to ensure the final product isn’t too far removed from the original idea.

10% Reversal/Rejection

While it might feel like the formal power play, work to avoid that sense. Reversal/Rejection is simply your Tell/Teach message to them. You’re still confident in their abilities, but you’re letting them know they’re off the mark and this is your opportunity to communicate where they can get back on track—build a two-way street with teammates. Just don’t forget the ratio—if you’re rejecting your teams more than 10% of the time, you will damage the relationship and make them feel as though you’ve lost confidence in them. If you feel like you are rejecting too much, consider how you’re communicating those expectations to the individual before they get started.

6-2-2 for presenting to the board

Do you give enough facts and opinions to let the board get to know you and trust your evaluation of things? Do you allow for the TNT (Teach, Negotiate, Tell) in the evaluation of your delivery of opinion and task? And are you delivering the right percentages of Accomplished, Working on It, and Thinking About It issues in your reports, presentations, and agendas? They must learn your approach and you must trust their feedback—use TNT to find the right balance.

60% What We’ve Done

A key role for a board is to evaluate and confirm work done, and the correctness of the work on the path to the organization’s success. Does the firm execute on track with the firm’s plans, philosophy, and culture? Can it be trusted and will you, the leader, prove it?! It’s easy to get excited about what we’re doing now and what we’re dreaming of, but it’s important to reflect on our accomplishments and to affirm our teams’ successes. Allow your board to become too focused on what’s next, and they won’t stop to appreciate the hard work it took to get there.

20% What We’re Doing

The next thing I focus on is giving the board the foundation that they are engaged and in the mix of things. Do not embarrass boards by letting them be surprised by initiatives/efforts undisclosed; they drive with you, not in the back seat. Share openly the projects you’re working on and the work that’s going into it. Let them in on the process.

20% What We’re Considering

The next role I focus on is giving the board the respect of heeding their advice and input ahead of the game. This is the art of asking what they would consider doing and avoiding the blank page requests that make committees uncomfortable and ineffective. You are listening all the time to triage issues for the planning page, do not have moments where you make them fill it out.

Whether you’re dealing with staff or your boards, it’s a good idea to have ratios like these in your mind. When you don’t stop to think about how you’re interacting with each, it can be easy to let those interactions get away from you. Build trust with both your staff and your board by keeping these in mind. If you have ratios of your own that you use, let me know. Tell me why I’m wrong!

A challenge to my staff and yours: don’t be complacent with pricing in 2018

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Refocus and avoid the trap of price creep

I recently gave my staff the task of asking themselves if they’ve fallen into any of these traps when setting their pricing: “things just get more expensive;” “these are the common tactics, discount this and charge for that—it’s the same for everyone;” “if we do not charge them, someone else will;” or “we are still a better deal.” Every one of these is just a lazy statement and a killer of our model and intentions. Goals for disruption cannot abide lazy thinking or acceptance of norms from the outside.

The credit unions we serve are no less susceptible to the dangers of sloppy or lazy thinking when it comes to setting pricing and competing with other financial institutions. Are you talking with your staff about how you set real value for your community? Read the four fallacies below and ask yourself if you’ve fallen into the trap.

“Things just get more expensive!”

My message to staff: NOT TRUE. New companies come along every day and change the expectations of apples to apples, and pretty soon you are selling oranges at a high price. Buyers simply overbuy and accept what you sell as value adds for more money. Stay on the point – make sure you pricing is not bundling unnecessary stuff to justify lazy pricing. “Do no harm” means do not oversell and do not let people be fooled by bundling things off the track of success for you or them. More is not better if more has nothing to do with a return.

“These are the common tactics, discount this and charge for that—it’s the same for everyone.”

My message to staff: Do not set de-facto pricing by being on auto-pilot. We have a price sheet – the credits we grant CUs are based on their thinking, not our credit habits. We discount to “invest” in the CU’s game plans. We want the CU to target these investments and tell us how they wish to use the funds. If they do not have a plan, then we should charge rack rate and invest for them. Push them to think about how they would use the funds; we discount to invest, not just to win deals. Applying mutual creativity is the key to us treating them as individuals and earning their respect for buying into their agenda. Invest so they win, do not just discount so you can win a sale!

“If we do not charge them, someone else will.”

My message to staff: BS, and I would rather someone else live with a bad deal delivered. Short term gains are not worth it if in the mid-to-long term the client loses for being sold the wrong thing. If we cannot be disruptive (in price, access, or shared execution) then we might not be the right ingredient for a win, and a sale might risk being the worse thing we can do. We are second and third to market for a reason. We want to sell products that contribute to the long game; there are few premiums for CUs in being first. The true premium for CUs is being vested and trusted in solutions that evolve, and solutions priced so CUs can make a return.

“We are still a better deal.”

My message to staff: I hear my parents reminding me that two wrongs do not make a right. Test yourself. Being slightly worse than the worst is not an answer for long term success. Find a better way to declare our value than to compare ourselves to others.

It’s 2018 – resolve to be more than we were last year and prove it by avoiding lazy traps. Pricing and its justification can be one of the biggest areas for lazy thinking. Do not get caught.

Tell me why I’m wrong.

Is the collective IQ of credit unions dropping?

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“The IQ of credit unions now is lower than it was twenty years ago.” That comment made in a room full of credit union CEOs was met as you’d expect; with shocked silence and challenging looks. I heard from them later that they disagreed with the comment, suggesting that the IQ of credit unions is going up, not down. They claimed we’re amid a changing of the guard in the industry, and new leaders are thriving where old ones failed to embrace change.

What wasn’t clear however is that I’m not suggesting the people inside credit unions are of lower IQ—I am sure that the IQ of the individual talent is improving (consistent with their member peers living in today’s retail spaces and expectations). My challenge to my peers was that I fear and feel that the IQ of credit unions is going down.

The plummet is the result of several factors, first of which is the emergence of buyers over builders (NCUA-induced, multi-industry vendor approaches, the weakness of trades and lobbyists, etc.). Second is the unrealistic expectation that all credit unions need the same level of expertise resulting in overpriced expertise with no yield based on situational responses. Lastly is the unfortunate death by 100+ priorities—everything is a priority and a credit union cannot decide when good is good enough, so they buy what their competition buys or CYA coverage instead of building a response that gives them an advantage in the right areas.

Today’s business model operators are playing a game in which they have little control over the key success factors if they stay on this track. Credit unions used to manufacture more of their own solutions, and therefore had more power over price, adaptability, and investment curves than they do today.

Consequently, smarter people are playing a game that is organizationally less intelligently positioned. We’re less about the competitive strengths of a cooperative, more dependent on outside influences other than the member-owner, and far less intuitive about how to gain advantage. We’re much more apt to use crutches elected by insiders than the pioneers that had to craft solutions, not just play with a paint by numbers response.

This is not an indictment of individual operators, just a worry about the decline of credit unions control over their destiny based on the IQ of their organization and the perseverance of spirit displayed.  Before you say, “this doesn’t apply to my credit union,” understand that I’m not painting all credit unions this way, but I do think every CU should gut check themselves against these traps.

Are there enough CU players ready to take big game risks with secondary capital?

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It is clear to most people that in a crisis, surviving as an operator of a financial service firm is not really based on capital, it is based on liquidity.  Check out this article and think about it. Liquidity allows you to survive the marketplace, capital is just something you need to ward off the NCUA and examiner’s community.  Because to most CUs, capital is simply the ante needed to lend other peoples’ money.  What is secondary capital to you?  Is it more money to ante up and grow based on a one-trick pony approach to earnings in a CU, or is it working capital that creates liquidity to survive the marketplace?

Or is it capital to build with and thrive in the marketplace?  Does your organization understand the difference, and is it postured to act on all three fronts: up the ante to stay in the game?  Balance working capital as liquidity to stave off regulators?  Balance working capital to extend investments and thrive with multiple revenue modes and resource extensions?

My question to you is does the industry have enough players that would take the BIG GAME risks with secondary capital to make it worthwhile to take on the attackers that say we are so close to being bankers with a unfair tax status that the whole industry should be washed into a tidal wave of change?  I relish the change, but do you, and how long before you would right the ship and push off to new brighter futures?

As a CEO I have never really had to push hard, I mean very hard, to raise capital… I have had to work very creatively to pay off the expectations of those who push capital into our balance sheet.  And when money comes easily to our balance sheets because the owners of capital to burn send it our way, I wonder what they know about how hard it is to earn on capital these days that I do not.

Worry does not mean I am not in on the game, and would not build businesses to leverage new capital sourced in the CU industry network, but it does mean I worry for those who will not find ways to earn and pay back to capital sources.

Today our members, our owners, suffer in finding ways to believe that credit unions truly pay on the capital our ownership (members) sends to credit unions.  Now of course CUs take little heed of this confusion, they wash it away based on the ideas that members are consumers and have little regard for ownership concepts or the fact that they are the providers of capital and balance sheet health for our cooperatives.  So as an industry we are almost void of examples, tactics, and the overwhelming sense we respect the ownership persona of our members.

What will that mean to a new structure where capital may come from people who do care?  Are we the agents (professional operators and industry designers) that are ready to toe the line for an active, demanding, and constantly auditing audience of a new kind of owner – the investor?  I believe I am, are you?  No matter how the investor wears their sheep’s clothing or hides their fangs – they will be different than a mild mannered consumer put to sleep by rate deals, smiles, and good intentions.

Tell me why I’m wrong!

Is there really reason for fanfare?

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I will look away as the NCUA parades for a victory lap over their TCCUSF actions

Recently I was asked why I refused to accept that the recent actions of the NCUA warranted a nod of approval and a comment recognizing a job well done. How could I argue with the math, with the good fortune to receive monies back, and that they were prudent in holding back a little for our future? How could I not see that the current leaders deserve a victory lap here? Why I joined so many, like my good friend Chip Filson, in feeling weakened by their actions over the last decade instead of empowered by them giving the system back its own money.

We worry for our futures because the NCUA took many of our peers and partner organizations off the map when they OVER compensated and doomed them to poor regulatory calculus and “capitalized” on an opportunity to redefine the system. (A) Reduce the coverage and overlap of the corporate system – less systemic risk (?) and fewer local opportunities (is that a good thing?). (B) Forcing failures on corporates washed through the weakened system and doomed local CUs and led to many professionals being victims of the unintended but purposeful overreach – lost jobs, lost careers, and setting a tone for capitulation and despair amongst many of the customer-owners across the industry. We shifted from self-reliance to compromising with central planners without a clue, and no track record.

Worse the NCUA shifted opportunities and the rights of CU industry players to third parties, monies moved, fees paid to outsiders, and the system no longer felt empowered to live out the scenarios based on its own independence to endure with our members (our status as cooperative entrepreneurs shifted to weakened businesses needing the NCUA mandates over creativity). And in a moment of “we are saving the day” the NCUA made a resource grab to grow its budget, increase its footprint, and cast shadows over the future by now having to justify more expenses on the back of local organizations without tangible returns or the feeling that the system was investing in go forward opportunities. We shifted from self-reliance to compromising with central planners without a clue, and no track record.

And finally, when the misdeeds of the NCUA where so obvious to all (the destruction of member capital through their crisis management), did the NCUA start anew, or start to build faith back with the system? No. It did what all self-serving bureaucratic mobs do – it peeled off a little of the return for their futures. It said, “trust us again, you will need us to hold on to these funds to save you once more.” It proved its budgets were more important than ours. It insulted us all, by once again proving it needed the funds for rainy days yet realized or better forecasted with facts – it just said this cycle would repeat. The NCUA can always bill us in the future for realized events, but no, it takes this opportunity to take it ahead of time. Guaranteeing that we stay compromised and reliant on central planners over local community business structures governed by consumers with the right intentions.

There is no “deregulatory agenda here” – just a bait and switch cycle, where a mob hires good PR managers to feed us their medicine package in pretty bottles and candy-coated stories. McWatters and the board – “Trust us – we could have kept it all, because we are going to need it! Not CUs, us the NCUA.”

Industries do consolidate; the numbers of CUs in this country will continue to decline for the simple fact that centralized planners believe in scale, believe in models easily audited and controlled, and simple because they doom others to fail, not themselves. There is always a victory lap for those who know better from afar declaring “it could have been worse” without real skin in the game. I just know too many people with skin in the game and a sense that the game is rigged for those that do not. Tell me why I’m wrong.

Calling on Better Angels

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Can we look past the perceived failures of the NCUA and work with them?

In a recent email, CUNA announced that it was praising NCUA for the TCCUSF closure and the refunds starting in 2018. A great victory for credit unions… except some in my circle see it as the NCUA bilking the industry and its members by voting to increase the normal operating level to 1.39% and withholding too much.

Some people do see it my colleague’s way, including me most of the time. And even when I give the NCUA the benefit of the doubt (like they need the money), I would rather them give CUs all the money back and then start accessing fees in separate justified transactions.

When I call on my better angels (and that is seldom when I think about the NCUA), I listen to the fact that the best way to change the NCUA is to work with them from the inside out. See that their overreach might be prudent, and sincerely believe that McWatters is a change agent, a balanced committed designer for better things, and that he has the political skills to move the ball. Unfortunately I believe my better angels are optimistic to the point of being naïve.

By now my better angels and I have watched the industry be crushed too many times by the reality that nothing seems to change from the inside out at the NCUA or most government organizations, and now I just wish we would burn it down and start all over. Not deny everything, just look hard at changes the NCUA would never consider until their futures are challenged. Risk moving to a new agency, risk no-insurance backed financial cooperatives, force a split between insurance and regulations, fed insurance and state regulations, etc.

So as to CUNA, the people who take credit for winning horses after the results are in, I doubt they would help any of this from the inside-out or outside-in. CUNA bets on what looks best as a lobbyist, not what might be right as a potential losing principle to stand on that might just one day be a winning long shot.

I hear McWatters simply ignored CU comments on this topic if they were simply expressed opinions and not an argument worthy of his intellectual consideration. And if that is true, he has the intellectual awareness of a pinhead. We do not want to debate design with McWatters alone, we wish to debate results. Not the agency’s, but our members’, our owners’, and the communities’ that count on credit unions.

Pinheads did not start CUs… people did that knew only a few things were needed: that we can help those who join us in hopes of helping others. My better angels want to join McWatters in his efforts, but on other days, I would only do it if he joined us in ours. Too bad I see those things so far apart.

Tell Me Why I’m Wrong.

Look beyond and beneath the “good news” of a TCCUSF refund

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Why increasing the normal operating level from 1.3% to 1.39% is questionable at best

I took statistics a long time ago; slide rules were still the common tool for large number calculations and Texas Instruments was just coming out with its initial hand calculators. My extremely wise professor would allow the use of calculators in an exam, if you could afford one, but he always prefaced the test with the admonishment, “Remember, if you press wrong number, you get wrong answer.” The current plan to close the TCCUSF is long overdue and a bold move by the board, but I think the action steps are based on an overreliance on “sophisticated models” which have been shown over the last 6 years to consistently and considerably underestimate the value of the assets taken and overestimate the losses. Obviously, more than a few wrong numbers have been pressed, to get these kinds of modeling errors.

The great news is that NCUA has told us that closing the Stabilization Fund this year could result in a distribution of between $600 and $800 million of credit union capital in 2018. The bad news is that the distribution is keyed to a questionable increase of the normal operating level (NOL) from 1.30 to 1.39. By closing the TCCUSF and transferring those funds to NCUSIF the equity ratio of the NCUSIF would be between 1.45% and 1.47%. That’s an additional $1B to protect us from ourselves! Based on what horrible example from our past or unforeseen attack in the future?

Obviously, by maintaining the normal operating level at 1.30% the agency would be required by statute to make a distribution of 15bps to 17bps, right? Not so fast there buddy! What about all of that extra risk from the legacy assets of TCCUSF that now rest within the NCUSIF? According to the agency, they need to elevate the NOL and retain 9 basis points of the distribution to fulfill the economic projections based on the FRB scenarios and Black Rock modeling. That’s why if the closing transfer to the NCUSIF is $1.9B (as projected by NCUA) the agency keeps over half of it to cover the risk that their Black Rock Model projects in a recessionary economy.

They sure lean on their high tech and expensive modeling consultants. Is that the same kind of modeling that back in 2011 projected Legacy Asset defaults to be between $13.2 and $16.4 billion and which today are projected to be between $10 and $10.4 billion, or between 30% to 60% overstated? Is that the kind of statistical accuracy one can expect from a world-wide firm like PWC, who incidentally was paid over $9M between 2010 and 2014 by the NCUA? Can we expect that the current projections by Black Rock, which was paid $5.5M between 2013 and this year, to be any more accurate? After all, we’re talking about over an additional $1 billion dollars being placed under the control of the NCUSIF as long as the board accepts the staff recommendation to increase the NOL. That means the agency would now have the earning power of over the $15B in the NCUSIF to hit up for an OTR that, even if reduced to 50%, supports an NCUA operating budget which continues to be projected to grow at 4.5% per year and which continues to look to the NCUSIF as the cash cow that means as much to the sustainability of an overweight and wasteful budget at NCUA as it means to the credit unions who have funded their own insurance fund with their members capital.

So, what we have is the typical quid pro quo that the agency so often foists on us, on one hand giving us some of our money back while on the other placing an additional burden on us by increasing the normal operating level to 1.39%. Gee guys, if the NOL was last increased to 1.3% in 2007, before the great recession, and we seemed to survive that okay, why do you need 1.39% today? Even if we agree that 1.39% is a good number today why don’t you at least guarantee us that the NOL will sunset after one year, so you can transparently prove to us to remain at that level, increase it, or heaven forbid, actually decrease it.

Good intentions indeed, but forgive me if I also want to look beyond and beneath the “good news.” Remember, you only have two weeks to get your comments into NCUA. Tell me why I’m wrong!

Picking out the diamonds in a tidal wave of gems

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Time management is about figuring out what not to pay attention to

If you’re on my email lists, you’ve probably seen the onslaught of communications I’m capable of sending out and wondered “how am I going to find the time to read all of this?” So when I was asked the question “how do you manage the volumes of important and less important emails to and from the network?” I decided to get philosophical on the topic of time management.

This topic is the most common worry of teammates on the way to the next step in their careers. “How do I keep up with my mounting responsibilities while also being even more informed?” It might be the number one challenge we face daily in the business world today: sensory overload and the constant conflicts in priorities fighting for our attention.

Time management isn’t just a business problem

We see it as a business problem because it is, but in reality it is there constantly throughout our everyday lives as we balance our work, home, family, etc. The amount of noise we face while managing our daily lives can be both a blessing and a curse. A blessing because we are more aware of everything today, or at least we know we have the option to be aware. The intensity of so many wonders and horrors for the active person today is inspiring (the grand designs of nature, people, science, etc.), but it has the potential to create devastating stress (the pain from connecting with negative events everywhere and all the time) as negative awareness can warp the senses. Our business lives are no different.

As business leaders, we can be impacted in two ways. Inspired for the potential of designs, hopes, remarkable efforts, and sincere valuable goals that can make us want to do everything at once with a euphoric endless energy. Or devastated by the sense that all great efforts might not be rewarded, are challenged by things off the path, can’t be done in the time available, in addition to all the down sides of human nature that distract us.

How do you react when you’re being bombarded with over-hyped inspiration and over-hyped devastating challenges? The first thing for every business leader to find is a sense of calm, and joy in the fact that life is a long journey; challenges actually create the work and sense of winning for the reward in effort, not just success. Being in the game is the goal more than anything else. In essence, when we have purpose, life is good. Filter out everything that is not in line with that sense of purpose.

More practically: time management is more about what you don’t pay attention to than what you do.

Effectiveness vs. efficiency

Recently I started reading a book that caught my eye: “The Subtle Art of Not Giving a F*ck” by Mark Manson. One review in particular gave me hope for the book: “Resilience, happiness and freedom come from knowing what to care about—and most importantly, what not to care about. This is a masterful, philosophical and practical book that will give readers the wisdom to be able to do just that,” Ryan Holiday. (Full disclosure: most of the books I buy have cool titles, but little in the way of content. Buyer beware!)

This is why I stress the concept of being effective over being efficient. Only effective people or organizations stay in the game and have the chance at dealing with their demons in search of maximized efficiencies. Maximized efficiencies look for marginal improvements once you reach effectiveness, and over paying for marginal, “in the eye-of-beholder” improvements not on your path will encourage you to leave an effective path. Once off the path you are no longer in the game enjoying the journey and calm.

The only thing worse for small firms than the ludicrous efforts made for maximizing efficiencies beyond effectiveness is the sense that they must overpay for disasters avoided. And today everywhere around us are people earning and controlling us by the sense of their value to disasters yet realized. If you eliminated this noise you would find calm much more available to us all, fearing the journey a little less, and find it far more believable that the game is winnable. Scale goes both ways, and if you balance the effective approach to your priorities you can scale down the noise.

Or at least be blissfully unaware as you don’t always have to give a…